Economist William D. Nordhaus delivered the 2014 Henry and Bryna David Lecture at the National Academy of Sciences on October 2. Nordhaus is the Sterling Professor of Economics at Yale University and will chair the Boston Federal Reserve Bank for 2014-2015. The topic of his lecture was “Climate Clubs: How to prevent free-riding in international environmental agreements.”
Nordhaus observed that while a lot of progress has been made in climate science, estimating the costs and benefits of reducing emissions, and developing policy instruments to reduce emissions (like carbon taxes and cap-and-trade systems), there has been essentially no progress in improving international climate agreements to prevent free-riding. He explained that international agreements like the Kyoto Protocol expect countries to act against their economic self-interests by voluntarily imposing higher costs on themselves (reducing carbon emissions), while other countries can reap whatever environmental benefits are gained without reducing emissions themselves (free-riding). This dynamic incentivized countries like the U.S. and Canada to drop out of the agreement, minimizing the Protocol’s impact.
Nordhaus proposed an alternative model for an international climate agreement designed to eliminate the free-riding problem, an arrangement he called a “climate club.” This type of club would consist of two elements: (1) All member countries would agree to meet a target minimum price for carbon emissions, and (2) The member countries would impose a tariff on non-participant countries as a penalty. Nordhaus shared the results of an analysis he conducted that demonstrated that a low-to-moderate price for carbon emissions (on the scale of $25-$50 per ton of CO2) and a low penalty tariff on non-participants (around 7 percent) would be enough to induce broad participation, allowing countries to act in their economic self-interests while still producing a reasonably efficient global climate policy.