Climate Action Through a Climate Club

Loading

 

Climate Action Through a Climate Club

This is an independent report that was commissioned by Bundesministerium der Finanzen on behalf of the German G7
Presidency in 2022. It does not necessarily represent, nor does it purport to represent, the views of either the G7
Presidency or of other G7 members.
Preparation of the report was under the overall responsibility of Nicholas Stern, I.G. Patel Professor of Economics and
Government and Chair of the Grantham Research Institute on Climate Change and the Environment at the London
School of Economics and Political Science. Hans Peter Lankes led the team at the Grantham Research Institute working
on the analysis and writing. The team included Amar Bhattacharya, Danae Kyriakopoulou (ch. 4), Rob Macquarie (ch. 6),
Roberta Pierfederici (ch. 5), as well as Andrew Lang from the University of Edinburgh (ch. 5).
This report sets out a rationale and possible design of a Climate Club, taking its point of departure from the June 2022
G7 Leaders’ Statement on Climate Club, as a contribution to the work programme of the German G7 Presidency. While
it is an independent contribution from outside government, the team has consulted with officials involved in the
G7 process.
Acknowledgements
Financial support for the preparation of this report was provided by Bundesministerium der Finanzen. The team would
like to acknowledge the high-quality discussions with and input from officials at Bundesministerium der Finanzen,
Auswärtiges Amt, Bundesministerium für Wirtschaftliche Zusammenarbeit, UK Department of Business, Energy &
Industrial Strategy, UK Cabinet Office, UK Treasury, officials of the Indian Government, US Treasury and European
Commission; international organisations including International Monetary Fund (Florence Jaumotte, Emilia Jurzyk, Ian
Parry, James Roaf, Johannes Wiegand), OECD (Laurence Boone, Filippo D’Arcangelo, Yannick Hemmerle, Tomasz Kozluk,
Pieter Parmentier, Mauro Pisu, Stephan Raes, Cecile Seguineaud), UN Climate Champions (Simon Sharpe), World Bank
(Indermit Gill, Stephane Hallegatte, Somik Lall), World Trade Organization (Marc Bacchetta, Eddy Bekkers, Robert
Koopman, Aik Hoe Lim, Jose-Antonio Monteiro, Ludivine Tamiotti, Daniel Ramos); as well as academia, private sector
and civil society, including Scott Barrett, Chris Bataille, Emily Benson, Parth Bhatia, Ben Cahill, Robert Falkner, Sam
Fankhauser, Matthew Goodman, Alasdair Graham, Michael Grubb, Ma Jun, Alzbeta Klein, Rohan Kocharekar, Cheng Lin,
Linus Linde, Sam Lowe, Heiner von Lüpke, Ilaria Mazzocco, Mark Meldrum, Karsten Neuhoff, Sebastian Oberthür, Rick
Rossow, Felipe Sanchez, Stephanie Segal, Jesse Scott, Aylin Shawkat, Jayant Sinha, Mark Sobel, Kuki Soejachmon, Hilton
Trollip and Wouter Vink.
We are also grateful to attendants from a wide range of countries for their active participation in roundtables organised
by Creon Butler and Lilia Couto at Chatham House in London, by Heiner von Lüpke and Karsten Neuhoff at Deutsches
Institut für Wirtschaftsforschung in Berlin, and by Patrick Lehmann-Grube at Climate Strategies.
Special thanks go to Marit de Bruijne, Georgina Kyriacou and Francisca Torres for editing and producing the report.
The above acknowledgements of individuals and institutions do not imply agreement with the content of this report.
That is the overall responsibility of Stern and Lankes.
This report was first published in October 2022 by the London School of Economics and Political Science.
© The authors, 2022
Suggested citation: Stern N and Lankes HP et al. (2022) Collaborating and Delivering on Climate Action through a
Climate Club: An independent report to the G7. London: London School of Economics and Political Science.
This report is commissioned via LSE Consulting which was set up by The London School of Economics and Political
Science to enable and facilitate the application of its academic expertise and intellectual resources. LSE Enterprise Ltd,
trading as LSE Consulting, is a wholly owned subsidiary of the London School of Economics and Political Science. The
LSE trademark is used under licence from the London School of Economics and Political Science.
LSE Consulting
LSE Enterprise Ltd
London School of Economics and Political Science
Houghton Street
London, WC2A 2AE
(T)
+44 (0)20 7106 1198
(E)
consulting@lse.ac.uk
(W)
lse.ac.uk/consultancy

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Contents
Executive Summary

7

1. Urgency of climate action

14

2. Strategy: Strengthening ambition and implementation

16

2.1 Harnessing collective commitment and building mutual support

16

2.2 Centrality of investment and innovation

16

2.3 A mix of policies

19

2.4 Finance and cooperation

20

3. Establishing a Climate Club to create momentum

22

3.1 Principles of a Climate Club

22

3.1.1 Setting ambition
3.1.2 Ensuring inclusiveness
3.1.3 Rationale for Climate Clubs
3.1.4 Policy diversity
3.1.5 Club benefits
3.1.6 Respect for international rules

23
24
24
25
26
27

3.2 Design of a Climate Club

4.

28

3.2.1 Conceptual issues
3.2.2 Membership
3.2.3 Organisation
3.2.4 Institutional considerations

28
31
32
33

Pillar 1 – Building Partnerships

35

4.1 Supplementing the ‘architecture’ of global climate partnerships

35

4.2 Role of partnerships in the Climate Club

35

4.2.1 Accelerating action
4.2.2 Reducing friction
4.2.3 Capturing strategic benefits

36
36
36

4.3 Setting strategy

37

4.3.1 Recognising priorities and identifying gaps
4.3.2 Overcoming barriers
4.3.3 Connecting agendas through a climate lens
4.4 Designing roadmaps, especially at the country level
4.4.1 Utilising country platforms

37
38
38
38
38

4.5 Supporting EMDEs with finance: ambition and complementarity in official, multilateral,
private sources
4.5.1 Setting fresh targets for official financial support
4.5.2 Supporting the global and local architecture for private finance
3

41
42
42

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

4.5.3 Finance for adaptation, resilience and sustainable development
4.5.4 Voluntary Carbon Markets and scaling up sustainable finance in EMDEs
4.5.5 Enabling multilateral institutions to scale up and mobilise the private sector

43
43
43

4.6 Supporting sectoral decarbonisation paths and scaling up green technologies

44

4.7 Conclusion

45

5. Pillar 2 – Managing policy diversity

47

5.1 Role of managing policy diversity in the Climate Club
5.1.1 Accelerating action
5.1.2 Reducing friction
5.1.3 Capturing strategic benefits

47
47
47
48

5.2 Approaches to addressing carbon leakage

48

5.3 Limitations of CBAM coordination

50

5.4 WTO aspects and implications for border regimes

52

5.4.1 Climate Club measures and the WTO
5.4.2 Ensuring free and fair trade: anticipating and addressing WTO risks
5.4.3 Preserving dynamic change

52
54
54

5.5 Summary: the contributions a Climate Club can make to this agenda

55

5.5.1 Managing friction around autonomous CBAMs
5.5.2 Improving measures for managing policy diversity
5.5.3 Dynamic re-evaluation of the need to manage policy diversity

56
56
56

6. Pillar 3 – Fostering sectoral alignment

57

6.1 Role of sectoral alignment in the Climate Club

57

6.1.1 Accelerating action
6.1.2 Reducing friction
6.1.3 Capturing strategic benefits

57
57
58

6.2 The substance of alignment

58

6.2.1 Form: a process for coordination
6.2.2 Focus: identifying sectoral opportunities

58
59

6.3 Policies and initiatives to advance sectoral decarbonisation
6.3.1 Targets and roadmaps
6.3.2 R&D investment
6.3.3 Support for common standards and production mandates
6.3.4 Green procurement
6.3.5 State support for near-zero emissions production
6.4 Summary and recommendations

65
66
68
69
70
70
71

7. Conclusions

73

References

76
4

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Appendix 1. Profile of key existing institutions in the climate arena

84

Appendix 2. Carbon pricing and leakage

87

Carbon pricing regimes and models

87

Global trends in carbon pricing

91

Recommendations on carbon pricing

93

Impacts of carbon pricing

94

References

96

Appendix 3. Policies to address carbon leakage

99

Exemptions and free allocation of emissions allowances

99

Carbon border adjustment mechanism (CBAM)

99

Common global carbon price

101

Carbon price floor

101

Consumption charges and climate excise contribution

101

Impacts of CBAMs on leakage, international trade and equity

102

Use of revenues in a CBAM

103

References

104

Appendix 4: Selected existing partnerships and initiatives in support of climate goals

106

Public institutions and initiatives

106

Private sector-oriented initiatives

114

List of Tables
Table 1: Summary of the rationale for and components of a climate club……………………………………………………. 22
Table 2: Investment targets in EMDEs (excluding China)……………………………………………………………………………. 41
Table 3: World trade in steel by area, 2019……………………………………………………………………………………………….. 49
Table 4: Climate Club proposal elements likely to invite WTO scrutiny……………………………………………………….53
Table 5: Features of selected hard-to-abate sectors………………………………………………………………………………….. 61
Table 6: Sectoral coverage of selected major initiatives…………………………………………………………………………….. 67
Table 7: Overview of action areas for the Climate Club……………………………………………………………………………… 75

List of Tables (appendices)
Table A1: Carbon pricing initiatives implemented at national/federal level ………………………………………….. 89
Table A2: Official finance institutions and initiatives ………………………………………………………………………… 106
Table A3: Selected multilateral development bank finance initiatives and instruments ……………………….. 109
Table A4: Official sectoral decarbonisation initiatives ………………………………………………………………………. 110
Table A5: Private sector-oriented sustainable finance initiatives ……………………………………………………….. 114
Table A6: Private sector-oriented initiatives for industrial or sectoral decarbonisation ………………………… 119
5

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

List of Figures
Figure 1: Carbon dioxide emissions by country, top 20 emitters 2019………………………………………………………. 17
Figure 2: Carbon dioxide per sector with electricity and heat separated………………………………………………….. 17
Figure 3: Carbon dioxide emissions per sector with electricity and heat allocated…………………………………….. 17
Figure 4: The 2030 emissions gap………………………………………………………………………………………………………………. 18
Figure 5: Low-carbon solution maturity by sector – progress since 1990 and possible future to 2050………….19
Figure 6: Climate Club organisational schematic………………………………………………………………………………………….34

List of Figures (appendices)
Figure A1: Carbon pricing map (2021)………………………………………………………………………………………………. 92
Figure A2: Carbon prices as of 1 April 2021 ………………………………………………………………………………………. 93
Figure A3: Exports to the EU in selected sectors likely to be considered in the CBAM, 2019 (billion $) …… 103

List of Boxes
Box 1: Climate ambition and systemically relevant countries and sectors…………………………………………………..17
Box 2: Club goods………………………………………………………………………………………………………………………………………. 30
Box 3: Case study: The Energy Transition Mechanism…………………………………………………………………………………40
Box 4: Case study: The Just Energy Transition Partnership………………………………………………………………………….40
Box 5: Comparison of price- and non-price-based policies………………………………………………………………………… 51
Box 6: How can coordination unlock decarbonisation in hard-to-abate sectors?……………………………………. 61

List of Boxes (appendices)
Box A1: Export-related leakage………………………………………………………………………………………………………………….100

6

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Executive Summary
Collaborating and delivering on climate ambition through a Climate Club
A Climate Club can be part of an effective global response to the climate crisis
1. The Earth is warming at an alarming pace. Climate change is here and its impact on lives and livelihoods
is already starkly evident. The world has come together behind the goals of the Paris Agreement, and made
progress at COP26 in Glasgow, but actions and commitments made to date fall well short of what is needed.
There is growing urgency to go much further, much faster. A Climate Club, as called for in the G7 Leaders’
Statement on Climate Club of June 2022, can enable greater ambition by fostering commitment to collective
climate goals, accelerating action, facilitating financial and technology partnerships, managing concerns
around carbon leakage and competitiveness, and aligning around common interests in guiding industrial
transformations.
2. A shared strategy for climate and economy. The world today is facing the urgent challenge of climate
change while experiencing extreme economic and geopolitical stress. In a fractured world the climate agenda
represents an important opportunity for countries to collaborate on objectives that are widely shared. The
proposed Climate Club must be seen and communicated as part of a positive narrative: a global strategy to
recover and rebuild in a way that places climate action at the heart of a new growth story, powered by
investment, technology, policy and finance.
3. Climate architecture. Given its centrality to growth and development and its economy-wide nature in
terms of causes and impacts, the climate agenda figures in many fora beyond the UNFCCC, including the G7
and the G20, the Coalition of Finance Ministers for Climate Action, Central Banks and Supervisors Network
for Greening the Financial System (NGFS), Major Economies Forum, High Ambition Coalition, NDC
Partnership, private sector initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ), Global
Investors for Sustainable Development (GISD) Alliance, Sustainable Markets Initiative (SMI) and the Climate
Finance Leadership Initiative (CFLI), and public–private coalitions focused on specific goals. Virtually every
international organisation now has the climate as part of its mission. Nevertheless, there are gaps and
shortcomings in the institutional architecture, which are delaying collective progress. Existing fora might have

7

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

engagement at the top, shared member ambition, critical mass, a focus on the climate agenda or
comprehensive coverage of climate topics.
A Climate Club would be effective by combining all of these features. It would be designed to enhance, not
duplicate, other initiatives. Supporting the UNFCCC, the Climate Club could evolve to become a powerful,
cohesive and dedicated forum to drive collective ambition, translating ambition into priorities for action, and
managing the cross-country complementarities and tensions that will arise. In that sense it could play a very
similar role for the climate to the role originally conceived of the G20 with respect to strengthening
international cooperation on the economic and financial architecture.
4. Principles of the proposed Climate Club. To be successful, the membership and design of a climate club
must be firmly based on a set of principles that are consistent with those of the G7 Leaders’ Statement:


It must require from its members a shared commitment to ambition (centred on the Paris and
Glasgow goals), action and collaboration.
It must be open (and offer benefits) to countries with different priorities, development
circumstances, and policy mixes.
It must be co-led and co-designed with emerging markets and developing economies (EMDEs) from
the start – which will account for most future (and are responsible for a minority of past) greenhouse
gas emissions – and not the G7 alone.
It must support and not side-line the Paris process, and strictly observe international law, including
trade law; if not, the Climate Club would fail to reach its goals and could be divisive and destructive.

5. Membership. One could argue that those countries that are most important to the climate agenda should
be targeted to ensure the greatest relevance. That principle guided the formation of the G20 and of the Major
Economies Forum. Another approach is to embrace the full diversity of all countries, irrespective of their
weight in greenhouse gas emissions: the Coalition of Finance Ministers and the NGFS are taking this
approach, which is a way to ensure that the world as a whole makes the transformation that is needed and
the construct is seen as open and inclusive (see also the ‘high ambition coalition’ at Paris COP21). The Climate
Club should seek to combine these perspectives, bringing together ‘systemic’ as well as smaller countries
united by their ambition. To enable a diverse membership, members might be expected to sign on to
qualitative aspirational goals initially, combined with a commitment to rising specificity and action over time.
A climate club implementing these criteria and principles is not really a ‘club’ in the formal sense of the term,
with its exclusionary connotation. It is an ‘Alliance of Leaders for Climate Action and Sustainable Growth’ and
would benefit from a relabelling, even though this report uses the ‘club’ terminology to align with the
G7 discourse.

Principles and architecture of a Climate Club
6. A Climate Club could provide a flexible framework for driving the climate agenda forward through a
coordinated, collaborative approach among countries representing a large proportion of global greenhouse
gas emissions. The principles set out in the G7 Leaders’ Statement should drive the design of the Club but
must be carefully defined.
7. Inclusiveness is crucial to ensuring that the Club achieves the necessary size and coverage to make a
difference. Designing a club to be inclusive implies acknowledging differences in the rationale for joining, in
countries’ climate policy mix, and in what would constitute desirable benefits of membership. To be inclusive,
membership in the Club should be based not on uniform policy pathways, but on the adoption of a policy mix
that can deliver on climate ambition. For countries whose climate ambitions are constrained by lesser
financial and technical capacity, a principal motivation is access to levels of support not otherwise available.
For others it is establishing rules – in a non-confrontational manner – for dealing with the possible
8

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

implications of policy divergence (e.g. carbon border adjustment mechanisms [CBAMs], and local product
preferences) and tackling measurement issues; or agreeing compatible standards for low-carbon products,
processes and supply chains, and doing so in a way that ensures that all have a seat at the table in shaping
rules and standards.
8. Respect for international rules, in turn, ensures that the Club does not undermine established frameworks.
The Climate Club must not create an alternative to the Paris Agreement. Members should cast their ambition
through progressively higher targets under the annual UNFCCC process, and work to support and reinforce
initiatives under the Paris umbrella rather than creating parallel tracks. Compliance with international rules
is particularly important when it comes to measures agreed under the Climate Club that have a bearing on
trade. It is permissible under World Trade Organization law for WTO Members to adopt trade-restrictive
measures for environmental purposes, such as addressing climate change. However, where such measures
are adopted, they must be designed and applied in a manner that is non-discriminatory, well-founded
and transparent.
9. Organisation. The Club would be a dynamic and flexible arrangement that supports the search for
responses and solutions through the most effective fora, a platform to agree on commitments and collective
action in areas of common interest, as well as for the measurement and monitoring of progress. We propose
that the role and work of the club be organised based on three mutually-supporting pillars: building
partnerships, managing policy diversity, and fostering sectoral alignment. Whereas there would be some
broad areas of commitment and actions involving all members, other actions could be taken forward by
plurilateral groups of members.

10. Institutional underpinnings. The Climate Club does not require an ‘institution’ but effective
organisational underpinnings and technical support. The G20 and the Coalition of Finance Ministers for
Climate Action (CoFM) provide important insights on the key dimensions and institutional considerations for
setting up and operating the Club. Drawing on these, the Club might consider having:
9

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7





Co-chairs, one from an advanced and one from a developing country, to ensure broad perspective,
inclusion, and a focus on the collective agenda
Standing and ad hoc working groups that focus on and set the agenda on specific issues, bringing
together the most relevant countries and institutional partners
Institutional partners involved in the climate space, drawing on the partnerships established by the
G20 and the CoFM but also extending to academic institutions and scientific bodies
A secretariat drawn from relevant international institutions but organisationally independent
of them
Ownership by countries as a whole rather than particular departments within national
administrations, with sponsorship at the top.

This report considers the architecture and rationale for the design of a Climate Club. More detailed design
aspects, legal underpinnings and the mechanism for financing its Secretariat and general operations must be
determined by the founding members (including G7 and partner economies). The Coalition of Finance
Ministers for Climate Action can serve as a useful blueprint in terms of financial and other arrangements for
the operationalisation of the Climate Club.
Although the initial impetus has come from the G7, crucially the Club should not be launched by G7 countries
alone. The framework should be agreed and designed jointly with key developing countries in order to take
a broader range of interests into account.

Pillar 1. Building partnerships to enable joint ambition
11. The Climate Club could be operationally structured into three ‘pillars’ or work areas. The first of these
would seek to build partnerships, since the idea of jointly benefitting from common action is at the core of
the Climate Club. The starting point must be mutual understanding and cooperation around goals, strategies
and actions, complemented by partnerships around finance, capacity-building and technology.
12. Goals, strategies and actions. Given the wide range of fora and institutions promoting progress on the
climate, it would be a key work programme under this pillar to assess what is being done and what issues
and gaps need to be addressed with respect to ambition, long-term strategies and roadmaps. The goal would
be to raise ambition and accelerate action and delivery while avoiding duplication or undermining other
processes, especially that of the UNFCCC. Partnerships developed under the Climate Club umbrella will need
to reflect a focus not only on climate change mitigation but also on adaptation, resilience and biodiversity,
which still receive only a fraction of the planning, financial and technological support they require.
13. Country platforms. Given the urgency and scale of action on the climate and development it will require
a high degree of coordination. The Climate Club can help facilitate coordination not just globally but also at
the country level, for instance through helping accelerate the formation of mechanisms such as the South
Africa Just Energy Transition Partnership and translating them into other countries. These efforts can build
on the recommendations by the 2018 Report of the G20 Eminent Persons Group on Country Platforms (CPs)
as a vehicle for joint action for tackling obstacles to investment upstream, supporting investment
preparation, and mobilising sustainable finance. Work on CPs should also draw in various private sector
initiatives, as proposed by the UN Special Envoy on Climate Action and Financing.
14. Financial partnerships. The Climate Club would offer a platform to consider approaches to scaling up
bilateral and multilateral finance, and for creating conditions enabling much larger flows of private finance.
Delivering on the commitment by developed countries to mobilise $100 billion a year by 2020 to support
developing countries on climate action has become a crucial symbol of trust. At the same time, climate
finance from official and other sources must expand much further. From its high-level vantage point the
Climate Club could target the flaws and gaps in the global and local architecture for private sustainable
10

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

finance; act as a platform for linking developed and EMDE members to accelerate the growth of voluntary
carbon markets; and provide a forum for its members – as shareholders of multilateral institutions – to align
on and implement reforms to modernise the development banking system to be fit for the purpose, urgency
and scale of the necessary sustainable investments. Unlocking greater financing from the multilateral
development banks (MDBs) will require both a greater set of commitments from public finance and reforms
on several fronts. Public finance commitments must go beyond the $100 billion commitment and can take
the form of mechanisms that build on the South Africa Just Energy Transition Partnership example. Suggested
reforms include encouraging adjustments to the MDB capital adequacy frameworks in line with the broad
strategic shifts outlined by the G20 Panel on MDB Capital Adequacy, achieving far higher private capital
mobilisation, as well as considering the need for capital increases.
15. Technology partnerships. The Climate Club can support or – where there are flaws or gaps – initiate
technical cooperation on research and development, as well as strengthening project development capacity
and packaging investments for clean energy and other climate-critical sectors in a way that can attract
international finance. Technology partnerships are most easily implemented at the sector level and would
involve significant coordination with the Club’s work under Pillar 3.

