Domestic carbon taxes in FFDCs increase domestic fuel prices, reducing the cost-competitiveness of FFDCs manufacturing relying on oil, gas and coal as inputs. Because those downstream heavy industries and services (besides oil and gas) are currently key drivers of GDP in FFDCs, the output growth of the entire economy slows down more than in all unilateral policy scenarios except with Nordhaus taxes.

FFDC countries are heterogenous and the incentives to implement cooperative domestic climate policies vary by country group (figure 8). For all FFDCs, the GDP is higher in non-cooperative scenarios with or without traditional border adjustment taxes. Nordhaus taxes depress output, but not everywhere enough to make cooperation attractive. The Gulf Cooperation Council [GCC] countries, Russian Federation, and other large oil and gas exporters have stronger incentives to cooperate in climate action if the alternative is a credible threat of Nordhaus taxes. These wealthier FFDCs have higher-value assets already locked in emissions-intensive industry exposed to trade sanctions and are strongly integrated into the world economy. Besides, Nordhaus taxes destroy the large value of their oil export revenues, which are much higher than any other FFDCs’ group. Therefore, they experience higher GDP losses under a Nordhaus border tax scenario than other FFDCs.

_Figure 8: Incentives to Cooperate for Different Fossil Fuel–Dependent Countries Vary by Country Group_ <!-- Start of picture text --> 0.50<br>0.00<br>-0.50<br>-1.00<br>-1.50<br>-2.00<br>GCC Other oil & gas Middle-income coal Low-income with Russian Federation<br>exporters exporters large fuel reserves<br>Unilateral climate policies w/o trade measures Unilateral policies, BCA on carbon content<br>Unilateral policies Nordhaus tax Cooperative carbon emissions taxes<br>Cooperative carbon wellhead taxes<br>Real discounted GDP as % of BAU<br><!-- End of picture text --> _Source:_ World Bank and Purdue University (ENVISAGE).

_Note:_ BAU = business as usual; GDP = gross domestic product; GCC = Gulf Cooperation Council. The colored bars show percentage changes in discounted real GDP over the period 2021–50 against BAU (at a 6 percent discount rate), calculated in market prices. All scenarios presented here assume baseline diversification in FFDCs. Negative values indicate gain relative to BAU.

Among coal exporters and low-income countries with large oil and gas reserves, even Nordhaus trade sanctions may not encourage cooperation (figure 8). Countries such as Colombia, Indonesia, Mongolia, and South Africa grow faster in all noncooperative scenarios, capitalizing on their source of comparative advantage in coal-intensive industries in a carbon-constrained rest of the world. However, their consumers are better-off with cooperative carbon taxes. Also, for the least developed countries with large, unexploited fuel reserves, domestic carbon taxes suppress output by more than trade sanctions.

# **3.2. Breaking the Tragedy of the Horizon**

FFDCs’ incentives to cooperate on climate action increase when LCT pioneers agree to share a portion of carbon tax revenues with FFDCs through wellhead carbon tax agreements (blue bars in 16