What Role for a Climate Club under the German G7 Presidency?
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What Role for a Climate Club under the German
G7 Presidency?
Options and Recommendations for a Climate Club
Policy Brief Leon Martini
28.02.2022 Benjamin Görlach
Recommendations
1 Both the EU and the G7 will re-evaluate their energy pol-
icy priorities in light of Russia’s invasion of Ukraine. A cli-
mate club can help to ensure that the transformation to
climate neutrality remains central to this endeavour: inde-
pendence from imported fossil fuels is not only compatible
with climate neutrality but must be seen as tantamount.
2 A climate club based on minimum or uniform carbon
prices remains politically elusive, technically challenging,
and its benefits doubtful. The German Presidency should
not waste precious political capital on such high-risk, low
reward initiatives.
3 Sectoral, industrial decarbonisation alliances that focus
on catalysing the transformation of industry have large po-
tential and prospects for political success.
4 A green hydrogen alliance, based on a common market
with uniform standards for green and sustainable hydro-
gen may prevent fragmentation and correct market fail-
ures that dampen the scale up of green hydrogen supply.
5 A climate club should come with increasing support for
developing countries through enhanced technical and
technological cooperation and additional climate finance.
with climate partnerships.
6
Ecologic Institute www.ecologic.euWhat Role for a Climate Club under the German G7 Presidency? – Policy Brief
Russia’s war of aggression against Ukraine
Introduction has resulted in a fundamental geopolitical
shift with far-reaching implications for en-
The German government has made the for- ergy and climate policies in particular. Pol-
mation of an “ambitious, bold, and cooper- icy priorities and agendas among the G7
ative” climate club a priority of its G7 Presi- and beyond have legitimately shifted to re-
dency.1 This push for a forum of ambitious spond to the international security threat
states that agree on accelerating climate and the humanitarian crisis unfolding in
action with a range of measures including Ukraine. Likewise, energy security is a ma-
“uniform standards for the emission and jor concern, and quicker independence
pricing of CO2” follows earlier proposals by from fossil fuel imports as a key objective of
then finance minister Olaf Scholz in Sum- energy policy. Finally, the act of aggression
mer 2021.2 It is moreover part of the coali- itself is also an attack on the rule-based in-
tion agreement of the German government ternational order and the structures of mul-
which lists an “initiative open to all states to tilateral cooperation. But while the G7 will
establish an international climate club with rightly need to focus on the immediate fall-
a common minimum carbon price and uni- out of the war, its response must be aligned
form carbon adjustment mechanism” as with the longer-term goal of transforming
one of its key priorities for international cli- the G7 economies to climate neutrality.
mate action.3
For numerous reasons, Europe needs to re-
Climate clubs have repeatedly been floated duce its dependence on Russian fossil
by academics, think-tankers and policy- fuels, especially gas. Accelerating climate
makers as a mechanism to accelerate inter- action, especially the rapid deployment of
national climate action.4 While the exact renewable energy sources, energy effi-
concept of a climate club is a matter of de- ciency in heating and industry and the elec-
bate, it can be broadly described as a forum trification of heating will reduce Europe’s
that brings together a limited number of like- dependence on Russian fossil fuels, im-
minded jurisdictions that focus on a small prove energy security, and contribute to
number of (linked) issues. Climate clubs are mitigating climate change. Doubling down
thus not as comprehensive and universal on climate protection therefore must be part
as existing multilateral frameworks like the of the response to the current situation and
UNFCCC. They are sometimes described will improve Europe’s security – energy and
as alternatives to comprehensive multilat- otherwise – in the medium to long-term. By
eral frameworks,5 but in fact can be im- contrast, Europe must avoid measures that
portant complements, improving the exist- risk further lock-in into fossil-based value
ing multilateral climate regime, rather than chains.
supplanting it.6 Actually, the UNFCCC and
especially the Paris Agreement, with its bot- Given all this, Germany would be ill-advised
tom-up logic, is premised on inter-govern- to ditch its climate club efforts at the outset,
mental climate action outside its formal since it can help acerating international cli-
framework that strengthen the multilateral mate action with all its strategic co-benefits.
climate regime.7 This policy brief discusses different options
for a climate club or similar intergovernmen-
Since the German government drew up its tal initiatives. In the first part, we define a
agenda for this year’s G7 summits, the climate club and describe some key char-
world has changed in profound ways. acteristics by which one can differentiate
1 German Presidency, 2022 5 e.g., Nordhaus, 2020
2 BMF, 2021 6 Brandi & Jakob, 2022
3 SPD et al., 2021, p. 26 7 Hale, 2020
4 E.g., Bierbrauer et al., 2021; Nordhaus, 2018,
2020; Tagliapietra & Wolff, 2021
2What Role for a Climate Club under the German G7 Presidency? – Policy Brief
intergovernmental initiatives. In the second expansive definition would fit almost every
part, we propose possible forms of cooper- intergovernmental climate initiative other
ative action that can advance global climate than the UNFCCC. Calling initiatives ‘alli-
action and that go beyond carbon pricing. In ances’ or ‘coalitions’ may be conceptually
the last part, we consider how a climate club clearer and politically more appropriate in
can be made ‘open’ and ‘cooperative’ and some cases as these terms do not come
spell out some general recommendations in with the baggage of being perceived as ‘ex-
light of the current political situation. clusive’ arrangements.10 In this policy brief,
however, we take a more pragmatic ap-
What is a Climate Club? proach and use the terms ‘clubs’, ‘coali-
tions’, or ‘alliances’ interchangeably to de-
The idea of a climate club is commonly as- scribe any intergovernmental initiative with
sociated with the economist William a clearly identifiable purpose and rules of
Nordhaus8 in the academic literature but membership. This may not be as conceptu-
goes back to at least the 1990s.9 A club is ally coherent but seems to be politically ap-
meant to address a problem that cannot be propriate given the German government’s
solved by individual countries alone, but expansive definition of a ‘climate club’.
