Join the (Climate) Club: A Game-Theoretic Analysis of Membership Incentives

Abstract

Countries' failure to meet their Paris Agreement's targets have prompted research on alternative models of international cooperation. One of them, championed by Nobel Memorial prize laureate William Nordhaus, is the idea of a climate club that offers clear benefits to member countries and imposes sanctions on non-member countries. This paper proposes a game theoretic model of governments and firms' incentives to join such a climate club. The model demonstrates that under certain conditions, there is a perfect Nash equilibrium such that a country with more resources to transition to renewable energy prefers to not join the club, whereas a country with less resources to transition prefers to join the club. I illustrate such paradoxical conclusion with a short empirical analysis of the correlation between a countries' resources and their level of assistance to other countries' transitions to renewable energy. Although limited in scope, the data support the possible existence of the model's paradoxical equilibrium.