In this paper we study a sequential cartel formation game, in which the coalition chooses an enforcement policy comprising an abatement target, monitoring expenditures and fines. Individual signatories respond by choosing their preferred abatement level which may or may not comply with the target. In equilibrium, signatories’ compliance levels are determined by individual welfare maximization under the agreed enforcement policy. Considering partial compliance, our analysis shows how the extent of compliance depends on abatement targets, monitoring expenditures (the intensity of monitoring) and the fine.
Furthermore, we examine the impact of costly enforcement on the stability and performance of international climate agreements. We find that the compliance level of a coalition member can always be improved by increasing the monitoring expenditure. However, the effect of the target on compliance levels depends on the structure of the fine function. Because monitoring is costly, full compliance will usually not be enforced. We also find that a "broad" and "deep" climate coalition cannot be stable under a costly enforcement mechanism.