Year XXXVIII, Number 2, July 2025

Alberto Majocchi
Professor Emeritus of Public Finance, University of Pavia

A few hours after taking office in the White House, President Donald Trump signed an executive order initiating the process of withdrawing the United States from what he called the «’unfair and one-sided scam’ of the Paris Climate Agreement”. Not only does this decision exclude the United States from multilateral negotiations to advance the fight against climate change, with a view to achieving carbon neutrality by 2050, but it also risks triggering similar behavior by other countries, thus seriously jeopardizing the goal set. It is therefore a matter, on the one hand, of taking note of this serious US decision, which is consistent with the guidelines of the new Trump presidency, and, onthe other hand, of assessing what initiatives can be taken by large countries that emit carbon dioxide in significant quantities in order to respond effectively to the new policy that has been imposed in the United States. One point of reference for initiating this assessment is the analysis developed by William D. Nordhaus (2018 Nobel Laureate in Economics) in a celebrated article published inthe American Economic Review in 2015, in which he observes how the difficulty of pursuing an adequate policy to combat climate change is linked to a strong incentive for free-riding implicit in current international climate agreements. Free-riding occurs when a country enjoys the benefits associated with the use of a public good without contributing to its costs. Specifically, in the case of measures to be taken to combat climate change, free riders have an incentive to take advantage of emission reductions resulting from actions taken by other countries without having to commit to the costs of national policies to limit emissions. And this phenomenon explains the difficulty of concluding agreements at the multilateral level, based on the unanimous consent of participating states, for example in the Conferences of the Parties (COPs) under the UN Framework Convention on Climate Change. Nordhaus notes that many international agreements have been possible using the Club mechanism. A Club is a voluntarily formed group whose members benefit from sharing the costs of producing an activity that has characteristics of a public good. In doing so, it benefits all Club members to a sufficiently high degree that members pay dues and adhere to Club rules to enjoy the benefits. The idea of a Climate Club to manage climate change could be seen as a step toward initiating a solution to the free-riding problem that prevents the efficient provision of global public goods. In basic terms, according to Nordhaus, a Climate Club would be an agreement among participating countries to undertake harmonized emission reductions. The agreement should be based on the establishment of an “international target carbon price”, and this target could be achieved using any mechanism: a tax on the carbon content of fossil fuels (carbon tax), a cap-and-trade system (European Emission Trading System) or other instruments, including regulation that has a similar effect on the price of emissions. A key part of the Club mechanism hypothesized by Nordhaus (and the main difference from all the proposals already in the field) is that non-participants should be penalized, with a duty- with a uniform percentage tariff-that severe at the border on imports from countries not participating in the Club. Two important points emerge in this proposal by Nordhaus with reference to the current situation resulting from Trump’s announced exit from the Paris Accords. First, a thesis is advanced here, taken up later in an IMF Note by Ian W.H. Parry, Simon Black and James Roaf, which envisions the adoption of a price floor for carbon decided jointly among the Great CO2 Emitters. In this case, the agreement would have to be reached among a limited number of countries with the highest amount of emissions. After Trump’s decision, if we exclude the United States, which covers 12 percent of total emissions, by 2023 China (34 percent), India (7.6 percent), the European Union (6.4 percent) and Russia (5.3 percent) together account for 53.3 percent of total global CO2 emissions. These countries could form the core of a Club determined to address the climate change challenge, including by using different instruments and agreeing on a carbon price of a level that can be accepted by all Club members. The impetus for joining the Club is related to the fact that each country could benefit-at no additional cost-from emission reduction efforts by other Club members. The second element - the penalization of countries that do not agree to join the Club -, which appears to be in line with Trump’s threats to introduce tariffs on US imports from the rest of the world, is related to the possibility of introducing at the Club level the Carbon Border Adjustment Mechanism (CBAM) instrument, already envisaged by the European Union, corresponding as a minimum level to the jointly set carbon price. The application of CBAM should consider not only price instruments, but also alternative mitigation approaches, which governments outside the Union might prefer for different economic and social reasons. The Club should then initiate a policy to bring other countries with high emissions (e.g., Japan, Saudi Arabia, Brazil, Indonesia, South Korea, Canada, Mexico) into the group, keeping in mind that the attitudes of these countries are bound to change profoundly as a result of the policy adopted by Trump. Ultimately, in the face of Trump’s attempt to impose US hegemony on the world by destroying multilateral ties painstakingly built over time - starting with the abandonment of the Paris Climate Change Accords -, the European Union will have to take a clear position in support of its emission reduction commitments, seeking alliances starting with the Great CO2 Emitters. To sustain this position, the Union will need to strengthen its foreign policy in order to garner support not only from the Euro- Asian Great Powers such as Russia and China, but also from the Global South, which would be severely disadvantaged by a failure of agreements to limit emissions and cope with the risks of climate change. The Union, without renouncing a priori to maintain the ties of friendship and structural alliance with the trans-Atlantic country, will have to show no yielding in the face of the arrogance of the American president, but will have to relaunch a network of agreements at the global level to restore hope for a future where multilateral cooperation prevails over the hegemonic thrust of the new US administration. This is certainly a difficult project to achieve, even taking into account the current weakness of the Union, but it can be a starting point toward a less confrontational world order.