A WTO compatible climate club that solves the free-rider problem in global climate policy

Abstract

The voluntary Paris Climate Agreement (and the Kyoto Protocol) has failed to halt the global growth of greenhouse gases since it does not address the free-rider problem in international climate agreements. Although there are proposals that address the free-rider problem (e.g., Nordhaus, 2015), the absence of WTO-compliance in existing proposals has impeded them from gaining support in policy circles. We propose a Climate Club in which member countries commit to net-zero carbon dioxide emissions by 2050 with intermediate goals, impose uniform penalty tariffs on imports of non-members, high tariffs on carbon-intensive products of non-members and progressive tariffs on members who do not meet intermediate targets. We propose an institutional structure like the Montreal Protocol including that rich country members voluntarily contribute to a Multilateral Fund for developing country members with low per capita emissions. This Climate Club meets the conditions of successful cooperative agreements on common resources since it contains reciprocal commitments and has penalties for non-compliance. Importantly, it is WTO compliant under the GATT Exception clause for the conservation of exhaustible natural resources and it can be implemented immediately. To achieve net-zero emissions by 2050, model estimates indicate the world needs both rapid technological progress to lower the costs of clean energy as well as an effective Climate Club. We propose that all high-income countries devote 0.20 percent of their GDP to technologies that lower the relative price of green energy or alternatives to other greenhouse gas emissions.