<!-- Start of picture text --> 5.00<br>4.00<br>3.00<br>2.00<br>1.00<br>0.00<br>-1.00<br>2015 2020 2025 2030 2035 2040 2045 2050<br>Unilateral carbon tax; BT on carbon content; TD Unilateral carbon tax; BT on carbon content; AD<br>Unilateral carbon tax, Nordhaus BT; TD Unilateral carbon tax, Nordhaus BT; AD<br>Cooperative carbon taxes; TD Cooperative carbon taxes; AD<br>Year-to-Year GDP in FFDCs as a % of BAU<br><!-- End of picture text --> _Source:_ World Bank and Purdue University (ENVISAGE).

_Note:_ BAU = business as usual; GDP = gross domestic product; TD = traditional diversification; AD = asset diversification. Red lines represent unilateral (noncooperative) climate policies with a Nordhaus import tax introduced in 2025; Grey lines represent unilateral (noncooperative) climate policies with border tax on carbon content of imports introduced in 2025; green lines represent cooperative climate polices based on traditional carbon prices. The colored lines represent the difference between GDP under a given scenario and GDP under the BAU scenario in a given year, expressed as a percentage of BAU. GDP figures represent real GDP calculated at market prices.

The incentives for FFDCs to cooperate change rapidly when LCT pioneers implement Nordhaustype import taxes, here assumed in the years 2025–30. Ad valorem 10 percent import duties on all FFDCs exports quickly erode their terms of trade and export competitiveness, harming consumption and output (figures 4 and 5). Therefore, traditional border adjustment taxes may not be enough to overcome free-riding incentives of FFDCs, but a credible threat of Nordhaus import taxes may.

The long-term incentives to cooperate on climate action towards the 2°C goal of the Paris Agreement are not aligned between LCT pioneers and FFDCs (figures 6 and 7). This study confirms the standard literature’s finding that global cooperation would be a cost-effective outcome for the world and for many LCT pioneers.<sup>5</sup> The LCT pioneers enjoy higher consumption (figure 6) and GDP (figure 7) when FFDCs share the burden of climate mitigation efforts through cooperative domestic carbon prices. The alternative of unilateral climate action toward the 2°C goal without protection against carbon leakage, or with just traditional border carbon adjustment taxes (orange and grey bars in figures 6 and 7), erodes the growth and consumption of LCT pioneers, more than unilateral 2°C compatible carbon prices.

For consumers in both groups of countries, the incentives to globally cooperate on climate action can be easily aligned. Consumers in FFDCs are slightly better-off in cooperative scenarios compared to any unilateral scenario simulated here (figure 6). Therefore FFDCs’ households may be supportive of domestic carbon taxes, even without a credible threat of Nordhaus taxes, because they transfer wealth from producers’, to consumers’ surplus, especially in our modeling setting. Obviously if the alternative is a trade war with Nordhaus import taxes, consumers’ self-interest to

> 5 Most macro-economic models calculate the results of cooperative and non-cooperative climate policies for the entire world only, usually to demonstrate that cooperative scenarios are more efficient for the global economy. Some distinguish between the impacts of non-cooperative climate policies on developed and developing countries, but so far very few studies have distinguished between the fossil fuel–dependent countries and the rest of the world.

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