2.6 – can we address climate change on our own?

Note: development in progress…

international cooperation

Why do we need international cooperation for climate change mitigation?

  • Climate change (via GHG emissions) is a global externality.
    • Correspondingly, GHG abatement is a global public good.
    • Public goods will be underprovided and contries will free-ride on others’ mitigation efforts.
  • There are ~200 sovereign states, each with its own agenda
    • No international agency can establish and enforce a binding policy
  • International agreements are needed for large-scale internationally coordinated emission reductions.

Countries might participate in international climate policy for a number of reasons, including:

  1. Create the global public good of reduced climate change.
  2. Create local/national public goods that happen to address climate change.
  3. Generate competitive economic benefits, such as creation of new industries (solar, wind, batteries).
  4. Bargain for side-payments, such as requests for money to help pay the cost of abatement and adapting to climate change.
  5. Create reputational benefits.

The Paris Agreement is our primary international agreement on climate change. The Paris Agreement is a bottom-up agreement, which means that each country sets its own emissions reduction target. The Paris Agreement is also non-binding, which means that countries are not required to meet their emissions reduction targets. For environmental agreements to work, enforcement is critical.

  • Countries might free-ride on others’ mitigation efforts.
  • Countries might not comply with the terms of the agreement.

competiveness concerns

One primary disincentive countries have to join and comply with international climate agreements is due to concerns about international competitiveness. If the US implements costly climate mitigation, but China does not, then China has an advantage in export markets where the US and China compete. This happens because China can produce goods at a lower cost than the US because they do not have to pay the cost of climate mitigation.

climate clubs

A climate club is a group of countries that enjoy free-trade with each other, conditional on adopting harmonized greenhouse gas mitigation. The basic idea is as follows:

  • A subset of countries agree to undertake harmonized GHG emissions reductions.
    • Agree on a min. international carbon price (e.g., $25/ton).
    • Each country can implement whatever policies desired to reduce emissions.
  • Countries “in the club” enjoy free trade with other club members.
  • If you’re not in the club, club members impose a tariff on your exports.
  • The penalty (tariff) for defecting creates an incentive for self-interested countries to join the club and reduce emissions to avoid trade penalties.
    • This design makes agreements self-enforcing.

Figure 1: Climate club penalty structure

carbon-border adjustment mechanisms

Carbon-border adjustment mechanisms are policies where a country (with carbon pricing) applies an import fee/tax on the carbon content of imported goods.

  • The amount of the fee is based on the local carbon price, adjusted for any carbon price in the exporting country.
  • E.g., domestic carbon price = $110; foreign carbon price = $10; tariff would be $100 per ton of carbon embedded in the product.

Pros/cons: * Addresses competitiveness concerns of domestic-only carbon pricing. Incentivizes stronger climate policy from trading partners * Requires costly/challenging compliance and monitoring to determine emissions intensities of imported goods. * Developing countries may be penalized

resources and further reading

references