Pillar 2. Managing policy diversity
16. The second proposed pillar of the Climate Club aims to enable members to accelerate and harmonise
climate ambition while managing friction caused by policy differences. Members should pursue these goals,
while recognising and allowing each country the flexibility to follow a range of decarbonisation strategies
domestically, thus accounting for countries’ different starting points and policy priorities.
17. Carbon leakage and border measures. So far, there is little evidence of carbon leakage – emissions
moving abroad and production being replaced by imports due to tough climate policy requirements – but it
is expected to become more significant in trade-exposed and emissions-intensive industries (EITE) as carbon
prices and other policies start to bite. In this context, carbon border adjustment mechanisms (CBAMs) are
gaining popularity as a tool to address leakage.
18. A forum for multilateral cooperation. The Climate Club could have a role in ensuring that any CBAMs
that will be implemented over the coming years, as well as other trade-sensitive measures, operate within
mutually agreed guard rails. This might include common protocols and methodologies for crediting foreign
carbon pricing and related regulations or incentive structures, or forms of best practice to ensure that the
various regimes work to prevent leakage without being unfair, untransparent, bureaucratic, complex, overly
broad or protectionist. What is not advisable, however, is to seek to turn the Climate Club itself into a giant
CBAM by creating treaty-bound club goods and penalties. A common CBAM would require a degree of policy
harmonisation that is unlikely to be compatible with an open, inclusive approach.
19. Managing friction. Tackling potential instances of friction extends beyond CBAMs to the implementation
of climate subsidies, local content requirements and consumption charges. It could also include the Club
acting as a forum for the development of methodologies on measurement of the carbon content of complex
goods as well as the carbon price equivalence of the overall stance of national policies – including future
plans. That would enable the enhancement of transparency through the monitoring of countries’ policy
ambition and implementation. It is important that assessment of policies and strategies recognises plans for
the transition process and are not just ‘snapshots’.
20. Importance of World Trade Organization engagement. Measures associated with the Climate Club are
likely to be subject to scrutiny from a WTO perspective, reflecting its role in operating the global system of
trade rules and agreements, maintaining open trade, and settling disputes. WTO law will generally hold
members to core standards of good governance. The Climate Club should consider engaging directly with the
WTO itself or with other existing bodies that inform the international trade system. This can take the form of
11

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

a convening forum under the auspices of existing WTO committees and working groups that would allow
non-members of the Climate Club to air their concerns and propose ideas. The Climate Club may aim to give
impetus to discussions within the WTO regarding not just guidelines for the design and implementation of
CBAMs, but also definitions of environmental goods and services, categorisation of green subsidies, or
international standards relating to carbon emissions.
21. Convergence over time. There is a crucial opportunity for the Climate Club to reconcile the impact of
policy divergence, if well-focused on a small number of EITE sectors. The Climate Club could support
converging decarbonisation paths by establishing consistent timelines across the work on partnerships, the
management of policy diversity and sectoral alignment while giving time to the implementation of trade
measures. Progress on these fronts would make trade action ultimately redundant.

Pillar 3. Fostering sectoral alignment
22. The third pillar proposed in the design of the Climate Club is an effort to align policies across member
countries to provide collective support for decarbonisation in key sectors. Coordination on industrial
transformation allows Club members to pursue shared material interests – in ways that recognise the variety
in country circumstances.
23. Industry focus. Cross-country coordination is especially urgent (and often lacking) for emissions-intensive
heavy industries – such as steel, aluminium, cement, hydrogen and chemicals. Developments in these
sectors, as well as in international transport such as shipping, are linked strongly to international trade
patterns and concerns. Decarbonisation is hindered by a pronounced collective action problem in the face of
costly abatement options and highly competitive global markets. Uncertainty over key technologies for lowor zero-carbon production, lack of incentives to innovate, and underdeveloped policy to support first movers
would all be addressed by coordination.
24. Flexible coordination. Not every sector will attract universal interest and in some production is
dominated by a small number of countries. Therefore, a Climate Club is expected to give rise to a varied
geometry of plurilateral coordination. There are already numerous, mostly recent, coalitions to advance
decarbonisation at the sectoral level. Alignment under a Climate Club should seek to reinforce this ecosystem
and overcome flaws and fill any gaps, by galvanising momentum behind existing institutions, acting as a focal
point for coordination on certain issues, and creating its own offering in areas not yet covered. The Club
builds critical mass and members have an assured seat at the table.
25. Roadmaps. At the level of overarching policy frameworks, countries can agree decarbonisation targets
and roadmaps in order to support investment confidence and commitment through shared expectations of
the development pathway ahead. The Breakthrough Agenda, launched by the UNFCCC’s Race to Zero at
COP26, offers a global framework in close interplay with sector-focused groupings such as Mission Innovation
(MI), the Leadership Group for Industrial Transition and the Mission Possible Partnership. In this context, the
Climate Club could pursue greater harmonisation of milestones and interventions within members’ national
roadmaps, primarily through resolution of trade barriers and support from partnerships made possible under
the first two pillars.
26. R&D and investment. As well as the targeted use of public funds on a national basis, Club members may
pool resources to support innovation in chosen sectors. Mission Innovation already undertakes a wide range
of activities supporting collaboration around zero-emission technologies. Apart from boosting participation
in MI, a Climate Club would add value by combining finance and technology transfer and sharing under the
partnerships pillar with spreading and monitoring domestic commitments to technological priorities, striking
deals on knowledge sharing and coordinated funding for R&D where possible.

12

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

27. Standards. Product standards are a powerful instrument for driving low-carbon innovation, including
technology-agnostic performance standards for production processes, standards directly on basic materials
and those on final products. They are also a prerequisite for certain interventions and for smoothing trade.
The private sector has experience with environmental standards and firms reporting on their products build
skills and infrastructure for compliance. However, methodologies vary significantly, so harmonisation should
go further for the necessary scale and pace of transformation measures. Club members could align by
endorsing measurement standards and setting targets for products – such as promoting common thresholds
and single measurement approaches for defining ‘green’ hydrogen or ammonia.
28. Procurement. Use of governments’ purchasing power through public procurement favouring products
with low lifecycle emissions can create lead markets for these products. Private procurement commitments
can play a similar role and could be incentivised through fiscal instruments. A public procurement alliance
already exists in the Industrial Deep Decarbonisation Initiative (IDDI), and in the private sector the First
Movers Coalition consists of over 50 companies making voluntary commitments. The Climate Club can help
to scale up these initiatives, by encouraging membership and sector coverage and by serving as a forum for
negotiations around implications for trade or support packages that some countries would need in order to
scale up their commitments.
29. State support. Members will need to set rules and understanding for public financial support to industries
to advance the goals of sectoral agreements. If a group of countries in the Club agreed to jointly undertake
Carbon Contracts for Difference policies or pool funds for demonstration projects, the market signal would
be amplified. There is a potential role for a Climate Club in seeking to build consensus on acceptable, WTOcompliant forms of public support for green investment, complementing and sharing best practice with
initiatives elsewhere, especially within the WTO. It may also be possible for a critical mass of WTO members
to move ahead on a plurilateral basis.

Conclusion
30. There is a pressing need to act on climate change. The establishment of a Climate Club can give critical
momentum to that shared agenda. Such a Club must be an ‘Alliance of Leaders’ in more ways than one. It
will require government leaders to be engaged because the climate transformation cuts across departmental
briefs and requires a shared, purposive, coherent national strategy. The climate transformation drives and is
indeed inseparable from the economic transformation towards a new, sustainable, resilient and inclusive
model of growth and development. This is a positive agenda of change. Climate leadership is
growth leadership.
31. This report argues that it is fundamental for this Club to be inclusive – and to be so from the start in
order to reflect a diverse membership in its design and organisation. In particular, it would be
counterproductive to invite developing countries to join a ‘rich countries’ club’ not of their making. The last
few years have seen an erosion of trust: there is a need for an expressly cooperative approach.
32. A Club (or Alliance) that promotes ambition with inclusiveness would be one in which countries come
together that otherwise would not, building on the momentum of countries’ net zero commitments. For its
institutional structure, it would draw on the experience of the G20 and the Coalition of Finance Ministers for
Climate Action. It would be respectful of existing, broad-based processes, operating in support of the
UNFCCC. It would therefore sit within an architecture of existing coalitions and initiatives, with a variable
geometry of members’ participation around specific issues. The whole set of climate, sustainability and
resilience strategies for development would benefit from the attention and the traction that an alliance of
leaders can bring.

13

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

1. Urgency of climate action
Climate change is real and increasingly tangible and, thankfully, the debate is no longer about the science.
The Intergovernmental Panel on Climate Change’s Special Report on Global Warming of 1.5°C (2021)
documents the rapid acceleration of climate change, dramatically narrowing the window for limiting global
warming to 1.5°C and underscoring the imperative to reach net zero emissions by 2050. The G7 has made
a collective commitment to the net zero target, and individual countries have set emissions reduction
targets towards that goal.
The climate agenda has enjoyed renewed momentum following the COP26 summit in Glasgow. COP26
forged a common understanding that global warming must be kept below 1.5°C. It created momentum
around goals and targets, with 90% of global emissions now covered by mid-century net zero targets. The
conference fully embraced the importance of adaptation, resilience and biodiversity; brought sectoral
initiatives and innovation-focused ‘breakthroughs’ on power, road transport, steel and green hydrogen;
new commitments on coal, methane and forests; took us a step closer to meeting climate finance
commitments; tidied up Article 6 of the Paris Agreement, which should broaden the voluntary carbon
markets; and, especially, it saw financial institutions taking a big leap towards alignment with net zero goals.
For the G7, a key challenge is how to help achieve these goals and raise ambition further through mutual
support and by encouraging others, particularly G20 countries, who are collectively responsible for 75–80%
of emissions. There are countries in and outside these groups that have made strong commitments but
others much less so.
Putting a price on carbon has emerged as a central policy tool in enabling a rapid transition to net zero
emissions. However, as major economies raise ambition, between-country differences in the strength of
ambition and associated implementation of carbon pricing and other policies for transitioning to net zero
can cause carbon ‘leakage’ and distort competition in some emissions-intensive trade-exposed (EITE)
goods. Consequently, the issue of cross-border price adjustment mechanisms has come to the fore and with
it an urgent need for international cooperation on climate policies.
The G7 has stated its intention to establish a Climate Club (G7
Leaders’ Statement on Climate Club, June 2022), and the G7
Presidency has commissioned the present report to provide an
independent perspective on this initiative. A Climate Club could give
important impetus to the Paris agenda if well designed and carried
through. But in order to be effective at achieving climate goals and
inclusive in its membership, it would need to set its sights well
beyond trade defences. Concerted climate action can be at the heart
of a dynamic development agenda. Climate action reduces
greenhouse gas emissions and delivers adaptation through growthpromoting investment and technology. Support for the less endowed
and the vulnerable, both internationally and domestically, is a central
pillar of the UN framework. International climate initiatives should
therefore be designed so that they enable investment, technology
and participation in support of the Sustainable Development
Goals (SDGs).
14

There is an urgent need
to accelerate action on
the climate and the
Climate Club can be
part of an effective
global response.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

This is a positive agenda for people and planet, at the core of the next industrial revolution (Schwab, 2016)
and indeed the growth and development story of the 21st century (IMF, 2021). It is important that the
Climate Club is understood, framed and designed in this way. Too much of the climate discourse implies
that climate action is a burden: this is where the Climate Club needs to shift the terms of the debate.
Climate-related targets sketch out the vision behind a new model of inclusive, sustainable growth. Not
obligation but opportunity; not costs but capital.
The importance of an open and inclusive approach raises the question of whether the ‘Club’ label, which
can convey exclusion, sets the right tone. Moreover, the notion of a climate club (which deals with a global
public good where action by those outside the club matters) has a weak and misleading foundation in the
theory of clubs (where club goods are excludable, congestible and divisible). The terminology should be
avoided politically as well as theoretically. An ‘Association’, ‘Coalition’, ‘Alliance’ or ‘Community’ might
better describe the idea. This should be borne in mind even if we keep this language in the following for
practical reasons – since the ‘Climate Club’ language is established in the public discourse.

15

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

2. Strategy: Strengthening ambition and implementation
2.1 Harnessing collective commitment and building mutual support
The world today is facing the challenge of climate change while experiencing extreme economic and
geopolitical stress. Markets were already fragile and inflationary pressures building up due to demand–
supply imbalances following the COVID-19 pandemic, but the Russian invasion of Ukraine and associated
disruptions are exacerbating these challenges.
Wars and hardening divisions can underscore an opportunity to act together in a spirit of internationalism
around objectives that are widely shared. Climate action should be seen as a key part of the energy security
agenda in which most countries, in the Global South as well as North, have a shared and overwhelming
interest. In a fractured world the climate agenda represents an important area where countries can
collaborate. Through the IPCC and the UNFCCC summits (COPs) they have shown a remarkable ability to come
together around the science and the imperative to act.
The proposed Climate Club must be seen as part of a broader global strategy to recover and rebuild in a way
that creates sustained and environmentally sustainable, resilient and inclusive growth. With much of the
world’s growth potential – but also its future emissions – concentrated in developing economies, this strategy
has to build on collaboration, avoiding divisiveness before a background of deep suspicion. Climate ambition
and climate action must be at the heart of a new shared growth story, powered by investment, technology,
policy and finance. This chapter briefly reviews the requirements of this broader strategy.

2.2 Centrality of investment and innovation
The future of people and the planet will be shaped by the capital investments realised over the next 10 to
20 years. As set out in a report for the G7 Presidency in 2021 (Stern et al., 2021), the agenda to deliver a
strong recovery and sustainable, resilient and inclusive growth therefore should be centred on a big push on
investments and innovation.
Top-down and bottom-up estimates of the investment needs –
short- and long-term, public and private – are remarkably
consistent (Stern et al., 2021). To drive the low-carbon
transformation and promote strong and sustainable economic
growth, global investment must increase by around 2–3% of GDP
per year above pre-pandemic levels, during this decade and
beyond, primarily in the private sector. This would reverse the
damaging decline of investment ratios since the Global Financial
Crisis and, importantly, it would enable combining growth with the
replacement of old, carbon-intensive capital stock by green
capacity at the necessary pace for a net zero emissions path.

16

For climate and growth,
the world needs good
policies as well as
investments, innovation
and finance. An effective
policy mix tackles prices,
standards, regulations
and complementary
measures.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Box 1: Climate ambition and systemically relevant countries and sectors
In 2019, China, the United States, India and Russia were the four biggest emitters of greenhouse gas emissions
globally. On a sector basis, power generation is the largest emissions driver. Power generation and transport
together accounted for over two-thirds of total emissions in 2019 and have been responsible for almost all global
emissions growth since 2010. The remaining third was mainly associated with the industry and buildings sectors.
After allocating electricity and heat emissions to final sectors, industry is the largest emitting sector, accounting for
over 40% of global emissions in 2019 (IEA, 2022a).
Figure 1: Carbon dioxide emissions by country, top 20 emitters 2019

Figure 3: Carbon dioxide emissions per sector with
electricity and heat allocated

Figure 2: Carbon dioxide per sector with electricity
and heat separated

Other
Buildings 2%
9%

Other
6%

Buildings
28%

Transport
27%

Industry
19%

Industry
39%

Transport
26%

Source: Own calculation from IEA (2022a)

17

Electricity
and heat
production
44%

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Looking forward, as of June 2022, 128 countries covering 83% of global greenhouse gas emissions have
enshrined net zero targets in laws or policy or have proposed legislation to do so. Of the 128 countries
with a net zero target, 104 have committed to achieving that target between 2041 and 2050, while 10
countries covering 55% of all emissions have committed to a longer timeframe (Net Zero Tracker, 2022).
Despite the strengthened long-term ambition, medium-term ambition lags behind. As of November 2021,
a substantial gap (in the range of 19–23 gigatonnes of carbon dioxide equivalent [GtCO2e]) remained
between the levels of emissions in 2030 projected in the Nationally Determined Contributions (NDCs)
submitted to the UNFCCC, and the lower levels that would be consistent with the 1.5°C temperature goal
of the Paris Agreement (Climate Action Tracker, 2021). According to the IPCC’s Special Report on Global
Warming of 1.5°C, limiting warming to 1.5°C requires that CO2 emissions fall to 45% below 2010 levels by
2030 and to net zero around mid-century. Collectively, the newly updated NDCs would lead to 2.4°C of
heating (UNEP, 2021; Climate Action Tracker, 2021; IEA, 2021).
Figure 4: The 2030 emissions gap

Source: Climate Action Tracker (2021). 2030 Emissions gap: Projections and resulting emissions gap in meeting the 1.5°C Paris
Agreement goal. November 2021. Available at: https://climateactiontracker.org/global/cat-emissions-gaps/. Copyright © 2021
by Climate Analytics and NewClimate Institute. All rights reserved.

Those investments should not be misperceived as ‘costs’. They can propel economic growth, create private
sector opportunities and bring significant co-benefits. Green growth and transformation will be primary
drivers of prosperity and employment for the 21st century, raising annual global output by about 2% above
the baseline average over 2021–30, according to an IMF study, and total employment by nearly 1% net
(IMF, 2021). There is solid evidence that green investments generate significant numbers of good quality
jobs. For instance, solar and wind energy deliver three times more jobs per dollar invested than fossil fuels
(see overview in Lankes et al., 2022). A study of the green investment potential in 21 emerging markets
identifies more than 200 million new direct jobs over 10 years (IFC, 2021a). Good jobs are fundamental to
social cohesion.
The Paris Agreement had a pivotal role in giving long-term direction for companies to invest and innovate;
it created the conditions for industries to move towards tipping points where low-carbon technologies can
18

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

out-compete high-carbon businesses (ETC, 2020; Systemiq, 2021). The potential is immense: by 2030, lowcarbon solutions could be competitive in sectors accounting for nearly three-quarters of emissions,
compared with one-quarter today (electricity) and no sectors only five years ago.
Despite the progress and the potential, the speed of change is much too slow: it must accelerate. Measured
against the International Energy Agency’s net zero path the deployment of low-carbon technology is well offtrack. Almost half of the annual CO2 emission reductions required to reach net zero by 2050 will come from
technologies that are currently in the prototype or demonstration phase. The next 10 years will be crucial to
bring key new technologies to market in time – solutions such as advanced batteries, green hydrogen,
sustainable bioenergy, and carbon capture, utilisation and storage (CCUS). Public-sector support and
partnerships are essential for technologies that face high upfront costs and uncertain returns – initiatives
such as Mission Innovation, International Solar Alliance, Climate Action Platform and the Breakthrough
Agenda, launched at COP26.
Figure 5: Low-carbon solution maturity by sector – progress since 1990 and possible future to 2050

Source: Systemiq (2021)

2.3 A mix of policies
A big push on investments and innovation requires supportive policy. Implementing a price on carbon
through taxes or trading mechanisms, while phasing out subsidies that favour fossil energy consumption, is
an efficient mechanism for shifting production and consumption towards lower-carbon sources. At the
same time, some countries have struggled to reach political agreement on carbon pricing at the national level
and carbon pricing alone is unlikely to drive down emissions sufficiently and equitably.
The slow progress of investors and markets is caused by multiple market failures, of which the emissions
externality is just one. Others include R&D positive externalities, capital market imperfections, network
19

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

effects, information gaps, and lack of consideration of co-benefits – such as the health benefits of cleaner
air. These factors are especially prevalent in hard-to-abate industries where technology development
requires both ‘push’ and ‘pull’ measures to develop the supply of near-zero emissions products and to
stimulate demand for them (IEA, 2019). Both types serve the underlying goal of creating long-term
predictability, so that industry players and investors have the confidence to support a shift in production.
Carbon pricing must therefore be part of a broader policy package. A well-designed and comprehensive
policy mix combines carbon pricing, standards and regulations as well as complementary policies to support
innovation and investments and address distributional impacts.
When comparing the policy mix countries are adopting to achieve carbon reductions by 2030, carbon pricing
plans play an important role for Canada, France, Germany, Italy and the UK among the G7. All countries
have various regulatory policies and targets, but they play a proportionately greater role in Japan and the
United States. Among other G20 members, price-based policies are likely to have a significant impact on
emissions only in Korea and South Africa. The combined effect of all declared policies and targets remains in
the low single digits for several middle-income G20 members.
Beyond policies targeting individual prices or markets there is the importance of affecting broad-based
change in key systems, including cities and areas such as land use, transport and logistics, and of course
energy. These systems together account for a large majority of greenhouse gas emissions. Change would
require vision, a strategic approach involving multiple public policy tools, and comprehensive and
coordinated action by the public and private sectors.

2.4 Finance and cooperation
International cooperation around policies, technology and finance, as well as sound institutions and
governance organised around country platforms, will be critical in enabling net zero transformation. In
particular, supportive finance is essential to a big push on investment and innovation, and therefore a
sustainable recovery and net zero pathway.
Most of the sustainable capital stock of the coming decades will be built in emerging markets and
developing economies (EMDEs). Developed countries fell short on delivering on the $100 billion climate
finance goal by 2020, but there is still an opportunity to step up and deliver in 2022. Climate finance needs
are, however, far larger than this target. For a Paris Agreement-aligned decarbonisation path that is
consistent with development goals, EMDEs will require additional annual finance (domestic and
international) above recent levels, estimated at $0.8 trillion by 2025 and $1.9 trillion by 2030 1
(Bhattacharya et al., 2022).
The financing challenge exceeds fiscal capacity by far and the private sector will have to contribute most of
the finance for the new capital stock, as it did for the old. These are commercial opportunities – not a call
for aid. A major advance at COP26 was that private finance stepped up with widespread commitments to
shift financial flows, organised under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ).

