Why Trade Agreements Need Climate Clauses

Climate policy asks each government to bear domestic costs for a global benefit, giving countries an incentive to defect. Voluntary pledges under the Paris Agreement carry no binding enforcement. Trade agreements, by contrast, can make market access conditional on compliance. The case for climate clauses rests on this difference in enforcement.

The structural link between trade gains and emissions

Farrokhi, Lashkaripour, and Taheri (2025) document that countries gaining more from trade agreements also tend to generate more trade-related emissions. Comparative advantage often lies in carbon-intensive sectors such as heavy manufacturing, resource extraction, and energy-intensive chemicals. Trade liberalization can therefore expand the sectors in which the emissions externality is largest. An agreement that ignores emissions leaves part of the social cost of liberalization unaddressed.

Carbon taxes create cross-border externalities

When country A imposes a carbon tax, the price of its carbon-intensive exports rises, increasing costs for importers in country B. At the same time, lower demand for fossil inputs in A may reduce world energy prices and weaken carbon-pricing incentives elsewhere. These pecuniary terms-of-trade externalities operate through prices rather than physical spillovers, but they still affect welfare and policy incentives abroad. Domestic carbon pricing does not account for them. Trade agreements already coordinate terms-of-trade effects and can internalize these additional spillovers.

The mechanism: contingent access and redistribution

The framework in Farrokhi, Lashkaripour, and Taheri (2025) has two components. First, market access is conditional on adopting an agreed carbon price. Countries that do not comply face reduced access, as in a climate club. Second, revenues from border carbon adjustments enter a Global Climate Fund and are redistributed to countries whose gains from trade would otherwise be reduced by carbon pricing.

In the model, this mechanism sustains a carbon price of roughly $119 per ton of CO2 and reduces global emissions by approximately 50 percent. Redistribution makes universal participation incentive-compatible by compensating carbon-intensive exporters that would otherwise bear a disproportionate cost and prefer to defect.

Why standalone instruments fall short

Farrokhi and Lashkaripour (2025) find that border carbon adjustments alone, without the participation and redistribution provisions of a trade agreement, deliver only 3.4 percent of the globally optimal emissions reduction. A border charge corrects an import price; it does not provide binding commitments, dispute resolution, or conditional market access.