Tiered Climate Clubs : A Bottom-Up Approach to Abate Global Emissions

The paper proposes an agreement structure that extends Nordhaus's (2015) climate club by adding a second tier. Countries outside the coalition are required to price carbon at a fixed fraction of the average carbon price adopted within the coalition, or face tariffs. Coalition countries abate more since doing so induces matching abatement elsewhere. In contrast to a single-tier climate club in which many stable coalitions are possible, the stable coalition is unique for the calibrated model, and it consists of the US, EU, and UK. With the calibrated match rate of 46 percent for the stable coalition, global carbon abatement is just over half of the efficient level when the coalition chooses policy to maximize coalition surplus. If the match rate is increased to 67 percent, global abatement equals the efficient level. If, instead, coalition countries do not cooperate with each other---perhaps deeming tariff threats against economically powerful regions to be too dangerous---then the agreement could still achieve 85 percent of the efficient abatement level if the match rate is increased to 100 percent