
Trade sanctions and the stability of climate coalitions
This report investigates the impact of trade sanctions on the stability of climate coalitions, finding that sanctions can increase coalition size when coalitions are large. However, smaller coalitions risk destabilisation if retaliation occurs. While sanctions may foster cooperation, global welfare implications remain mixed due to trade distortions.
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OVERVIEW
Introduction
The report explores the impact of trade sanctions on the stability of climate coalitions, particularly in the context of international environmental agreements (IEAs). It investigates whether imposing sanctions on non-cooperative countries can foster greater climate cooperation and whether these measures are effective when non-cooperative countries retaliate. The study uses both theoretical models and quantitative analysis to assess the potential outcomes of trade sanctions on coalition stability and global welfare.
Policy regimes, trade sanctions, and stability
Three policy regimes are examined: basic (no sanctions), sanctions (coalition members impose tariffs), and retaliation (non-coalition members impose retaliatory tariffs). Under the basic regime, coalitions form without the threat of trade sanctions. In the sanctions regime, coalition members impose tariffs on non-members to incentivise cooperation. The retaliation regime accounts for non-coalition members imposing their own tariffs in response. The report finds that trade sanctions can stabilise larger coalitions but may destabilise smaller ones if retaliatory tariffs are introduced. This creates a threshold effect where only sufficiently large coalitions benefit from the stabilising influence of sanctions, while smaller coalitions may collapse.
Analytical model
The study employs a game-theoretical model to simulate the behaviour of countries in different coalition settings. The model shows that in the basic regime, stable coalitions are generally small and consist of regions with similar economic size. Introducing trade sanctions increases the incentives for cooperation, but retaliatory actions reduce the benefits for smaller coalitions. Larger coalitions are more resilient to the destabilising effects of retaliation. The study highlights that coalition stability is sensitive to the size of the coalition, with smaller coalitions at higher risk of destabilisation due to the costs of increased emissions abatement and reduced trade benefits.
Numerical analysis
Using a computable general equilibrium (CGE) model, the report provides quantitative results for different policy regimes. For the basic regime, stable coalitions typically consist of a few regions covering about 32% to 58% of global GDP, depending on the assumed social cost of carbon (SCC). As the SCC increases, coalition size tends to decrease, highlighting the challenges of maintaining large coalitions under higher carbon pricing scenarios. Under the sanctions regime, small tariffs (1% to 10%) can stabilise larger coalitions, with global welfare and emission reductions improving when sanctions are applied. However, if non-cooperative countries retaliate, only larger coalitions (those representing more than 50% of global GDP) remain stable.
Costs and emissions in stable coalitions
The analysis shows that global emissions reductions under stable coalitions range from 0.6% to 1.4% for the basic regime. For sanctions and retaliation regimes, emission reductions increase to 6.8% to 25.8%, depending on the SCC and the tariff rate. The average global CO2 price varies from USD 3.86 to USD 50 per tonne in different coalition scenarios. While large coalitions reduce emissions significantly, additional trade distortions due to retaliatory tariffs can negate the environmental gains by reducing global welfare.
The role of key players
The USA and Europe play a pivotal role in the stability of climate coalitions. The report finds that coalitions are unlikely to remain stable without the participation of these major economies, especially under high SCC scenarios. Their large import volumes make them crucial to the success of trade sanctions as a tool for stabilising climate coalitions. China’s role is also significant, although less critical than that of the USA and Europe.
Conclusion
Trade sanctions can serve as a powerful tool to enhance international cooperation on climate change, but their effectiveness is limited by coalition size and the risk of retaliation. The study concludes that for sanctions to stabilise coalitions effectively, large economies like the USA and Europe must be part of the coalition. Additionally, while sanctions may increase the size of climate coalitions, the resulting trade distortions can lead to adverse impacts on global welfare, particularly in scenarios involving retaliatory measures.