1

Estimates apply to EMDEs excluding China.
20

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

But concessional finance from bilateral donors remains central to international climate priorities and donors
should double bilateral climate finance from its 2018 level to $60 billion by 2025. The multilateral
development banks (MDBs) can play a critical role in supporting the development of country platforms and
policies and in increasing the flow and lowering the cost of capital by making full use of their capacity and
by reducing, managing and sharing risk (G20 Panel, 2022). MDBs will need to triple their climate-related
lending from 2018 levels by 2025. Other sources of funds that will need to scale up include multilateral
agencies, philanthropy and voluntary carbon markets (VCMs), each of which provide valuable and
complementary forms of finance (Bhattacharya and Stern, 2021b).

21

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

3. Establishing a Climate Club to create momentum
A climate club could provide a flexible framework for a coordinated, collaborative approach among
countries representing a large proportion of global greenhouse gas emissions. The G7 Leaders’ Statement
on Climate Club released on 28 June 2022 describes the goal of the proposed Club as supporting
implementation of the Paris Agreement by accelerating climate action and addressing the risk of carbon
leakage. It is to be an intergovernmental, inclusive, open and cooperative arrangement that acts in a manner
consistent with international rules.
A wide range of international institutions and inter-governmental fora pursue the climate agenda and it is
important to be clear about the value that a Climate Club can add. There are gaps and shortcomings in the
institutional architecture, which are delaying collective progress. To break the logjam and make progress
with urgency and at a scale that matches the size of the challenge, it is necessary to internalise the many
facets of the climate and sustainable growth agenda, the ‘gains from trade’ embedded in the global,
structural transformation of economies; and to ensure they receive the necessary high-level attention by a
group of countries that is committed to this agenda. In order to do so, a Climate Club would meet five key
criteria: it would combine engagement at the top, shared member ambition, critical mass, a focus on the
climate agenda and comprehensive coverage of climate topics. Appendix 1 provides an overview of the
current institutional architecture and how it measures up against these criteria.
This chapter first reviews the rationale and principles for the Climate Club, including the implications of
these principles for the membership, organisation and focus of the club, and then discusses in more detail
how a club might add value in building partnerships, managing policy diversity and fostering sectoral
alignment.

3.1 Principles of a Climate Club
Table 1: Summary of the rationale for and components of a Climate Club
Purpose

Accelerate and coordinate climate action for sustainable growth and development.

Principles

Ambition, inclusiveness, respect for rules.

(Inclusiveness)

Motivations

Collective action, manage friction, strategic complementarities.

Policies

Policy mix, political constraints, starting points.

Policies

Partnership, managing policy diversity, industry alignment.

Membership

Commitment to ambition, action, collaboration.

Organisation

Building partnership, managing policy diversity, industry alignment pillars.

Operations

Enable (measurement, monitoring), boost (existing initiatives under UN), support (dynamic
solution-finding process).

Governance

Co-lead G7/non-G7; tech support; member forum; plurilateral / variable geometry.

The principles that were set out in the G7 Leaders’ Statement – ambition, inclusiveness, respect for rules –
have considerable implications for the design of a Climate Club and are examined below.
22

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

3.1.1 Setting ambition

If a Climate Club is to make a meaningful contribution to climate objectives, clearly it needs both to spur
ambition and to include or influence countries accounting for a large share of global emissions. The G7
proposals are for an open climate club architecture. Major emitters have begun, since the run-up to COP26,
to narrow their commitment timelines for net zero, though the range remains broad and specificity around
paths differs, especially for climate mitigation. The Club would need to build out through engagement with
leading economies and major emitters at all income levels, opening a path to membership.
However, climate mitigation action on its own sketches an incomplete vision for a Club that would be aiming
to attract a broad membership, including from countries that have pressing development needs but also
richer countries in which the politics of climate change remain fraught. Climate action is still, at times, seen
as being in competition with the pursuit of growth and development goals and with distributional equity. 2
Yet there has been overwhelming evidence for some time that this is a false dichotomy (Lankes et al., 2022).
Inaction on climate change is already today undermining and setting back the fight against poverty and
inclusive development (IPCC, 2022a). As discussed in Chapter 2, it is also increasingly clear that action on
climate change, structured well, provides considerable benefits and opportunities for dynamic growth and
development (Stern et al., 2021; WEF, 2021, 2022a). 3 At the same time, poorly designed climate policy can
hurt development and worsen the livelihoods of those already in poverty, which, understandably, provokes
opposition and undermines action.
Thus, action on climate can and must help drive inclusive growth and development if it is to succeed. This
involves resources and investment domestically but also across borders. International collaboration will be
essential to delivering an integrated and concerted response to the twin challenges. The Climate Club should
therefore cast a broader vision, one that places climate action at the heart of a positive agenda of
cooperation and mutual support for climate goals, dynamic growth and inclusive and resilient development.
Its impact on the climate would materialise through the investment, finance and technological
transformation enabled by such a club.
These considerations define the ‘ambition’ for the Club and therefore also the nature of the commitments
that would be expected of members.

2

3

The narrative that climate action damages economic opportunity and development has also been promulgated by fossil fuel and
other vested interests to delay or curtail climate action (Oreskes and Conway, 2012).
This is true not only for mitigation action but also for investment in adaptation: see, for example, the 2019 report of the Global
Commission on Adaptation, which found that every $1 invested in adaptation could generate between $2 and $10 in net economic
benefits. Many investments for development, mitigation and adaptation are mutually supportive.
23

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

3.1.2 Ensuring inclusiveness

Inclusiveness gives concrete shape to the idea of an open Club and is
crucial in ensuring that the Club achieves the necessary size and
coverage to make a difference. It is essential that the Club be inclusive
from the very beginning. Founding members should reflect different
starting positions in terms of their income levels and policy mix, to send
the appropriate signal of openness and to ensure an inclusive design.
And again, the Club must embody a commitment to helping others
achieve sustainable, inclusive, resilient growth. Without this mutual
commitment the Club could be divisive and destructive for the broader
climate process. Unless there is clarity from the start on this, it will
undermine progress.

A Climate Club should
require ambition, be
inclusive, respect
international rules
and support existing
climate fora.

Designing a Club to be inclusive implies acknowledging differences in the rationale for joining, in countries’
climate policy mix and in what would constitute desirable benefits of membership.
3.1.3 Rationale for Climate Clubs

According to the G7 Leaders’ Statement on Climate Club, its purpose is to support implementation of the
Paris Agreement by accelerating climate action while addressing risks of carbon leakage. The emphasis on
joint and cooperative approaches, for instance in transforming industries to accelerate decarbonisation and
in boosting partnerships, suggests that a third purpose is to capture strategic complementarities. The
Climate Club therefore aims both to promote the climate agenda and to manage friction. These issues are
closely linked. The added value of an international Climate Club can be as a forum for reconciling national
policies. And the need to manage friction, in turn, can become particularly pressing if countries raise their
levels of ambition.
A Climate Club can be approached from different perspectives that are broadly aligned with these aims.
Building ‘downward’ from the goals of the Paris Agreement, a Climate Club might consist of an ambitious
group of countries setting higher targets. Climate mitigation is a global public good and as such, the Paris
Agreement lacks the incentives and enforcement mechanisms to ensure greater ambition – there may be a
perception that the pay-off to unilateral climate action is limited, while at the same time countries can freeride on the actions of others.
The Climate Club as originally proposed by William Nordhaus (2015) would tackle non-cooperation by
creating treaty-bound club goods and penalties: specifically, enforcing carbon pricing among members and
tariffs on non-members. Others argue that the drivers of climate ambition are domestic rather than
international collective action, that legally enforceable regimes among the major powers and shared
policies are not a realistic prospect and that their divisiveness will undermine the common goals (Aklin and
Mildenberger, 2020). Indeed, it is questionable whether club theory applies in this context, where the key
club good is non-excludable. That analysis would support softer, more inclusive arrangements, such as
normative or bargaining clubs with a more flexible range of tools (Falkner et al., 2021), through which
countries can leverage the credibility of mutual external commitments to face down vested interests and
tackle distributional concerns.

24

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Building ‘upward’ from the climate strategies of individual countries or groups of countries, a Climate Club
might offer a framework for handling the cross-border impact of differences in policies and pace both
among Club members and between members and non-members. The point of departure here is the
opposite of the ‘collective action’ quandary: countries intend to raise their climate ambition, such as carbon
prices, irrespective of action by others. The expectation that doing so could damage their industries and
cause carbon emissions to migrate (‘leak’) has led to plans such as the EU’s carbon border adjustment
mechanism (CBAM) and the US–EU carbon-based sectoral arrangement on steel and aluminium trade. A
Climate Club might extend these schemes to willing partners, set their internal rules – importantly, around
how to reconcile different policy approaches – and agree how to structure relationships with members that
do not join these schemes as well as with countries outside the Club. Critiques centre on the limited
evidence of carbon leakage (Eskander and Fankhauser, 2021; Grubb et al., 2022) and on the challenges of
implementing the trade schemes (Dröge and Fischer, 2020): their administrative complexity, the tension
between the aims of levelling competition and the Paris-mandated ‘common but differentiated
responsibilities’ (CBDR) for poorer countries, and compatibility with WTO rules.
Building ‘across’ from individual players in the presence of strategic complementarities, a Climate Club
might offer a framework for mutually beneficial coordination in support of both climate goals and growth
and development. With strategic complementarity it is individually rational to align approaches, for instance
around common technical and measurement standards for new technologies, the creation of lead markets
or the regulatory basis for private finance. A large number of initiatives are already underway in these areas
under the UNFCCC umbrella but often lack critical mass; a Climate Club could step in here (Shawkat
et al., 2022).
These different perspectives, top-down, bottom-up and across, can lead to a similar place. Thus, one result
of the CBAM might be to induce other countries to raise carbon prices, or implementing common product
standards might obviate the need for border adjustments. But the principal motivations and the vision
behind them are different. In the first case, countries are sitting on the fence with respect to climate action,
but a Climate Club can address external constraints and support collective action. In the second, countries
are ambitious, but a Climate Club helps to manage domestic political constraints. And in the third, there is
a common search for pragmatic solutions.
This tension runs through the literature and the political discourse on climate clubs. A successful Climate
Club design would bridge these perspectives, broadening coalitions by combining collaborative approaches
with those that address trade concerns.
3.1.4 Policy diversity

Equally importantly, as described in Chapter 2, there is considerable variation in the policies and strategies
for decarbonisation. It should be borne in mind that no single policy mix constitutes the unique path to
success, and each will reflect a country’s structural and political context. Systemic change occurs at scale
through the effective combination of policies, setting a clear sense of direction and giving confidence to
investors. The challenge is to change the composition of the whole capital stock over time by making all new
investment and technology decisions consistent with a zero-carbon trajectory and encouraging retrofits
where possible.

25

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

In a market economy, putting a price on carbon, through a tax or emissions trading system (ETS), is the single
most powerful and economically efficient mechanism to shift demand towards lower carbon intensity, and
with it investment, innovation and employment. Relative prices can also be adjusted through subsidies that
ensure correct pricing of fossil and non-fossil externalities. But in many situations, price and subsidy action
on their own may not be effective fast enough and may require unacceptably steep hikes in carbon prices.
A more effective approach would then be regulatory action and a schedule for phasing out polluting
industries and processes, or the setting of performance standards. The historical evidence is that regulatory
limits have been effective not only at curtailing environmental pollutants (from SO2 to CO2 and heavy metals)
but also at setting a powerful signal for private sector behaviour and spurring innovation.
Policies must be tightened if 2030 targets are to be achieved, and their mix may change. Nevertheless, it is
unrealistic to assume that all major emitters will adopt price-based approaches. An effective policy mix will
be tailored to circumstances, including endowments, distributional issues and political constraints. The
economically first-best combination of measures may not always be an option, in which case we would
expect, for example, a stronger regulatory stance or investment support to compensate for the absence of
clear price signals. It is critical to assess the full range of climate policies required to achieve net zero ‘on time
and within [carbon] budget’, and how each can influence the explicit or implicit price of carbon.
If it is to be effective at accelerating climate action, the bottom line is that a Climate Club must accommodate
countries with different policies and recognise that, when set at appropriate levels, various combinations
of policies are able to achieve the common objectives by promoting net zero-consistent investments,
innovation and inclusion. This reinforces the conclusion that the criteria for membership in the Club should
be defined not around the implementation of similar policy pathways, but around agreed levels of ambition
and the adoption, or credible commitment to adopt, a policy mix that delivers on that ambition.
3.1.5 Club benefits

Why would countries join a Club and register higher climate commitments? It is hard to see that a purely
‘normative club’ which countries use to declare their intentions without enforcement mechanisms would be
an advance on registering unilaterally with the UN process. Norm-setting might be enhanced by
collaboration on common nomenclatures, measurement and monitoring – an ‘information club’; such
efforts are already underway in various fora, but a Club might be attractive if it means having a seat at the
table. At the other end of the spectrum, a ‘transformational club’ with legal enforcement might create
valuable club goods – such as trade benefits available only to members and penalties for non-performance
– but those would have to be based on common or comparable policies (almost certainly requiring
legislation and treaties), which would conflict with the reality of policy diversity (Falkner et al., 2021). Such
agreements might be conceivable for sub-sets of countries that are willing to converge around particular
policies or industry regulation but not for all major emitters.
As discussed, countries are likely to have different motivations for joining a Climate Club, and club benefits
will differ accordingly:

For countries that may be open to policy choices but whose climate ambitions are constrained by
lower financial and technical capacity as well as distributional concerns, a principal motivation is to
access levels of support that are not otherwise available. The key incentive is ‘partnership’ in
support of a shared ambition for sustainable development.
26

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

For countries with ambitious carbon mitigation policies, including the aim to phase out free
allowances under emissions trading systems, a principal motivation is to either achieve the
harmonisation of pricing across borders or agree rules of the game for dealing with divergence
through CBAMs and for exports. The key incentive is the ‘management of policy diversity’. This
must be focused on emissions-intensive trade-exposed (EITE) goods, where it matters most. If too
broad, untransparent or complex, CBAMs will be heavy on administration and seen as covert
protectionism. 4

For countries that have more industry-centred policies, the principal motivation might be to achieve
common standards and support compatible pathways for low-carbon products, processes and
supply chains, including joined-up demand and R&D to set the direction and build critical mass for
industry transformations. The key incentive is ‘alignment’ and having a seat at the table in
shaping it.

These club benefits are of course not exclusive: countries may seek to manage policy diversity as well as to
benefit from a sectoral framework for harmonisation; those seeking partnership may want to avoid being
penalised by CBAMs.
A Climate Club with a diversity of club benefits would broaden its membership and enable trading across.
There is a crucial opportunity for the Climate Club to reconcile the impact of policy divergence. Trade action
through CBAMs or regulatory barriers aimed at levelling the playing field for emissions-intensive traded
industries are necessary complements to ambitious domestic policy. But implementation, even if narrowly
focused, creates administrative burdens and sits uneasily with the concept of ‘common but differentiated
responsibilities’ (CBDR). The Climate Club could support converging decarbonisation paths by establishing
consistent timelines across the partnership, management of policy diversity and alignment work while giving
time to the implementation of trade measures. If well designed, it could make trade action
ultimately redundant.
3.1.6 Respect for international rules

The third principle established in the G7 Leaders’ Statement is the importance of acting in support of the
Paris Agreement, and in particular the Glasgow Climate Pact, and being compliant with international rules.
To support the Paris Agreement, it is especially important that the Climate Club does not establish an
alternative to the UN process, one that would be dominated by the larger and richer countries, would upset
the fragile balance of interests and lead to deadlock in the Conference of the Parties. The Climate Club
should therefore cast its ambition through progressively higher targets under the annual UNFCCC process
and, especially, work where possible to support and reinforce initiatives under the Paris umbrella rather
than creating parallel tracks. This has obvious implications for the organisation and the ‘business’ of the
Climate Club.

4

It is important to recognise the deep suspicion of the developing world over the experience of protectionism (from the EU and US
among rich countries), and anger around COVID-19, unmet climate finance targets, Ukraine and Russia.
27

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Respect for and compliance with international rules is particularly important when it comes to measures
agreed under the Climate Club that have a bearing on trade. It is perfectly permissible under WTO law for
WTO members to adopt trade-restrictive measures for environmental purposes. However, where such
measures are adopted, WTO law will generally hold parties to core legal standards, in particular:

Non-discrimination, necessity and non-arbitrariness. WTO law requires that goods of different origins
do not modify the condition of competition between products to the detriment of imports of a particular
origin, except where the measure is for a legitimate public purpose and is not applied in a way that is
‘arbitrary or unjustifiable’, and provided there is not reasonably available any less trade-restrictive and
equally effective means of pursuing the regulatory objective. A measure is likely to meet these conditions
if it is based on recognised international standards.

Trade-distortive subsidies. The WTO Agreement on Subsidies and Countervailing Measures (SCM)
prohibits export subsidies and subsidies conditional on local content. Other kinds of subsidies, such as
state aid given as financial support, are also challengeable under WTO law if they affect competitive
conditions enough that they cause harm of specific kinds (displacing imports, price undercutting, lost
sales, and so on). There used to be a safe harbour in the SCM Agreement for specific kinds of
environmental subsidies, but this has expired – in the climate context, it is often noted that a new safe
harbour for beneficial green subsidies may be needed.

Public procurement. The Government Procurement Agreement seeks to ensure fair competition
between foreign and domestic suppliers in procurement markets, and to ensure procurement decisions
are made on a transparent and broadly commercial (non-discriminatory) basis. This is a plurilateral
agreement and not all prospective Climate Club members are parties to it, although many are.

Furthermore, under both the Paris Agreement and the WTO, commitment obligations under a Climate Club
and associated agreement would be expected to reflect members’ different starting positions, in line with
the principle of CBDR.

3.2 Design of a Climate Club
3.2.1 Conceptual issues

Together, the Climate Club’s ambition, inclusiveness and respect for
rules shape its ‘architecture’, i.e. the criteria for membership,
organisational design, and the processes and institutions that would
constitute the Club. Membership must be open but also reflect the
ambition to close the gap between the Paris Agreement goals and
current reality; the organisational structure must recognise the
diversity of objectives of an inclusive membership; the processes
need to ensure that the Club’s principal contributions are
supporting and supplementing initiatives and arrangements under
the Paris umbrella; and its institutions should be light in order not
to create a parallel machinery to the UNFCCC.

28

An open Club isn’t really a
‘club’ with its exclusionary
connotation. It is an ‘Alliance
of Leaders for Climate Action
and Sustainable Growth’.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

One question is whether these principles define a ‘Club’ at all, in the sense of the economic theory of clubs.
This is important because much of the analysis of climate clubs is concerned with the way ‘club goods’ or
indeed penalties for non-members alter the incentives of individual players towards taking collectively
beneficial action. However, in the theory of clubs, which goes back to James Buchanan (1965), ‘club goods’
are excludable (non-members do not benefit), congestible (growing membership reduces the individual
benefit of membership), and divisible (players/countries can create separate clubs) (see Box 3.1 and
Sandler, 2015). Players self-select for membership in relatively finite numbers given rivalry in consumption,
and based on broadly comparable preferences since otherwise the entry price is hard to determine. None of
these conditions is fully present when it comes to climate action, where the core benefit is a global public
good, or indeed when it comes to action that supports sustainable, inclusive and resilient growth and
development, which is generally non-rivalrous. Moreover, much or all of club theory is about
people/countries acting in their narrow self-interest. Of course, interest in climate change is acting for future
generations and our own, wherever we come from.
The implication is that there is no simple relationship between an entry price (commitments) and a benefit
(club good) that applies to a limited and fairly homogenous membership, as is typical of clubs. Similarly, a
coercive approach based on sanctions for outsiders would fail to capture the diversity of interests in and
constraints on climate action and could backfire. Instead, an open and by design inclusive Climate Club,
using this term loosely, will have to be based on a mosaic of incentives and on exploring mutually beneficial
bargains from ‘issue linkages’ across disparate objectives (Sandler and Hartley, 2001; Falkner et al., 2022).
And it will have to start from the premise that members are committed to act cooperatively for the global
public good.
It is hard to model and estimate the incentives to join such a club, even in a stylised manner as typically has
been done for combinations of carbon prices and border tariffs (e.g. Chateau et al., 2022). A rare attempt
at capturing the payoffs from different climate club architectures through economy-wide CGE [computable
general equilibrium] modelling concludes that “the key benefits that could structure the club are enhanced
technological diffusion and the provision of low-cost climate finance, which reduce investment costs”
(Paroussos et al., 2019). 5 The bottom line must surely be that the Climate Club should seek to offer potential
benefits that correspond to the range of country preferences.

5

Interestingly, although they face the highest absolute mitigation costs, China and India are the largest relative winners from club
participation because the burden faced by these countries to finance their energy transition could be massively reduced following
their participation in the club.
29

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Box 2: Club goods
A club is a voluntary group deriving mutual benefits from sharing a partly rivalrous public good,
characterised by excludable benefits (Buchanan, 1965). Such goods are known as club goods. Club goods
are different from pure public goods for a number of reasons:

First, the use of a club good is voluntary because sharers must join the club to receive the good’s
benefits, which are withheld from non-members. Despite fees, club members perceive a net gain
from membership. For pure public goods, everyone within the range of spillovers automatically
receives the good’s benefit or cost.

Second, the optimal number of sharers for club goods is finite, unlike that of pure public goods,
where everyone can be accommodated without crowding externalities. Clubs are, therefore,
exclusive collectives.

Third, for club goods, the disposition of non-members must be addressed. Multiple clubs form,
where the population is partitioned into non-overlapping identical clubs, or a single club forms,
where leftover individuals do not consume the club good.

