# cooperative scenarios.

The threat of Nordhaus taxes also looks credible, as LCT Pioneers seem to have an incentive to apply it in order to encourage cooperative behavior of FFDCs. Consumers in LCT Pioneer countries are better-off with Nordhaus-type import taxes compared to all other unilateral scenarios (figure 6), due to the windfall tax revenue and households’ income benefits. For producers in LCT pioneer countries, Nordhaus import taxes do not make much difference compared to other unilateral scenarios (figure 7). While some firms suffer from the increased costs of imported supply chains, others benefit from import substitution. However, on aggregate their output is significantly higher when FFDCs cooperate. Therefore, from the producers’ perspective in the LCT pioneers’, the value of Nordhaus tax lies primarily in its power to induce global cooperation on climate change.

_Figure 7: Percentage Differences in Discounted Real GDP over the Period 2021–50 against BAU_ <!-- Start of picture text --> 0.60<br>0.40<br>0.20<br>0.00<br>(0.20)<br>(0.40)<br>(0.60)<br>(0.80)<br>(1.00)<br>LCT Pioneers FF Dependent Countries The world<br>Unilateral carbon taxes w/o trade measures Unilateral carbon taxes; BCA on carbon content<br>Unilateral carbon taxes; Nordhaus tax Cooperative carbon emissions taxes<br>Cooperative carbon wellhead taxes<br>Real discounted GDP as a % of BAU<br><!-- End of picture text --> _Source:_ World Bank and Purdue University (ENVISAGE).

_Note:_ BAU = business as usual; FFDCs = fossil fuel – dependent countries; GDP = gross domestic product; LCT = low-carbon transition. BAU is defined here as the absence of new climate policies and a slow increase in the carbon price of different climate clubs following historical trends, no additional diversification efforts, and no trade measures. The colored bars show percentage differences in discounted real GDP over the period 2021 – 50 against BAU (at a 6 percent discount rate), calculated at market prices. All scenarios presented here assume traditional diversification in FFDCs.

In contrast to LCT pioneers, the FFDCs have lower accumulated GDP in cooperative scenarios (figure 7) than with unilateral ones, except when they are faced with Nordhaus-type trade sanctions. While fossil fuel extractive sectors suffer from lower demand and prices induced by the unilateral carbon taxes in importing countries, the tradable products of heavy manufacturing and services are better off. By 2050, FFDCs’ heavy manufacturing exports increase, especially in oil and gas exporting countries, such as GCC countries and Russia (see figure 12). Lower exports of oil and gas entails depreciation (compared to the reference scenario) of the real exchange rate, improving the international competitiveness of tradable products, especially in heavy industry. Through this mechanism, referred to as the “reverse Dutch Disease,” stringent climate response measures in major fuel-importing economies additionally facilitate traditional diversification of FFDCs economy away from reliance on fossil fuels, but into the downstream industries relying on the fuel value chain. This does not help modern manufacturing industries not related to fossil fuels. These knowledge-intensive sectors are crowded out by heavy industry incumbents that enjoy not only lower domestic prices of oil, but also subsidies for energy intensive sectors assumed in the traditional diversification scenarios, and so are able to absorb most of the cheaper labor and capital released from oil and gas extraction.

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