Coordination and Commitment in International Climate Action: Evidence from Palm Oil

Abstract

Weak environmental regulation has global consequences. When domestic regulation fails, the international community can intervene by targeting emitters with import tariffs. I develop a dynamic empirical framework for evaluating import tariffs as a substitute for domestic regulation, and I apply it to the market for palm oil, a major driver of deforestation and one of the largest sources of emissions globally. Coordinated, committed tariffs reduce emissions by 39% relative to business as usual, but free-riding concerns undermine coordination and static incentives undermine commitment. Even without international coordination, the EU can leverage its commitment power to reduce emissions by 6% unilaterally. A domestic export tax reduces emissions by 39%, and full domestic regulation reduces emissions by 40%. Each is fiscally appealing independent of emission concerns.