Fourth, club goods must possess an exclusion mechanism that is virtually costless, so that nonpaying individuals do not receive the good’s benefits. This mechanism can collect tolls to finance
the club good. In contrast, exclusion is not possible or desirable for a pure public good.

Fifth, club goods involve a dual decision – the choice of provision and membership size. Only optimal
provision is relevant for pure public goods.

Sixth, unlike pure public goods, club goods are often optimally provided through congestioninternalising tolls. In contrast, the Nash equilibrium associated with the private provision of pure
public goods is typically suboptimal.

Seventh, club goods can be efficiently supplied through alternative institutional arrangements – e.g.
member-owned clubs or for-profit firms.

Club goods do not represent all goods between the polar extremes of private goods and pure public
goods. There is no linear scale between these two extremes, insofar as the properties of publicness
really vary along two dimensions – rivalry and excludability. Moreover, club goods must possess some
rivalry and sufficient excludability. Thus, public goods that are non-rivalrous but excludable – e.g. payper-view television programmes – are not club goods, because the marginal cost of additional users is
zero. As such, exclusion does not achieve efficiency. Public goods that are subject to crowding but
cannot be excluded (e.g. some forms of information) are not club goods. This is also true of public goods
whose exclusion cost overwhelms any efficiency gains, so that exclusion is not justified under current
technological realties. Hence, club goods do not encompass all impure public goods, where benefits
are partly excludable and/or partly rival. The key issue is that there exists a sufficiently inexpensive
exclusion mechanism to charge users for the congestion that their use causes.
Source: Sandler and Hartley (2001)

30

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

3.2.2 Membership

Membership of the Climate Club is a difficult balancing act. The Club must represent high ambition: that is
its purpose. At the same time, in order to make a difference, the Club must seek to cover, over time, a large
share of global greenhouse gas emissions. In considering both these requirements there will inevitably have
to be a degree of flexibility in the timing and in moving from aspirations to providing firm underpinnings to
these commitments.
To enable an appropriately diverse membership from the start, members might be expected to sign up to
qualitative aspirational goals initially, combined with a commitment to rising specificity and action over time.
The Club’s entry documentation might include:
1.

A commitment to ambition centred on the Paris and Glasgow goals, and therefore anchoring all
action on a path and at a pace and with milestones consistent with these goals. Only such a
commitment to delivering a global public good can legitimise policy action that might impact other
countries. Consistent with the UN process, the Club would cast its ambition through progressively
higher decarbonisation targets under the annual UNFCCC process to remain within carbon budgets,
recognising the reality of differentiated approaches across countries. There is an analogy to the ‘high
ambition group’ at Paris COP21.

2.

A commitment to action through combined policies that will ensure the achievement of the climate
goals in a manner that promotes inclusive growth and development. Members would spell out a
credible mix of policies consistent with the NDCs and growth and development goals in a manner that
is comparable and monitorable, setting benchmarks and calculating the consistency of policy effort
with the targets. The common aspirations and policy efforts describe a path to Climate Club
membership. Given the Club’s aim to be inclusive, it should actively support potential members in
building the capacity to meet its criteria.

3.

A commitment to collaboration, tapping into the tremendous benefits that global cooperation on
climate can bring by giving impetus to national actions, ensuring coherence and consistency of effort,
and encouraging others to follow the Club’s lead. Collaboration and helping others to achieve a new,
cleaner, more resilient, more efficient and inclusive approach to growth and development must
indeed be the essence and foundation of the Climate Club.

One could argue that those countries that are most important to the climate agenda should be targeted
to ensure the greatest relevance. That principle guided the formation of the G20 and of the Major
Economies Forum. Another approach is to embrace the full diversity of all countries, irrespective of the
scale of their greenhouse gas emissions. This approach is being taken by the Coalition of Finance Ministers
and Network for Greening the Financial System (NGFS), and is a way to ensure that the world as a whole
makes the transformation that is needed and the construct is seen as open and inclusive (see also the
‘high ambition coalition’ at Paris COP21). The Climate Club should seek to combine these perspectives,
bringing together ‘systemic’ as well as smaller countries united by their ambition.
A sensitive but politically important consideration is whether the Climate Club needs a critical mass of
members before being formally launched. In this case, size matters less than the profile of founding
members. It will be all the harder for a Club that is designed and launched by G7 members to gain the
confidence of a wider membership, since key emerging markets and other leading countries will be
presented with a fait accompli. It is crucial, therefore, for the Club to have participation from such
countries at the design stage, and to include prominent non-G7 countries among members at the launch.
31

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

3.2.3 Organisation

The Climate Club might have several organisational components:

The membership process itself with its normative power of defining and setting members’ ambition,
including entry criteria and pathways to membership.

An information component, with technical support centred on measurement and monitoring.

Intergovernmental arrangements under the Club umbrella for responding to concerns, boosting
existing initiatives, filling gaps and agreeing new (common) approaches where necessary.

With respect to the last of these, the G7 Leaders’ Statement envisages that the Climate Club is to be built
on three pillars, including mitigation, measurement and leakage; industry decarbonisation; and
partnerships. It makes sense to cluster motivations and subject matter in a way that brings together
related departments and expertise. In this report the recommendation is to associate the pillars with the
key club benefits identified earlier, and to label them accordingly: building partnership, managing policy
diversity and fostering industry alignment. This approach would provide a clearer sense of the purpose of
work under each pillar and how it relates to the motivation of members. The partnership pillar should
be flagged up first. This is more than just a presentational matter: it sends a crucial signal of inclusiveness
and support.
On that basis, the Climate Club would support three key pillars, some of which can build on existing
arrangements that have developed under the UNFCCC framework that would be given impetus and added
disciplines by the Club:

Pillar 1 on ‘building partnership’, focused on catalytic cooperation, including through technology
partnerships and financing and technical assistance options in support of key systems transitions,
adaptation and resilience in developing member countries. Work under this pillar would include the
consideration of bilateral and plurilateral agreements (such as Just Energy Transition Partnerships),
and strengthening private finance channels, voluntary carbon markets and collective action through
the multilateral institutions. Action under this pillar must enhance (not detract from) climate finance
under the UN framework.

Pillar 2 on ‘managing policy diversity’, under which members would agree how to measure and
compare policies and outcomes across countries, and that would offer a forum for agreeing principles
and monitoring climate-related border measures, including in relation to carbon leakage. It must be
recognised, however, that in practice measures of policy can only be directional; they must not be
static but should look at intended paths and their credibility; and they may inform on the risks of
carbon leakage but are unlikely to be robust enough to help credibly calibrate border measures. Where
possible, in order not to build parallel structures, the Climate Club might support the work of relevant
fora at the WTO, such as on trade in climate-related goods or on exemptions for climaterelated subsidies.

Pillar 3 on ‘fostering sectoral alignment’, under which interested members would review
decarbonisation options for key sectors, including EITE, and agree on collective support for common
standards and innovation, such as through public procurement for lead markets, as well as trade
measures, including by facilitating the work of existing fora where relevant. Work under this pillar
should be grounded in precedent, for instance in the work of the international standard setting bodies
32

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

or of the Technical Barriers to Trade (TBT) agreements at the WTO. Successful alignment under this
pillar might offer a win-win agenda for climate, development and trade and take the sting out
of CBAMs.
The opportunities, challenges and potential value added of the Climate Club under each of these pillars are
discussed in greater depth in Chapters 4–6.
A coordination platform in support of the UNFCCC: Especially under the ‘managing policy diversity’ and
‘fostering alignment’ pillars, the Climate Club should define itself as a dynamic and flexible process that
supports the search for solutions through the most effective fora, a platform to agree on commitments and
collective action in areas of common interest as well as the measurement and monitoring of progress. These
processes do not necessarily have to involve the full membership of the Club but could be taken forward by
plurilateral groups of members. A key value-added would be that the Club facilitates mutual benefits
through issues-linkage, including coordination and choices across pillars.
While the focus of some of the work will and must clearly be on EITE, the Climate Club should recognise from
the start that net zero together with sustainable development will mean going beyond a narrow focus on
traded industrial goods and will need to include energy and land systems and their implications for pricing,
trade and decarbonisation.
3.2.4 Institutional considerations

The Climate Club does not require an institution. In fact, creating elaborate organisational structures would
risk developing, over time, into an alternative to the UN process and should be avoided for that reason
alone. But the Climate Club would be expected to engage on a broad array of subjects for which it will need
resources and to create technical capacity. The operating model of the Climate Club would be to set up a
small Secretariat, draw on institutional partners for technical support, and work with and through existing
structures and platforms (partnership bodies, trade fora, sectoral alliances, and so on) to prepare
substantive briefs and ensure follow-up. Of course, member governments would be engaged as well with
the requisite departmental expertise.
There is a rich body of experience on setting up groups for cooperative and collective action that the Club
could draw on. Of one kind are the ‘Gs’ (G7, G20 and G24), where membership is determined by broad
collective goals and systemic importance in the case of the G7 and the G20. The second, more recent,
experience of relevance are groups explicitly formed to foster climate ambition and action, notably the NGFS
(Network for Greening the Financial System) and the Coalition of Finance Ministers for Climate Action. The
G20 and the Coalition of Finance Ministers in particular provide important insights on the key dimensions
and institutional considerations for setting up and operating the Club:

Criteria for membership. In the case of the G20 the principal criterion for membership is systemic
importance rather than any specific commitments. In the case of the Coalition of Finance
Ministers, members are expected to sign up to aspirational goals embodied in the six Helsinki
Principles. While there is not a strict or quantitative entry criteria, there is an expectation of
commitment to rising climate ambition and action over time. This may indeed be a good model
for the Club.

Leadership and governance. In the G20, the Presidency of the group is on an annual basis, and the chair
has a key role in determining the agenda for that year. The Presidency rotates between G7 and non-G7
countries and the troika (previous, current and next chairs) aims to provide continuity and inclusion in
33

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

decision-making. In the Coalition of Finance Ministers, there are two co-chairs, one from an advanced
and one from a developing country. As a result, there is a greater sense of inclusion and more focus on
the collective agenda rather than the priorities set by the chair country. This may therefore be the
better approach for the Club.

Working groups. Given the breadth of the agenda, both the G20 and the Coalition of Finance
Ministers have set up standing and ad hoc working groups that focus on and set the agenda on
specific issues. These working groups bring together the most relevant countries and institutional
partners and are typically co-chaired by an advanced and developing country. Given the breadth of
its agenda, this approach would be appropriate for the Club as well.

Institutional partners. The G20 has proactively sought to engage relevant institutional partners. The
IMF and the World Bank have had a central role from the outset, and other institutional partners
have been drawn in on specific issues based on their mandate and expertise. The Coalition of
Finance Ministers has sought to engage with a much broader set of institutional partners involved in
the climate space. The Club could draw on these established partnerships. For the Club, the WTO,
IMF, World Bank (and other MDBs) and OECD/IEA might be the key institutional partners. But it
could seek to broaden that engagement, to academic institutions and scientific bodies for example.
Secretariat. In the G20, the Presidency has provided the Secretariat and continuity has been
pursued through the troika. For the Coalition of Finance Ministers, the World Bank together with
the IMF has provided the Secretariat. An ambitious Climate Club would need a free-standing
secretariat. Such a secretariat could be drawn from relevant international institutions but would
need to be organisationally independent of them.

It is worth reemphasising that, while the initial impetus has come from the G7, the Club should not be
launched by the G7 alone. The framework should be agreed and designed jointly with key developing
countries in order to take a broader range of interests into account.
With its broad agenda, the Group must be owned by countries as a whole rather than a particular
department within national administrations. It is countries that ought to be the members of the Group, with
sponsorship at the top represented by the equivalent of the G20 Sherpas at the prime
ministerial/presidential level.
Figure 6: Climate Club organisational schematic

Membership
Co-Chairs

Secretariat
Pillar 1
Pillar 2
Pillar 3
Co-Leads
Co-Leads
Co-Leads
Institutional partners (IOs and/or academic partners):
technical/analytical support

The Climate Club should
be a dynamic and
flexible process that
supports the search for
solutions through the
most effective fora.

Relevant bodies, fora, alliances etc. (public and private):
incl. MDBs, WTO, ISO, NGFS, LeadIT, IDDI, GFANZ, MPP
and others

34

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

4. Pillar 1 – Building Partnerships
Partnerships represent the first pillar proposed within the overall design of the Climate Club. International
cooperation to deliver on climate ambition is the Club’s raison d’être.
This chapter outlines the potential role of a work programme under the Climate Club in fostering partnerships
to support countries facing different circumstances in developing ambitious decarbonisation and sustainable
development paths, addressing adaptation and resilience as well as mitigation needs. It explores the role of
the Climate Club in supporting and accelerating the mobilisation of private and public investment, including
through establishing Country Platforms that bring together development partners, and through boosting
climate finance by the multilateral development banks. It also discusses how to work in partnership on
financial, sectoral and technical cooperation and technology transfer, to enable leap-frogging in climatefriendly industrial development.

4.1

Supplementing the ‘architecture’ of global climate partnerships

There are important existing institutional structures for international climate cooperation, many of them in
relation to the UNFCCC, UN, international financial institutions, the G7, G20, regional institutions etc.; as well
as a wide variety of initiatives, including the Glasgow Breakthroughs, High Ambition Coalition (of which most
G7 are members), private sector initiatives and others mentioned throughout this report.
Nevertheless, as mentioned earlier, there is a need to make progress with urgency and at a scale that matches
the size of the challenge. The Climate Club can internalise the ‘gains from trade’ embedded in the global,
structural transformation of economies; and it can ensure they receive the necessary high-level attention by
a group of countries that is committed to this agenda.
The work programme under the partnerships pillar would be about
getting the most from the existing structures and initiatives, and
building on the complementarities, e.g. across breakthroughs,
finance, country platforms and the opportunities for trade and
investment. Whether built around finance, technology, or sector
policies, they would form part of an alliance that would take a
cross-cutting perspective at the highest level and reflect a defining
focus on climate action. Club members can work together to
consider how progress can be made on different
priorities, recognising the importance and complementarities
(political and economic) of advancing on different fronts
simultaneously. Different members or groups might take the lead
on different fronts.
In each case, the Climate Club would define its role strictly and
explicitly as supporting the UNFCCC process, not replacing it – it
would seek to build critical mass and momentum for progress to
be made and registered under the UNFCCC umbrella.

The Climate Club would
provide high-level support
for partnerships with a
singular focus on climate,
raising ambition through
strategy and roadmaps,
and supporting EMDEs with
finance and technology.

4.2 Role of partnerships in the Climate Club
Partnerships can contribute to the Club’s purpose of accelerating climate action, while also reducing
international frictions and capturing strategic, mutual benefits. These three dimensions are interrelated.
35

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

4.2.1

Accelerating action

While 195 parties have signed up to the 2015 Paris Agreement, implementation lags behind. For many
countries, particularly EMDEs, action to match this ambition is held back by a lack of technical and financial
resources. It may also be impaired by misleading narratives that place climate action in competition with the
pursuit of economic development.
Partnerships can provide the necessary means to match countries’ commitments to decarbonise their energy
and industrial sectors and deliver on key systems transitions, adaptation and resilience, aligning with the
Club’s purpose as an intergovernmental forum of high ambition.
Partnerships will be particularly attractive not only to those countries that are ambitious but constrained:
they will also be of great value to countries that do have the resources to deliver on their own net zero
ambition but recognise the criticality of a sustainable growth path in EMDEs for curtailing global greenhouse
gas emissions.
4.2.2

Reducing friction

By helping to harmonise and achieve consistency in the pace of climate ambition, partnerships may, over
time, reduce the need for trade measures to address concerns around carbon leakage and level the
competitive playing field. Making possible the delivery of more ambitious decarbonisation targets, especially
for trade-exposed sectors as outlined under Pillar 3 and for key systems transformations, would further
advance the availability and reduce the cost of low-carbon technology and infrastructure.
At the same time, finance and technology partnerships that help to scale up investment for low-carbon
technologies would further incentivise and enable the shift away from carbon-intensive sectors and towards
low-carbon infrastructure, reducing the need for price-based measures.
In the meantime, and while price-based measures remain in place, our consultations highlighted that their
acceptability among EMDEs would be enhanced if the revenues from carbon pricing and CBAMs were
allocated to global environmental or development objectives rather than resulting in a fiscal windfall for
rich countries.
4.2.3

Capturing strategic benefits

COP26 delivered a major advance for the climate
agenda, and a wide range of fora and institutions
beyond the UNFCCC have now dedicated
resources across areas including climate change
mitigation, adaptation and resilience, nature,
and biodiversity, and across forms of support
ranging from finance and regulation to
investment and technology. But efforts remain
largely fragmented. The Climate Club can act as
a forum where coordination across these
agendas is facilitated, identifying gaps as well as
synergies across the different thematic tracks,
members, and means of delivery, while avoiding
duplication and undermining existing progress.

For partnerships to be effective, the Club
must include the big emitters – current
and prospective. But this is not a club for
mitigation alone. Partnerships to deliver
on adaptation and resilience are equally
important, and the Club’s membership
must reflect this.

Beyond coordination benefits, finance and technology support to deliver on common strategies can create
benefits for individual members by helping match investments to where the needs are strongest and returns
greatest. Roadmaps to improve EMDEs’ investment climate and institutional framework, to address
36

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

weaknesses in the international financial architecture, and to facilitate finance partnerships at the country
level can help enable breakthroughs on finance for sustainable investments in fast-growing EMDEs
(Bhattacharya et al., 2022). These are commercial opportunities, not development aid, creating strong
incentives also for developed economy members to join and capture these benefits.

4.3 Setting strategy
Each country sets its own strategy, but these are new issues for all countries, and all have to gain from
converging on an overarching frame and sharing ideas and analyses in setting priorities.
Realising the opportunities from climate action and economic development as outlined in Chapter 2 requires
economic transformation driven by a substantial step up in investment and innovation (Stern et al., 2021).
Given the urgency and the scale of the challenge, this will not happen without strong policies and
collaboration to shift incentive structures across the whole system, particularly around energy and finance.
At the core of the Climate Club must be a shared vision and strategy for accelerating delivery by the key
stakeholders: developed countries and EMDEs, international financial institutions, and the private sector.
4.3.1

Recognising priorities and identifying gaps

Setting strategy requires developing a common understanding of the policy and institutional architecture
needed to accelerate ambition and deliver on the global transformation. It involves identifying gaps that
guide the selection of areas on which partnerships should focus, while avoiding duplication or undermining
existing processes. Efforts should concentrate on how best to leverage investment, policy reforms, finance
and technology to deliver:

Investment. A big push on investment and innovation and in all forms of capital is critical to drive the
transformation to net zero and to keeping 1.5°C within reach. And as highlighted in Chapter 2, the
benefits of such a push extend well beyond the climate agenda. Targeted action through partnerships
can help unlock barriers and break the vicious cycle of low investment, slow growth, high debt burden
and constrained public spending that is hampering economic development across many parts of the
global economy. It can create valuable co-benefits, contributing to a bigger story of sustainable,
resilient and inclusive development.

Policy reform. Strong country ownership of policy reform must lie at the heart of delivering the big
investment push. But while the reform agenda will be country-specific, Climate Club partnerships can
help ensure that strategies reflect common principles, from the complementary role of mitigation
measures within a wider policy mix (see Pillar 2), to the crucial role of adaptation, building resilience
and ensuring just transitions, in shaping politically balanced agendas.

Finance. The scaling up of finance needed to support the push on investment and innovation and
underpin policy reform is unprecedented, but within reach. The Climate Club can give impetus to
structured international partnerships to facilitate coordination across public and private initiatives
and connect different sources of finance across the official, multilateral and private sectors. It can
provide further strategic direction for a climate-lens reform of the international financial
architecture, complementing the wider G20 agenda.

Technology. The Climate Club can foster analytical cooperation through research and innovation
partnerships, strengthening institutional capacity and supporting R&D and technology for key sector
transformations. Finance and technology partnerships can support the agenda of sectoral alignment
under Pillar 3 through facilitating large-scale capital mobilisation to create lead markets for climatesmart technologies.
37

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

4.3.2

Overcoming barriers

Headwinds such as the current energy crisis risk weakening countries’ commitment to the climate agenda
even as the long-term opportunities and underlying case for sustainable investments remain strong (Climate
Action Tracker, 2022). International coordination on shared strategies via the Climate Club can act as a
‘commitment mechanism’, anchoring continued alignment with the long-term vision.
Clear communication of strategies and commitments, whether on setting priorities for sectoral
decarbonisation or for investment in particular green technologies, can act as a powerful signal providing
direction to private investment and finance. They can help galvanise investors’ management of transition
risks (e.g. the risk of stranded assets), or reinforce expectations of tangible returns from a green transition
and sustainable development opportunities (OECD, 2021).
4.3.3

Connecting agendas through a climate lens

Climate Club strategies can support the process of strategysetting at existing international fora including the G7 and G20,
by elevating climate to a core lens through which to advance the
wider economic and finance governance agenda.
At the same time, finance and other partnership decisions need
to be taken as part of the broader agenda for the climate and
sustainable growth, recognising the opportunity for enabling
achievement of a global public good but also transformations
and underpinning of an orderly trading system. The whole-ofgovernment framing of the Climate Club would extend to
agendas cutting across individual ministries, including those
related to the macroeconomic environment (particularly
inflation and debt dynamics), international cooperation and
development, trade and industrial policy (e.g. on the critical
minerals agenda), investments, and global tax cooperation.

In a world of fractured
geopolitics, the climate agenda
represents fertile ground on
which to build partnerships and
collaborate on a crisis whose
causes and effects cross
borders, and whose solutions
create opportunities for
sustainable development across
the world economy.

