Testing the free-rider hypothesis in climate policy

Abstract: Free-riding is widely perceived as a key obstacle for effective climate policy. In the game-theoretic literature on non-cooperative climate policy and on climate cooperation, the free-rider hypothesis is ubiquitous. Yet, the free-rider hypothesis has not been tested empirically in the climate policy context. With the help of a theoretical model, we demonstrate that if free-riding were the main driver of lax climate policies around the globe, then there should be a pronounced country-size effect: Countries with a larger share of the world's population should, all else equal, internalize more climate damages and thus set higher carbon prices. We use this theoretical prediction for testing the free-rider hypothesis empirically. Drawing on data on emission-weighted carbon prices from 2020, while controlling for a host of other potential explanatory variables of carbon pricing, we find that the free-rider hypothesis cannot be supported empirically, based on the criterion that we propose. Hence, other issues may be more important for explaining climate policy stringency or the lack thereof in many countries.