Why Trade Agreements Need Climate Clauses

Climate treaties ask governments to bear domestic costs for a global benefit. That structure invites defection, and defection is what we observe: voluntary pledges under the Paris Agreement carry no binding enforcement. Trade agreements, by contrast, allocate market access, one of the few things governments value enough to change behavior for. The case for embedding climate clauses in trade agreements rests on this asymmetry in enforcement capacity.

The structural link between trade gains and emissions

The connection is not incidental. Farrokhi, Lashkaripour, and Taheri (2025) document that countries benefiting most from trade agreements also tend to generate higher trade-related emissions. Comparative advantage often runs through carbon-intensive sectors: heavy manufacturing, resource extraction, energy-intensive chemicals. Trade liberalization expands precisely the sectors where the emissions externality is largest. Ignoring this correlation means designing trade deals that systematically widen the gap between private gains and social costs.

Carbon taxes create cross-border externalities

When country A imposes a carbon tax, it raises the price of its carbon-intensive exports. Country B, which imports those goods, faces higher costs. Simultaneously, A's reduced demand for fossil inputs may lower global energy prices, partially offsetting carbon-pricing incentives elsewhere. These are pecuniary terms-of-trade externalities: they operate through prices rather than through physical spillovers, but they are real and they are large. Uncoordinated carbon pricing ignores them. Trade agreements, which already manage terms-of-trade effects, are the natural institutional home for internalizing them.

The mechanism: contingent access and redistribution

The framework proposed in Farrokhi, Lashkaripour, and Taheri (2025) has two components. First, market access is made contingent on adoption of an agreed carbon price; countries that fail to price carbon face reduced access, creating an enforcement incentive structurally similar to a climate club. Second, revenues from border carbon adjustments are pooled in a Global Climate Fund and redistributed to compensate countries whose trade gains would otherwise be eroded by carbon pricing.

The quantitative result is substantial: the mechanism can sustain a carbon price of roughly $119 per ton of CO2 and reduce global emissions by approximately 50 percent. The redistribution is not incidental to the design; it is what makes universal participation incentive-compatible. Without it, carbon-intensive exporters bear disproportionate costs and have strong incentives to defect.

Why standalone instruments fall short

Farrokhi and Lashkaripour (2025) show that border carbon adjustments alone, without the participation and redistribution architecture of a trade agreement, deliver only 3.4 percent of the globally optimal emissions reduction. The lesson is that price corrections at the border cannot substitute for the institutional machinery that trade agreements provide: binding commitments, dispute resolution, and conditional market access.