Measures to Enhance the Effectiveness of International Climate Agreements: The Case of Border Carbon Adjustments

Alaa Al Khourdajie, Michael Finus

Research output: Working paper

Abstract / Description of output

Unilateral or sub-global actions on climate change are not very effective but global action is not achievable due to strong free-rider incentives. These incentives arise because non-signatories benefit from emission reductions of signatories without incurring abatement costs. Moreover, non-signatories may even increase their emissions as a result of lower fuel prices and because of a relocation of production from "clean" signatory to "dirty" non-signatory countries, typically referred to as carbon leakage. We study whether and under which conditions border carbon adjustments (BCAs) can mitigate free-riding in a simple strategic trade model which captures consumers' taste for variety. We show that BCAs lead to larger stable international climate agreements associated with global welfare gains but only if treaties are of the open membership type and do not serve the interests of few countries which may prefer an exclusive membership rule. We focus on the strategic interaction between signatory and non-signatory countries and the game-theoretic properties and institutional rules of treaty formation.
Original languageEnglish
PublisherBath Economics Research Papers
Number of pages57
Volume71/18
Publication statusPublished - 1 Feb 2018

Keywords / Materials (for Non-textual outputs)

  • self-enforcing international climate agreements
  • international trade
  • border carbon adjustments
  • consumers' taste for variety and horizontal product differentiation

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