Why carbon border adjustment mechanisms will not save the planet but a climate club and subsidies for transformative green technologies may

• Published in: Energy economics 2023-06, Vol.122, p.106695, Article 106695
• Main Authors: Tarr, David G., Kuznetsov, Dmitrii E., Overland, Indra, Vakulchuk, Roman
• Format: Article
• Language: English
• Subjects: Carbon border adjustment; Carbon leakage; Climate Club; Game-changing technologies; Russia; World Trade Organization
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2023.106695

We find that both empirical results and economic theory show that carbon border adjustment mechanisms (CBAMs) will be ineffective at meeting global goals for carbon emissions reduction; but CBAMs will be effective at improving the competitiveness of the domestic industries by assuring that imports bear equal costs of carbon pricing. We elaborate two complementary proposals that hold greater promise for meeting climate goals: (i) a Climate Club, where member countries impose a minimum price for carbon emissions at home and a tariff surcharge on all imports from non-member countries; and (ii) a 0.2%-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. •A Climate Club shows great promise as an effective international cooperative agreement for global carbon reduction.•A subsidy of 0.2 percent of-GDP for transformative green energy is important for meeting global carbon reduction goals.•The Climate Club may be accommodated within the World Trade Organization using Article XX of the GATT.•Carbon Border adjustment measures (CBAMs) will be ineffective at meeting global goals for carbon emissions reduction.•CBAMs improve domestic competitiveness against dirty imports and contribute to the political acceptance of carbon pricing.