Incentivizing a carbon-free economy: a method to identify free-riders

Abstract

Top-down approaches to reducing global carbon dioxide emissions have so far met with limited success, even though most countries accept the urgency of mitigating climate change and have entered into various agreements that should help reduce emissions. This article does not dismiss the importance of such "top-down" agreements for developing rational strategies to achieve declining total emissions, but it suggests a complementary approach to encourage immediate "bottom-up" progress on climate goals that do not need to wait for global cooperation. This paper develops a framework to identify free-riding behavior among countries that use three readily measured parameters of the country’s economy: carbon intensity, rate of change of the carbon intensity, and per capita GDP. It then goes on to propose a simple formula to calculate trade sanctions against a free-riding country that could be used in bilateral actions to incentivize carbon emissions reductions. The paper argues that the value of the goods, the difference in carbon intensity between the importer and exporter, and the cost of carbon removal can be used to calculate the unfair trade advantage of a free-riding country. The dynamics of the proposed framework are tested through three case studies, highlighting current free-rider behavior - based on historic emissions for the period 1991-2012; an lternate, hypothetical scenario whereby a subset of countries follow aggressive carbon emission reductions; and a 450 ppm stabilization scenario.