5---CBAs link to protectionism – that’s our internal link.

This free-rider concern led Nordhaus (2015) to propose a climate club, whereby ambitious jurisdictions could group together and seek to prevent free-riding behavior by levying penalties on insufficiently ambitious jurisdictions. In theory, ambition need not take the form of a carbon price; other measures that reduce emissions could be considered equivalent. In practice, Nordhaus cautioned that relying on price mechanisms would make implementation far more straightforward. Otherwise, it would be difficult to measure the relative stringency of countries’ policies, and any such judgements could swiftly become contentious.

In a climate club, penalties against low-ambition countries could take the form of a broad tariff on all imports, which has advantages relative to a carbon border adjustment mechanism. It is administratively simpler, because there is no need to measure the carbon content of imports. It is also less prone to trade reshuffling in response, because all goods from non-club countries would face the tariff.

Differences with a Carbon Border Adjustment Mechanism

Climate clubs differ from carbon border adjustments in that they are not meant to level the playing field for any particular good. Instead, they seek to encourage policy ambition by penalizing insufficiently ambitious countries with an across-the-board tariff. Like carbon border adjustments, they are capable of channeling protectionist sentiment toward potentially helpful ends, but there are also risks that the climate would be used as an excuse to impose tariffs that are not justified on climate policy grounds.

Climate clubs don’t have generalizable fiscal implications. If countries adopt carbon pricing to join the club, that will generate substantial revenues for those countries, but choosing to pursue an ambitious program of subsidies to join the club would have the opposite budgetary effect. Carbon border adjustments are designed to fall on only a small number of sectors that are carbon-intensive in production, so they have relatively minor revenue impacts. However, a climate club could conceivably enact broader tariffs, and thus would generally raise more revenue than a carbon border adjustment mechanism – though far less than an economy-wide carbon price.