What Is a Climate Club?

A climate club is a coalition of countries that adopts a common carbon price and imposes trade penalties on nonmembers. The idea, formalized by Nordhaus (2015), targets the central failure of international climate agreements: free-riding. Because emissions reduction is a public good, each country has an incentive to let others bear the cost. A club changes the arithmetic by making nonparticipation expensive in trade terms.

How the mechanism works

Members agree on a carbon price (or an equivalent emissions-reduction commitment) and maintain normal trade relations with one another. Nonmembers face discriminatory tariffs or loss of market access. The penalty must be large enough that staying outside the club is more costly than joining, even for countries with high abatement costs. When that condition holds, the equilibrium is universal participation: every country joins, the penalties are never actually imposed, and free trade is preserved.

What the quantitative evidence shows

Farrokhi and Lashkaripour (2025) embed the climate-club mechanism in a calibrated general-equilibrium trade model covering 64 countries and 40 sectors. They compare three regimes: unilateral carbon pricing, border carbon adjustments, and a climate club with contingent trade penalties. The results are not close. Border taxes alone capture 3.4 percent of the globally optimal carbon reduction. The club captures 33 to 68 percent, depending on the penalty structure and the degree of coordination. The gap reflects the difference between correcting a price margin at the border and restructuring the participation incentives of sovereign governments.

Why redistribution may be necessary

Universal participation requires that every country gains from joining relative to staying out. For some countries, particularly those whose comparative advantage runs through carbon-intensive production, the abatement cost of membership is high. Farrokhi, Lashkaripour, and Taheri (2025) show that embedding the club mechanism inside trade agreements and redistributing revenues through a Global Climate Fund can sustain participation at a carbon price near $119 per ton of CO2. Without redistribution, the coalition may hold only among rich countries whose abatement costs are already low.