This article is taken from World Energy (WE) number 48 – The New Order

Climate change is one of the most pressing issues of our time. The science is clear: human activities have already caused approximately 1 degree C of global warming above preindustrial levels, and this is likely to reach 1.5 degree C between 2030 and 2050 if it continues to increase at the current rate. In the Paris Agreement, governments have committed to limiting temperature increase to well below 2 degrees C above pre-industrial levels and pursuing efforts to limit it to 1.5 degree C. Keeping global warming below this safer limit will require global greenhouse gas (GHG) emissions to quickly decline by at least 45 percent from 2010 levels by 2030 and reach net-zero by 2050, with negative emissions thereafter. In short, the world has to substantially accelerate climate change mitigation actions to exclude a possibly catastrophic climate scenario. In a recent paper published in Nature, we propose forming a climate club to incentivize countries to decarbonize quickly. It aims to solve a fundamental problem of climate policy, that of freeriding on others’ emissions abatements. Indeed, emissions abatement costs are largely national but the benefits from climate stability are global. The United States under President Trump, for example, dropped out of the Paris agreement, citing “unfairness” as the reason. Dealing with this classical free-riding problem needs to be at the core of a new climate strategy. In our view, a climate club would be an ideal model to solve free riding and decrease global emissions rapidly.

In our idea of a climate club, members commit to stronger domestic climate measures and agree on the coordinated introduction of carbon border adjustment measures, i.e., measures that levy a tax on the greenhouse gas content of imports comparable to carbon charges on domestically produced goods. For trade between club members, no carbon border adjustment would be applied since all participating economies would commit to similarly strong measures to cut emissions. This would provide an incentive to remain committed to the agreement. Externally, the members would impose comparable carbon border adjustment mechanisms. Such a shared mechanism would prevent industrial relocations to countries with laxer environmental policy, the so-called carbon leakage, and preserve the competitiveness of club members. It would also create an incentive for other countries to join the club, thus making it a catalyst for tougher climate action worldwide.

There could be a historical opportunity in 2021 to form a climate club and reverse the world’s failure to tackle climate change. Both technological reasons as well as political developments in the US, the EU and China make a climate club, at least for these three economies, a realistic possibility. On the technology side, there have been stunning clean technology cost reductions. Solar and wind are already the cheapest ways of adding new electricity generation in most countries, and they could become the biggest source of electricity generation by 2025. Over the last decade, the cost of electricity from wind declined by 70 percent, while utility-scale solar photovoltaic costs declined by 90 percent. Similar cost reductions are being seen for electric vehicles, which are now expected to reach up-front price parity, without subsidies, with internal combustion vehicles by the mid-2020s. This development is also being made possible by battery technology advancements and cost reductions. Meanwhile, global momentum is building behind green hydrogen, which promises decarbonization of those parts of the energy system that electricity cannot reach. On the political side there have been major developments too. The European Commission is already planning the introduction of carbon border adjustment measures as a central pillar of the European Green Deal. Until now, the fear of European policymakers was that the United States under President Trump would have considered such a move as the start of a trade war, and the United States would have had enough levers to retaliate against Europe, making the initiative unviable. With President Biden, there is now an opportunity for a very different conversation. In fact, Joe Biden’s Plan for Climate Change and Environmental Justice pledges the introduction of carbon border adjustment measures on carbon-intensive goods imported from countries that are failing to meet their climate and environmental obligations. At the United Nations General Assembly in September 2020, Chinese President Xi Jinping committed to make China carbon-neutral by 2060. This historic pledge has been accompanied by Xi’s call for a “green revolution” and for leading economies to “provide more global public goods, take up their due responsibilities and live up to people’s expectations.” These political developments mark the first time that the three blocs, representing half of global greenhouse gas emissions, seem to share a common climate ambition. We believe that a carbon club would have major geopolitical benefits for the EU, US and China. Joe Biden has a clear view on a relationship with China: The United States needs to confront China on technology, intellectual property and human rights violations at the same time seeking to cooperate with Beijing on areas of common interest, including climate change. A climate club would thus fit into the new US President’s wider China strategy. Europe meanwhile is eager to collaborate with both the United States and China on a new climate agenda. Soon after Biden’s election, the European Union outlined its willingness to engage with the US on climate, including on the joint introduction of carbon border adjustment measures. Europe would also be happy to have China on board, as it would be in its geopolitical interest to avoid a hardening of the US-China standoff, from which Europe would only lose.

The scope of the climate club should not be limited to the joint introduction of carbon border adjustment measures as we argue in our piece in Nature. It could encompass a wide range of actions that its members can jointly undertake to unlock some of the key bottlenecks the world will face in the pathway to climate neutrality. A first example is the joint development of those clean technologies that are required to decarbonize our economies, but that are still at an early stage of development, such as green hydrogen or solid-state batteries. By exploiting international synergies and economies of scale, their development could indeed be significantly accelerated. A second example is the joint development of carbon removal initiatives. Removing carbon from the atmosphere will be necessary to reach net zero by mid-century and subsequently to achieve net negative emissions. This can be done with both nature-based and technology-based solutions. Nature-based solutions notably include afforestation and reforestation. Technology-based solutions include carbon capture and storage and geoengineering solutions like direct air capture. Notwithstanding their key importance for climate action, these solutions currently remain insufficiently addressed due to a lack of incentive to individual action. This makes international cooperation essential in the field. The climate club might spark a new global effort on afforestation and reforestation as well as on research and innovation in technology-based solutions. A third example is the joint promotion of measures to contain the permafrost’s thaw. As a result of rising global temperature, the Arctic permafrost is not thawing gradually, as scientists once predicted, but rather at an unprecedented speed. This is a major problem for climate change, because the permafrost is a massive reservoir of greenhouse gases. As these soils soften and slump, they indeed release ancient organic materials, and masses of greenhouse gases, that have been frozen underground for millennia. The permafrost globally holds up to 1,600 gigatons of carbon dioxide: nearly twice what is currently in the atmosphere. This situation led scientists to sound an alarm bell and point to the urgent need to avoid reaching a tipping point that would ignite a vicious cycle in which global warming would release gases from the permafrost, and make the heating much worse. The climate club should act to avoid this dangerous climate tipping point, jointly funding measures to urgently contain the permafrost thaw, actions such as restoring grassland by both reducing forests and increasing large animal herds grazing. This is a global common good, and as such it requires international cooperation. To conclude, both technological and political conditions are now ideal to establish a new climate club in which members commit to stronger domestic climate measures and agree on the coordinated introduction of carbon border adjustment measures. This would remove a major stumbling block to global decarbonization: the classical free-riding problem. The world finally has a chance to reverse its failure in tackling climate change. Being responsible for half of global greenhouse-gas emissions, the European Union, the United States and China have a historical duty to lead. Doing so with a climate club offers the highest guarantee of success.

Tagliapietra is a Research fellow at Bruegel. He is also Adjunct professor of Energy, Climate and Environmental Policy at the Università Cattolica del Sacro Cuore and at The Johns Hopkins University School of Advanced International Studies (SAIS) Europe.

Wolff is the Director of Bruegel. His research focuses on the European economy and governance, on fiscal and monetary policy and global finance.