that requires some form of collective action. Intergovernmental initiatives can be differ-
Nordhaus proposed it as a mechanism to entiated along two core dimensions:
enhance collective action on climate
change, as an alternative to the UNFCCC 1 First, the degree to which there are for-
process. There are three features that de- malised, binding rules of membership:
fine Nordhaus’ climate club, which can help what are the criteria that prospective
us understand what a climate club is. First, members must fulfil to join the club?
there are formalised rules of membership. These can range from explicit and le-
In Nordhaus’ proposal they are structured gally binding requirements, e.g., on a
around an “international target carbon minimum carbon price at one end of
price”, i.e., all member nations must have the spectrum, to the voluntary commit-
comparable carbon pricing mechanisms ment to some objectives, e.g., a
that impose an agreed-upon minimum car- pledge, on the other. Generally, the
bon price. Second, non-members can be more formalised and binding the rules
sanctioned. In the original proposal, this is are, the more difficult it will be to find
achieved through a common external bor- political agreement, the more integra-
der tariff against non-members. Third, as a tion with domestic legislation is re-
result of the first two aspects, there is a tan- quired, and the higher are the barriers
gible benefit, a so called ‘club good’, and to entry.11 A climate club based on a
thus incentive for members to join. In this minimum carbon price, for instance,
case, the absence of the border tariff would likely require a treaty among
among club members. members and procedures for the case
of non-compliance. Other initiatives
While some argue that the defining feature
have less demanding requirements
of a climate club must be a “club good” from
and thus lower barriers to entry.
which non-members can be excluded, there
are broader definitions of climate clubs. 2 The second dimension is the extent to
Hovi et al., for instance, describe any actor which the club generates a tangible
group with fewer members than the UN- benefit to members – and thus an in-
FCCC and that aim to cooperate on climate centive to join. Benefits from which
a ‘club’. It should be noted that this non-members can be excluded are
8 Nordhaus, 2015 10 Vangenechten & Lehne, 2022
9 Aldy et al., 2003 11 Falkner et al., 2021
3What Role for a Climate Club under the German G7 Presidency? – Policy Brief
called ‘club goods’. Such club goods development strategies.15 There are also
may be the preferential access to mar- bargaining coalitions that agree on common
kets for club members or the absence negotiating positions in the UNFCCC pro-
of sanctions. By contrast, benefits from cess.
which non-members cannot be ex-
It is one of the greatest advantages of alli-
cluded are referred to as ‘public
ances or clubs to concentrate on a small
goods’.12 Most initiatives may generate
number of (connected) issues. This allows
a mix of both.
negotiations to focus on specific areas,
where finding common ground is possible
The mix of benefits and membership re-
among actors with heterogenous interests.
quirements determines the incentive for
It potentially also makes joining the club or
countries to join an initiative. Large benefits,
alliance for prospective members easier,
in the form of club goods, may come with
since the requirements for membership will
large costs that potentially stem from ful-
span fewer issues. The German proposal,
filling the requirements of membership.
while stressing the centrality of carbon pric-
Some countries will find it easier to fulfil as-
ing, lists a diverse array of different issues
pects of membership than others (e.g.,
to be tackled by its climate club, including
those countries that already have a carbon
green hydrogen, public procurement, and
price in place). While a price-based climate
standards. Considering that agreeing on a
club has tangible benefits, fulfilling the
number of very diverse issues reduces the
membership requirements can imply a loss
prospects of success, the German Presi-
of sovereignty, investing considerable polit-
dency should identify areas of priority
ical capital domestically, passing domestic
and try to advance alliances on each of
reforms, etc. Moreover, the more formal-
them in relative isolation from another.
ised and binding the rules are, the harder it
becomes to find agreement among actors The following section will discuss different
with heterogenous interests. Rising costs alliances or clubs and juxtapose them to the
will reduce the potential membership of the classic Nordhaus climate club proposal. It
club or may prevent it from being estab- will weight their advantages and disad-
lished in the first place. Initiatives that have vantages against the backdrop of the cur-
less stringent and formal membership re- rent political context and provide some
quirements may also have fewer tangible guidance for potential initiatives at this
benefits, but the barriers to entry are also year’s G7.
much lower.
