Climate Clubs: A Complementary Design to the UN Paris Agreement

Abstract: Negotiations on climate policy have made only a little progress since the early 1990s. Economic theory offers various reasons for this unsatisfactory situation. Climate change is a global public good. Each country’s emissions contribute to an increase in the overall concentration of greenhouse gases, and each country’s mitigation policy generates higher costs than benefits. Hence, in a first step, this article focuses on game theory results that indicate free-riding incentives in the case of a public good. In the end, no one wins and all parties are worse off. A climate club would provide a supplementary approach and a solution to eliminate free-riding, externalities and lack of commitment by individual states. For such a club to be successful, some characteristics must be in place. Consequently, various options for a successful club are discussed. Finally, an analysis of the climate club approach between the European Union, United States and China suggests that, combining the international trade policy and domestic carbon pricing, could help to achieve the aim of keeping the global temperature rise below 2°C.

Key words: climate club, game theory, externalities, climate mitigation policy, carbon tax

         JEL codes: Q5, Q58