Market and policy shocks in economic systems: interrelated dynamics in the sustainability transition

Abstract

This note addresses the issue of market and policy shocks in the transition to sustainability. Market Shocks may be driven by price volatility; policy shocks are likely to occur either given contingent conditions of policy feasibility - a concept that shifts over time - or in reaction to extreme climatic events. The paper questions the role of ‘events’ as drivers of change, with a focus on innovation responses. In doing so, it broadens the perspective on environmental policy’s role and effects. Environmental policy is connected to institutional and market dynamics. It is not limited to the Pigovian rationale - the mere minimization of current costs - but rather tied to a ‘standard and cost approach’ which attempts to incorporate efficiency concepts in a dynamic scenario, where learning and adaptation through technological and behavioral changes are crucial.