Intergovernmental initiatives can take many
Club Options
different shapes and forms.13 Various differ-
ent initiatives already exist. For example, at A Climate Club based around a
Common (Minimum) Carbon Price
COP 26 in Glasgow last year, a normative
coalition was initiated with the launch of the The initial idea of a climate club, as formu-
Methane Pledge,14 where participants lated by William Nordhaus, is built around a
agree to take voluntary action to reduce minimum carbon price established by its
methane emissions by at least 30% globally members, and border tariffs levied against
by 2030. Another example is the Carbon non-members.16 Such a climate club could
Neutrality Coalition, whose members be an important steppingstone towards a
pledged to develop climate-neutral uniform carbon price across major emitters,
12 Additionally, there are plenty of local benefits 13 See Falkner et al., 2021, for a typology
associated with fulfilling one’s international obli- 14 https://www.globalmethanepledge.org/
gations. Phasing out coal, for example, results 15 https://carbon-neutrality.global/
in cleaner air, potentially more affordable elec- 16 Nordhaus, 2015
tricity, new jobs in clean industries, etc.
4What Role for a Climate Club under the German G7 Presidency? – Policy Brief
and ultimately a joint carbon market, which in carbon pricing among the G7 and beyond
has long been advocated as the econo- (see Table 1 in the appendix for an over-
mists’ ideal solution for efficient and effec- view). Whether carbon prices in two coun-
tive climate protection. tries present a comparable constraint on
emissions is not only a function of the level
A price-based climate club has formalised,
of the price itself – there are several other
binding rules and some form of contractual
parameters that need to be considered.
arrangement among its members, including
This includes the scope of the system
sanctions for non-compliance. Decidedly, it
(which industries and emitters are covered),
is an exclusive arrangement, one chief
in the case of emissions trading system the
function being the sanctioning of non-mem-
rules for free allocation (or other exemp-
bers. Nordhaus proposed it explicitly as an
tions and support measures), transparency
alternative to the UNFCCC and a solution
and the stringency of compliance, etc.
to free riding. Yet it is unclear if a climate
Reaching consensus on these issues will
club in this narrow sense can induce more
require time and substantial political will. It
climate action and strengthen the interna-
might also imply domestic reform of carbon
tional climate regime for several reasons.
pricing systems, which usually are delicate
Firstly, a climate club built around carbon political compromises that should be han-
pricing could remain limited in size, and dled with care.
thus also in impact. Members of such a cli-
Thirdly, a flat-rate tariff against non-mem-
mate club would have to have implemented
bers will likely violate WTO principles. If
a domestic carbon price first. Within the G7,
non-members put retaliatory measures in
the EU countries and the UK have national
place, there would no longer be a club
carbon prices. Canada and the US have
good, and the approach fails. Conse-
partial carbon pricing systems. At state
quently, the WTO would have to give con-
level, Japan only at the level of two munici-
sent for the club and forbid any retaliatory
palities. Beyond the G7, while the number
action – an unrealistic scenario at present.
of carbon pricing systems is growing, it re-
The alternative, a more targeted border ad-
mains limited (China, South Korea, Mexico,
justment, would have to be closely aligned
Chile, New Zealand).17 Some countries
with the respective carbon pricing system of
have notoriously struggled to reach political
each club member to ensure WTO compli-
agreement on carbon pricing at the national
ance, which will make agreeing on a com-
level, most notably in the US and Australia.
mon system that fits all club members tech-
A climate club built around a common car-
nically and politically very difficult. In the
bon price could alleviate some concerns –
end, enacting unilateral border adjustments
e.g., around the loss of competitiveness.
will be much easier.
However, domestic distributive politics re-
main one major barrier to the introduction of Others do not argue for climate clubs pri-
carbon prices or their reform, that a climate marily as a vehicle for more climate action
club is unlikely to overcome.18 but propose it as an alternative to the EU’s
CBAM.19 However, as is argued in Box 1, a
Secondly, even when countries decide to
climate club is not a credible substitute for
implement a carbon price, agreeing on
the EU’s CBAM.
comparable standards, including a common
minimum carbon price, presents another
practical challenge. There is large diversity
17 To complicate matters further: if a climate club exposed industries. If this criterion is applied,
is to provide effective protection against carbon the list of countries shrinks even further.
leakage, it matters to which economic sectors 18 Aklin & Mildenberger, 2020
the carbon price is applied – and in particular 19 e.g., Bierbrauer et al., 2021; Okonjo-Iweala,
whether it covers energy-intensive and trade- 2021
5What Role for a Climate Club under the German G7 Presidency? – Policy Brief
Box 1. Climate Clubs and the EU CBAM
Climate clubs and carbon border adjustments are sometimes discussed in the same breath.
What is the relationship between climate clubs and border adjustments? And what does the
German Presidency’s push for a climate club mean for the EU’s CBAM proposal?
As argued above, the original climate club proposed by Nordhaus includes a sanctioning
mechanism against non-members. A CBA could fulfil this function: club members would agree
to exempt each other from the application of a CBA and agree to apply a CBA to trade with
non-members. Nordhaus proposed a moderate flat-rate tariff. More targeted CBA’s may be
possible but are technically complicated as they would need to be tailored to the respective
carbon pricing system of each member country. In any way, border adjustments are an inte-
gral part of climate clubs that are based on carbon pricing – they generate the club good.
Critics see a risk for the global rules-based trading system as a consequence of unilateral
CBAs (e.g., Bierbrauer et al., 2021; Okonjo-Iweala, 2021; Parry et al., 2021). Trade partners
may enact retaliatory action against the introduction of CBAs and file complaints at the WTO.
