How can Ministries of Finance support the low-carbon transition through coherent ‘policy packages’?

New evaluations clearly show that combining multiple policy instruments – pricing, subsidies, public investment, regulation and green procurement – is more effective at mitigating climate change than carbon pricing alone. On average, governments around the world are already deploying 36 distinct instruments to this end. Ministries of Finance are ideally placed to support the design of these packages, as Patrick Lenain explains.

The transition towards greener and more resilient economies is one of the defining economic opportunities of our time. From growth and innovation to enhanced competitiveness and long-term savings, the potential gains are substantial.

Ministries of Finance are increasingly aware of their responsibilities in this transition. With their fiscal and financial instruments, they can determine whether climate ambition is translated into durable implementation. A growing number of Ministries are already taking meaningful steps: shaping economic and development strategies with climate considerations forming an integral part, mobilising financing and engaging with green fiscal subsidies and carbon pricing frameworks.

A new report by the Coalition of Finance Ministers for Climate Action underlines this growing momentum. It also makes the case, with significant empirical evidence, that Ministries of Finance have a wide range of powerful policy tools available, and that well-designed, well-sequenced and well-coordinated policy packages are critical for climate action.

At the same time, there are clear constraints that have slowed progress: fiscal sustainability pressures, capacity and data gaps, and uncertainty about the costs of transition measures have all played a role. Additionally, only about a third of Ministries of Finance currently see climate action as a part of their mandate.

Ministries of Finance do not just hold the public purse: they affect how economies allocate resources, price risk, tax behaviours and mobilise capital at scale. With their fiscal tools, they can play a key role in accelerating low-carbon investments and reaching climate objectives.

Yet, many do not.

Evaluating carbon pricing

The reluctance by some Ministries of Finance to act decisively and deploy their full toolbox reflects, to some extent, a past focus on carbon taxes. For most of the last three decades, the dominant intellectual framework in climate economics has been elegantly simple: put a price on carbon and let markets do the rest. The logic is impeccable in theory. A sufficiently high, economy-wide carbon price internalises the social cost of greenhouse gas emissions, drives abatement where it is cheapest, and generates revenue that can fund the transition. It is, as economists have noted, correcting the core market failure.

The problem is that this theory collides with empirical realities. A new strand of research, taking advantage of existing track records, shows that carbon pricing on its own does not work as well as predicted in the Economics textbooks. In countries that have deployed carbon pricing, the actual impact on emissions varies widely across sectors and policy designs.

This is not surprising given that markets on their own tend to underinvest in clean technologies due to interrelated problems such as innovation spillovers (where no firms invest in clean technologies if the benefits spread freely to competitors), network effects (where no single investor has an incentive to get the ball rolling), information asymmetries (where decisions are made with incomplete information), and capital market imperfections (where worthwhile projects struggle to obtain funding). It also requires harnessing the processes of dynamic change and economic transformation.

Hence, the emerging consensus – supported by a growing body of empirical evidence from the IMF, OECD and World Bank – is that standalone carbon pricing is not sufficient. By contrast, research shows that effectiveness can be increased through ‘policy packages’ for climate action that combine pricing, subsidies, public investment, regulation and green procurement. It is therefore no surprise that governments, on average, deploy 36 distinct instruments for climate mitigation. Canada and Sweden use 49. Peru uses 13. None uses just one.

What has changed is that researchers now have access to enough data to evaluate the effectiveness of these packages with greater rigour. Studies using regression analysis and causal inference methods increasingly find that comprehensive policy mixes can outperform standalone carbon pricing in reducing emissions.

However, this effect is not a given. Coherence in the selection of policy tools, their exact design, and the sequencing of deployment are key.

Ministries of Finance should take notice. With their broad remit across tax policy, public investment, budget management and oversight of state enterprises, they are ideally placed to support the design of coherent policy packages for climate action.

The economic case for ambition

It is natural for Ministries of Finance to attach considerable importance to short-term benefits like stimulating economic activity, creating jobs and boosting tax receipts. But far from weakening the case for ambitious climate action, it strengthens it.

While climate initiatives are often thought of as long term, recent experience in the United States, European Union and China has demonstrated that well-designed packages can trigger short-term gains. In the UK, the net zero economy grew 10 per cent between 2023 and 2024, accounting for nearly £83 billion in gross value added. In China, clean energy sales and investment reached approximately 10 per cent of GDP in 2024. These are not marginal footnotes to the headline economy: they represent genuine structural transformation with measurable fiscal returns.

The gains for energy security are also crucial – especially in times of rising geopolitical and military threats, as the current war in Iran underlines. Even France with its giant nuclear reactor fleet relies on imported fossil fuels for almost 60% of its final energy consumption. Switching away from coal, oil and gas can help shield countries from international turbulence.

For Ministries of Finance, the transition carries urgency as well as opportunity. The tools for faster progress are available, the evidence base is growing, and the economic case for action is strong. Ministries can get involved now and provide support through fiscal tools, analytical capabilities and the design of coherent and cost-effective policy packages.

Context and sequencing matter

In doing so, adapting their toolkits to the specificities of their country is pivotal. Institutional context must shape instrument choice and sequencing.

For lower-income economies, the foundational priorities are specific: reforming fossil fuel subsidies, strengthening social protection systems and improving power sector planning may be natural starting points. These can be the building blocks upon which more ambitious pricing and investment packages can later be constructed. In oil-exporting economies facing the energy transition, or water-scarce nations confronting agricultural disruption, the entry points for coherent policy packages look quite different from those available to Northern European governments that have robust institutional capacity and deep capital markets.

Sequencing matters, too. Empirical research increasingly supports the intuition that governments should introduce ‘carrots’ – direct subsidies, tax incentives, R&D grants – before deploying ‘sticks’ in the form of carbon pricing and stringent regulation. This does not necessarily reflect a lack of ambition; done well, it can be good policy design.

Supporting coordination

Ministries of Finance can also contribute by supporting coordination between stakeholders – line ministries, local governments, businesses and consumers. Their oversight of budgets, tax systems, public enterprises and macroeconomic frameworks gives them both the vantage point and the authority to identify conflicts, sequence implementation and ensure that climate ambition aligns with fiscal sustainability.

The coming decade will be decisive. Fiscal space is tightening across advanced and emerging economies alike. Private capital will flow towards low-carbon assets only if policy signals are credible, stable and reinforced by public investment. The architecture for a durable green transition cannot be constructed by Environment Ministries alone, or by standalone carbon price signals.

Finance Ministers are not, and should not be, the sole drivers of climate action. But they need to be active stewards – embedding climate objectives into medium-term fiscal frameworks, pricing risk properly, sequencing instruments thoughtfully and contributing the full breadth of their institutional capacity.

The fiscal tools are there. The evidence is compelling. Initial steps have been made. The opportunity ahead is for Ministries of Finance to build on this momentum and realise its full potential.

This commentary draws on research led by the author, supported by the Grantham Research Institute and published in February 2026 by the Coalition of Finance Ministers for Climate Action: How Ministries of Finance Can Support Coherent Climate Policy Packages: Available Analytical Tools and Emerging Good Practice.

Patrick Lenain is a Senior Associate with the Council on Economic Policies and writes here in a guest capacity. The views in this commentary are those of the author and do not necessarily represent those of the Grantham Research Institute. The author would like to thank Alexander Barkawi, Nick Godfrey, Hannah Maier-Peveling and Frank van Lerven for their reviews.