Key Takeaways:
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- The “energy transition” refers to a global shift in energy sources from fossil fuels to low-carbon energy sources as a way to mitigate climate change
- Government policies can play a key role in shaping the energy transition through regulations, subsidies, and tax incentives
- A just energy transition is one in which green energy resources are available and affordable, with minimal economic and environmental impacts
- In some states, like Texas, renewable energy may be the cheapest option thanks to plentiful wind energy and solar power
In some parts of the world, the transition from fossil fuels to renewable energy is well on its way — while in other places, it doesn’t seem to be happening fast enough. According to Resources for the Future, the clean energy transition faces headwinds and tailwinds as shifting demands and government policies shape the global energy mix.
But what impact do government policy changes have on the energy sector? And how do they align with global emission reduction frameworks like the Paris Agreement?
Let’s take a look at some of the biggest policy shifts in energy transition in recent years, and how both the public and private sector have a role to play in reducing greenhouse gas emissions and transforming the global energy system.
What Is the Energy Transition?
The energy transition refers to a global shift in energy production as a way to reduce the carbon emissions that contribute to global warming. In short, existing power plants that run on fossil fuels like coal and natural gas are being phased out in favor of renewable energy resources like solar, wind, and hydro power.
Some of these shifts are being driven by the private sector, as economic growth and competitiveness between countries leads to improved energy efficiency. Even though energy demand is expected to increase through 2050, demand for fossil fuels like oil has already peaked in countries with high economic development.
But governments play a major role in shaping climate goals and incentivizing energy providers to prioritize sustainability and decarbonize the energy economy.
What Are the Most Impactful Government Policies Driving the Global Energy Transition?
Government policies that drive the energy transition can take many different forms, from vehicle emission standards to direct subsidies of renewable electricity generation. Here are three of the most impactful policy shifts in energy transition in recent years:
Tax Incentives
Tax incentives are a way for the government to provide financial support to businesses or consumers for investing in green energy by giving them a break on their tax bill. For example, with the cost of a solar panel installation averaging $15,000 to $25,000, tax credits and other incentives can make solar panels more appealing to homeowners.
One of the most popular tax incentives in the U.S. is the electric vehicle (EV) tax credit, which provides up to $7,500 in income tax credit to taxpayers who buy a new EV. This helps to make EVs more affordable and gets more of them on the road sooner.
Subsidies
Subsidies are similar to tax credits in that they lower the cost of green energy, but they generally take the form of up-front grants or payments. As part of the Inflation Reduction Act (IRA) the Solar for All Competition awarded up to $7 billion in grants to “bring solar to millions of homes in low-income and disadvantaged communities.”
According to the Institute for Energy Research (IER), solar, wind, and biofuels receive the majority of federal subsidies, vs. 15% for coal, oil, and natural gas between 2016 and 2022. So while governments still subsidize some fossil fuel power generation, subsidies play a key role in the shift towards a green energy supply chain.
Emissions Regulations
A third lever that governments can wield in the transition to green energy is regulatory power. Through emissions reductions mandates, governments can incentivize entire industries to take climate action, while minimizing economic disruption.
For example, the Environmental Protection Agency (EPA.gov) has set strict emissions requirements for vehicles applying to model years 2027-2032. By gradually phasing in these requirements over time, car manufacturers can plan ahead and replace some of the most gas-guzzling vehicles in their line-up with more efficient options.
How Do Carbon Pricing Mechanisms Influence Energy Markets?
Carbon pricing mechanisms take a more market-based approach to the green energy transition. Rather than funding renewable energy sources directly, the idea is that by attaching a financial cost to carbon emissions, stakeholders will have a compelling reason to reduce them. These mechanisms usually come in one of two forms.
Carbon Taxes
Carbon taxes place a fixed tax on greenhouse gas emissions like carbon dioxide. A carbon tax incentivizes businesses to price in the true cost of carbon emissions, but doesn’t set specific targets for emissions reductions.
Cap-and-Trade
A cap-and-trade program places a “cap,” or a maximum amount of allowable carbon emissions, across an entire energy sector. Facilities with lower emissions (measured in tons of carbon dioxide) can sell or trade their permit to facilities with higher emissions, helping to keep the entire sector within the allowable limits.
Policy Shifts and Regulations
How Are Policymakers Addressing Energy Equity and Affordability During the Transition?