Therefore, critics of unilateral border adjustments propose climate clubs, through which the
participating jurisdictions agree on minimum carbon prices and enact CBAs in a coordinated
way. There are indications from the German government that these considerations partially
motivate their proposal for a climate club. So, could a climate club be an alternative to the
Commission’s CBAM proposal?
In the long run – perhaps, in the short run – no. As argued above, there are high political
hurdles for an ambitious climate club to emerge. Currently, only the EU, the UK, South Korea,
New Zealand, some US states and some Canadian Provinces apply a carbon price on indus-
try emissions. Getting enough major emitters to implement a domestic carbon price that ap-
plies to industry, and demonstrated their ability to enforce compliance, will take years if not
decades. Even then, the challenge remains that the resulting carbon prices are likely to di-
verge strongly, as they have been in the past (Sartor et al., 2022). For these reasons, a climate
club with a unified (minimum) carbon price would be a long-run aspiration rather than a short-
term alternative to the CBAM proposal.
Can a climate club be a complement to the EU’s CBAM? This depends on what one under-
stands a climate ‘club’ to be. A forum that cooperates on carbon pricing and border adjust-
ments in informal ways can surely be complementary to the EU CBAM. Likewise, industrial
decarbonisation alliances can be complementary to CBAM, although they may require greater
coordination to align different border measures. When it comes to a climate club in the narrow
sense, however, i.e., one based on uniform minimum carbon prices, the EU’s CBAM will likely
need to be amended in order to align it with the specific requirements of the climate club so
to generate the club good to all members.
However, there is a risk that arises from tying up the German Presidency’s effort to establish
a climate club with the EU’s efforts to establish a CBAM. Giving concessions on CBAM to
partners in the G7 to find compromise on a climate club would risk politicising the Commis-
sion’s efforts. Agreeing to, for instance, not applying CBAM to the US or taking into account
non-price measures without extending these to all other trade partners would imply discrimi-
nating on grounds other than the carbon intensity of the imports – a likely violation of WTO
principles. Consequently, the German Presidency should not tie up the EU’s CBAM pro-
posal in its effort to initiate a climate club.
6What Role for a Climate Club under the German G7 Presidency? – Policy Brief
Informal Cooperation Around Carbon tensions. The risks of retaliatory action or
Pricing and Border Adjustments WTO complaints in response to the EU’s
Short of a formal Climate Club, with a man- proposed CBAM are very real and would
datory domestic carbon price as a precon- also apply to climate clubs. At the same
dition for membership, there is ample time, there is risk of fragmentation, as dif-
scope for enhanced cooperation around ferent countries devise individual border ad-
carbon pricing and energy taxation justment mechanisms.25 The Biden admin-
among G7 and G20 nations. Carbon pric- istration, for instance, has contemplated in-
ing remains a necessary but not sufficient troducing border adjustments, and a legis-
tool for decarbonisation and last year, in the lative bill introducing border tariffs was in-
Carbis Bay Declaration, G7 leaders under- troduced into Congress. Likewise, Canada
lined the importance “of a fair and efficient is considering introducing a border adjust-
carbon pricing trajectory to accelerate the ment. To contain trade tensions, the G7
decarbonisation” of their economies. must find ways to cooperate about border
adjustments. This includes discussing
While a global carbon price remains elusive
the role of border adjustments, their
for the time being, there is increasing inter-
pros and cons, and principles for de-
est in domestic carbon pricing in numerous
signing permittable carbon border ad-
countries. Voluntary cooperation over car-
justments, and commitments to non-re-
bon pricing has long been supported by ini-
taliation.
tiatives such as the International Carbon
Action Partnership (ICAP),20 the World Second, and connected to the need to co-
Bank Partnership for Market Implementa- operate on CBAs, G7 members should dis-
tion (PMI),21 or the Carbon Pricing Leader- cuss how to make different levels of climate
ship Coalition (CPLC).22 But scope for ambition comparable. All climate action cre-
greater cooperation, coherence, and ambi- ates compliance costs, whether through ex-
tion remains. plicit carbon pricing or through other instru-
ments. Comparing different levels of ambi-
Possible areas of technical coordination in-
tion, in the form of a ‘shadow carbon price’
cludes continued monitoring of carbon pric-
remains methodologically very difficult to
ing, energy taxation, and fossil fuel subsi-
do. However, for future cooperation, having
dies, common standards with regards to
more clarity and transparency of countries’
metrics and indicators to measure carbon
ambition is important, not just for coordinat-
footprints, dialogue about necessary car-
ing border measures.
