Abstract Climate change and the global transition to low-carbon energy represent pressing economic and environmental challenges that require effective policy interventions. Understanding how to design instruments that align private incentives with societal objectives is crucial, highlighting the importance of investigating the interaction between carbon pricing and subsidies for clean energy deployment. This study employs a game-theoretic, mechanism-design framework to develop a two-stage analytical model of strategic interaction, in which a regulator sets carbon prices and complementary subsidies while firms optimally choose abatement levels and clean energy investments; the model is solved through backward induction to derive closed-form Nash equilibrium strategies. The analysis is based on a theoretical model, which provides closed-form solutions for equilibrium strategies. Analytical results reveal how policy effectiveness depends on market structure, technology efficacy, and damage sensitivity, and identify the Nash equilibrium conditions under which carbon pricing alone is sufficient or when additional subsidies are required. The primary policy recommendation emphasizes the combination of credible carbon pricing with targeted, performance-based subsidies, ensuring efficient deployment of clean technologies, accounting for strategic behavior, informational constraints, and political feasibility, and providing actionable guidance for policymakers committed to sustainable development objectives.
Salimian et al. (2026) studied this question.