One of the criticisms of tax credits and government subsidies is that they don’t reach everyone equally. The electric car tax credit, for example, is most valuable to people with higher incomes who invest in a brand new EV with a high price tag.
A just transition would ensure that everyone has access to electricity at a price point they can afford. Programs like the Low Income Home Energy Assistance Program (LIHEAP) are specifically designed to help low-income people with energy costs, including energy bills and weatherization expenses.
As of April 2025, this program is potentially on the chopping block, as the current U.S. administration seeks to roll back programs like LIHEAP.
Other initiatives include the National Community Solar Partnership+ (NCSP+), which aims to expand access to household solar, and investments in the energy grid, which helped to fund improvements to the Texas electric grid after the storm in February 2021.
What Regulations Are Shaping the Phase-Out of Fossil Fuels and How Effective Are They?
Government regulations are shaping the transition to sustainable energy at both a local and international level. In 2024, the U.S. Department of Energy (DOE) released a Final Rule aimed at “eliminating on-site fossil fuel usage” in new federal buildings as of 2030, and requiring a 90% reduction for buildings started between 2024 and 2029.
In the European Union, a proposal to ban internal combustion engines in new vehicles sold in Europe is set to come into effect in 2035.
While regulations like these can be effective — the International Energy Agency (IEA) predicts a tenfold increase in EVs on the road — they aren’t nearly enough. The IEA says that “much stronger policies” are needed to keep global warming below 1.5°C.
How Do International Agreements like the Paris Agreement Influence National Energy Policies?
International agreements like the Paris Agreement (which was reached in 2015) serve as a framework that individual countries can use to set national energy policies. As the United Nations (UN.org) puts it, climate change “goes beyond national borders [and] requires international cooperation and coordinated solutions.”
Under the Paris Agreement, countries are required to submit a national climate action plan every five years, with the goal of keeping the average global temperature below 1.5°C above pre-industrial levels. These agreements help countries hold each other to account and honor their own commitments.
Although the Paris Agreement is a legally binding treaty, not all countries are equally committed. China and Russia have both signed the agreement, but the U.S. withdrew from the Paris agreement in 2020, rejoined in 2021, and is on track to withdraw again. Meanwhile, many countries don’t submit their climate action plans on time.
What Strategies Are Governments Using to Balance Energy Security With Decarbonization?
The goals of energy security and decarbonization may seem contradictory. As supply chains are disrupted by wars and pandemics, and governments seek to keep energy costs low for consumers, they continue to rely on high-carbon energy sources. They may expand coil mining or oil drilling, or install liquified natural gas (LNG) facilities, rather than investing in offshore wind farms and solar panels.
But the World Economic Forum makes the case that “energy security and sustainability are complementary.” While diversifying energy sources can increase a country’s energy security, so can advances in energy efficiency and improvements to the electric grid.
Electricity providers can use artificial intelligence (AI) for grid management, helping to balance supply and demand and detect cybersecurity threats to critical infrastructure. These improvements can diversify the energy mix and increase national security.
How Do Policy Shifts Impact Investment in Emerging Clean Energy Technologies Like Hydrogen and Carbon Capture?
Many clean energy technologies take years to research, develop, and implement, so even small policy shifts can have an impact on their rollout. The Blackrock Investment Institute credits the Inflation Reduction Act with triggering “greater investment in, and demand for, low-carbon energy infrastructure and technology.”
On the other hand, private investors may be reluctant to commit their money to green energy projects in times of instability and uncertainty.
As of 2025, the U.S. Department of Energy has earmarked more than $1.8 billion for Direct Air Capture (DAC) hubs to capture and store carbon. Meanwhile the National Clean Hydrogen Strategy and Roadmap envisions a network of Regional Clean Hydrogen Hubs and over 100,000 jobs in the hydrogen industry by 2030.
It remains to be seen whether this level of government investment will continue, or whether policy shifts in energy transition will slow the pace. But as this technology advances, market forces may lead to even greater momentum regardless.
How Can Consumers Lower Energy Bills Following Policy Shifts in Energy Transition?
Policy shifts in energy transition can have a major impact on the rollout of new energy technologies. Sometimes, these shifts can lower energy costs, while other times, they can result in job losses and price spikes.
If you’re looking for competitive energy rates, enter your ZIP code here to search our Texas electricity plans. Some plans even include free nights and weekends.