Greener thy neighbor? On the welfare effects of protectionist climate policies

The world is witnessing a surge in green industrial policies, with prominent examples such as the U.S. Inflation Reduction Act incorporating significant protectionist elements. We argue that such green protectionism can play a strategic role in fostering international coordination on climate action. In a simple model combining a standard abatement game with a beggar-thy-neighbor game, we show that protectionist policies improve welfare when expected distortions are low, as they facilitate coordination on climate mitigation at minimal costs. When expected distortions are high, protectionist measures are not adopted and are effectively welfare-neutral. However, when expected distortions are of intermediate size, unregulated protectionist climate policies lead countries to rely excessively on distortive instruments, reducing global welfare. Our findings suggest that regulators like the WTO can enhance welfare by restricting but not entirely banning green protectionist measures. When countries are asymmetric, the case for differentiated regulation depends on whether asymmetries primarily affect countries’ incentives to coordinate on abatement or the social cost of using protectionist instruments to sustain that coordination. We further find that efforts to reduce uncertainty about the size of distortions might backfire, inadvertently encouraging coordination on costly protectionist measures.