bon pricing levels and the distributional im-
pacts of carbon prices, and the risks of con- ‘Discussing’ carbon pricing and border ad-
tinued divergences in carbon pricing lev- justments among the G7 would not amount
els.23 This cooperation could be formalised to an ‘alliance’ or a ‘coalition’, not to speak
into an OECD initiative, which may be mod- of a ‘club’. Rather than forming a formalised
elled on the OECD inclusive framework on climate club around a common (minimum)
Base Erosion and Profit Shifting, which con- carbon price, voluntary pledges by govern-
tributed to reaching a global tax deal last ments to reach minimum carbon prices may
year.24 be a lot more feasible. It would be an open
process, geared towards finding common
Additionally, two key aspects merit particu-
ground, enhance understanding, and to
lar attention by the G7. First, unilateral car-
create momentum and peer-pressure. It
bon border adjustments (CBAs) will create
may also involve ‘peer reviews’ as is
and already are creating diplomatic
20 https://icapcarbonaction.com/en/part- 23 IMF & OECD, 2021
nership/about 24 https://www.oecd.org/tax/beps/?mod=article_in-
21 https://pmiclimate.org/ line
22 https://www.carbonpricingleadership.org/ 25 Parry et al., 2021
7What Role for a Climate Club under the German G7 Presidency? – Policy Brief
already done with regards to fossil fuel sub- which means a key technical (and political)
sidies at the G20. Such discussions can hurdle has been taken. Common product
moreover lead to a shared understanding requirements also do not amount to an ex-
and convergence with regard to carbon clusive club, since third countries can con-
price levels, coverage, enforcement and tinue to export to alliance countries as long
permissible forms of border adjustments as they meet the standard. Moreover, all
down the line. countries are free to adopt the same label-
ling systems (and limits). Similar standards
Industrial Decarbonisation Alliances already exist for operational and energy ef-
There are many opportunities for G7 coun- ficiency requirements under the EU’s
tries to cooperate on industrial decarboni- Ecodesign framework, for instance, for light
sation that the German presidency should bulbs. Extending these to the production
seize. In fact, the German climate club process would be a logical extension of the
white paper already considers many of current regulatory framework.
these options. As sectoral alliances, these More exclusive sectoral arrangements on
may focus on public procurement, joint lead industrial decarbonisation are possible, as
markets, or standards for green hydrogen. is currently envisioned under the EU-US
Carbon-Based Sectoral Arrangement on
Product Requirements and Labelling
Steel and Aluminum Trade.29 The deal,
G7 members could focus on setting com- where details are to be formally negotiated
mon standards in industry as part of indus- in the coming two years, foresees external
trial decarbonisation alliances. An alterna- barriers to carbon-intensive steel and alu-
tive approach to a price-based climate club minium to enter US or EU markets and an
would be setting common limits on the life- inward-looking industrial strategy to build
cycle emissions of key industrial products, green industries. It also aims to reduce ex-
like steel and cement. Such limits are called cess capacity. As part of the deal, the US
product carbon requirements (PCRs).26 has immediately removed Trump-era tariffs
Product carbon requirements are a domes- on EU steel and aluminium, the EU in turn
tic policy choice, but to contain possible ten- removed retaliatory tariffs on US goods
sions with trade partners and to avoid frag- such as bourbon whiskey or motorcycles,
mentation of different methodologies and and both suspended WTO disputes. Con-
labelling systems, there is a need for coop- sidering the intention to “restrict market ac-
eration.27 There are also large benefits from cess for non-participants that do not meet
cooperating over PCRs as they can pave standards for low-carbon intensity” it is
the way to common lead markets among much closer to an exclusive ‘club’ than
G7 countries.28 other arrangements.
Product requirements do not require deep While there is great potential in such ar-
legislative integration. Rather, countries rangements, there are also some pitfalls.
only have to agree on common methodolo- First, the US frames the agreement in de-
gies and labelling systems to declare the cidedly geopolitical terms as a way to “pre-
life-cycle emission of industrial products. vent leakage of Chinese steel and alumin-
They can then set limits on the carbon foot- ium into the U.S. market”.30 While the ar-
print of products, either unilaterally or in a rangement is meant to be open to other
coordinated fashion, at a later stage. ISO countries that meet the conditions, there is
standards already exist for calculating and a risk that it will stir further escalation with
declaring the carbon footprint of products, China over trade.
26 See Gerres et al., 2021 29 U.S. Department of Commerce, 2021
27 Kamin et al., 2021 30 White House, 2021
28 CISL & Agora Energiewende, 2021
8What Role for a Climate Club under the German G7 Presidency? – Policy Brief
Secondly, using tariffs to sanction ‘dirty’ green public procurement, also in coopera-
steel, while waving certain partner countries tion with LeadIt and Mission Innovation. At
will likely violate WTO principles of non-dis- COP 26 in Glasgow, members of IDDI an-
crimination. It may be justified under the ex- nounced the Global Pledge to Procure
emptions of Article XX or XXI GATT,31 but Green Steel and Cement.34 Its goal is to
the risk of violating the most favoured na- adopt green procurement principles and
tion principle will remain. So instead of us- public procurement targets for 2030 to be
ing an arrangement with border tariffs, the launched by mid-2022.
arrangement can be based on common
Given the existence of a number of
PCRs for steel and aluminium products.
promising initiatives, the German presi-
These would fulfil a similar function in re-
dency should build on them and encour-
stricting carbon-intensive products to enter
age its G7 partners to join. The IDDI’s
EU and US markets but be a lot more trans-
Green Public Procurement Pledge, for ex-
parent and based on environmental criteria.
ample, has a goal to extend participation to
Complementary policies to push technolo-
a minimum of 10 countries by 2023. Ger-
gies and create demand can be devised ir-
many, Canada, and the UK are already par-
respective of existing tariffs or PCRs.
ticipants. Considering the recent US an-
nouncement to establish a ‘Buy Clean Task
Public Procurement and Green
Industrial Policy Force’ and to align public procurement with
climate neutrality and existing green pro-
Alternatively, or additionally, G7 countries
curement schemes in Japan this may be an
could cooperate on green public procure-
open door to push.
