Climate Club in China

This paper examines the conditions under which a subnational Climate Club is stable and welfare-enhancing. We analyze a Climate Club among Chinese provinces using a hybrid-cooperative game framework in which regions simultaneously decide whether to join the club and set their abatement levels. We show that equilibrium requires member compliance and non-member sanctions, with total welfare decreasing in economic flow fee rates for a given club size and jumping upwards when higher flow fee rates enlarge the club size. We further identify the optimal strategy of carbon prices and economic flow fees rates that generate net positive total welfare for participating members. Our framework is then extended to investigate the effects of health vulnerability, historical emissions, and trade protection on club membership, emissions and total welfare. We find that incorporating health vulnerability strengthens economic and environmental gains. Conversely, accounting for historical emissions and trade protection weakens these effects by diminishing incentives for participation and abatement. Finally, we examine the club participation player-level decision process provide concrete policy recommendations. Overall, the Climate Club can serve as an effective complementary policy instrument for carbon mitigation, yielding substantial social welfare improvements if club constraints are judiciously selected. • Practical energy policy tool : We model a market-based mechanism where provinces set common carbon prices (140-420 yuan/ton) and impose economic flow fees (1.25-2.5%) on non-participants, providing concrete parameters for implementation. • Quantitative regional analysis : Using 2017 provincial data on emissions, economic flows, and energy consumption across 30 Chinese provinces, we solve for Nash equilibria under different carbon price regimes. • Applied extensions : We incorporate three policy-relevant modifications - health vulnerability indices, historical emissions responsibilities, and trade protection exemptions - demonstrating how real-world constraints affect optimal club design. • Actionable findings : Our results identify specific provinces (Shanghai, Zhejiang, Guangdong) as natural leaders and quantify welfare-maximizing carbon prices (210 yuan/ton) that balance emission reductions (290.5 million tons) with economic impacts.