The Economics of Climate Change
The Free-Rider Problem and Climate Clubs
Why voluntary climate agreements struggle with free-riding, and William Nordhaus's idea of climate clubs that penalise non-members.
Every country benefits when others cut emissions, but each pays the full cost of its own cuts. This creates a strong incentive to free-ride: to let others do the work while enjoying a stable climate. Voluntary agreements struggle against this incentive.
Nordhaus’s climate club
In 2015, economist William Nordhaus proposed a climate club. Countries in the club would agree to:
- Adopt a minimum carbon price or equivalent climate policy.
- Impose penalties, such as uniform tariffs, on imports from countries outside the club.
The penalties give outsiders a reason to join, because staying out means facing tariffs on their exports. Nordhaus’s modelling suggested a club with a modest tariff could achieve much stronger participation than voluntary agreements.
Related ideas
- Border carbon adjustments, such as the EU’s Carbon Border Adjustment Mechanism, charge importers for the carbon content of goods, encouraging trading partners to price carbon.
- Sector clubs: groups of countries agreeing on standards for particular industries, such as green steel.
- In 2022, the G7 launched a Climate Club focused on decarbonising industry, though without trade penalties.
Concerns
- Trade conflicts: penalties could trigger retaliation and conflict with World Trade Organization rules.
- Fairness: developing countries argue clubs could impose costs on them unfairly, given rich countries’ historical emissions.
- Measurement: comparing climate efforts across countries with different policies is complex.
A country outside the club exports steel to club members. If club members impose tariffs on its steel, the country's exporters lose sales. Adopting a carbon price to join the club might cost less than losing access to major markets. The club changes the country's calculation from "why should we act?" to "can we afford not to?"
Voluntary pledges have raised ambition, but without incentives or penalties, free-riding remains a powerful force. Economists therefore explore mechanisms like clubs and border adjustments.
- Free-riding undermines voluntary climate agreements.
- Nordhaus proposed climate clubs with minimum carbon prices and tariffs on outsiders.
- Border carbon adjustments and sector clubs are related ideas.
- Trade conflicts and fairness concerns complicate climate clubs.
No recording for this one yet - EconReader can read it aloud for you.