Understanding how societies resolve conflicts between individual and common interests remains one of the most fundamental issues across disciplines. The observation that humans readily incur costs to sanction uncooperative individuals without tangible individual benefits has attracted considerable attention as a proximate cause as to why cooperative behaviours might evolve. However, the proliferation of individually costly punishment has been difficult to explain. Several studies over the last decade employing experimental designs with isolated groups have found clear evidence that the costs of punishment often nullify the benefits of increased cooperation, rendering the strong human tendency to punish a thorny evolutionary puzzle. Here, we show that group competition enhances the effectiveness of punishment so that when groups are in direct competition, individuals belonging to a group with punishment opportunity prevail over individuals in a group without this opportunity. In addition to competitive superiority in between-group competition, punishment reduces within-group variation in success, creating circumstances that are highly favourable for the evolution of accompanying group-functional behaviours. We find that the individual willingness to engage in costly punishment increases with tightening competitive pressure between groups. Our results suggest the importance of intergroup conflict behind the emergence of costly punishment and human cooperation.