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Climate Club by Dennis Peterson

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Global price per ton, enforced by import duties on nonparticipants


Description

Summary

This is a short exposition of the recent Climate Clubs mechanism proposed by Nordhaus. Its essentials are:

1) A simple price per ton of carbon emissions, implemented by all participating countries.

2) Import duties imposed by partipating countries against nonparticipants.

In addition to the work by Nordhaus, this proposal suggests a simple procedure for negotiating the global carbon price.


What actions do you propose?

On the planet Magrathea there are ten countries, each emitting 2 Gt CO2 per year, totaling 20 Gt/year. Each country participates equally in international trade.

Magrathean scientists determine that carbon emissions will cause economic damage of $50 per ton CO2, for a total of $1 trillion per year. They also find that the damage can be prevented with a tax of $25/ton CO2, or $50 billion per country.

If all countries were to enact this tax, then each country would come out $50 billion ahead, every year.

But what happens if one country abandons the tax? It saves the $50 billion tax, and still benefits from the contributions of the other countries. Its share of that is $45 billion, so now it's $95 billion ahead.

This is the public goods problem we face in climate change. Every country hopes all other countries contribute. But whatever the rest of the world does, each country does best by not contributing. At least, until civilization collapses.

What can be done?

The Magratheans, luckily, are pretty smart. Their governments propose a treaty, requiring each country to enact a carbon fee of $25/ton, or $50 billion/year for each country. To enforce this treaty, they allow each participating country to impose import duties on each nonparticipating country, in the amount of

The Magratheans, luckily, are pretty smart. Their governments propose a treaty, requiring each country to enact a carbon fee of $25/ton, or $50 billion/year for each country. To enforce this treaty, they allow each participating country to impose import duties on each nonparticipating country, in the amount of $10 billion/year. (They also prohibit retaliation for these import duties.)

Suppose only one country participates. It loses $50 billion, but collects $90 billion in import duties from the other countries. It also benefits a little from its climate contribution, adding another $5 billion, but all countries get that.

Now suppose nine countries participate. The remaining renegade will save $50 billion, pay a total penalty of $90 billion, and get climate benefit worth $45 billion, for a net negative $5 billion. Other countries pay $50 billion in benefit, climate benefit of $45 billion, and

Now suppose nine countries participate. The remaining renegade will save $50 billion, pay a total penalty of $90 billion, and get climate benefit worth $45 billion, for a net negative $5 billion. Other countries pay $50 billion in benefit, climate benefit of $45 billion, and $10 billion in import duties for a total of positive $5 billion.

Of course, the renegade could withdraw from the treaty entirely, retaliating with import duties against all other countries, collecting $90 billion. To prevent this, the climate treaty should be part of a larger free trade agreement. To withdraw entirely is to abandon all protections under the agreement.

Feasibility

Cap and trade negotiations have focused on setting individual caps or targets for each country. Every country has an incentive to negotiate the highest possible cap. It's difficult to reach agreement on such a large set of numbers.

If instead we focus on a single, shared carbon price, we only have to agree on one number.

Choosing the Number

We still need to negotiate our global carbon price. Here's one possible method. (This method is the original part of this colab entry, so Nordhaus shouldn't be blamed.)

1) For each country, estimate the carbon reductions that would accrue for various carbon prices. This doesn't have to be complicated, and approximate accuracy is fine. Nordhaus claims that expected emissions reductions for carbon prices of $12.5, $25, $50, and $100 are 9 percent, 18 percent, 36 percent, and 72 percent of baseline emissions. We could simply use these numbers, multiplying by each country's current emissions.

2) On a public bulletin board, create a grid, one row for each country, one column for each candidate carbon price.

3) Each country marks which carbon prices it's willing to accept. Countries can change their marks after observing what other countries do.

4) Once all countries are done making changes, choose the carbon price that attains the lowest total tonnage of CO2 emissions.

To save time, the grid can be initialized by letting every country submit, for each proposed carbon price, the total global participation it requires in order to agree to that carbon price. Then, for each price, a simple computer algorithm can mark the grid for all countries, finding the combination that maximizes participation while staying consistent with all countries' requirements. Once this is done, countries can make manual adjustments.

With this approach, countries can take into account the actions of particular trading partners, or choose to accept higher carbon prices if the total global emission cuts make them worthwhile.

This procedure can be repeated on a periodic basis. It may seem less predictable than a fixed schedule, but since countries can change policy at any time, fixed schedules are an illusion anyway (Kyoto being an illustrative example).

Penalties

The penalties are intended to motivate participation, not to charge for actual carbon emissions. Accordingly they are a simple percentage of the monetary value of goods. There's no need for complicated estimates on carbon intensity of imports.

Impact

According to modeling by Nordhaus, a carbon price of up to $50/ton could attain high participation, using an import duty penalty of 4% for nonparticipants. Higher reduction "would require improvements in technology so that it becomes economical to attain these higher reduction rates at lower costs."


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How will these actions have a high impact in addressing climate change?


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Time line


Related proposals


References

Nordhaus, William. 2015. "Climate Clubs: Overcoming Free-Riding in International Climate Policy." American Economic Review, 105(4): 1339-70.