Climate Clubs and Carbon Border Adjustments

International climate cooperation has a familiar incentive problem. Emissions reductions benefit all countries, while the cost of abatement falls on individual governments. Voluntary pledges under the Paris framework do not by themselves enforce participation. Trade-based policies add another margin: they can change import prices or make market access conditional on climate policy. The papers summarized here compare the quantitative effects of border carbon adjustments, climate clubs, and climate-linked trade agreements.

Border adjustments and their limits

A carbon border adjustment charges imports according to their embedded carbon content, narrowing the cost difference between domestic and foreign producers. In a textbook setting, this reduces leakage and protects trade-exposed firms subject to unilateral carbon pricing. Farrokhi and Lashkaripour (2025) study the policy in a quantitative trade model with 64 countries, 40 sectors, and input-output linkages. When carbon charges are added to existing tariff schedules, they achieve only 3.4 percent of the globally optimal carbon reduction. Actual tariffs are not designed to correct carbon externalities, so the added charge does not generate the required relative prices.

Climate clubs as an enforcement device

Nordhaus (2015) defines a climate club as a coalition that imposes trade penalties on nonmembers, making free-riding costly. Farrokhi and Lashkaripour quantify this mechanism. In their model, a club that conditions market access on a common carbon price sustains 33 to 68 percent of the globally optimal reduction, roughly ten to twenty times the outcome under border taxes alone. The club induces universal participation because the cost of staying out exceeds the cost of joining. Once all countries comply, the penalties are not imposed, and free trade is preserved.

Climate goals inside trade agreements

Farrokhi, Lashkaripour, and Taheri (2025) study how to incorporate climate objectives into trade agreements. Their design starts from two observations. First, countries that gain more from trade liberalization also tend to generate more trade-related emissions, in part because comparative advantage runs through carbon-intensive sectors. Second, a carbon tax in one country changes the prices faced by its trading partners. Uncoordinated policy does not internalize this pecuniary terms-of-trade externality.

The proposed agreement pairs contingent market access with a Global Climate Fund that redistributes border-tax revenues. In the model, this arrangement supports a carbon price of roughly $119 per ton of CO2 and reduces global emissions by about 50 percent. Redistribution compensates countries whose trade gains would otherwise be eroded by carbon pricing, making their participation sustainable.

Industrial policy and climate externalities

Lashkaripour and Wu (2025) survey how industrial policy, including subsidies, local-content requirements, and sector-specific interventions, interacts with carbon pricing. Climate externalities provide an additional rationale for industrial policy beyond traditional market failures. They also expand the set of policy interactions that coordination must address.