Climate Coalitions: Solving Carbon Free-Rider Issue?

Because greenhouse gases affect the global climate regardless of where they are emitted, countries benefit from other nations' efforts to cut emissions while retaining incentives to underinvest themselves. In a Policy Article, Catherine Wolfram and colleagues argue that countries could make climate policy more effective by forming a coalition that would adopt carbon pricing for four major industrial sectors – iron and steel, aluminum, cement, and fertilizers – which together produce about 20% of global greenhouse-gas emissions. To prevent companies from shifting production to countries with weaker climate policies, coalition members would also impose carbon charges on imports from nonmembers, the authors note. Here, Wolfram et al. investigate the value and potential of such coalitions. Using detailed data on individual industrial plants and global trade patterns, the authors compared a uniform carbon price with a graduated system that sets lower prices for lower-income countries. They found that an initial coalition could reduce global greenhouse-gas emissions by about 1.5%, while having relatively small effects on industrial production, limiting carbon leakage, and generating nearly $200 billion in annual public revenue. According to the authors, the approach is designed to address a central weakness of international climate policy: countries differ greatly in their economic capacity and willingness to impose carbon costs. A tiered system, combined with technology sharing, climate finance, and capacity building, could therefore allow lower-income countries to participate while gradually strengthening their climate policies. "A coalition that marries carbon pricing and trade policies offers a practical path at a fractious time and offers a pathway to overcome the international climate-policy coordination problem. It aligns incentives, builds on what countries are already doing, and replaces a race to the bottom with a race to the cleanest," Wolfram et al. write.