4.4 Designing roadmaps, especially at the country level
Setting strategy and fostering alignment has much further to go. To be credible, it must be backed up by
roadmaps to deliver. The Climate Club would act as a forum where commitments can be made at an
international level, complemented by actionable medium-term milestones.
This would involve identifying policy challenges, investment needs and opportunities at the country and
sector level. The membership process can enable the sharing of decarbonisation plans and experiences
across members and facilitate their common measurement and monitoring as part of the agenda developed
under Pillar 2.
4.4.1

Utilising country platforms

Building on the recommendation by the 2018 Report of the G20 Eminent Persons Group for the support of
Country Platforms (CPs), and leveraging insights and experience from the COVID-19 pandemic on the
importance of enhancing coordination among stakeholders, the Climate Club can lead on repurposing
Country Platforms as a vehicle for delivering on international climate action as a global public good (Sembene
et al., 2022), for accelerating in-country investments and their financing to deliver on countries’ nationally
determined contributions (Bhattacharya et al., 2022), and for mobilising private investment and finance to
support the net zero transition (Carney, 2021; GFANZ, 2021).
38

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

CPs must differ from traditional coordination mechanisms primarily by ensuring that the national
government is in the lead, and that the prioritisation of reforms and investments is fully aligned across
development partners and governments. They must focus on joint action for upstream support, investment
preparation, and finance for sustainable development and climate action.
So far, CPs have largely emerged on an ad-hoc basis rather than as part of a systematic strategy. The G20 has
promoted their use but implementation is lacking (Bhattacharya and Stern, 2021a). Their application has
faced challenges, particularly stemming from the lack of incentives for governments to take the lead, issues
around complex stakeholder coordination (including among ministries and with development partners) and
low technical and implementation capacity.
This is where the architecture and governance structure of a Climate Club can make a difference. By including
Country Platforms systematically and continuously on its agenda, the Climate Club can provide a forum for
members that are able and willing to act as development partners to come together in coordinated groups
to scale up investments and finance at the country level.
Participation in Country Platforms and the development of partnerships to support them can provide
valuable club benefits and act as a motivation for prospective EMDE members to join, enabling the sharing
of best practice across a range of cases and facilitating accelerated implementation.
By advancing the Country Platform agenda across its wide membership, the Climate Club can build
experience and know-how in developing roadmaps tailored to countries’ specific needs and agendas,
whether these centre on the energy transition away from coal, on support for adaptation and resilience, or
the development of renewable sources of energy. The Climate Club’s initial efforts should thus focus on
capturing cases that can serve as blueprints for a global scale-up. This must be reflected in its membership
and the focus of partnerships. Priority should be given to:

Energy transition of high emitters. Accelerating energy transitions in systemically important
countries should be the top priority, including current as well as potential future high emitters. The
Asian Development Bank’s Energy Transition Mechanism can serve as a blueprint for aligning donors
and investors to accelerate the transition to clean energy, and the Climate Club can build coalitions
for replicating the mechanism elsewhere (see Box 3).

Influencing sustainable development trajectories. Successful implementation of the South Africa
JTEP will be an important test case on the African continent (see Box 4). Choice of cases must also
reflect the systemic importance of energy transitions and energy access in other African economies.
Country platforms can serve as opportunities to influence sustainable development trajectories at a
time of transformation and avoid locking in high-emissions paths ahead of a major expansion in
energy and related infrastructure in coming decades.

Adaptation and climate links to nature, biodiversity, health and education. Efforts should also be
directed at countries that can serve as blueprints for prioritising adaptation and resilience, for
addressing the interactions between climate and nature/biodiversity, and for addressing the links
between climate, health and education. Indonesia, Vietnam and Senegal have been identified by the
G7 as potential priorities (G7, 2022a).

Poor, vulnerable and fragile states. Finally, efforts must ensure that ‘no one is left behind’, including
poor, vulnerable and fragile countries. One way to develop pilots is to build on the Compact for Africa
initiative (G20, 2020).

The Climate Club’s key advantage is that it can ‘connect the dots’, and it will be crucial for CPs to draw in
various private sector initiatives. The Country Platform Action Plan, prepared by the UN Special Envoy on
Climate Action and Financing and published during COP26, outlines a model for using CPs to combine
39

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

ambitious NDCs and tailored projects to help achieve them, and to help address both upstream
and downstream barriers to investment through developing a strong project pipeline and enhancing
the regulatory environment for investment. GFANZ, CFLI and the Global Infrastructure Facility are also
promoting Country Platforms as a key part of their efforts to scale up finance for climate investments in
developing countries.
Box 3: Case study – the Energy Transition Mechanism
The Asian Development Bank (ADB) launched the Energy Transition Mechanism (ETM) at COP26, with the
mission to speed up the retirement of coal-fired power plants in developing Asia. The mechanism leverages a
market-based approach to accelerating the transition from fossil fuels to clean energy, through using low-cost
capital from governments, MDBs, private sector investors, long-term investors and philanthropy to incentivise
early retirement of coal power assets. Investments from these sources are designed to finance country-specific
ETM funds to retire coal power assets on an earlier schedule than if they remained with their current owners.
Proceeds from the assets are in parallel mobilised to fund clean energy investments.
In terms of its structure, the ETM Partnership Trust Fund has a steering committee representing donors and
developing countries providing oversight to ensure climate credentials. The Fund’s activities are also
coordinated with the ADB Just Transition Facility to support just transition activities in pilot countries.
The Philippines and Indonesia were key partners in launching the pilot study for ETM, while Japan’s Ministry
of Finance provided the first seed financing for the mechanism at $25 million. The financing framework was
complemented by an MOU with the Rockefeller Foundation, which is providing a share of support towards
the mechanism.

Box 4: Case study – the Just Energy Transition Partnership
At COP26, the UK, France, Germany, EU and the US launched the South Africa Just Energy Transition
Partnership (JTEP), an $8.5 billion commitment to accelerate South Africa’s energy transition.
The commitment will be a crucial component of South Africa’s efforts to transition its energy system, an
endeavour estimated to require $250 billion, mostly for investments, over the next three decades (Blended
Finance Taskforce, 2022). Calculations by Systemiq estimate that the $8.5 billion could leverage additional
capital to meet around $40 billion of South Africa’s just energy transition needs and that the figure could be
even greater with financial innovation.
To succeed, the climate finance provided under the partnership must be fit-for-purpose to match the needs
of the energy transition, as well as other sectors dependent on fossil fuels across the entire value chain. It
must be a transparent, efficient, and demand-driven process, ensuring capital is channelled towards the parts
of the system where it is most needed.
Partnerships delivered through Country Platforms can also provide the space for government-led efforts
within the Climate Club to align with development finance institutions, enhancing the finance elements of the
partnership. For example, as part of its €700 million contribution to the JTEP, Germany will be providing a KfW
development loan of €300 million for energy sector reforms (G7, 2022a).
Looking ahead, South Africa’s JTEP could serve as a potential prototype for accelerating energy transitions and
building back better through CPs. In June 2022, the G7 committed to initiating negotiations “on further
ambitious partnerships with India, Indonesia, Senegal and Vietnam” (G7, 2022a). The architecture and
governance structure of the Climate Club should facilitate the formation of such partnerships between
members that can act as development partners and those that can demonstrate the need for such support to
deliver on enhanced ambition.
40

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

4.5 Supporting EMDEs with finance: ambition and complementarity in official, multilateral,
private sources
Emerging markets and developing economies will be at the centre of the global economic and climate
transformation over the next three decades, accounting for the entirety of the world’s population growth by
1.9 billion 6 and hosting the vast majority of new construction of physical capital (Our World In Data, 2021).
Whether and how these investments are undertaken will determine the world’s ability to reach net zero
emissions by 2050 and achieve climate resilience. Research by the Grantham Research Institute and others
estimates that investment to meet the requirements for EMDEs 7 in the areas that are critical to their climate
goals alone will have to increase from 4.3% of GDP in 2019 to 6.9% in 2025 and 8.7% in 2030 (see Table 2).
Table 2: Investment targets in EMDEs (excluding China)
Gross spending 2019

Spending target 2025

Spending target 2030

US$bn

% GDP

US$bn

% GDP

US$bn

% GDP

Sustainable
infrastructure

730

3.5%

1,160

4.8%

1,840

5.7%

AFOLU (agriculture, food,
land use, nature)

150

0.7%

355

1.4%

650

2.0%

Adaptation and resilience

35

0.2%

180

0.7%

325

1.0%

Total

915

4.3%

1,695

6.9%

2,815

8.7%

Source: Bhattacharya et al. (2022)

International finance will matter strongly for delivering this investment push and supporting climate action
and sustainable economic development. Finance at scale will be needed to (a) facilitate a sustainable
recovery for economies to ‘build back better’ and (b) enable the accelerated transformation required to
transition to a net zero, sustainable, inclusive and prosperous future. It must be coordinated, front-loaded
and fast; the more this is the case, the less costly action will be. And it should be seen as an investment, not
a cost, delivering growth and development.
Domestically and internationally, both public and private finance have crucial roles to play. It is important
that total finance generated is more than just the sum of its parts, and this will require an enhanced
partnership between the private and public sectors to increase levels of mobilisation. Coalitions such as
GFANZ have emerged on the private sector side to align interests and work cooperatively on workstreams
that exchange know-how and share best practice (GFANZ, 2021). The Climate Club can function as an
equivalent ‘home’ for public sector finance, in partnership with existing initiatives such as the Coalition of
Finance Ministers for Climate Action and the Central Banks and Supervisors’ Network for Greening the
Financial System (NGFS).
Overall, action under this Pillar of the Climate Club must enhance (and not detract from) climate finance
under the UN framework and must complement (and not crowd out) investments and finance committed
under existing private, public and multilateral initiatives.

6
7

EMDEs excluding China.
Excluding China.

41

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

4.5.1

Setting fresh targets for official financial support

There is much to be desired in terms of the delivery of official climate finance. While there has been progress
in both bilateral and multilateral public finance flows since 2013, climate finance flows attributable to
developed countries fell well short of the targeted $100 billion per annum by the time of COP26
(Bhattacharya and Stern, 2021b).
Consultations with relevant stakeholders from across EMDEs during the preparation of this report stressed
that delivering on the commitment by developed countries to mobilise $100 billion a year by 2020 to support
developing countries on climate action is an intensely important symbol of trust and foundational to their
progress on climate action.
But discussions also highlighted that developed countries must go beyond this commitment: the scale of
investment needed for emerging and developing economies (excluding China) reaches an additional $800
billion per year by 2025, and close to $2 trillion by 2030 (Bhattacharya and Stern, 2021b). While developed
countries will not be expected or able to fill the whole gap, concessional donor finance will be a critical
component given its capacity to scale up other pools of climate finance.
This is where the Climate Club can make a difference, as an intergovernmental forum for climate ambition.
Joining the club will involve sector-level engagements and commitments. 8 Members can also advance the
agenda by setting fresh targets for official financial support for EMDEs. The whole-of-government framing of
the Climate Club can elevate climate finance to an agenda that goes beyond the specific horizon of the
development agencies. Strategies developed under the Climate Club would reflect investment and trade
opportunities, cutting across a range of ministries.
An important practical focus for scaling up official finance would be country platforms, including ‘Just Energy
Transition Partnerships’, as explored earlier in this chapter. At the same time, finance partnerships formed
under the Climate Club must avoid two traps. First, they must not be restricted to members in a way that is
perceived as exclusive by non-members and that undermines the UNFCCC process. And second,
consultations with stakeholders from across EMDEs highlighted the need to avoid a replication of ‘the existing
global order’ within the Club and ensuring that finance is delivered in a way that responds to concerns around
foreign support. For example, stakeholders from India shared that while the Climate Club conversation has
not featured prominently in India so far, the preparation of the South Africa Just Transition
Energy Partnership was received at the time with scepticism, reflecting mistrust of the motivations behind
foreign support.
4.5.2

Supporting the global and local architecture for private finance

The Climate Club may function as a forum giving further impetus to the global and local architecture for
private sustainable finance. Building on strong momentum in recent years, sustainable finance is projected
to grow into the mainstream over the next decade. Where rules are set and which approaches become
industry standard will matter hugely.
The precise contribution of the Climate Club in this context would need further exploration. A plethora of
initiatives already exist at a regional (e.g. the EU taxonomy) or even global level (e.g. the Financial Stability
Board’s Task Force on Climate-related Financial Disclosures). To the extent that there is the need for a
coordinated political push on particular aspects of the agenda, the Climate Club might provide a relevant
forum for high-level discussion and guidance, in a manner that is supportive or complementary to existing
initiatives.

8

See ‘Pillar 3: Fostering sectoral alignment’.

42

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

In particular, the Climate Club can provide a forum for discussing the appropriate and proportionate design
of international standards, so that they do not impose unintended barriers to capital flowing to the
investments that need it the most. For example, while mandatory climate risk disclosures may be
immediately possible for large developed-economy-based financial institutions, imposing such requirements
for Small and Medium Enterprises, particularly in EMDEs, without providing resources and support to enable
compliance, would result in unintended damage. In advancing the agenda around sustainable finance
regulation and supervision, a heterogeneous membership structure of the Climate Club will be critical in
ensuring different contexts and financial sector country profiles are accommodated.
4.5.3

Finance for adaptation, resilience and sustainable development

Even in the scenario of strong progress on climate change mitigation delivered in the Climate Club, some
effects of the climate crisis remain unavoidable – the question is one of frequency, intensity, scale and
geographical spread. This is a reality the Climate Club cannot afford to overlook, and its design will need to
reflect the importance of supporting EMDEs as they seek to adapt and build resilience to changing and more
volatile climatic conditions.
Finance partnerships developed under the Climate Club umbrella will need to reflect a focus on adaptation
and resilience as well as biodiversity, which still only receive a fraction (around 7%) of total climate finance
(Buchner at al., 2021). But support will need to go beyond finance, to include analytical support, climate
modelling and insurance solutions. Risk transfer instruments such as contingent credit lines, insurance and
catastrophe bonds, regional risk-sharing facilities and state-contingent debt instruments can be nurtured and
scaled up as part of partnerships developed under the Climate Club.

4.5.4 Voluntary Carbon Markets and scaling up sustainable finance in EMDEs
The Climate Club can further act as a platform for linking developed and EMDE members to accelerate the
growth of Voluntary Carbon Markets. Following agreement on Article 6 of the Paris Agreement at COP26 in
Glasgow, VCMs are becoming more accepted as an effective and credible tool to help deliver finance to
projects that reduce emissions. Strong demand for carbon credits, especially for those generated by carbon
removals, can also create enough confidence for early developers to invest in green technologies that would
otherwise lack access to finance. To effectively leverage their potential, mechanisms need to be put in place
to ensure the quality and integrity of such finance, and this is where the potential of the Climate Club to act
as a forum promoting standard-setting could further be leveraged, complementing existing efforts by the
Integrity Council for Voluntary Carbon Markets and Voluntary Carbon Markets Integrity Initiative.
While there is significant scope to increase financial flows from VCMs and international private finance,
relying solely on financial transfers from advanced economies to EMDEs will not be a sustainable strategy
given the scale of the climate challenge. The Climate Club must therefore ensure that partnerships are also
in place to facilitate the know-how and sharing of best practice, and the provision of technical and analytical
support to help deepen and upgrade domestic financial markets in EMDEs with a view to enabling local
investors (particularly long-term investors such as pension funds) to fund sustainable development assets.
Multilateral institutions can be critical partners in delivering the technical assistance and capacity building to
help local investors diversify into sustainable investments, as well as offer practical support using instruments
such as guarantees and local currency solutions.

4.5.5 Enabling multilateral institutions to scale up and mobilise the private sector
The Climate Club can act as a forum for its members – as shareholders of multilateral institutions – to align
on and drive the implementation of reforms to modernise the development banking system to be fit for
43

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

purpose and scale up sustainable investments. At COP26, ten MDBs 9 issued a joint statement committing to
support developing economies’ Nationally Determined Contributions and to aligning their financing flows
with the Paris Agreement. Translating the investment needs outlined in Table 2 above into financing
requirements yields an expectation for the MDBs to triple their financing by 2025 (Bhattacharya et al., 2022).
Unlocking this level of financing will require reforming the development banking system on several fronts, in
particular encouraging adjustments to the capital adequacy frameworks for MDBs in line with the five broad
strategic shifts outlined by the Panel on MDB Capital Adequacy established by the G20 (G20 Panel, 2022), as
well as considering the need for capital increases.
MDBs can stretch their current balance sheets by giving more credit to callable capital, reforming statutory
lending limits, balance sheet optimisation, greater risk pooling, and turning over assets faster (World Bank,
2015; World Bank, 2021; Chakrabarti et al., 2022). Simulations of the MDB lending capacity that such reforms
and innovations might enable typically point to hundreds of billions of US$ in additional capacity – probably
the most straightforward and least costly way for climate- and development-related finance to grow.
Reforms must also be geared towards increasing private sector capital mobilisation. MDBs currently mobilise
less than $1 of private capital for every public dollar, with scope to increase this significantly (Blended Finance
Taskforce, 2019). One way to increase mobilisation is to mandate MDBs to spend money more catalytically
by scaling up the use of instruments such as guarantees. Such instruments currently account for less than 5%
of MDB sovereign financing despite mobilising around 30% of their private co-finance (Blended Finance
Taskforce, 2019). The MDBs could also scale up the use of blended finance facilities to improve private sector
multipliers (Lankes, 2021).
Outcomes can be supported by a closer partnership across the official sector (represented by the Climate
Club), the MDBs, and the private sector. On the latter, a number of private-sector led initiatives have been
launched over the past two years to mobilise finance for sustainable investments in EMDEs, including the
Climate Finance Leadership Initiative (CFLI), the Sustainable Markets Initiative, FAST-Infra, the Global
Investors on Sustainable Development Alliance, and most recently GFANZ. 10

4.6 Supporting sectoral decarbonisation paths and scaling up green technologies
Beyond ‘greening finance’ and ‘financing green’ projects, the Climate Club can initiate and host partnerships
for sector-specific and technology-specific solutions. Countries can participate in analytical and technical
cooperation on R&D, as well as supporting project development capacity and packaging investments for
clean energy and other climate-critical sectors in a way that can attract international finance.
Analytical cooperation might be facilitated within the architecture of the Climate Club in two important ways:
finance and capacity building. In the case of finance, this could take the form of a dedicated research and
innovation funding programme developed by the members to support R&D and technology partnerships in
key sector transformations. These can further be nurtured through connections across universities
throughout the Club’s membership, building on existing initiatives such as the UN Climate Change and
Universities Partnership Programme, the International Universities Climate Alliance and the Global Alliance
of Universities on Climate (GAUC).

The statement was signed by the African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, the Council of Europe
Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Intra American Development
Bank Group, the Islamic Development Bank, the New Development Bank and the World Bank Group: https://ukcop26.org/mdb-joint-climatestatement/.
10 See Appendix 4 for a comprehensive overview of relevant finance initiatives.
44
9

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Financial and technical packages at the country level can be structured in ways that advance sectoral
priorities agreed under Pillar 3. Investments in physical and human capital can support recipient countries’
ability to meet emerging standards for green products, thereby easing trade concerns, boosting investors’
confidence in a smooth and rapid transition, and leading to a conducive investment climate. Provided with
the right support, a range of countries could step up the ambition of their decarbonisation plans in key sectors
and thereby claim a share of green lead markets, benefitting from other sectoral measures adopted or
promoted by the Club, such as buyers’ clubs for near-zero emissions exports.
The Climate Club can leverage member capacity to directly support the creation of such lead markets for
climate-smart technologies that are essential for the low-carbon transition but which are capital-intensive in
nature and require large-scale capital mobilisation. Ensuring the affordability of such technologies,
particularly among developing country members of the Club, may hinge on lowering the cost and improving
the availability of financing. Risk sharing and blended finance facilities can build international or local
currency financing systems to support at-scale adoption of these new technologies, by ensuring their
affordability and financeability.
In advancing this agenda, the Club can build on existing initiatives such as the Leadership Group for Industry
Transition (LeadIT) for public–private collaboration on the decarbonisation of key industries, and the privatesector-led Mission Possible Partnership (MPP), which connects stakeholders from across the value chain to
accelerate the net zero transformation of key industrial sectors. 11 Financial and technical support through
the Club can assist countries to update, fortify and implement roadmaps, through collaboration with LeadIT
on key industries, while networks such as MPP can support partnerships developed within the Climate Club
by providing a powerful initial source of private co-financing for demonstration projects, offtake
commitments to support for new green production capacity, or participation in programmes for innovation
knowledge sharing or for skills redevelopment of the workforce.
In addition, finance partnerships can be designed to speed up
technological change by pooling resources to support innovation
in chosen sectors. For example, governments can coordinate to
create policy and regulatory frameworks that provide finance
incentives that decrease costs and accelerate the uptake of
promising energy vectors such as clean hydrogen. Aside from
incentives, partnerships can also leverage institutional capacity
to provide technical assistance. Where technologies are already
mature, partnerships can focus on financing, project
preparation, and regulation. The European Investment
Bank’s Green Hydrogen Fund and the World Bank’s Scaling
Solar platform can serve as potential blueprints for
leveraging development institutions as valuable partners in
these two dimensions.

Finance partnerships can be
designed to speed up
technological change by
pooling resources to
support innovation and
deployment of solutions in
chosen sectors.

4.7 Conclusion
The centrality of partnerships within the Club’s architecture reflects the recognition of the need for an “open,
cooperative, international Climate Club, consistent with international rules and with participation beyond
the G7” (G7, 2022b). It underscores a commitment for the Club to be inclusive from the start, accounting for
members’ different starting positions in terms of income levels and policy mix, reflecting the principle of

11

See Section 6.3 for more detail on the two initiatives.

