With regards to climate policy, there is an active debate among economists on the relative merits of clean energy subsidies vs the more textbook economic solution of a carbon tax. However, the models used to inform this debate have a common simplifying assumption: the preferences of the government are kept constant over time. In reality, control of the government often rotates between parties with very different policy preferences. This paper finds that adding turnover in party control of the government can have significant implications. Specifically, the party more concerned about the environment (``the green party") finds it optimal to subsidize irreversible investments in clean energy, even when carbon taxes are available and can be placed at any level. We then provide quantitative evidence on the green party's optimal subsidy using two approaches: sufficient statistic estimation and a calibration exercise. The results suggest that the optimal subsidy is quantitatively significant, between 5% and 17% of the cost of investment. Furthermore, if the green party naively uses just a carbon tax, clean investment is 34% lower than when they use their optimal subsidy.

Global public goods problems, such as climate change, are often addressed through international agreements. Occasionally these agreements have involved using other policies, such as trade policy, as a way to incentivize countries to join and uphold the agreement. For example, the Montreal agreement on Ozone-depleting substances includes trade sanctions on non-participants. There have been calls to design future climate agreements in a similar way. This paper offers a novel explanation for why "issue linkage" in international agreements can be beneficial: for many global public goods, there is a significant chance that some countries won't value the public good very highly. For such countries, threats to reduce funding for the public good will be ineffective, whereas threats to impose trade sanctions might work. Even if some countries also don't respond to threats of trade sanctions, issue linkage is still welfare improving because trade sanctions are far more efficient punishments. This argument is formalized using a repeated game with incomplete information. A calibration exercise suggests that using trade sanctions to enforce a climate agreement could significantly increase global welfare.