Climate clubs and the macro-economic benefits of international cooperation on climate policy

Abstract

The Paris agreement has provided a new framework for climate policy. Complementary forms of international collaboration, such as climate clubs, are probably necessary to foster and mainstream the process of gradual and voluntary increase in nationally determined contributions. We provide a quantitative macro-economic assessment of the costs and benefits that would be associated with different climate club architectures. We find that the key benefits that could structure the club are enhanced technological diffusion and the provision of low-cost climate finance, which reduce investment costs and also enables developing countries to take full advantage of technological diffusion. Although they face the highest absolute mitigation cost, China and India are the largest relative winners from club participation because the burden faced by these countries to finance their energy transition can be massively reduced following their participation in the club. Achieving the Paris Agreement goals may require complementary institutions such as climate clubs. Enhanced technological diffusion and the provision of low-cost climate finance are shown to support the creation of climate coalitions.