Time has come for Europe, the US and possibly China to create a global “Climate Club”. Global greenhouse gas emissions have increased by about 2% annually over the last two decades. Since the signing of the Paris agreement, global emissions have continued to grow. We have learnt that delivering on climate protection is difficult when abatement costs are largely national but the benefits from global climate prevention are global. And indeed, the US under President Trump dropped out of the Paris agreement for exactly that reason. In short, mankind is not making nearly enough progress to exclude a possibly catastrophic climate outcome.
Nobel Prize winner William Nordhaus has argued convincingly that the problem of free riding on climate action cannot be simply overcome by voluntary agreement such as attempted with the Paris accord. Instead, he proposed a simple idea whose time has come: a club to implement tough climate action. This climate action would be significantly more ambitious than the loose Paris agreement. To achieve the ambition, the club would agree on a high common carbon price for all club members, while penalising countries that do not participate. The penalty on non-participants is necessary to keep the club together.
The European Union has understood the importance of external trade measures for its climate policy. In fact, European Commission president Ursula von der Leyen has repeatedly argued for a carbon border adjustment on carbon intensive imports to prevent production to be shifted abroad. Carbon border adjustment can be implemented in line with WTO rules.
True, Europe does not consider carbon border adjustment to be a penalty. Instead, it is an important part of levelling the playing field and avoiding carbon leakage. The US under Trump, however, would have rejected it as an undue penalty. President Trump would have had enough leverage outside of WTO rules to make it difficult for the EU to implement its climate ambitions.
With the new US President, there is an opportunity for a different conversation. Beyond increased political support, more than 3000 US economists have called for a border carbon tax to complement a domestic carbon tax.
Europe should propose to the incoming US president to create a climate club with a common carbon border adjustment. Internally, no border tariffs would be applied since both economies would implement a comparable minimum price on greenhouse gas emissions. This creates an incentive to remain committed to the agreement. Externally, the two economies would impose the same carbon border adjustment. Such a common external tariff would not only prevent undue carbon leakage. It would also be a strong incentive for other countries to join the club. After all, together, the two economies still make for some 40% of global GDP.
This club would likely be a stable club. If the carbon border adjustment is done in compliance with WTO rules, trade retaliation from third countries would not be possible. Moreover, the transatlantic region is still too important for third countries to be able to credibly oppose such a measure with other threats. Since abatement has become much cheaper with price competitive green technology, a simple carbon border adjustment mechanism may well be enough to keep the club stable.
This idea would put the transatlantic economy at the core of global efforts to reduce greenhouse gas emissions. But both Europe and the US would be well-advised to reach out to Beijing to become a founding member of the climate club. And indeed, influential advisors to the State Council have already called for a multilateral approach on climate to avoid China to be side-lined.
A club including the three major economies of the world would make it difficult for any country to free ride on climate mitigation. From a US perspective, China joining could even be rewarded by removing the bulk of Trump’s tariffs on Chinese imports. And Europe would find it in its geopolitical interest to avoid a hardening of the US-China stand-off. Conditions have never been better to negotiate an effective climate club.