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

Abstract This paper is the first to propose an international climate agreement that both addresses the free-rider problem in international climate policy and is also World Trade Organization (WTO)-compliant. The Paris Climate Agreement is WTO-compliant but is falling far short of its goals since it does not address the free-rider problem. The Nordhaus (Climate clubs: Overcoming free riding in international climate policy. The American Economic Review. 105(4), 1339–1370, DOI: 10.1257/aer.15000001, 2015) proposal addresses the free-rider problem, but it would violate the WTO commitments of many countries. We propose a climate club for carbon dioxide (and similar clubs for methane and nitrous oxide) where each of the member countries commits to net-zero emissions by 2050 (using any regulatory approach) with intermediate goals and imposes various trade penalties on non-members and delinquent members. The proposal includes accommodation for developing countries. Our proposal is WTO-compatible under GATT Article XX(g) since it does not impose a specific regulatory approach for achieving net-zero emissions. This climate club should significantly reduce emissions since it meets the conditions of multiple sub-fields of economic research on what is required for successful cooperative agreements on common resources. Compared to an agreement imposing carbon pricing only, these climate clubs are both more economically efficient and politically acceptable since they provide incentives for important complementary climate policies.