ment and joint lead markets. Green public
procurement coalitions are voluntary initia- Besides stimulating demand for low-carbon
tives that define common targets and prin- products, G7 initiatives should try to ease
ciples. Public procurement is an important tensions among trade partners around
source of demand for low-carbon industrial green industrial policy. Industrial policies
products and therefore for scaling up low- are a common source of trade disputes and
carbon technologies.32 state support to green industries is some-
times confronted with allegations of ‘green
There already exist several minilateral initi-
protectionism’. The EU is negotiating its
atives geared towards green public pro-
CBAM, while the US is considering “carbon-
curement and industrial decarbonisation
based trade policies to reward American
that the German presidency can build on.
manufacturers”.35 Accelerating the decar-
The Leadership Group for Industry Transi-
bonisation of industry requires strong coop-
tion (LeadIT) was launched by Sweden and
eration among key trade partners to pre-
India and gathers governments and private
empt conflicts and ease tensions. This
actors for knowledge and technical ex-
might take the form of initiatives like IDDI
change as well as to foster public-private
that tries to define guidelines and best prac-
collaboration.33 The Clean Energy Ministe-
tices for public procurement among govern-
rial’s Industrial Deep Decarbonisation Initi-
ments. Such discussions should be ex-
ative (IDDI) is a coalition particularly fo-
panded to more areas.
cused on stimulating demand for low-car-
bon products. It develops common stand- Another area in need of attention are
ards for environmental reporting mecha- ‘green’ subsidies. What form and volumes
nism and formulates best-practices for are permissible, and how they can avoid
31 Meyer & Tucker, 2022 34 https://www.cleanenergyministerial.org/in-
32 Martini et al., 2022 dex.php/news-clean-energy-ministerial/iddi-
33 From the G7, Germany, France, the UK, and drives-global-green-procurement-global-pledge-
US are members. procure-green
35 White House, 2022
9What Role for a Climate Club under the German G7 Presidency? – Policy Brief
tilting the playing field in unfair ways. Agree- standardisation and certification is
ment among the G7 on these topics is im- needed to ascertain the green nature of
portant for developing WTO law along cli- the traded hydrogen and its derivatives.
mate-friendly terms as part of the Trade and Developing markets and infrastructure:
Environmental Sustainability Structured suppliers will only invest into production
Discussions (TESSD). Likewise, avoiding facilities and transport infrastructure if
major trade disputes among G7 coun- there is sufficient demand, but demand
tries over trade-related climate measure will only arise if there is sufficient supply
is essential for not holding back the cli- at reasonable costs.
mate agenda more generally.
In this process, there are clear benefits from
An industrial decarbonisation alliance may multilateral coordinated action. The market
also involve enhanced technology trans- for green hydrogen and derived products is
fers or technical cooperation. While this emerging rapidly. In its current form, based
may not be as important among G7 nations around bilateral agreements and Memo-
given similar levels of technological devel- randa of Understanding, this entails numer-
opment, it may be an incentive for middle- ous risks: a proliferation of standards could
income countries to join the alliance – ac- bog down the global market; uncertainties
cess to enhanced technological coopera- could stifle the necessary investments (un-
tion may in this respect serve as a club certainty for suppliers about which volumes
good that is conditional on green public pro- they can expect to sell to whom at what
curement standards, PCRs, or the like. price, and uncertainty for consumers
whether they will be able to meet their de-
A Green Hydrogen Alliance mand).
Finally, international coordination and coop-
A club or alliance could help to address
eration on green hydrogen lends itself to be
these risks in different ways:
addressed in a future alliance or club.
Green hydrogen and derived products are By combining sufficient market power, it
of undisputed relevance for the transfor- could establish a global standard (and
mation to climate neutrality – particularly for associated certification and tracking sys-
transforming industry (e.g., in steel produc- tems) for green and sustainable hydro-
tion), but also for certain parts of long-dis- gen, and thus avoid the global market for
tance transport (aviation, shipping) where green hydrogen being bogged down by
direct electrification is not a feasible alter- a multitude of competing standards.
native. Common standards for green hydrogen
Since green-hydrogen-based solutions typ- could serve as the basis for a common
ically compete with incumbent fossil-based market for green hydrogen, greatly re-
technologies, they will only work if it the ducing transaction costs and overcom-
supply of green hydrogen is reliable and ing the risk of competing standards: in
cheap – or regulation strengthens its posi- this model, club members would commit
tion despite the cost. At the same time, they to accept hydrogen and derivative prod-
will only make sense as part of a climate ucts that were recognised as green by
neutrality strategy if the hydrogen is green another club member.
