Farid Farrokhi, Boston College

Trade policy is often cast as a solution to the free-riding problem in international climate agreements. This paper examines the extent to which trade policy can deliver on this promise. We incorporate global supply chains of carbon and climate externalities into a multi-country, multi-industry general equilibrium model of trade. By deriving theoretical formulas for optimal carbon and border taxes, we quantify the maximum efficacy of two trade policy solutions to the free-riding problem. First, we show that border taxes, when used as non-contingent, indirect mechanisms for carbon taxation, have limited potential to mitigate global emissions even under optimal design. However, Nordhaus’s (2015) climate club framework, in which border taxes are used as contingent penalties to deter free riding, is highly effective. The cli-mate club can achieve up to 69% of the emissions reduction under globally optimal carbon pricing, while ensuring global participation and maintaining free trade. This success depends on major economic powers like the U.S., E.U., and China forming an initial alliance of core members and leveraging their collective trade penalties to compel participation by reluctant governments.

DATE: Friday, November 1, 2024

TIME: 3:30-5:00 p.m.

LOCATION: Fronczak 444