Climate Club Can Set Positive Incentives for More Climate Protection

Successful climate protection requires more effective incentive schemes that motivate countries to increase their efforts to reduce greenhouse gas emissions. According to ZEW, the UN Climate Change Conference in Glasgow (COP26) offers a good opportunity to negotiate or even establish a climate club. This would be an important step towards raising the level for ambitious climate protection. For the ZEW economists, on the other hand, it is questionable whether the gradual increase in country-specific climate change mitigation efforts agreed in the Paris Climate Agreement is really sufficient to achieve the global climate protection target. According to calculations by Climate Action Tracker, many countries have hardly shown any ambition to further reduce their emission targets. At the same time, only a few signatory countries to the Paris Agreement are on track with the 2-degree target. The reason for the hesitation of many countries certainly also lies in the underlying free-rider incentives that emanate from contributions by others to their own ambition levels.

“The international community is under enormous pressure to achieve successful results at the climate conference in Glasgow. The central question is whether it will be possible to translate the self-imposed goals from the Paris Climate Agreement into concrete and effective measures to avoid global greenhouse gas emissions in a timely manner. Instead of relying solely on the signatory states to gradually increase their climate change mitigation contributions, from an economic point of view the principle of reciprocity should become more central. Establishing a climate club can be the right approach,” says Professor Martin Kesternich, deputy head of the ZEW Research Department “Environmental and Resource Economics, Environmental Management”.

A climate club relies on international cooperation to solve the problem of ensuring climate protection. The member states agree on a CO₂ price and thus create an incentive for greater emission reductions. At the same time, they negotiate exclusive benefits among themselves, such as free trade agreements or financial incentives for lower emissions. As studies have shown, such positive incentives to cooperate are even more effective than punishment for non-cooperation.

The current practice of gradually increasing country-specific climate protection targets (ratcheting) merely relies on the hope that emission reductions will become more ambitious in the future. However, it remains unclear what incentives ratcheting actually creates in international climate protection.

“From an economic point of view, the ratcheting mechanism does not change the underlying incentive problem. On the contrary, this mechanism can even prove detrimental. Countries that are actively engaged in climate protection continue to bear the costs alone, while all countries benefit from the reduced emissions. As a result, countries are tempted to contribute little or nothing to climate protection. Our experimental economic study on this topic even shows that ratcheting has a negative effect. Countries with ambitious goals have been shown to curb their ambition in order to prevent being free-ridden by others,” says ZEW Research Associate Professor Bodo Sturm from HTWK Leipzig.