(produced with renewable electricity) and By bringing together the suppliers and
environmentally sustainable. This entails the consumers, it could help to reduce
numerous coordination needs: the uncertainty around investments into
green hydrogen infrastructure. This
Standardisation and certification for hy- could include long-term purchase and
drogen and derived products: Since the cooperation agreements, but also
traded atoms are identical for green, agreements to jointly develop the infra-
blue, pink or grey hydrogen, robust structure for green hydrogen. In a
10What Role for a Climate Club under the German G7 Presidency? – Policy Brief
rapidly emerging market, such agree- meet the requirements. These may take the
ments could help to give greater cer- form of enhanced technical cooperation or
tainty to investors – both on the side of technology transfers as part of an acces-
suppliers and consumers. sion process. They may also involve in-
creased climate finance, to help developing
Making alliances ‘open countries decarbonise their economies.36
Likewise, an alliance or club may also be
and cooperative’ linked to facilitating more ‘climate partner-
ships’, whereby joining the club or alliance
The German G7 Presidency has stressed is part of the deal between G7 and develop-
their desire to make any climate club ‘open’ ing countries.
and ‘cooperative’. This warrants some con-
siderations. First, being open and coopera- Recommendations
tive does not preclude members from en-
joying privileges that are not available for With the invasion of Ukraine, the geopoliti-
non-members. Rather, it means that the al- cal landscape has shifted in ways that can-
liance or club is in principle open to all juris- not be foreseen. Yet this has not changed
dictions, provided they meet the member- the urgency of tackling the climate crisis,
ship requirements. Requirements, there- and the need for advancing multilateral cli-
fore, must be transparent and membership mate action. The German G7 Presidency’s
accession procedures clearly spelled out. push to establish some kind of climate club
Secondly, the G7 is by definition an exclu- or alliance can be part of an effective re-
sive club. For this reason, launching an in- sponse to the fallout of the Russian war,
tergovernmental initiative at the G7 runs the and a signal that multilateral cooperation is
risk of being perceived as a ‘G7 thing’. For still alive. The question is therefore what is-
the initiatives laid out above, especially on sues should be at the focus of this initiative,
industrial decarbonisation and hydrogen, and how it should function?
the G7 is a good testing ground and forum
1 Initiatives need to address the com-
to find initial agreement. However, there
mon ground between the geopolitical
may be benefits from launching an initiative
crisis and the transformation to climate
in the context of the G20, the Clean Energy
neutrality: drastic improvements of en-
Ministerial, or the Major Economies Forum
ergy efficiency, electrification of
on Energy and Climate (MEF) rather than at
transport and heat, and massive accel-
the G7. In addition to generating a larger
eration in renewables deployment both
membership base, the risk of being per-
help to reduce dependency on fossil
ceived as a ‘rich countries club’ may be
fuels imports – and are inevitable for
lower.
decarbonisation.
Lastly, being ‘open’ and ‘cooperative’ may
require increasing support for low and mid- 2 Initiatives should have a clear focus on
dle-income countries on climate action. a small number of issues where addi-
Some low- and middle-income countries tional action is required, and where
may struggle to meet membership require- there is a clear benefit from intergov-
ments for technical or administrative rea- ernmental action. Keeping the focus
sons. Implementing carbon pricing or prod- limited makes it easier to find agree-
uct labelling systems, for instance, requires ment among partners and improves
extensive administrative capacity. Any G7 the likelihood for success of individual
initiative should therefore come with mech- initiatives.
anisms for helping developing countries
36 Vangenechten & Lehne, 2022
11What Role for a Climate Club under the German G7 Presidency? – Policy Brief
3 Initiatives should be aligned with the competitive, climate-neutral industry,
UNFCCC process, prepare the ground but also to make industry more resilient
for COP 27, and strengthen the multi- towards supply disruptions. Alliances
lateral climate regime. Making alli- in this field could focus on common
ances cooperative and open entails standards, labelling, and product re-
supporting low- and middle-income quirements for carbon-intensive prod-
countries meeting membership re- ucts. Equally, coordinated action on
quirements and offering additional green public procurement and lead
benefits, such as climate finance or markets is an avenue for cooperation
technological cooperation. that has few political barriers but large
transformative potential. A common
4 The original concept of a price-based lead market for low-carbon products or
climate club remains politically elusive, common access to the green procure-
or risks limiting itself to very few coun- ment schemes of all club members
tries. The German Presidency should would present a strong incentive for
not waste precious political capital on joining a club.
such high-risk, low reward initiatives,
especially in the current situation. En- 6 Lastly, green hydrogen is a field that
hanced technical cooperation on car- lends itself for greater formalised coop-
bon pricing – in the realm of the G20 eration in the form of an alliance. It also
and OECD – is less transformative but adds to the diversification of energy
can pave the way for more formal co- supply options – yet only at a timescale
operation in the long-run and should that will not provide effective relief in
therefore be supported by the G7. This, the current geopolitical situation. By
however, may not be an immediate pri- creating a common market based on
ority for the German G7 presidency. common standards for green and sus-
tainable hydrogen, an alliance could
5 Sectoral, industrial decarbonisation al- address two main risks: first, the risk of
liances that focus on catalysing the a proliferation of competing standards
transformation of industry have large for green hydrogen, with associated
potential and prospects of political suc- transaction costs, and second, the
cess. They also align with the strategy risks that uncertainties on the supply
to reduce Europe’s dependency on and demand side stifle the needed in-
Russian gas: next to buildings, industry vestments, and slow down the emer-
is one of the major users of gas as a gence of a global market for green hy-
feedstock and for process heat. Re- drogen.
