initially by the owners and exporters of fossil fuels. They showed that this result holds regardless of whether fuel importers cooperate, and that fuel exporters lose on international carbon taxes even if they can influence price strategically with an export tax. Erickson et al. 2015; Erickson and Lazarus 2015; Elliott et al 2010 and Seto et al. 2016 explored further why carbon lock-in makes fossil fuel producers reluctant to undertake climate action. Therefore, Stiglitz (2015) noted that fossil fuel exporters may not have the incentive to implement traditional demand-side domestic carbon pricing just under the pressure of moral suasion.

– Relatively fewer authors explore the coping strategies that the fossil fuel dependent countries can pursue amid the international climate mitigation action. Already in 1995 Wirl argued that the best strategy for oil exporters is to pre-empt importers’ carbon tax at the wellhead. Dullieux et al 2014 suggested that in anticipation of consumers’ carbon tax, OPEC could respond by increasing the producer price to postpone extraction and reduce consumption, rendering the carbon tax useless and capturing (a part of) the ”climate rent”. Similarly, Bohringer et al (2018) argued that OPEC may increase the oil price as a response to EU climate policy, thereby reversing leakage while retaining resource rents, but the coalition or cartel size critically affects the effectiveness of such strategy. The unusual joint effort of OPEC+ (including Russia) and the United States to defend the oil price hit by coronavirus pandemic in April 2020 shows that the size of such coalition can grow under stress, at least temporarily.

Supply-side climate policies in the major fossil fuel producers (mainly coal) are proposed to overcome the “green paradox”. The green paradox is the observation first made by Sinn (2008, 2012 and 2015) that the owners of polluting assets (such as fossil fuels), when anticipating tightening of environmental policies, would accelerate extraction and consumption of fossil fuels for fear of their becoming worthless (stranded), hence accelerating global warming. Papers like Asheim 2012; Lazarus et al. 2015; Gerarden et al.2016; Muttitt et al. 2016; Richter et al. 2018; Collier and Venables 2014; Fæhn et al. 2017; Day and Day 2017; Eichner and Pethig 2017, Lazarus and van Asselt 2018, or Piggot et al., 2018 explore different variations of coal production taxes or output quotas that coal producers could initiate to ensure that as demand for coal drops their revenues do not fall correspondingly, thus relieving the pressure to accelerate fuel consumption and reversing the green paradox. Most recently Asheim et al (2019) called for a supply-side climate treaty, based on coordinated agreement to limit global fossil fuel supply by major producers. Harstad 2012 proposed that the coalition of climate leaders could simply buy out foreign fossil fuel reserves and keep them in the ground. In this paper we explore the options for a combination of supply and demand side carbon tax and trade policies that could be negotiated between fuel exporters and importers in their mutual interest (see Peszko et al 2019).

In this context, this paper contributes to the World Bank report “Diversification and Cooperation in a Decarbonizing World” with macroeconomic model simulations of the alternative strategies – that the global community and fossil fuel dependent countries’ (FFDCs) can pursue to encourage and enable their participation in a global low carbon transition (LCT). Without FFDCs, an international coalition of climate action may not be comprehensive and stable enough to achieve the climate mitigation goals of the Paris Agreement.

This analysis also contributes to the debate on stranded assets but transcends the conventional narrative with a broader perspective. The stranded assets literature originated from the observation of the quantitative mismatch between the volume of carbon embedded in the size of proven reserves of fossil fuels and the volume of future emissions consistent with different global temperature increase constraints, or “carbon budget” (Carbon Tracker and Grantham Institute 3