45

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

‘Common but Differentiated Responsibilities and Respective Capabilities (CBDR)’ (as per the Paris
Agreement).
The partnerships pillar offers a strong value proposition for EMDEs to join. Unlike Pillar 2, where benefits are
more relevant to high emitters in the form of managing policy diversity in climate mitigation, or Pillar 3 where
benefits are stronger for those participating in the decarbonisation of existing high-emitting sectors and
investment in the scaling up of new green technologies, partnerships under Pillar 1 centre on support for
those with a strong ambition but more limited resources, enabling them to deliver.
Financial and technical capacity support, access to new markets for green products, the sharing of experience
and best practice in just transition processes, and technology development and deployment, can all act as
strong motivations for EMDEs to join a forum where these can be developed and shared at scale.
The Partnership Pillar would further enable and encourage (chiefly developed country) members to scale up
their climate finance commitments and deliver on them, whether regarding official climate finance or the
capitalisation of MDBs. It would also underpin collaboration under other club pillars, in particular
partnerships to accelerate the decarbonisation of industry and key sector transformations.
At the same time – and this is crucial in ensuring broad engagement by the membership under each pillar –
members have goals, asks and ‘assets’ across pillars. Partnerships are part of the overall ‘package’ of actions
for climate and growth.

46

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

5. Pillar 2 – Managing policy diversity
An inclusive Climate Club means each country should have the flexibility to follow a range of decarbonisation
strategies domestically, accounting for different starting points and policy priorities. But differences in
policies and stringency create the risk of carbon leakage and of subjecting industries in countries that lead
on climate policies to competitive disadvantages compared with those in climate laggard countries. The
second proposed pillar of the Climate Club is designed to enable countries to accelerate climate ambition,
while managing possible friction arising from the diversity of climate policy approaches implemented in
different jurisdictions. Approaches might range from facilitating agreement on principles for smoothing the
implementation of autonomous carbon border adjustment mechanisms (CBAMs), to sharing best practice on
alternative anti-leakage measures, and improving the development of methodologies for measuring the
carbon content of complex goods.

5.1 Role of managing policy diversity in the Climate Club
Managing policy diversity can contribute to the Club’s purpose of accelerating climate action, while also
reducing incidences of international friction arising from carbon leakage, and capturing strategic, mutual
benefits. These three dimensions are interrelated.
5.1.1. Accelerating action

As noted in Chapter 2, putting a price on carbon has emerged as a central
climate mitigation policy tool in correcting the market failure of
environmental externalities and enabling a rapid transition to net zero
emissions (Cannan and Pigou, 1921; Stiglitz et al., 2017; Boyce, 2018).
However, currently only about one-fifth of global emissions are covered by
carbon pricing programmes, with some countries struggling to reach political
agreement on carbon pricing, especially in the current environment where
consumers are faced with an energy and cost of living crisis. More
worryingly, the global average price of carbon is around $3 per ton, well
below the $75 a ton that the IMF estimates is needed to reduce emissions
enough to keep global warming below 2°C (Gaspar et al., 2019).
In light of these constraints, carbon pricing alone is unlikely to drive down
emissions sufficiently and equitably (Patt and Lilliestam, 2018). Shifting
production and consumption towards lower-carbon energy sources could
and should also involve regulatory and other measures. The Climate Club
could seek to advance a coordinated commitment to accelerate and
harmonise ambition.

The Climate Club should
aim to enable members
to pursue a mix of
policies to accelerate
climate ambition while
managing frictions
caused by policy
differences.

5.1.2. Reducing friction

One feature holding back progress is the lack of an international framework to protect those ‘pioneers’ ready
to move ahead with ambitious climate mitigation policies (whether pricing or equivalent) from being at a
disadvantage in the international marketplace (BMF, 2021). In terms of climate outcomes, the fear is that if
countries are not equally ambitious in their climate policies, production will move to jurisdictions with weaker
environmental measures and a higher carbon intensity of production. This would limit the intended objective
of reducing domestic emissions, by moving emissions to countries with less stringent climate policies (so-

47

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

called ‘carbon leakage’ 12), while also distorting international trade in the process. The risk of carbon leakage
concerns primarily emissions-intensive, trade-exposed (EITE) sectors. So far, there is no empirical evidence
of policy-driven carbon leakage (Eskander and Fankhauser, 2021), largely because EITE industries have been
shielded from the effects of climate policies (e.g. through exemptions and free allocation of ETS permits),
while carbon prices never reached sufficiently high levels. This is changing.
Over the long run, coordination on the level of ambition would remove the need for a framework to protect
disadvantaged industries. In the meantime, the lack of convergent climate policy is prompting ‘pioneers’ to
consider measures to manage carbon leakage and competition losses, including CBAMs at the national or
regional level. This is true for countries or blocs with carbon pricing policies, such as the UK and EU, as well
as for countries pursuing regulatory more than price-based approaches, such as the United States.
Action under this pillar thus also focuses on addressing temporary divergence in the level of ambition until
harmonisation is achieved, through for example agreeing the rules of the game for measures designed to
manage carbon leakage, chiefly carbon border adjustments but also subsidies and sector agreements. These
will need not only to ensure compatibility with WTO rules but can go beyond, to create productive synergies
between the Climate Club and WTO, enabling the effective management of potential disputes and reducing
legal risks.
5.1.3. Capturing strategic benefits

The agenda around managing policy diversity also presents opportunities for members of the Climate Club
to capture strategic benefits when it comes to alignment of views and approaches on matters lying at the
intersection of trade and climate change issues.
Specifically, the Climate Club, with support from the WTO, could advance a shared understanding among
members on taxonomies and categorisation of ‘shades of green’ for green subsidies. There are a number of
precedents here, including the recently concluded negotiations on fisheries subsidies. Additionally, to the
extent that the Climate Club develops as a ‘thought leader’ in setting standards for the environmental goods
trade and facilitates trade among countries that align with them, the incentives for members to join can
become material and significant.

5.2 Approaches to addressing carbon leakage 13
The risk of carbon leakage is especially high in EITE sectors such as cement, steel and aluminium, where
international competition prevents firms from passing costs downstream (Mehling et al., 2019). Table 3
shows bilateral trade flows for steel, one of the most heavily traded sectors in which leakage and
competitiveness concerns have been prominent. The figure provides initial pointers at trade relationships
that might be impacted by domestic climate action.
So far, carbon leakage concerns have been mostly addressed unilaterally, for instance through the provision
of subsidies or by shielding EITE industries from the full impact of carbon prices, through exemptions and
free allocation of permits. 14 However, free allocation has been widely criticised as hindering the industrial
transition to climate neutrality, by dimming the incentives to switch to climate-neutral production processes,
material efficiency and recycling. The need to phase out free allocation, combined with the recently observed
spikes in carbon pricing, especially under the EU and UK Emissions Trading Systems, are making carbon

A situation where international differences in climate policies prompt companies to relocate emissions-intensive operations to jurisdictions with
weaker emission regulations. This practice can undermine the effectiveness of mitigation policies as well as the legitimacy of claimed national
emissions reductions.
13 See Appendix 3 for a comprehensive overview of anti-leakage measures.
14 There are different approaches for allocating permits. The most common are: grandfathering, i.e. allocating permits based on historical emissions;
fixed-sector benchmarking, i.e. based on a product or sector’s historical or current emissions; and current output-based allocation.
48
12

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

leakage and potential competitiveness losses more material and urgent to address as a means to support
deep industry decarbonisation and manage friction due to different levels of climate ambition.
In this context, CBAMs are gaining popularity as more countries are raising climate ambition and commit to
much stronger NDCs. CBAMs are designed to ‘equalise’ the carbon costs for domestic and foreign producers,
by imposing a charge on imported goods based on the amount of greenhouse gases emitted during their
manufacture that is equivalent to explicit or implicit domestic carbon prices. CBAMs, by acting as a market
signal, can also encourage decarbonisation in third countries to which the mechanisms may apply (Agora
Industry, 2022).
Table 3: World trade in steel by area, 2019
Europe

CIS

Americas

China

Other Asia

Other

Total
imports

131.3

20.6

1.9

3.9

10.6

2

170.3

CIS

2.3

10.2

0

2.5

0.5

0

15.5

Americas

9.5

2.3

28.2

8.2

12.8

1.4

62.4

China

1.2

0.2

0.2

13.8

0.1

15.5

Other Asia

4.2

7.5

1.3

37.6

61.1

6.1

117.8

Other

14.6

8.2

0.6

6.9

7.8

11.9

50

Total exports

163.1

49

32.2

59.1

106.6

21.5

431.5

-7.2

33.5

-30.2

43.6

-11.2

-28.5

Europe

Net exports
(exports – imports)

Source: 2020 World Steel in Figures, World Steel Association.

The announcement made by the EU 15 on the adoption of a CBAM has been an important milestone, with the
UK, 16 US 17 and Canada 18 exploring similar mechanisms. While most G7 countries have already proposed or
are considering implementing a CBAM, G20 countries appear more cautious and several have expressed
concerns over WTO compliance and respect of the principles of common but differentiated responsibilities
(CBDR), if CBAMs are implemented in advanced countries (Ecologic, 2022).
Formation of a Climate Club has been mentioned prominently as a strategy to advance this agenda by
creating treaty-bound club goods and penalties, specifically, target carbon pricing among members,
complemented by a CBAM applied to non-members (Mehling et al., 2019; Tagliapietra and Wolff, 2021).
In addition to CBAMs, other policies have been identified as potential tools to incentivise decarbonisation
and address carbon leakage. The IMF proposed an International Carbon Price Floor (ICPF), where countries
implement a minimum carbon price, while accommodating equity considerations by setting lower price floor
requirements for emerging market economies. To facilitate negotiation, the price floor would initially be
applied to a small number of countries responsible for the majority of global emissions (Parry et al., 2021).

In July 2021, the European Commission adopted a proposal for a CBAM that requires importers of aluminium, cement, iron, steel, electricity and
fertiliser to buy certificates at the ETS price for emissions embedded in the imported products (European Commission, 2021).
16 https://committees.parliament.uk/committee/62/environmental-audit-committee/news/171544/ministers-to-consult-on-implementing-cbamfollowing-eac-recommendation/
17 https://carboncredits.com/congress-introduces-us-cbam-clean-competition-act/
18 https://www.canada.ca/en/department-finance/programs/consultations/2021/border-carbon-adjustments/exploring-border-carbonadjustments-canada.html
49
15

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Other instruments to tackle carbon leakage include the application of consumption charges (Munnings et al.,
2019; Neuhoff et al., 2015; Grubb et al., 2022) and a climate excise contribution (Neuhoff et al., 2021; Climate
Strategies, 2021; Grubb et al., 2022). 19

5.3 Limitations of CBAM coordination
Notwithstanding the potential for CBAMs as a means to manage the
lack of harmonisation of climate ambition, there have been significant
concerns about the risks that they could pose in terms of unwarranted
trade distortions, WTO compliance, retaliatory actions from trade
partners, and general diplomatic tensions (e.g. Bierbrauer et al., 2021;
Okonjo-Iweala, 2021; Parry et al., 2021). Some have argued that the
formation of a Climate Club and establishment of a CBAM for the Club
membership as a whole could help manage and internalise these
tensions (Hagen and Schneider, 2021; Tagliapietra and Wolff, 2021).
However, there are questions relating on the one hand to the political
sensitivity of restricting trade with some countries; and on the other,
to the feasibility of such an approach in the light of important
challenges associated with the implementation of a CBAM, by
individual countries or blocs and – even more so – across a range of
countries with diverse policies that might constitute the desired Club
membership (Grubb et al., 2022). Chief among the issues are: 20

The need to phase out
free allocations of
certificates and recent
spikes in carbon prices are
making carbon leakage
and competitiveness
losses more material,
underpinning calls
for action.

Complexity of regulatory choices. For example, on which policies, goods, sectors, countries, types of
emissions to include, how to set prices, as well as questions around how to treat export-related leakage.

Administrative burdens. CBAMs are administratively challenging, even if limited to a small range of EITE
goods as is the case under the EU proposal. In the context of a Climate Club where they would need to
be enforced among a range of countries with distinct structural and policy profiles, the CBAM would have
to be aligned with the respective carbon pricing system of each club member to ensure WTO compliance.
If the perimeter of carbon content had to be extended to the Scope 2 (energy input) and Scope 3 (supply
chain) emissions of a product, as might need to be the case to ensure non-discrimination, the difficulties
would multiply.

Accommodating different starting points. Given that CBAMs are already planned in countries like the
EU members states and the US, any CBAM integrated or developed within the Climate Club would have
to introduce a process for these to be amended in order to align them with the requirements of the Club
(Agora Industry, 2022).

Balancing commitments to CBDR. CBAMs could prove difficult to reconcile with members’ commitments
to the principle of common but differentiated responsibilities (UNCTAD, 2021), as carbon tariffs can
create adverse distributional effects for countries subject to the measure (Branger and Quirion, 2014)
and exacerbate regional inequality (Böhringer et al., 2012), including worsening the GDP gap between
developing and developed countries (UNCTAD, 2021; TCD-IMF, 2022).

19
20

See Appendix 3 for a comprehensive overview of anti-leakage measures.
For a comprehensive treatment of these limitations see Appendix 3.
50

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Determining carbon price equivalence. The introduction of a CBAM, coupled with the need for the Club
to honour members’ freedom to choose their own policy mix according to their economic and social
circumstances, create a need for metrics that determine the level of equivalence across them.
Theoretically it is possible to estimate the associated equivalent monetary value per ton of carbon for
many non-price based policies (World Bank, 2019). However, such methodologies can be complex and
hard to implement in a way that is transparent and that all parties would recognise as non-discriminatory.
These methodological aspects are likely to generate claims of discrimination by some countries, with a
material risk to be challenged at the WTO level.

Legal challenges related to trade. A CBAM could be abused or perceived as a protectionist measure
violating the principle of non-discrimination under WTO regulations, giving rise to legal challenges (see
next section).

Box 5: Comparison of price- and non-price-based policies
One of the biggest challenges in the implementation of a CBAM is the development of a robust
methodology for estimating price adjustments. This is particularly hard when the goal is to account for
different mitigation policies, including both price-based instruments (i.e. explicit carbon prices, such as
carbon taxes, and other price-based instruments, such as fuel taxes or feed-in tariffs) as well as non-pricebased measures (i.e. subsidies, standards and regulations). Two different methods have been proposed
for this purpose: an outcome-based approach and an input-based approach.
Outcome-based approach
This approach focuses on the outcome of a policy already implemented, by assessing its effect on the
carbon content embodied in the imported goods. Carbon content measures reflect the impact of past
policies on current emissions. In this case a CBAM would only charge border carbon prices on the actual
embedded carbon. The effect of non-price policies would be already accounted for by the CBAM, if those
policies contributed to reducing the embedded carbon in the imported products. This approach is
followed by the current EU proposal of a CBAM.
The main challenge of this approach is that estimating the embedded emissions of products requires
reliable data on the greenhouse gas content of products along the value chain of the imported good. In
addition, it would be hard to assess a carbon price that has already been paid by the exporting company
before the product entered the country implementing the CBAM. Nevertheless, this is an important
aspect to consider in order to avoid a situation similar to a double taxation (Grubb et al., 2022).
Input-based approach (Carbon Price Equivalence)
This approach focuses on estimating ex-ante the effects of policies on reducing emissions. Theoretically
it is possible to estimate the associated equivalent monetary value per ton of carbon for many non-pricebased policies (World Bank, 2019), known as implicit carbon price. This can enable a comparison of the
stringency of different price and non-price-based policies.
Currently the OECD, under the newly established Inclusive Forum on Carbon Mitigation Approaches
(IFCMA), is working towards the double objectives of: stocktaking of mitigation policies and mapping of
policies into their emission bases; and, estimating the impact of these policies on emissions. This work
can play an important role in providing better data and improving the comparison of policies in terms of
their effectiveness in reducing emissions. On the other hand, it could also serve as a basis for future work
51

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

on developing a metric to compare price and non-price-based policies, based on their economy-wide
carbon price equivalent (ECPE). This is the carbon price that would be needed to trigger the same amount
of emission reductions of a given policy.
Methodological issues
The methodology for calculating the carbon price equivalent and comparing the policies’ impacts has
raised concerns, as it can be extremely complex and hard to implement in a way that is transparent and
non-discriminatory.
1) For instance, the stocktaking of policies requires making difficult choices on which policies to
include. This is not trivial, as some non-climate policies, like air pollution policies, can still have
an impact in reducing emissions. Other choices concern which emissions and jurisdictions to
cover and the sectoral aggregation, as the composition of a sector’s products may differ across
countries, making the comparison problematic.
2) Other issues relate to the estimation of abatement impacts of different policies, which requires
choosing the baseline against which to compare future greenhouse gas emissions, as well as how
to treat overlapping measures, as it can be extremely challenging to disentangle the contribution
of individual measures to emissions reductions.
3) Additional challenges include how to account for the variability of values of some factors, like
changes in relative energy prices, offsets, relative purchasing power technology costs, exchange
rates, etc. that impact the relative costs of producing lower carbon goods to comply with different
regulations. These factors will need to be updated in real time to ensure reliable and current
measures of shadow carbon pricing in different jurisdictions (Agora Industry, 2022).
4) Also, divergences across the mitigation models employed – in terms of modelling assumptions,
parameters, uncertainties, etc. – could become a source of controversy when concrete financial
consequences are attached to their projections.
5) All those different methodological aspects for measuring equivalent levels of ambition to avoid
‘punishment’ via a CBAM are likely to generate claims of discrimination by some countries, with
a material risk of challenge at the WTO level. For developing countries, the methodology may
need to account for differentiated historical responsibility. At the very end, the comparison
process will be more of a political process than a technical one.
Given these methodological (and political) challenges, getting countries to agree on methods to measure
policy equivalence could prove to be an extremely difficult exercise.

5.4 WTO aspects and implications for border regimes
5.4.1 Climate Club measures and the WTO

The WTO is likely to give particularly close scrutiny to certain measures associated with the Climate Club,
such as sectoral agreements and treatment of technologies and products as ‘sustainable’ or otherwise, green
subsidies, the possibility of differentiated carbon prices for different jurisdictions, decisions on the
equivalence between price-based and non-priced-based regimes, and concessions such as free allowances
to legacy industries (see Table 4). This reflects the organisation’s role in operating the global system of trade
rules and agreements, maintaining open trade, and settling disputes.
52

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

At the core of the WTO’s approach to climate measures that may have an impact on trade lies the idea of
protecting “members’ autonomy to determine their own environmental objectives”, enabled through Article
XX of the General Agreement on Tariffs and Trade (GATT), which lays out the instances in which WTO
members may be exempted from the Agreement’s rules (WTO, 1947). 21 This enables members to adopt
trade-restrictive measures for environmental purposes, shifting the issue from being purely a trade one
(whether discrimination against imported goods occurs), to an environmental and trade one (whether the
restrictive effects of the measure in question are adequately justified by its environmental objectives)
(WTO, 2020).
While members are free to decide on their level of ambition and on which environmental issues this ambition
applies to, WTO law will generally hold members to core standards of good governance. Specifically, it will
seek to ensure that the measures are rationally designed, evidence-based, non-discriminatory, reasonably
justifiable (non-arbitrary) and transparent.
Table 4: Climate Club proposal elements likely to invite WTO scrutiny
Area

Climate Club relevance

WTO relevance

Sectoral definitions
of sustainability

The sectoral agreements under Pillar 3 of
the Club will be based on agreed
understandings among members regarding
which technologies and products are
treated as ‘sustainable’ and given
favourable treatment.

Questions around whether the definitions of
‘sustainable’ products are objective,
evidence-based and transparent, as any
doubts over the above may amount to
arbitrary or unjustified discrimination
between environmentally-equivalent
products.

Common but
differentiated
responsibilities

Possibility of different carbon prices
applicable in different jurisdictions.1

Potential source of arbitrary or unjustified
discrimination between products from
jurisdictions taking different approaches.

Equivalence

Agreement on methodologies for assessing
the equivalence of different approaches to
climate change mitigation.

Potential source of arbitrary or unjustified
discrimination between products from
jurisdictions taking different approaches.

Green finance

Financial support and subsidies to green
technologies, industries and enterprises.

Potential risk of treatment as challengeable
(prohibited or actionable) subsidies.

Concession to
legacy industries
and technologies

Free allowances and other concessions.

Where they distort competition, such
concessions may amount to either
challengeable subsidies, or arbitrary or
unjustifiable discrimination in favour of
domestic legacy industries.

Note: 1. See, for example, the IMF’s International Carbon Price Floor proposal: https://www.imf.org/en/Publications/staff-climatenotes/Issues/2021/06/15/Proposal-for-an-International-Carbon-Price-Floor-Among-Large-Emitters-460468. Source: Authors’ elaboration.

