Trade Sanctions can Harm Cooperation on Climate Protection

By Achim Hagen and Jan Schneider

A promising approach in international climate policy, which is also discussed in the context of the EU Green Deal, is the formation of a climate club. The idea was brought forward by Nobel laureate William Nordhaus in a widely acclaimed study: A coalition of countries with ambitious climate policies -- the climate club -- could use trade sanctions to incentivize other countries to join the climate club and thus adopt more ambitious climate policies.

BCCP Fellow Achim Hagen and his co-author Jan Schneider show that such sanctions can be detrimental to international cooperation on climate protection if trading partners take retaliatory countermeasures. In this case, the desired positive effects on cooperation only arise if the climate club is already sufficiently large before the trade sanctions are introduced. Moreover, even if the climate club expands as a result of trade sanctions, the additional distortions of international trade can lead to substantial welfare losses. Both Europe and the United States are indispensable members of a climate club for the successful implementation of trade sanctions.

The full paper "Trade sanctions and the stability of climate coalitions", is published in the Journal of Environmental Economics and Management.

This text is jointly published by BCCP News and BSE Insights.