The Strategic Value of Carbon Tariffs∗

We ask whether the threat of carbon tariffs might lower the cost of reductions in world carbon emissions by inducing unregulated regions to adopt emission controls. We use a calibrated simulation model to generate the payoffs of a game in which a coalition regulates its own emissions and chooses whether or not to employ carbon tariffs against unregulated regions. Unregulated regions respond by abating, retaliating, or ignoring the tariffs. In the unique Nash equilibrium, the use of tariffs is a credible and effective threat. It induces cooperation from non-coalition regions that lowers the cost of global abatement substantially relative to the case where the coalition undertakes this abatement alone.