Notwithstanding the norm of non-discrimination, discrimination is exceptionally permitted where measures
serve a legitimate public purpose, provided they are not applied in ways that are ‘arbitrary or unjustifiable’
and provided there is no less trade-restrictive, or equally effective, means of pursuing the regulatory
objective reasonably available. 22

21
22

Particularly XX(b) and XX(g).
https://www.wto.org/english/res_e/booksp_e/gatt_ai_e/art20_e.pdf

53

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

The WTO’s Subsidies Agreement also places limits on the use of subsidies to domestic industries and
producers. Both export subsidies and domestic content subsidies are prohibited, but other trade-distortive
subsidies can also be challenged where they cause injury to foreign producers.
5.4.2 Ensuring free and fair trade: anticipating and addressing WTO risks

WTO dispute settlement can be a time-consuming process, with many disputes taking three years or more
to complete. Importantly, remedies are forward-looking, which means no retrospective compensation is
payable for breaches of WTO law. Failure to comply with a WTO ruling can lead to retaliatory trade
restrictions from the complaining country. 23
In practice, the likelihood of WTO risks materialising in the context of measures taken by members of the
Climate Club or indeed by the Club itself will depend on whether countries (members or non-members of the
Climate Club) decide to raise the issue at the WTO level. A case cannot be brought by the WTO itself or by a
private party, but only by a WTO member.
While it is possible, it is less likely that a WTO dispute would be initiated by a Climate Club member against
another member on issues relating to measures taken in the context of the Climate Club. This reinforces the
importance of an open, inclusive and broad-based approach to the Club’s membership. The broader the
membership, the lower the risk of a dispute materialising.
The possibility of WTO claims against fellow Club members would be further reduced in the presence of wellfunctioning processes for the resolution of disputes and friction within the Club itself, minimising the need
to resort to the WTO for such purposes. This aligns with the Club’s principles as outlined in Chapter 3 of
ambition and inclusiveness, in ensuring that the Club focuses on finding routes to convergence
among members.
Still, the prospect of concerns arising across members cannot be ruled out. In those cases, the Committee on
Trade and Environment of the WTO is designed to function as a forum for discussion and potential space for
airing disputes and moving them forward (WTO, 2020). Additionally, consideration may be given to a
moratorium on intra-club WTO disputes of certain kinds.
Experience suggests that measures backed by significant international consensus may attract more
legitimacy within the WTO than purely unilateral measures. To that end, measures adopted by the Climate
Club could be aligned as far as is practicable with international standards where they exist, or where they are
under development.
5.4.3 Preserving dynamic change

Overall, concerns about WTO compatibility should not in and of themselves impact the level of ambition of
the Climate Club initiative and indeed, they must be weighed against the urgency of climate action that might
call for some level of tolerance of such risks. Instead, the Climate Club design and architecture must anticipate
and address such risks and have in place mechanisms for responding and adapting to evolving risks to ensure
that these decrease over time.
There are three broad ways in which the Climate Club can embody dynamic change:

23

First, through adaptation and revision mechanisms. Such mechanisms, if built directly into the Club’s
institutional structure, would enable the Club to identify, respond to, and correct misjudgements or
unexpected events. This would help reduce WTO/legal risk, and other risks that international rules

https://www.wto.org/english/tratop_e/dispu_e/disp_settlement_cbt_e/c6s1p1_e.htm
54

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

might be breached, in enabling Club members to manage disputes and address unexpected
competitive impacts internally.

Second, through a dynamic, flexible and inclusive approach to membership. As highlighted earlier,
the more open and inclusive the membership of the Climate Club, the lower the risk of a WTO dispute
in practical terms. While recognising the challenges of bringing together a large number of countries
from the start, the Club must remain open and inclusive, enabling dynamic change over time in terms
of its membership.

Third, through inclusive processes for setting standards. Given the dynamic nature of Club
membership, there will be a strong interest for the Club to take into account the interests of nonmembers, including prospective members, in its activities. This applies particularly to the setting of
standards. While on the one hand, an exclusive ‘seat at the table’ can strengthen incentives for
members to join the Club, the benefits of an inclusive approach to standard-setting should not be
ignored. This can be reflected in the design of the Club more strongly (for example through a formal
mechanism for addressing concerns of non-members in the process) or less strongly (for example
through crafting a role for non-members as observers or through consultation and
discussion mechanisms).

In particular, rather than viewing the WTO only through the lens of potential trade disputes, the Climate Club
should consider engaging on trade- and standard-related topics directly with the WTO itself or other existing
bodies that inform the international trade system. This can take the form of a convening forum under the
auspices of existing WTO committees and working groups that would allow non-members to air their
concerns. In the case of discussions around proposed CBAMs, the WTO is already fulfilling this role, with WTO
members joining the relevant committees to discuss and raise concerns and clarifications. 24
A convening forum can also serve as a space to hear discussions around standards (including carbon
accounting methodologies) and shared views on ‘green’ subsidies. 25 An important goal for the Climate Club
may be to encourage, and give impetus to, discussions within the WTO regarding, for example, definitions of
environmental goods and services, categorisation of green subsidies, international standards relating to
carbon emissions, guidelines for the design and implementation of CBAMs, and so on.

5.5 Summary: the contributions a Climate Club can make to this agenda
Analysis presented in this chapter has highlighted the challenges associated with differences in the pace and
depth of climate policies as well as with efforts to manage these differences. These range from administrative
complexity and difficulties with calculating policy equivalence to accommodating membership from
countries with different policy mixes.
Softer, more inclusive arrangements, in combination with progress across other pillars making up the
architecture of the Climate Club, may provide a more productive way forward in creating a forum that
enhances multilateral cooperation on a robust policy package to support industrial decarbonisation.
Specifically, the Club could seek to provide a forum for managing diversity in climate policy ambition in the
short term, while aiming to align members’ policy stringency, hence making anti-leakage measures
unnecessary in the long term.

The dialogue has also been taking place in public: e.g. China’s Ministry of Commerce issued a statement in March 2022 expressing “hope” that the
“EU’s legislative measures should be in keeping with WTO rules”.
http://english.mofcom.gov.cn/article/newsrelease/press/202204/20220403302934.shtml
25 See Pillar 3, ‘Fostering sectoral alignment’ and also: https://www.wto.org/english/news_e/news21_e/clim_03nov21-6_e.pdf
55
24

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

5.5.1 Managing friction around autonomous CBAMs

The Climate Club could take a role in smoothing the implementation of autonomous CBAMs, by facilitating
agreement on principles and best practice. This could include the creation of joint institutions and common
protocols, the development of methodologies for crediting foreign carbon pricing and commonly agreed
approaches to attributing the carbon content of complex goods at the border (Agora Industry, 2022); it could
also involve the identification of best practice to ensure that the various regimes work to prevent leakage
without being unfair or protectionist (Cosbey et al., 2019). Here the Club could benefit from close
collaboration with WTO institutions to manage friction in trade and ensure equitable CBAM design.
5.5.2 Improving measures for managing policy diversity

The Climate Club could also act as a forum for members to agree on additional measures to manage friction
linked to different levels of climate ambition. Different approaches, other than CBAMs, have been proposed
in the literature to address carbon leakage and competitiveness losses (see Appendix 3). These might range
from cooperation on carbon pricing (e.g. by linking ETSs) to implementation of carbon price floors,
consumption charges or climate excise contributions, and other approaches. Among those, each jurisdiction
should be free to choose the approach that seems more appropriate, given its political, economic and social
circumstances. The Club in this context could act as a forum for supporting discussions around principles and
best practice for different anti-leakage measures to minimise friction; it could also promote better
measurements that can smooth the implementation of tools directed at managing policy diversity – e.g.
through the development of methodologies for measuring the carbon content of complex goods as well as
by improving the comparability of different types of policies. The OECD’s Inclusive Forum on Carbon
Mitigation Approaches can play a role in this by providing better data as well as improving comparability of
policies in terms of their effectiveness in reducing emissions. Here the Club could collaborate with the IFCMA
to help countries identify concrete applications of the IFCMA’s analytical work, including for the design of
better climate policies. The Club should promote capacity-building, analytical support and information
sharing, especially to developing countries, and ensure transparency and better data availability for
measuring both policy effectiveness and the carbon content of products. Agreed measurements would also
enable a dynamic path to membership, taking into account the different starting points of countries.
5.5.3 Dynamic re-evaluation of the need to manage policy diversity

The actions described so far in this chapter can contribute to solving trade tensions around national-level
implementation of CBAMs and other anti-leakage measures, and could result in reduced risk of carbon
leakage. However, our analysis highlights that a CBAM implemented in the context of
a Climate Club would be technically challenging and politically elusive.
Ultimately, over the long term, the most feasible way for countries to achieve convergence in policy ambition
would be through the adoption of harmonised regulations across different jurisdictions, which would obviate
the need to adopt a CBAM and other complex carbon leakage policies. In this context a key role for the
Climate Club would be to improve coordination across different sectoral trade agreements and more
generally to accelerate the implementation of sectoral level decarbonisation measures (see next chapter).

56

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

6. Pillar 3 – Fostering sectoral alignment
Sectoral approaches provide finer granularity for the Climate Club’s ambition than economy-wide
decarbonisation goals, by driving joint investment and innovation and enabling Paris-aligned development in
specific systems and industries. Dynamic and flexible coordination on industrial transformation can shape
and amplify the impact of wider partnerships for financial, technical and technological support. And where it
seeks to complement the Club’s management of policy diversity, sectoral coordination is best targeted at
emissions-intensive and trade-exposed industries, where fixing common standards, technology deployment,
market creation and trade infrastructure would all provide substantial shared benefits.
This chapter outlines the advantages of including sectoral alignment within the wider architecture of a
Climate Club. It then addresses the scope, features and actions it could include, and opportunities for
progress in specific sectors. The Club should not detract from existing fora that are able to deliver results,
but rather leverage available policies and existing international governance and initiatives.

6.1 Role of sectoral alignment in the Climate Club
Alignment on sectoral measures can contribute to the Club’s purpose of accelerating climate action, while
also reducing international friction arising from carbon leakage, and capturing strategic, mutual benefits.
Each of these three dimensions are interrelated.
6.1.1 Accelerating action

The UNFCCC and the Paris Agreement contribute to five overarching governance functions – guidance and
signal, rule-setting, transparency and accountability, means of implementation, and knowledge and learning
(Oberthür et al., 2021a) – on a broad, cross-sectoral basis. However, they do not contain much in the way of
sector-specific governance. For example, the Agreement does not contain any explicit breakdown of global
goals to sector level; its rules about NDCs and long-term strategies do not include requirements to have a
sectoral breakdown; and Parties are not required to report transparently or comprehensively on indicators,
other than emissions, that could illuminate and promote transformation in specific sectors (Rayner et
al., 2021).
It is important that any additional multilateral arrangements do
not side-step the existing system but integrate and promote it
from within (von Lüpke et al., 2022). The goal of rendering
sector-specific goals into a multilateral frame is to solidify the
high-level ambition of the Paris Agreement. In keeping with the
Agreement’s emphasis on national climate policy, countries
must remain free to set their policy packages in accordance with
their circumstances and preferences. However, as members of
an alliance countries can decide to align their policy decisions in
specific sectors in order to give them greater effect. A
coordinated transition in systems for industrial production,
energy, transport and land use will be foundational for
sustainable development and are all areas that a Club could
consider supporting over time.

Policy alignment would
provide collective support for
the transformation of key
industries – a win-win for
climate and economies.

6.1.2 Reducing friction

Sectoral alignment can also reduce the negative consequences of trade measures adopted to address
concerns around competitiveness and carbon leakage. Reaching agreement on mitigation commitments,
57

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

targets or actions can decrease the likely discrepancy between the level and pace of sector-level
decarbonisation across participating countries. Furthermore, the actions taken and benefits enjoyed by
participants in the agreement can strengthen buy-in from industry and encourage alignment in non-member
countries, while partnerships under the Club’s first pillar will offer financial and technical support to enable
those countries to join the alliance and enable heightened ambition at the sectoral level. Governments will
be encouraged to implement more ambitious national policies if they are confident that this will not lead to
a disadvantage in competitive international markets.
Countries could align on standards in traded industries, with complementarities for the other Club pillars,
including measurement methodologies and labelling that would enable to develop rules for carbon pricing
and trade measures (WTO, 2021). Coordinated action to stimulate innovation and investment would increase
the supply of and demand for products meeting low-carbon thresholds. This would lower the incidence
of price-based policies to limit carbon leakage and perhaps even remove the need for carbon
border adjustments.
6.1.3 Capturing strategic benefits

Sectoral measures undertaken by a group of countries promote the global public goods of sustainable
development and managing climate change. However, to the extent that they can regulate access to certain
benefits from this collective effort, such as from increased trade in green industries, they also create
incentives to join the alliance. Steps taken jointly to promote innovation, to provide certainty, incentives and
support for first movers, and to grow the available supply of essential materials and infrastructure, will have
positive externalities that aligned countries will be best placed to exploit.
Through this incentive effect, alignment at the sector level can lead to a more inclusive alliance. Only Club
members will have a seat at the table to shape the focus and nature of alignment. The prospect of capturing
economic surplus from new markets for green products will attract countries to join and will reduce the
number and significance of unaligned, non-member countries.

6.2 The substance of alignment
6.2.1 Form: a process for coordination

Since broad multilateral accords are thought to be superior for achieving compliance (Barrett and
Dannenberg, 2022), it could be most effective to seek strong consensus on a single industry. However, not
all countries that join the broader alliance will have interests in collaborating on the same sectors. On grounds
of inclusivity, sectoral measures should not unduly favour a subset of prospective member countries.
Arguably, some sectors would not need universal affirmation to be effective at driving progress, because only
a few countries account for the majority of production. For example, an estimated 90% of steel is produced
in around ten key countries (Clean Energy Ministerial, 2022). However, the importance of ensuring that
countries beyond the G7 accede to the agreement is clear: for example, while G7 countries produce 17% of
steel, 8% of cement and 28% of primary chemicals globally, China has larger heavy industry sectors than the
G7 combined (IEA, 2022b).
Therefore, a Climate Club is expected to give rise to a varied geometry of plurilateral coordination. In
recognition of common but differentiated responsibilities and the need to support lower income countries
that have reduced means to promote decarbonisation, partnerships (the Club’s first pillar) will also be needed
in support of alignment measures.
Two paradigms for alignment can be considered here:
1. Fixed sectoral agreements, interpreted as the outcome of diplomacy (Bodansky, 2007). The core
would likely be a shared target, including a relevant metric and timeframe (for instance, a Paris-aligned
58

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

trajectory for the average emissions intensity of key goods in covered sectors). An agreement might
prescribe certain policies, such as regulation or price-based measures, or leave it to individual
governments to set appropriate policies to achieve the target. Any agreement must include a common
understanding on methodology and acceptable approaches to monitoring and measuring progress.
For reaching agreement to be possible, goals and any prescribed policies must be calibrated so that
they are perceived as achievable and fair.
2. Dynamic coordination, by contrast, would see the Climate Club embody a process for alignment. There
are already numerous coalitions to advance decarbonisation at sectoral level (discussed in more detail
below) – several of which have appeared as recently as COP26 in 2021, such as the Breakthrough
Agenda, which covers power, road transport, steel, hydrogen and agriculture. However, the form and
extent of sector-specific governance remains uneven across the major emitting sectors, and key
governance functions are fulfilled to varying degrees (Rayner et al., 2021). Alignment under a Climate
Club should seek to reinforce this existing ecosystem, either by amplifying the work of existing
initiatives or by filling gaps in their collected functions. This approach would be responsive to the
current distribution of green technologies among countries, the current and anticipated costs of
deployment and building enabling infrastructure, and the ability of the public and private sectors to
absorb those costs.
The flexible approach would enable greater bargaining and
synergy across the different pillars of the Club. Moreover, it
would avoid the challenge of balancing all trade-offs in striking
a fixed agreement, and enable the alliance to tackle multiple
sectors at once. Several sectors share certain preconditions and
drivers for effective decarbonisation, so concerted action on
these cross-sectoral enablers could drive investment and
innovation across the economy. The Breakthrough Agenda itself
provides a model for just such an approach through variable
geometry: the broader commitment to collaboration is
endorsed by 45 countries, but fewer than this participate in
alignment towards each sectoral goal (HMG, 2022). Provided
the Club becomes a stable entity, this dynamic, multidimensional sectoral alignment would give a wider range of
actors confidence in the medium- and longer-term pathway for
sustainable development.
6.2.2.

A dynamic process for
coordination focused on
emissions-intensive, tradeexposed (EITE) industries and
international transport would
maximise the Club’s potential
to add value.

Focus: identifying sectoral opportunities

For an ambitious alliance, focus sectors should represent substantial abatement potential, in terms of their
contribution to current global emissions and reductions under reasonable scenarios aligned with Paris goals.
The major systems, including energy, land and transport, are all vital for net zero and sustainable
development, and possible sites of action by the Club. These sectors link to the Club’s secondary purpose of
easing international friction through their role as inputs into traded goods, where discrepancies in emissions
intensity will feed through into trade friction under carbon border policies. Actions could include
commitments to joint investments in R&D for enabling technologies (such as sustainable fuels) or common
infrastructure (such as interconnectors for green electricity).
Emissions-intensive heavy industries would especially benefit from international governance and
coordination. This is partly because of a pronounced collective action problem in the face of uncertain and
very costly abatement options. High operational and investment costs, long investment cycles (upwards of
25 years), and trade in highly competitive global markets are common features across most heavy industries,
59

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

such as production of steel, cement and chemicals (IEA, 2022b; Oberthür et al., 2021b). Under the status quo,
low- or zero-emission basic products do not stand to capture a dedicated share of the market, and policy to
support first movers is underdeveloped. Consequently, firms have little incentive to invest in converting their
production processes. Developing and scaling up solutions also requires available materials and enabling
infrastructure (WEF, 2022b).
Coalitions of countries could target all of these barriers to investment by agreeing shared standards, jointly
implementing policies to create demand for green products, as well as coordinating finance to accelerate
innovation and deployment of solutions on the supply side. In addition, trade-exposed industry is likely to be
the main target of border policies to address carbon leakage, as reflected in previous proposals for an alliance
(e.g. Shawkat and Sartor, 2022). Moves to agree rules that manage policy diversity under the second pillar
would boost confidence to invest among Club members’ domestic firms and increase the incentives for
exporters overseas to do so to comply with new trade controls. Measures on EITEs under the third pillar could
amplify this positive shift, while also helping to forestall tensions arising from climate policy divergence in
the first place.
International transport also represents a potential focus area for Pillar 3 measures, owing to its distributed
governance and relatively limited suite of cost-effective abatement options at present (IPCC, 2022b) – while
not ‘traded’ in the same sense, it provides crucial enabling infrastructure for low-emissions trade and
contributes to the cost profile of decarbonisation in other sectors.
A further area in which to pursue cooperation may be in materials and supply chains that span sectors, such
as those for minerals and rare earth metals that are essential for scaling up deployment of low-carbon
technologies. Club members could identify fragilities and bottlenecks and seek to close these, through
measures like trade concessions and joint investment, which will have mutual benefits for sustainable, lowcarbon, resilient development.
Box 6 examines key dynamics and opportunities in sectors that the Climate Club could target in the near
term. Part of the political logic driving the Club – based in part on fears around carbon leakage – implies a
focus on hard-to-abate sectors. However, over the years to come, countries might also coordinate through
the third pillar’s apparatus on mutually supportive actions for zero-emissions power, agriculture or domestic
transport. Ultimately, the choice of specific industries will result from diplomacy during the Club’s formation
and the dynamic process of bargaining once it is established, but it should also be based on evidence,
including in relation to relative probabilities of carbon leakage.

60

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Box 6: How can coordination unlock decarbonisation in hard-to-abate sectors?
Investment decisions in all sectors over the next few years will be critical for achieving the Paris temperature
goals, since relevant capital assets endure for decades; in heavy industry, 2050 is just one investment cycle
away (IEA, 2022b). There are strong actions available to a coalition of influential countries to drive a
development pathway that meets these goals. The analysis here covers properties of three heavy industries
(steel, ammonia and cement) and shipping, outlined in Table 5, exploring the development of near-zero
emissions hydrogen as a cross-cutting enabler.

Table 5: Features of selected hard-to-abate sectors
Sector

Share of
global CO2
emissions
(%)1

Technology for
decarbonisation

Major sectoral
initiatives

Largest
producers2

Exports as
share of
production
(%)

Steel

8

Electrolytic iron
ore reduction
using hydrogen,
plus electric arc
furnace; CCUS

worldsteel;
ResponsibleSteel;
SteelZero;
Net Zero Steel
Initiative

China 54%
India 7%
Japan 5%
US, Russia, South
Korea each 4%
(G7 17%)

20

Ammonia 1.3

Electrolysis with
hydrogen;
CCUS

International
Fertilizer
Association

China 30%
US, EU, India,
Russia 8-10%
each

10

Cement

7

CCUS

Global Cement
and Concrete
Association;
Cement
Sustainability
Initiative;
Concrete Action
for Climate

China 52%
India 6%
EU 5%
US 2%
(G7 8%)

5

Shipping

2.9

Low-emission
hydrogen,
ammonia,
biofuels, and
other synthetic
fuels

Getting to Zero
Coalition;
Sustainable
Shipping
Initiative;
International
Chamber of
Shipping

N/A

N/A

Sources: GCCA (2022a), IEA (2022a, 2022b), IMO (2020), IPCC (2022b), worldsteel (2022)
Notes: 1) Latest available data: 2018-2019. 2) Steel figures for 2021; ammonia cited in IEA (2022b), no date given;
cement figures for 2018.

