Climate Compacts to Combat Free Riding in International Climate Agreements
Princeton Bendheim Center for Finance, 2020
In this webinar for the Princeton Bendheim Center for Finance, Nobel Prize winner Willian Nordhaus explains the main problems regarding the economics of a low-carbon energy transition. The main problem in the way of an energy transition is the muddled, fragmented and lowly character of CO2 taxation. Even in countries where CO2 taxes are enacted, subsidies to fossil energy sources are still significantly higher, preserving fossil fuels as the most attractive alternative. Meanwhile, the free rider dilemma is driving the international climate policy to a dead end. Voluntary adoption of climate policies in some countries does not ensure the adoption in others, and the benefits of unilateral compliance are too low. This can be clearly seen in low carbon prices around the world and the collapse of the Kyoto Protocol. In order to overcome the negative incentives that cripple global climate policies, it is necessary to create international agreements composed by a "climate club" or "climate compact" with enough power to punish non-compliant states to combat free-riding.
Comment from our editors:
This webinar is a great introduction to the global implications of climate policies and the real obstacles to reach a real global energy transition. Delivered by William Nordhaus, one of the most eminent minds on the subject, it brings back a mix of institutional economics, climate economics and international political economy. It is a great introduction to the subject of climate economics and carbon prices.
However, Nordhaus's approach is decidely neoclassical of nature, as his argument rests on the use of markets and the system of relative prices to combat climate change. There a other approaches, mainly from an ecological point of view, arguing that to try and use the market system to preserve the environment will always fall short of the task, simply because it would still preserve the mantra of economic growth.