Climate Club and the free riders
Welcome to the Club! That's what one could say to Switzerland these days. Although Switzerland's official entry into the G7 Climate Club is scheduled for the next UN climate conference at the end of November in Dubai, the country is already listed in the club's membership directory in internal UN documents. While the enthusiasm for every new member – including Australia, Denmark, the Netherlands, Luxembourg, South Korea, Singapore, Argentina, Chile, Colombia, Uruguay, and Indonesia - joining the club alongside the G7 and the EU Commission is palpable, the persistent absence of major climate offenders like China, India, and Brazil remains a critical issue. Because without their involvement, achieving the goal of the Paris Agreement to limit global warming to 1.5 degrees Celsius will be challenging.
Challenging political implications
It's no coincidence that Chancellor Olaf Scholz is considered the midwife of the Climate Club. Germany, as an industrial export nation, will be most affected by the rising climate and energy costs on the path to achieving net-zero greenhouse gas emissions. Therefore, the G7 Climate Club and the EU's climate tariff, which are currently in the testing phase, can be seen as twin initiatives. The intellectual father of this pair is the American economist William Nordhaus, who received the Nobel Prize in Economics in 2018 for the concept. According to his model, club members should agree on a minimum price for CO2 emissions and impose a penalty tariff on non-members to compensate for it in international trade. This approach aims to prevent states that do not contribute to climate protection from becoming free riders and even profiting from environmentally harmful production due to lower costs.
As compelling as Nordhaus's approach is, its political implementation is challenging. The G7 Climate Club, founded at the end of last year as a "Coalition of the Willing", momentarily only requires a commitment to the net-zero goal by the middle of the century. However, it does not involve any financial obligations. Minimum prices for CO2 emissions or penalty tariffs are not yet in place, and they are not expected given the ongoing trade and geopolitical tensions. The Climate Club risks becoming just another debating forum.
EU Commission taking the lead
Thus, the EU Commission is taking the lead with the climate tariff, demonstrating how to prevent "carbon dumping" and how a climate club could function. Nonetheless, it is feared that the CO2 border adjustment mechanism (CBAM), which is scheduled to be introduced after the three-year testing phase, may create a distortion of competition at the expense of the European industry solely due to the enormous bureaucratic effort required for data collection. If the CO2 footprint for imports into the EU needs to be determined for imports above €150, there is a high likelihood that many of these imports will never enter the European markets, and European exporters may seek other opportunities. This, however, wouldn't benefit the climate. The concerns raised by the affected sectors – cement, iron/steel, aluminum, fertilizers, hydrogen, and electricity – about the looming regulatory monster should be taken seriously, especially in Brussels, where strengthening the European industry is often emphasized in soap-box oratories.
Beyond the question of whether such an EU tariff regime is compatible with the rules of the World Trade Organization (WTO), the club founders should not only expand the club members' duties but also their rights and privileges. Because what good is it if club members have a better environmental conscience, but free riders end up making better deals, ultimately increasing environmental pollution?