Why Carbon Border Adjustment Mechanisms Will Not Save the Planet But a Climate Club and Subsidies for Transformative Green Technologies May

Abstract

We find that both empirical results and economic theory show that carbon border adjustment mechanisms (CBAMs) will be ineffective at meeting global carbon emissions goals, but they are effective in improving the competitiveness of domestic industries who bear the costs of carbon pricing. We elaborate two complementary proposals that hold much greater promise for meeting climate goals: (i) a Climate Club, where member countries impose a minimum price of carbon emissions at home and a tariff surcharge on all imports from non-member countries; and (ii) a 0.2 percent of GDP subsidy by high-income countries for transformative research designed to make green energy cheaper than fossil fuels. We discuss multiple paths for a Climate Club to be accommodated within the rules of the World Trade Organization and recommend use of the Exception clause under GATT Article XX.

Keywords: carbon border adjustment, Climate Club, game-changing technologies, carbon leakage, World Trade Organization, Russia