Tiered Climate Clubs: Global Abatement Without Global Agreement *

Abstract

This paper introduces a novel policy structure  to mitigate global carbon emissions without requiring broad multilateral cooperation. Extending Nordhaus's (2015) climate club, countries in the ``second tier'' must price carbon at a fixed fraction of the average carbon price within the first tier, or face tariffs. Tier 1 countries  abate more since doing so induces matching abatement in the second tier.  The   stable first-tier  coalition consists of the US and   EU, which optimally sets a carbon price at 60% of the global Social Cost of Carbon. This policy structure achieves global abatement four and a half times higher than the uncoordinated Nash equilibrium and one-third of the globally efficient level. Quantitative results have been revised from the prior draft due to a corrected calibration error, detailed in the Appendix.

Keywords: international environmental agreement, climate club, trade penalties, bottom-up coalition JEL Classifications: Q54