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Advancing Global Carbon Abatement with a Two-Tier Climate Club

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  • Terrence Iverson

Abstract

A two-tier climate club exploits the comparative advantage of large countries to mete out punishments through trade, while taking their capacity to resist punishment as a constraint. Countries outside the coalition price carbon at a fixed fraction of the average carbon price adopted within the coalition, or face tariffs. Coalition countries abate more since doing so induces matching abatement elsewhere. If the rate at which noncoalition countries match coalition abatement goes to one, equilibrium abatement approximates the globally efficient outcome even though the coalition only internalizes damages within its borders. Even with a low match rate, the arrangement drastically reduces aggregate abatement costs. In contrast to a single-tier climate club in which many stable coalitions are possible, the stable coalition in the calibrated model is unique and consists of the US and the EU. Global abatement achieved by the stable agreement is about 40 percent of the efficient level.

Suggested Citation

  • Terrence Iverson, 2022. "Advancing Global Carbon Abatement with a Two-Tier Climate Club," CESifo Working Paper Series 9831, CESifo.
    • Handle: RePEc:ces:ceswps:_9831
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp9831.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    international environmental agreement; climate club; trade sanctions; retaliation; incomplete participation costs; country-size heterogeneity;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • F18 - International Economics - - Trade - - - Trade and Environment
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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