The way I see it, the major barrier to countries implementing carbon taxes is the fear their economic competitors won’t do the same, therefore hindering their economic growth needlessly. A valid concern.
Why don’t some nations build an ‘opt in’ style Free Trade Agreement that allows any country to join as long as they prove they have implemented and enforced a carbon tax. Those countries then have high financial incentives to only trade within the ‘carbon tax block’ and any country outside is at a serious trade disadvantage.
I’ve (quickly) looked and have not found anything like this proposed (which is frankly crazy).
Would you support your country jumping into this FTA?
What are the unforeseen downsides or objections to a plan like this?
What wound be the benefits of belonging to this free trade agreement?
Countries would still have economic competition from countries outside the free trade agreement, unless part of the agreement is actively restricting trade from countries not in the agreement.
Countries within the FTA obviously will not want their carbon taxed products competing with ‘polluted products’. This gives countries in the FTA an incentive to place tariffs on goods produced outside the FTA. This would make it difficult or expensive to export into the FTA if a country isn’t a member. The benefits are the access to the FTA markets (more or less).
So then your problem is that access to the FTA markets comes with barriers to the non-FTA markets.
Then you’ve got a network effect problem. Let’s say one country declares it’s the new FTA starter. What does the second country’s situation look like then?
If the second country joins the FTA, then its effects will be:
What you did with the opt-in idea is found a solution for some of the incentive barriers to this agreement. Sort of an incremental growth approach which is more likely to succeed than an all-or-nothing approach.
But then the rule that it involves tarrifs against non-FTA countries means there is a downside to it. Suddenly the utility graph has a big zone that’s below zero.
This is a really hard problem (one that is historically solved by armies forcibly consolidating territory into unified political units), and I hope you keep working on it.
In what I was suggesting, there are no required tarrifs between the non-FTA and FTA countries. The only requirement would be that within the FTA there are no tariffs. Presumably the trade laws between a non-FTA and FTA country would remain the same, and might have a slight increase to compensate for the internal carbon tax.
I’m sure this small clarification doesn’t actually make much of a difference on your larger point. I’m clearly not a trained economist. I appreciate your response, but there are a few things over my head. Do you have good suggested reading/videos for “Network Effect Problems” or “Utility Graphs”? Or should I just search around?