placing fossil-based value chains is
therefore needed both for a
12What Role for a Climate Club under the German G7 Presidency? – Policy Brief
Appendix
Table 1: Carbon pricing and position on CBAs across the G7 and selected G20 countries
Position on Carbon Border
Country Carbon Pricing
Adjustment Mechanism
Ger- • EU ETS for power and industry • EU CBAM proposal – generally sup-
many • German ETS for heating and transport portive
• EU CBAM proposal – generally sup-
Italy • EU ETS for power and industry
portive
• EU ETS for power and industry
France • Carbon tax on heating, transport, and indus- • EU CBAM proposal – highly supportive
try not covered by EU ETS
• No BCA under consideration
• Carbon Tax but level very low (US$3/tCO2e)
• Not affected much by EU CBAM, but
• New carbon pricing system under considera-
Japan steel industry oppositional
tion
• Wants EU CBAM to consider implicit
• Additional regional and voluntary systems
carbon prices
• Considering UK CBAM, but no pro-
G7 • UK ETS for power and industry (mirrors EU posal or political consensus in UK gov-
UK ETS in Phase IV) ernment, prefer multilateral solution
• EU CBAM would only apply in limited
way due to UK ETS
• Considering US CBA, but legislative
challenges (domestic, WTO)
• CBA would be based on ‘implicit car-
• No federal carbon pricing system
USA bon price’ and adjust for regulatory
• Sub-national systems in 12 states in place
compliance cost
• Demands EU CBAM to consider ‘im-
plicit carbon prices’
• Federal carbon pricing standard mandates
all provinces to have carbon pricing system in
place. • Canadian CBA under consideration
Canada
• 14 different sub-national carbon pricing sys- • Not affected substantially by EU CBAM
tems (ETS, carbon tax, and baseline and
credit).
• Cautious towards EU CBAM, expects
WTO compliance
• China ETS for power sector (38% of emis- • May perceive CBAM as geopolitical in-
China sions), considering expansion to more sec- strument if it includes concessions to
tors, price signal still weak US
• Major exporter of iron, steel, and alu-
minium to EU
• Critical of EU CBAM
Russia • Russia would be majorly affected by
G • No carbon pricing in place
EU CBAM (iron and steel, aluminium,
20 fertilizer)
• Critical of CBAM, esp. if designed dis-
criminatory
India • Argue that CBAM is not congruent with
• No carbon pricing in place
CBDR-RC
• Exports (iron and steel) substantially
affected by EU CBAM
Brazil • Carbon pricing under consideration • Not substantially affected by CBAM
Indone- • Not majorly affected by EU CBAM, but
• Carbon pricing (tax and ETS for power sector)
perception influenced by ongoing con-
sia under consideration
flict with EU over Palm Oil
13What Role for a Climate Club under the German G7 Presidency? – Policy Brief
South • SA Carbon Tax, covering 80% of emissions, • Moderately affected by CBAM (alumin-
Africa low price level (What Role for a Climate Club under the German G7 Presidency? – Policy Brief
Parry, I., Black, S., & Roaf, J. (2021). Proposal for an International Carbon Price Floor Among Large Emitters
(No. 2021/001; IMF Staff Climate Notes). International Monetary Fund.
Sartor, O., Cosbey, A., & Shawkat, A. (2022). Getting the Transition to CBAM Right. Agora Energiewende.
https://www.agora-energiewende.de/en/publications/getting-the-transition-to-cbam-right/
SPD, Bündnis 90/DIE GRÜNEN, & FDP. (2021). Mehr Fortschritt Wagen: Koalitionsvertrag 2021.
https://www.bundesregierung.de/breg-de/aktuelles/koalitionsvertrag-2021-1990800
Tagliapietra, S., & Wolff, G. B. (2021). Form a climate club: United States, European Union and China. Na-
ture, 591(7851), 526–528. https://doi.org/10.1038/d41586-021-00736-2
U.S. Department of Commerce. (2021). U.S.-EU Joint Statement on Steel and Aluminium. https://www.com-
merce.gov/news/fact-sheets/2021/10/steel-and-aluminum-us-eu-joint-statement
Vangenechten, D., & Lehne, J. (2022). Can climate clubs accelerate industrial decarbonisation? E3G.
https://www.e3g.org/publications/can-climate-clubs-accelerate-industrial-decarbonisation/
White House. (2021, October 31). FACT SHEET: The United States and European Union To Negotiate
World’s First Carbon-Based Sectoral Arrangement on Steel and Aluminum Trade. The White House.
https://www.whitehouse.gov/briefing-room/statements-releases/2021/10/31/fact-sheet-the-united-
states-and-european-union-to-negotiate-worlds-first-carbon-based-sectoral-arrangement-on-steel-
and-aluminum-trade/
White House. (2022, February 15). Fact Sheet: Biden-Harris Administration Advances Cleaner Industrial Sec-
tor to Reduce Emissions and Reinvigorate American Manufacturing. The White House.
https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/15/fact-sheet-biden-harris-
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manufacturing/
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15What Role for a Climate Club under the German G7 Presidency? – Policy Brief
This project is financially supported by:
IMPRINT
Contact
Leon Martini
Junior Researcher
Ecologic Institute
Pfalzburger Straße 43/44
10717 Berlin
E-Mail: leon.martini@ecologic.eu
Acknowledgements
We thank Jennifer Tollmann, Domien
Vangenechten (all E3G), Kristin Reißig,
Lisa-Maria Okken (WWF), Camilla
Bausch, and Anthony Cox (Ecologic Insti-
tute) as well as the participants of the The publisher is responsible for the content
fourth Climate Expert Dialogue jointly or- of this publication.
ganised by WWF, E3G, and Ecologic In-
stitute for their constructive comments
and feedback.
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