Every year, COP summits call for action to tackle climate change. Every year, global emissions remain stubbornly far above targets. Is it time to rethink the strategy? Instead of searching for the ‘optimal’ climate policy, a new study by TSE’s Jean-Charles Rochet seeks to identify the best deal that would be adopted by all countries, including the largest polluters. His research shows how economists can supply the tools to unleash the potential of global cooperation and new technologies, if only our leaders can find the political will.
Climate summits have been falling short for 30 years. How does your paper aim to put them on the right track?
Economists typically approach climate change by trying to calculate the “optimal” carbon price, reflecting the true societal damage caused by CO2 emissions. But that calculation focuses on overall costs and benefits, as if a central authority could impose a global plan. In reality, every country decides for itself whether to participate in a climate policy. This choice is heavily influenced by international differences in climate concerns, exposure to ecological risks, and reliance on fossil fuels.
Reflecting these differences, our study investigates how far global emissions can be cut voluntarily. To keep all countries on board, we develop a redistribution mechanism for financially compensating those hit hardest by the shift to a lower-carbon economy. Crucially, our “self-enforcing” deal is designed to leave no participant worse off than before.
What kind of policy emerges from this approach?
When each country sets its own targets, efforts are highly disjointed. As a result, our paper shows that the most efficient solution still involves a single international carbon price, ensuring that emissions are reduced where it is cheapest to do so.
Calibrating with detailed data from 69 countries, our model shows that a self-enforcing mechanism could cut global emissions by 35%, consistent with limiting warming to 2°C. However, this would require a carbon price of $250 per ton alongside $2.5 trillion in annual transfers from richer, cleaner economies to poorer, more carbon-intensive ones.
That’s about 3% of global GDP in transfers. Why do ‘cleaner’ countries need to pay so much?
A high carbon price is not equally painful for everyone. High-emitting countries like China and India need compensation because they will face the biggest losses as jobs, trade and production relocate to cleaner countries. Otherwise, they will simply opt out.
In our framework, the countries who fund the transfers are those who benefit most from the green economy and place higher value on emissions reduction. Today, some countries are already bearing more abatement cost than their domestic interest would justify, which could be seen as an implicit transfer to others.
What if major players like the United States decide to opt out?
It is hard to imagine wealthy countries agreeing to climate finance at this scale. As a relatively clean economy, the US would need to pay around $335 billion per year, which is about five times its 2023 foreign aid budget. France and Italy face transfers that could reach 5-8% of GDP.
However, our results illustrate that a lot can still be done by smaller coalitions, as long as China stays on board. We simulate a deal that excludes countries that have made weak pledges or shown signs of backtracking, such as the US, Canada, Australia, Argentina and Brazil. The remaining participants can still achieve a 27% emissions reduction that comes very close to the 2°C target.
Can anything expand what is politically feasible?
Right now, the economics works better than the politics. Even so, innovation is a potential gamechanger. If green technologies become cheaper and more widely available, the cost of reducing emissions falls. In turn, this makes it easier for high-emission countries to accept stronger climate policies and reduces the compensation cost for cleaner countries. Governments can accelerate the diffusion of innovative tools through R&D subsidies, institutional support and technology sharing.
We also demonstrate the more gradual benefits of increasing domestic support for climate action. Better information, incentives, direct experience of climate impacts, or awareness campaigns can push citizens and governments to place greater value on the environment, increasing the acceptability of climate deals.
So, should we stop the COPs?
The title of our paper is deliberately provocative. Our real focus is to explore the potential of voluntary cooperation. We show that existing national pledges are not only insufficient, they are needlessly expensive. Even if all the COP21 pledges were fully implemented, global emissions would fall by only 10%. With a uniform carbon price of $70, our mechanism could deliver the same result for a $1.4 trillion lower annual cost.
The COPs are a valuable forum for coordination. As well as setting the right targets, they can support the design of credible mechanisms to redistribute the uneven gains of carbon cutting. Cooperation can also be encouraged by climate-club arrangements and trade-based enforcement to prevent emissions leaking across borders. But without green innovation, political will or new forms of international burden-sharing, the gap between climate aspirations and outcomes will only narrow at the margins.
KEY TAKEAWAYS
• One price works best - A uniform global carbon price remains the most efficient way to reduce emissions.
• Success is technically feasible - A self-enforcing climate deal can cut global emissions by 35%, enough to meet the 2°C target.
• Transfers are essential - $2.5 trillion would need to be paid every year to compensate the losses of today’s heavy polluters.
• Political constraints - The main barrier is not economic design, but the willingness to finance and sustain cooperation.
• Technology is a powerful lever - Cheaper green technologies reduce both emissions and the cost of reaching agreement.
FURTHER READING
Building new analytical tools to meet new challenges, researchers at TSE Energy & Climate Center provide expert guidance for the green transition. “Should we stop the COPs?” (coauthored by Renaud Bourlès and Jeremy Laurent-Lucchetti) and other publications by Jean-Charles Rochet are available to read on the TSE website.
