Why the EU's proposed CBAM must not be used to launch a carbon club

Fuelled by frustration over the perceived insufficient progress on climate action among many of the world’s major economies, the idea of a so-called carbon club is gaining considerable momentum. Prime Minister Boris Johnson’s apparent keenness to use the UK’s presidency of the G7 to discuss coordinating action on carbon border levies is perhaps the most prominent, though by no means the only, example. Many writers and seasoned campaigners are jumping on the bandwagon, in part emboldened by the support of Nobel prize-winning economist William Nordhaus.

Given the urgency of the climate, crisis frustration is an understandable response – less so the belief that there might be a single silver bullet that can propel the world to net-zero by mid-century. If there is such a panacea, carbon clubs are not it. In fact, the mere discussion of them is likely to prove counterproductive. Opponents of CBAM and climate action, in general, may well be quietly rubbing their hands at the prospect.

But let’s take a step back.

The carbon club idea has taken hold against the backdrop of the EU advancing its plans for a Carbon Border Adjustment Mechanism – simply put a carbon border levy to ensure imported industrial products face the same carbon price as those covered by the domestic Emissions Trading System (ETS). Legislative proposals are expected by 14 July with implementation set for early 2023.

A carbon club – so the theory goes – would see other countries erecting carbon borders in a coordinated fashion, and establish what might be seen as an overwhelming force, with an undeniable market logic and an unstoppable momentum.

The problem starts with a misunderstanding of the EU move for a CBAM, a response to reform of its 15-year-old ETS, which will see domestic heavy industry facing a strengthened carbon price as free emissions allowances are phased out. The CBAM would avoid granting an immediate competitive advantage to foreign producers, leading to displaced domestic production and increased emissions outside the EU, i.e. carbon leakage.

It is not designed as a template to address the decarbonization of heavy industry world-wide but as a very specific, legitimate domestic response to safeguard the efficacy of the bloc’s carbon pricing system. For other jurisdictions with different carbon mitigation policies, an adjustment at the border, if any, is unlikely to resemble the EU’s. Some may choose to apply standards on carbon intensity to both domestic and foreign products, rather than a carbon price. A border adjustment may not be justified in this case. If anything, countries with different approaches could exchange experience on their policies to drive this industrial transition and avoid putting border measures at the core.

We’ve already seen strong pushback on the EU’s CBAM plans from across the world, but most concerningly from China and India which will need plenty of convincing that the scheme is not first and foremost a protectionist measure. The idea that a group of countries needs to emerge around what is currently labelled as a protectionist initiative may neither help the EU’s ambition nor the multilateral process. Trust is also at a premium amid the COVID-19 pandemic and foot-dragging over long-promised climate finance to help poorer countries with the net-zero transition. Heading into November’s crucial COP26 UN climate negotiations, the necessity to offer plenty of carrots alongside sticks – but not “clubs” – is paramount.

There’s another concerning trend among carbon club advocates and that is to view the EU’s CBAM – against evidence to the contrary – as a blunt and ubiquitous instrument, which would apply indistinctly to all imports, from steel to TV sets and food products. Again, such talk is already negatively impacting perceptions of what is intended by the EU. Given the long supply chains involved, evidence of carbon leakage for consumer goods will be hard to establish and tracking their carbon content accurately will be plain impossible.

The fact is that carbon club advocates are approaching the most fiendish problem facing humanity with a simplicity that is doomed to failure.

Just as the fight against coronavirus can’t be won by one country or one vaccine – or indeed vaccines alone – so winning the climate fight will require many complimentary policies and approaches. We can only hope the ill-advised carbon club discussion will lead to a realization that industrial decarbonization won’t be straightforward, and policy discussions are needed rather urgently.

Regardless of the path trading partners choose to follow, they will increasingly require a shared approach to measuring and tracing carbon content. Therefore, convening strategic discussions centred on this topic of vital common interest appears to us to be a means of moving on from the current fractious – and perhaps short-sighted – debate over CBAM and carbon clubs.