Climate Clubs and Carbon Border Adjustments

International climate cooperation faces a stark incentive problem. Emissions reduction is a global public good, but its costs fall on individual governments. Voluntary pledges under the Paris framework have no enforcement mechanism worth the name. Trade policy (border carbon adjustments, climate clubs, and climate-linked trade agreements) offers a different lever, one that ties market access to climate participation. The research collected here quantifies how much each of these instruments can actually deliver.

Border adjustments and their limits

A carbon border adjustment charges imports according to their embedded carbon content, equalizing the cost facing domestic and foreign producers. The intuition is clean: prevent carbon leakage and remove the competitive disadvantage of unilateral carbon pricing. But intuition oversells the policy. Farrokhi and Lashkaripour (2025) build a quantitative trade model with 64 countries, 40 sectors, and input-output linkages. Their central finding is that border carbon taxes, layered onto the existing (already distorted) tariff structure, achieve only 3.4 percent of the globally optimal carbon reduction. The reason is structural: real-world tariffs are not set to correct externalities, and adding a carbon surcharge to a misaligned base does not produce the right relative prices.

Climate clubs as an enforcement device

The concept of a climate club goes back to Nordhaus (2015): a coalition whose members impose trade penalties on nonmembers, making free-riding costly enough to deter it. Farrokhi and Lashkaripour formalize this idea quantitatively. In their model, a club that conditions market access on adoption of a common carbon price can sustain 33 to 68 percent of the globally optimal reduction, roughly ten to twenty times the border-tax-only outcome. The club achieves universal participation in equilibrium: the penalties for staying out exceed the cost of joining. Crucially, once universal compliance holds, the penalties are never actually imposed, so the club preserves free trade while enforcing climate discipline.

Climate goals inside trade agreements

A separate but complementary line of work, Farrokhi, Lashkaripour, and Taheri (2025), asks how climate objectives can be embedded in the architecture of trade agreements themselves. Two observations motivate the design. First, countries that gain the most from trade liberalization also tend to generate higher trade-related emissions; the correlation is not coincidental but structural, since comparative advantage often runs through carbon-intensive sectors. Second, when one country imposes a carbon tax, the resulting price changes spill onto trading partners through terms-of-trade effects, a pecuniary externality that uncoordinated policy ignores.

Their proposed mechanism pairs contingent market access with a Global Climate Fund that redistributes border-tax revenues. The quantitative result: the arrangement can support a carbon price of roughly $119 per ton of CO2 and reduce global emissions by about 50 percent. The redistribution is not charity; it is the price of sustaining participation from countries whose trade gains would otherwise be eroded by carbon pricing.

Industrial policy and climate externalities

Trade-and-climate policy does not operate in a vacuum. Lashkaripour and Wu (2025) survey the broader landscape of industrial policy, including the role of subsidies, local-content requirements, and sector-specific interventions that interact with carbon pricing. Climate externalities give industrial policy a second rationale beyond traditional market failures, but also multiply the dimensions along which policy can go wrong.