With the Glasgow Climate Pact of 2021, the world is on the path towards 2.4 degrees of global warming. In order to support the Paris climate goals, the German G7 Presidency is now pushing for an “open and cooperative climate club”. This initiative is correct and goal-oriented. However, it must generate an international climate dividend for poorer countries in order to support their energy transition.
The idea of a climate club is as simple as it is impressive: the members are pioneers in climate protection and at the same time benefit from mutually coordinated trade policies. So the ticket is ambitious CO2 reduction targets, and the added value is a strong incentive for the industry to produce in the club despite higher costs. As the club becomes the lead market for climate-friendly materials and products, this will create a competitive advantage for key sectors and future technologies. For climate pioneers, it also secures the prosperity of tomorrow.
Germany uses G7 presidency
While climate clubs have so far been an academic debate, the idea has now entered the political mainstream. Germany has taken up the cause of persuading the seven largest industrial nations to set up such a club during its G7 presidency. If the world’s most important economic blocs on both sides of the Atlantic plus Japan pull together on climate policy, it is calculated that others will inevitably follow suit. The economic disadvantages would be too great if there were no preferential access to trade with the climate pioneer states.
From a trade law perspective, it would have to be clarified how climate clubs can be made WTO-compliant. This raises demanding detailed questions, such as the comparability of national climate instruments. More important, however, is a normative aspect: How can the principle of common but differentiated responsibility be satisfied? Accordingly, all states are responsible for combating climate change, but in accordance with their economic development and their historical CO2 emissions. This principle of justice justifies the logic of the global climate policy architecture.
In order to uphold climate justice, a climate club must necessarily support developing and emerging countries in their transition to a low-carbon future. Indeed, the German proposal for an “open and cooperative” club hints at offers of support. But he remains vague. What is even more serious is that the trade policy coordination of the club members necessarily leads to a so-called CO2 border adjustment. This ensures equal economic opportunities for companies inside and outside the club, even if competitors produce at lower costs in countries that are less ambitious in terms of climate policy. However, it is precisely poorer countries that are most affected by such a measure. To put it bluntly: with a CO2 border adjustment, climate pioneers in the rich north tax the laggards in the poor global south.
This is not only ethically unacceptable and contrary to the principle of climate justice. It also carries the risk of undermining the necessary support from the Global South for an ambitious international climate policy. If the latter is perceived as discriminatory or even protectionist, the countries with the highest future emissions will refrain from further tightening their climate targets. International climate policy was becoming increasingly uncooperative, and the Paris goals were finally out of reach.
One way to solve this problem is to create an international climate dividend. The concept of the climate dividend was floated for the US in 2019 by a group of 28 Nobel Prize winners. The idea: the revenue from a CO2 tax should be paid back directly to the citizens. On average, they would receive more in dividends than they pay in increased energy prices. Ambitious climate policies would not come with greater inequality, or a new breed of economic losers. Vulnerable social classes would be protected.
Dividends as climate finance in developing countries
In the case of an international climate club, the climate dividend would be generated through border adjustments. Unlike, for example, existing EU plans, the revenue would not go to public finances. Instead, they would be channeled to developing countries as additional international climate finance. In doing so, they support the energy transformation and green industrialization there, and generate a development dividend in the medium term. The principle of justice would be preserved. At the same time, however, the international steering effect of preferred trade among climate club members would remain, as would the incentive for latecomers to approach the club’s CO2 ambition levels.
Further accompanying measures would have to be added. For example, it is essential to exempt the LDC countries, i.e. the least developed countries, from any border adjustment measure. In terms of WTO law, this should not be a problem, but it requires political will. In addition, parts of the income could be used for climate-related losses and damage, for example in the “Loss and Damage Facility” planned in Glasgow.
As the debate about the supply chain law shows, international trade is viewed critically as a climate policy instrument. In order to be consistent with their domestic environmental policies, however, ambitious countries must act beyond their borders. For example, if the EU wants to prevent deforestation, it must sanction imports of products such as palm oil, cocoa or beef if their production is linked to the destruction of the rainforest. Without a global leviathan, the only way forward is to increase the cost of non-cooperative behavior. So the question will not be whether but how trade is used for climate policy goals.
Germany should therefore use its G7 presidency to push for a climate club led by the industrialized countries. However, prospective members with ambitious climate goals must be able to benefit from International Climate Dividends and use them to move closer to club membership, while the club commits to supporting them in the decarbonization of their economy. Such a climate club would be open, cooperative and just.