The EU CBAM and a climate club

The discussion paper provides an overview of how the two instruments, the carbon border adjustment mechanism (CBAM) and climate clubs, can connect with each other. Both instruments have similar goals, can complement and reinforce each other, and have high potential to create synergies. While a CBAM provides a “stick” to trade partners by extending a domestic carbon price to cover imported goods, a climate club offers benefits as “carrots” to prospective members. It is challenging to suspend the EU CBAM within a climate club. In particular, an ambitious explicit carbon price would be necessary in order to lift the EU CBAM without jeopardising its objectives. Any initiative for international climate cooperation needs to balance the risk of carbon leakage and potential loss of competitiveness with the benefit of higher ambition (and broader participation).

The paper proposes that a climate club could focus on decarbonisation of specific industrial products, aligning the members’ MRV frameworks and establish methods for attributing emissions to products, creating labels or certificates for embedded emissions, and developing common emissions standards for these products. Club members would gain a competitive advantage for certified products on international markets. This would be further reinforced if a climate club pushed for the development of lead markets for these products, for instance by setting rules for public procurement.