What Is a Climate Club?

A climate club is a coalition whose members adopt a common carbon price and impose trade penalties on nonmembers. Nordhaus (2015) formalizes the idea as a response to free-riding in international climate policy. Emissions reductions benefit all countries, but each government would prefer that others bear the cost. A club raises the trade cost of remaining outside the agreement.

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 reduced market access. If remaining outside is more costly than complying, including for countries with high abatement costs, every country joins. The threat of a penalty then sustains participation without being used, and trade among all countries remains free.

What the quantitative evidence shows

Farrokhi and Lashkaripour (2025) place this mechanism in a calibrated general-equilibrium model with 64 countries and 40 sectors. They compare unilateral carbon pricing, border carbon adjustments, and a climate club with contingent trade penalties. Border taxes deliver 3.4 percent of the globally optimal carbon reduction. The climate club delivers 33 to 68 percent, depending on the penalty structure and degree of coordination. The difference arises because a border adjustment changes one price margin, whereas the club also changes governments' incentives to participate.

Why redistribution may be necessary

Universal participation requires every country to prefer membership to staying out. This condition is harder to satisfy for countries whose comparative advantage lies in carbon-intensive production and whose abatement costs are therefore high. Farrokhi, Lashkaripour, and Taheri (2025) show that incorporating the club mechanism into trade agreements, with revenues redistributed through a Global Climate Fund, can sustain participation at a carbon price near $119 per ton of CO2. Without redistribution, the coalition may remain limited to rich countries with relatively low abatement costs.