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

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.

Automated summary

Both empirical results and economic theory suggest that carbon border adjustment mechanisms (CBAMs) will not effectively reduce global carbon emissions, but they can enhance the competitiveness of domestic industries by ensuring imported products bear the same carbon pricing costs. Instead, we propose two complementary approaches, namely a Climate Club where member countries implement a minimum domestic carbon price and impose a tariff surcharge on imports from non-members, and a 0.2% GDP subsidy by high-income countries for transformative research in making green energy more affordable than fossil fuels. We explore various pathways for the Climate Club to comply with the rules of the World Trade Organization, with the exception clause under GATT Article XX being recommended.