The Climate Club is Dead, Long Live the Climate Club!

For more than a decade, the idea of a climate club has been discussed in the scientific community as a way to promote cooperation and complement the international climate regime established by the UN Framework Convention on Climate Change (UNFCCC). In moving from theory to practice, this idea has undergone a significant change.

In 2015, Nobel laureate William Nordhaus called for an ‘exclusive’ climate club in which members would coordinate their carbon pricing instruments – emissions trading or taxes – and jointly levy external tariffs on emissions-intensive products from countries that have not introduced corresponding instruments. Nordhaus argued that such a club could prevent countries from piggybacking on other countries’ climate policy efforts. German chancellor Olaf Scholz promoted this idea in the political debate as early as 2021, when he was still finance minister.

While an elegant idea in economic theory, this proved unfeasible in political practice. In reality, coordinating pricing instruments is highly complex; the bilateral negotiations between the EU and Switzerland to link their emissions trading systems took almost 10 years. The idea of a climate club based on the Nordhaus model therefore hardly found political resonance among partner countries of the G7 and beyond. Even in the final statement of the latest G7 Summit, the idea played a minor role.

In that statement, the Terms of Reference for a G7 Climate Club were approved and adopted by the G7. These Terms of Reference make clear that the idea of a carbon pricing club has faded to the background. Instead, one of the main functions of the club would be to ‘explore and discuss possible measures to improve the measurement and reporting of emissions’.

Although the initial idea to focus on a common and uniform carbon price therefore may have lost steam, this does not mean that the G7 Climate Club will fail. On the contrary, the Terms of Reference open up the possibility to constructively develop the idea of a climate club into an instrument to address concrete decarbonisation challenges faced by heavy industry.

The aim of the G7 Climate Club is to ‘contribute to raising climate action globally by facilitating a near zero emissions industrial production transition’. In supporting the implementation of the Paris Agreement, its key focus will therefore be on transforming heavy industry towards decarbonisation and unlocking green markets.

To achieve this aim, the G7 Climate Club is built on three key pillars:

(1) advancing ambitious and transparent climate change mitigation policies,

(2) transforming industries, and

(3) boosting international climate cooperation and partnerships.

This focus on industrial transformation makes sense for several reasons. Just a few years ago, the cement, steel and basic chemical industries were considered ‘hard to abate’ – i.e. particularly difficult cases for climate change mitigation action. In recent years, however, the industry has moved significantly. For example, several large steel companies have set their own climate targets and announced investments in new climate-friendly steel plants. However, implementation by industry needs government support, for example by building the necessary hydrogen infrastructure. International coordination can help reducing uncertainties and support investment decisions. While several international initiatives are working in this direction, a central institution that ‘orchestrates’ these various initiatives is missing. The Terms of Reference clearly define this as a function of the G7 Climate Club. Specifically, it should serve as an ‘enabling framework for enhanced cooperation, better coordination and possible joint action’, and ‘work to raise the visibility of these initiatives and broaden support for their output including as a high-level political forum’. 

The agreed Terms of Reference are important in that they help to prevent the initiative from fizzling out after the end of the German G7 Presidency. However, with the launch of the Climate Club delayed to 2023 and not expected until as late as COP28 (December 2023), more work remains to be done. Specifically, the German government, which will continue to lead the process shaping it, should clarify (1) the precise functions of the initiative (2) the expectations on its members, and (3) the advantages of a climate club, particularly in relation to already existing initiatives.

In the past, the focus of international climate policy was primarily on sharing the burden of climate protection fairly. This is also reflected in the Nordhaus proposal and its focus on free-riders. Recently, however, it has become increasingly clear that the question of sharing the opportunities of the transformation can also lead to conflicts. China is already the technology leader in various key industries. With the Inflation Reduction Act, the United States now also has an instrument to build up green industries in its own country. A climate club for industrial transformation could create a framework at the international level that allows countries to jointly explore opportunities for sectoral transformation. However, this should not only be about the opportunities for industrialised countries, but also include emerging and developing countries. And this is perhaps the biggest weakness of the statutes of the G7 Climate Club.

Contrary to what was originally announced, it has obviously not been possible to get non-G7 countries on board from the start. This must change at all costs, because the Climate Club has no chance of survival as a pure G7 initiative. Framing the G7 Climate Club as ‘inclusive in nature’ is insufficient to ensure that it is truly open to other countries, particularly emerging and developing countries. Under the third pillar of the Climate Club, members can provide support to developing countries via individual or joint funding. However, this is on a completely voluntarily basis. Whether this provision is strong enough to motivate developing countries to join the club is questionable. For the G7 Climate Club to be successful and drive transformational change across heavy industry, it will be crucial that both emerging and developing countries are included from the beginning, so that they are able to co-lead and design the club when officially launched.

A version of this text was published earlier in the climate table newsletter, see https://table.media/europe/en/opinion/the-climate-club-can-still-make-a-difference/

Lukas Hermwille is a senior researcher for global climate governance at the Wuppertal Institut (profile page)

Catherine Hall is a PhD Researcher in International Climate Change Law at the Center for Climate Change, Energy and Environmental Law (CCEEL) (profile page)

Harro van Asselt is a professor of climate law and policy at the University of Eastern Finland (profile page)