61

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

The discussion below focuses mainly on technological options for decarbonisation to identify cross-sectoral
complementarities, particularly around near-zero emissions fuels. However, material efficiency, circular
practices and energy efficiency will all play a role in industrial decarbonisation (IPCC, 2022b).
Hydrogen: a cross-cutting resource
Hydrogen is recognised as an important energy vector where electrification is unsuitable for decarbonisation.
The Energy Transitions Commission estimates hydrogen could account for 15-20% of global final energy
demand by mid-century, attributing particularly high certainty over hydrogen’s future role in steel, ammonia,
methanol, shipping, and aviation (ETC, 2021). For clean hydrogen to play this role, its production must switch
from carbon-intensive processes involving natural gas to production via electrolysis using renewable electricity
(‘green’ hydrogen) or be reformed with carbon capture and storage that provides near-total CO2 capture and
very low methane leakage (‘blue’ hydrogen). Green hydrogen uptake will largely depend on decreases in endto-end cost, which the Hydrogen Council (2020) estimates will need to reach $1.8/kg to achieve 15% of global
energy demand. However, the point at which hydrogen becomes viable is not homogenous across sectors,
because of differences in capital expenditure and transportation costs required for hydrogen to be deployed
at scale.
A wide range of policy levers and coordination among multiple types of actors will be needed to accelerate
hydrogen uptake (ETC, 2021). Furthermore, a growing hydrogen economy will likely result in a reorientation
of value chains, including since “regions with abundant low-GHG energy and feedstocks have the potential to
become exporters of hydrogen-based chemicals and materials processed using low-carbon electricity and
hydrogen” (IPCC, 2022b). Clean hydrogen is likely to become a globally traded commodity, with
significant consequences for resource and monetary flows.
A Climate Club could therefore accelerate international collaboration based on countries’ shared national
interests in the growth of clean hydrogen production and conditions for smooth trade. Governance is
emergent: an overarching goal is already provided by the Breakthrough Agenda; Mission Innovation and the
IEA’s Technology Collaboration Programmes give international support to research and development; and
hydrogen features in national decarbonisation strategies among well over 30 countries (Royal Society, 2021).
However, there remains a need for stronger agreement on clear and near-term targets for deployment, more
ambitious interventions in support of hydrogen projects in end-use sectors, and a full portfolio of international
standards that include emission measurement methodologies and safety and operational protocols (see
6.3.3). Progress in these key areas, paired with international finance for projects in EMDEs, would both
stimulate demand and galvanise a supply chain for clean hydrogen that would have benefits across multiple
hard-to-abate sectors.
Steel
Decarbonising steel production will require several technological solutions, with hydrogen and CCUS-based
approaches both likely options. However, although various companies are piloting prototypes, most
technologies are not yet commercially viable for the industry. Utilisation of scrap in place of iron ore – recycling
for material efficiency – offers another route to near-zero emissions, but encounters challenges with regard
to final product quality, meaning not all demand can be met through recycling.
Solutions will vary internationally with patterns of production methods. US production is estimated to be 75320% more carbon-efficient than the global average, depending on which products are measured (CRU, 2021),
owing to the country’s larger fleet of electric arc furnaces, which are the most compatible with hydrogenbased direct reduced iron. Supporting hydrogen-based methods could help drive down the cost of zero-carbon
hydrogen production, benefitting its use in other sectors. However, some 60% of all steel plants globally still
use the most carbon-intensive approach, the blast furnace-basic oxygen furnace; the share is 77% in China and
63% in India (Swalec and Shearer, 2021). China is by far the largest global producer and the largest exporter
of finished and semi-finished products (IEA, 2022b). Blast furnaces need CCUS to remove residual emissions,
62

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

which will become less cost-competitive as hydrogen costs decrease. China and India have many new plants
and are continually adding new capacity, so both have an interest in reducing costs for CCUS to bring down
their overall sector emissions.
Out of EITE industries, steel is paid the most attention by existing international initiatives (see 6.3), but many
observers still see opportunities for improvement (e.g. Hermwille et al., 2022). One of the Breakthrough
Agenda’s goals is dedicated to near-zero emissions steel, and the US and EU have agreed, under the ‘Global
Arrangement on Sustainable Steel and Aluminium’, to negotiate to avoid mutual tariffs on steel and aluminium
products. However, there is currently no global alignment on the definition of green steel, and developers are
not incentivised to monitor emissions. Some initiatives, such as the World Steel Association (worldsteel) or
industry coalition ResponsibleSteel, aim to harmonise measurement standards; the IEA (2022b) has also
proposed steps towards this goal.
The Climate Club could devote political capital towards wide uptake of credible standards, involving a coherent
approach to emissions measurement, a technology-agnostic threshold for green steel, and requirements for
monitoring and auditing. The OECD convenes stakeholders through the Steel Committee and Global Forum on
Steel Excess Capacity, both of which are increasingly focused on steps for decarbonisation, and as such could
provide analytical and operational support. A related step is to empower public procurement or buyers’ clubs
to support early movers. The Industrial Deep Decarbonisation Initiative (IDDI) already mobilises government
commitments to green steel procurement (see 6.3.4); the Club could thereby facilitate the expansion of IDDI’s
membership through incentives for countries to join the broader alliance. The transatlantic Green Steel Deal’s
principles must be opened to participation from other countries if it is to have a real impact on the global steel
industry. The US and EU will gain from explosive growth of lead markets for green steel and for relevant
technologies, while other producer countries would benefit from avoiding near-term tariffs and longer-term
stranded assets.
Ammonia
Ammonia is a potential zero-carbon fuel in its own right, and also the primary ingredient in nitrogen fertiliser
production: 70% is used for this purpose (IEA, 2022c). In this role ammonia produced using different methods
is substitutable, meaning the emissions intensity of fertiliser can be reduced without affecting the quality of
the final product. However, most ammonia is produced using natural gas steam reforming. Similarly to steel,
available routes for decarbonisation include the use of clean hydrogen as a feedstock, or CCUS to reduce
emissions from fossil fuel inputs. In fact, ammonia can be used as a carrier to transport hydrogen, since it has
a higher volumetric energy density and can be ‘cracked’ back to hydrogen or a mixture of the two (Royal
Society, 2021). China is the largest producer of ammonia worldwide, followed by the US, EU, India and Russia.
However, China, the US and the EU are all net importers (IEA, 2022c).
The first companies are now starting production plans for green ammonia and countries with significant
renewable energy resources, like Australia, have provided initial funding for projects aiming to manufacture
ammonia from hydrogen produced from renewable electricity. However, ammonia is subject to
fewer substantial commitments or agreements at the international level. An indirect high-level target exists in
the form of the International Fertilizer Association’s ambition to reduce greenhouse gas emissions from
nitrogen fertiliser production by at least 30% per tonne by 2040.
The Climate Club could provide a forum in which to negotiate and set harmonised, long-term emission
reduction mandates for fertiliser among members, which would stimulate demand for lower-emissions
ammonia and, in turn, for clean hydrogen as an input (see 6.3.3). Coordinated action would contribute to
managing trade friction, and as such should be conducted in parallel with negotiations over carbon prices and
border policies under the Club’s second pillar. Mobilising investment is also essential: in one IEA scenario, 80%
of cumulative capital investments are in near-zero emissions capacity. To go further on this critical factor,
governments could collaborate to fund the early, highest-risk ventures or subsidise enabling infrastructure;
63

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

or, to galvanise private investment, a club of countries could commit to tender for low-emissions production
of ammonia, nitrogen fertilisers, or other nitrogen products (see 6.3.4).
Cement
The cement and concrete industry represents one of the most challenging areas of the economy to
decarbonise and could account for around 60% of the global costs of industrial decarbonisation (McKinsey &
Company, 2018). A substantial rise in production is projected until at least 2050 to meet construction needs
for the built environment, particularly in EMDEs (Imbabi et al., 2012). The associated process emissions arise
primarily from the chemical reactions involved in production, making CCUS a central part of the solution.
Cement is therefore largely separate to the hydrogen grouping that unites the other case study sectors in this
report. However, hydrogen or electricity can be used for the heat required by kilns to tackle remaining
emissions from fuel use in supply and production chains. Other solutions include substituting clinker, the main
raw material in cement and the source of most emissions, for alternatives such as fly ash or ground limestone.
Industry stakeholders have already engaged with the necessary changes for net zero and shown support for
ambitious policy. Firstly, the Global Cement and Concrete Association (GCCA) has collaborated with the World
Economic Forum to form the Concrete Action for Climate Initiative to call for collective action beyond the
industry, and additionally has published a net zero roadmap with recommendations for policy. This followed
a low-carbon technology roadmap from the Cement Sustainability Initiative (CSI), which joined the GCCA in
2018 and brings together 24 major cement producers representing over 30% of the world’s cement
production, with operations in more than 100 countries. Key policy asks include carbon pricing mechanisms;
changes to standards and public procurement to create demand for low-carbon concrete and cement
products; support for R&D through public funding and risk sharing; support for CCUS including enabling
transport and storage infrastructure; and strong lifecycle CO2 performance standards for the built
environment (GCCA, 2022b).
The geographical pattern of production is heavily skewed, but unlikely to affect coordination. China produces
over half of the world’s cement, with no other single country or region coming close to China’s total output.
However, this is likely to shift dramatically towards other EMDEs, particularly in South Asia and Africa, as
China’s construction boom tapers off. Owing to their weight, cement industry products are traded in smaller
volumes and across shorter distances than other industrial materials (IEA, 2022b) – so trade concerns will be
a less significant factor affecting international coordination than in other sectors. A more important
consideration will be ensuring that all countries have access to low-emissions basic materials and relevant
technologies.
The Climate Club could promote and accelerate a two-pronged strategy towards cement decarbonisation.
Firstly, particularly across the US, Europe, and China, members could agree to set strong and harmonised
standards for final products (such as embodied carbon in building codes) and render these into green public
procurement targets (through participation in the Industrial Deep Decarbonisation Initiative, which targets
cement as well as steel). These steps would encourage high-quality data on the emissions-intensity of
production, create lead markets for near-zero emissions concrete, and incentivise recycling as well as private
investment in technological solutions. Secondly, particularly in EMDEs and in tandem with the first pillar, the
Club could forge partnerships to fund the roll-out of large-scale demonstration projects, particularly CCSequipped plants and key shared infrastructure, which may include transport for CCUS or facilities for recycling.
These solutions should link to priorities, such as R&D programmes, outlined by other governance initiatives
(see 6.3.2).
Shipping
New mitigation technologies are particularly important for shipping, although efficiency can still deliver some
mitigation potential (IPCC, 2022b). Clean ammonia also has potential as a marine fuel. However, many
technological options still require significant R&D to be commercially viable. For instance, compared with uses
64

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

in industry, hydrogen production costs must decline even further for alternative fuels to be competitive in
international transport: an H2 price of $2/kg implies a 170% cost premium over hydrocarbon shipping fuels,
compared with around 40% for steel and ammonia, against fossil fuel-based production (ETC, 2021). There is
an additional and simultaneous need to invest in ships that are able to use sustainable fuels and in fuelling
infrastructure (Mission Innovation, 2022). Progress will be incremental at first, before accelerating; for
instance, modelling suggests that only 5% of the international shipping fuel mix needs to be sustainable by
2030 to induce a tipping point and align with the Paris Agreement (Osterkamp et al., 2021).
New public–private coalitions of the willing have been formed, such as the Getting to Zero Coalition, which
accounts for over a quarter of the industry’s market share by revenue and has backing from 14 governments.
The industry association International Chamber of Shipping (ICS) has endorsed a stronger target by the
International Maritime Organization (IMO) – the UN body that regulates the shipping sector – than its existing
goal of reducing emissions by 50% from 2008 levels by 2050 (ICS, 2021). However, political and policy actions
to date are limited in ambition. IMO members rejected a net zero target for 2050, despite 14 countries
(including four G7 members: France, Germany, the UK and the US) signing a declaration at COP26 in support
of such a goal.
It is possible to move faster. Stricter efficiency and carbon intensity standards would create stronger incentives
for investment in solutions. The Climate Club could provide a forum for trading off progress on these goals
against other concessions and support in the form of partnerships under the first pillar. It could also strengthen
the political will behind knowledge sharing and joint innovation activities under Mission Innovation’s zeroemission shipping work (see 6.3.2) and extend these to more countries, or agree a new innovation fund
capitalised through mandatory contributions from shipowners globally, as endorsed by the International
Chamber of Shipping (ICS, 2021). A further, potentially powerful tool would be to agree ‘green corridors’ –
“specific trade routes between major port hubs where zero-emission solutions have been demonstrated and
are supported” – as sites to jointly promote favourable regulation, subsidise sustainable fuel use, coordinate
on refuelling infrastructure, and convene partnerships between customers, vessel operators and fuel
producers (Mission Possible Partnership, 2021). Potential targets include the iron ore route between Australia
and Japan, and containers between Asia and Europe, implying broad international scope for bargaining.

6.3 Policies and initiatives to advance sectoral decarbonisation
Beyond a carbon price, a diverse package of policies can be used to catalyse innovation and investment for
climate action and sustainable development. The detail will vary according to which industry Club members
choose to prioritise, but in general the use of a suite of available policies will have reinforcing effects. For
example: shared standards allow segmentation of market demand to create lead markets for green products
and incentivise R&D investment; and governments forming buyers’ clubs to guarantee offtake of green
output will make publicly-funded projects more attractive for private co-finance. Concerning lead markets –
to which standards, procurement and state support all can contribute – the Club has an important role to
play to break down perceived zero-sum competition over innovations (Quitzow et al., 2014) and to seek,
where possible, mutually beneficial growth of new industries and approaches – through smooth trade in a
wide range of green products and necessary materials, technology diffusion and financial support.
Most important for the Club’s approach to Pillar 3 is how to pursue policy change in a way that adds value to
existing international coordination efforts. For several years there have been a growing number and variety
of collaborative mechanisms relevant to energy technology innovation, with different institutional
frameworks, mandates, scopes of activities and technology focus areas (IEA, 2019). By contrast, international
governance is relatively new for emissions-intensive industry (Oberthür et al., 2021). Nevertheless, it is an
increasingly crowded space, with various coalitions of governments, private-sector initiatives, and some
public–private groupings all contributing to setting goals and driving progress. Table 6 displays the ecosystem
65

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

of initiatives for our case study sectors, and a selection of available policies, to reveal hotspots and gaps in
the current supply of international governance. In addition to the specialised organisations and initiatives,
the Club could draw on support from the IEA for the technical work to coordinate definitions and discuss
relevant policies. 26
A Climate Club should exploit and galvanise this landscape. By serving as a high-level, strategic forum that
connects international development, trade and sectoral policies, the Club could drive momentum in three
ways: attracting more countries to join existing institutions and encouraging more active participation; acting
as a focal point for collaboration to align priorities and get ahead of overlaps; and pushing for progress on
areas that are currently underserved.
6.3.1 Targets and roadmaps

At the level of overarching policy frameworks, countries can agree to targets for decarbonisation or other
sustainable development objectives that promote the goals of the Paris Agreement in focus sectors. Ideally,
any target is accompanied by interim milestones, as well as by national roadmaps that outline the policy
actions governments intend to take. These frameworks can provide confidence to all players in relevant
sectors and set shared expectations of the development pathway ahead, which can lead private actors to
bring forward investment in anticipation of the proposed changes.
The Breakthrough Agenda, launched by the UNFCCC’s Race to Zero at COP26, offers a framework for
international targets at the highest level in five ‘sectors’. 27 The targets (‘Glasgow Breakthroughs’) are defined
for 2030 and represent goals to develop and rapidly scale up broad categories of low-carbon technology (for
example, ‘near-zero emission steel’).

The Climate Club has a range
of powerful policies to draw
on, but it must navigate – and
generally support – the
existing governance and
initiatives to ensure it adds the
most value.

The focus is primarily on cross-sectoral institutions comparable in nature to an intergovernmental or private sector alliance. Apart from under
standards, the analysis does not address sector-specific coalitions, more of which are covered in Box 6 for selected sectors. Appendix 4 provides
further details of cross-sectoral institutions and sectoral initiatives.
27 The five are power, road transport, steel, hydrogen and agriculture. Note that these overlap and do not all correspond to the same level of analysis:
for instance, hydrogen will have applications in both the steel industry and road transport. Further Breakthrough goals for additional sectors are
under consideration.
66
26

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Table 6: Sectoral coverage of selected major initiatives
SECTOR
POLICY

Hydrogen

Steel

Cement

Ammonia

Shipping

Aviation

Targets

Breakthrough Agenda

Breakthrough Agenda

Mission Innovation

Leadership Group for
Industrial Transitions

Leadership Group for
Industrial Transitions

Leadership Group for
Industrial Transitions

Leadership Group for
Industrial Transitions

Leadership Group for
Industrial Transitions

Leadership Group for
Industrial Transitions

Mission Possible
Partnership

Mission Possible
Partnership

Mission Possible
Partnership

Mission Possible
Partnership (under
‘Chemicals’)

Mission Innovation
Roadmaps

International Energy
Agency

International Energy
Agency & International
Fertilizer Association

Joint R&D

Mission Innovation

Mission Innovation
(under ‘Net-zero’
Industries)

Mission Innovation
(under ‘Net-zero’
Industries)

Mission Innovation
(under ‘Net-zero’
Industries)

Mission Innovation

Standards

International
Partnership for
Hydrogen and Fuel
Cells in the Economy

Worldsteel

Global Cement and
Concrete Association

Sustainable
Agriculture Initiative
Platform (indirectly)

International Maritime
Organization

International Civil
Aviation Organization

First Movers Coalition

Industrial Deep
Decarbonisation
Initiative

First Movers Coalition

First Movers Coalition

World Trade
Organization

World Trade
Organization

Procurement

ResponsibleSteel

Industrial Deep
Decarbonisation
Initiative
State support

World Trade
Organization

World Trade
Organization

Sustainable Aviation
Buyers Alliance
World Trade
Organization

World Trade
Organization

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

The Agenda itself represents an umbrella and has begun to orchestrate efforts by convening dialogues
between other international initiatives working towards shared sectoral goals. Among those are international
groupings that support the development of ambitious roadmaps. The Leadership Group for Industrial
Transition (LeadIT), consisting of governments and companies, facilitates public–private dialogue and
develops evidence (including a database of national and regional roadmaps across the energy, transport and
industrial sectors (Johnson et al., 2022) to promote high-level leadership and speed up technological change.
The Mission Possible Partnership (MPP) is a private sector initiative, backed by the World Economic Forum
and Energy Transitions Commission, that has also carried out deep analysis towards the formation of Parisaligned pathways in heavy industry and international transport. Many industry-specific associations
and institutions have also published their own roadmaps (see Box 6). Another participant is Mission
Innovation, an intergovernmental coalition that sets objectives for technology progress in key sectors (see
R&D investment).
The Climate Club need not set high-level sectoral signals but should endorse progress towards the
Breakthrough goals and seek to support the Agenda’s orchestrating role. It should draw on LeadIT and the
MPP to facilitate members’ drafting of new roadmaps or enhance existing ones to align milestones and
interventions (such as the timing of investment and interim objectives to deploy new technology). This would
serve to deliver the strongest possible signals to international markets. Cross-pillar linkages could encourage
alignment, such as the prospect of new partnerships to finance sectoral priorities and share key technologies,
or through the second pillar, addressing trade concerns that other initiatives identify as barriers to progress.
Value could also be added in fostering commitment to common monitoring and reporting on progress
towards the Breakthrough goals. Through its wider incentives to join the alliance, the Club could also drive a
boost in the membership of these related initiatives, which is currently insufficient, particularly if it made
doing so a condition for participation in other aspects of its third pillar.
6.3.2

R&D investment

As well as the targeted use of public funds on a national basis, Club members may pool resources to support
research, innovation and development. However, there are complications. Firstly, the surplus from
innovation will not be captured proportionately by those who do the most to innovate (Oxley and Sampson,
2004). Secondly, many innovations that will benefit hard-to-abate sectors will be in cross-cutting areas, such
as carbon capture or hydrogen. Coordinating an ambitious approach to investment in innovation is essential.
Mission Innovation (MI) undertakes a wide scope of activities on R&D. Dating back to 2015, it has a broader
membership (of 22 countries plus the European Commission) than more recent institutions and outlines
innovation priorities in its focus sectors, including hydrogen, shipping and ‘net zero industries’. Members
commit to National Innovation Pathways that set out how they will meet their energy and climate goals and
pledge to collaborate internationally through participation in missions and a platform for tracking,
knowledge-sharing, and incubating solutions. For example, in shipping, MI aims to ensure that ships capable
of running on zero-emission fuels make up at least 5% of the global deep-sea fleet by 2030, which would
contribute to the ‘tipping point’ of demand for those fuels (hydrogen, ammonia, etc.; see Box 6). The NetZero Industries Mission was launched in September 2022; progress is envisioned under three pillars:
demonstrations, enabling conditions (such as feasibility studies and regulatory frameworks), and R&D in
breakthrough technologies.
A Climate Club could add value by driving technology diffusion, especially to EMDEs, bolstered by finance and
technology transfer under the first pillar. The Club could provide an additional forum and resources for raising
R&D investment and structuring finance for demonstration projects towards the priorities identified by MI.
Furthermore, it may contribute to deepening knowledge-sharing: extending the offer of collaboration to
EMDEs with material interests in sectors like hydrogen or steel but which are not members of MI; seeking
agreement of common mandates for minimum knowledge-sharing requirements from joint projects; and
68

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

encouraging members to include participation of experts and companies from partner countries in national
research programmes.
6.3.3

Support for common standards and production mandates

Product standards are recognised as a powerful alternative instrument to market-based carbon prices for
driving low-carbon innovation (Grubb et al., 2022). Performance standards have the potential to phase out
inefficient production processes and are technology-agnostic. For instance, both green and blue hydrogen
are expected to be able to meet a low-carbon threshold, depending on the emissions of the electricity used
for electrolysis or the effectiveness of carbon capture during production, respectively. Standards directly on
basic materials (e.g. steel or ammonia) and on final products (e.g. embodied carbon in buildings, or fertiliser)
differ in their impacts. Standards on materials themselves create direct incentives for improved processes
and deployment of new technologies, but not for efficiency through recycling. Final standards incentivise
circular practices, which can dilute the impact on green production technologies. However, they also cut
across sectors – for instance, certificates for embodied carbon in buildings would benefit green production
of both steel and concrete.
The private sector has experience with environmental standards. Broad approaches to measuring Product
Carbon Footprints and Environmental Product Declarations are endorsed by international standards bodies,
such as the International Organization on Standards, the Greenhouse Gas Protocol, and building certifications
like LEED or BREEAM. They provide metrics for measuring embodied emissions in products, including for
specific steel, cement and concrete products, and firms reporting on their products build skills and
infrastructure for compliance with environmental regulation. However, methodologies vary significantly, so
harmonisation must go further for truly transformational measures (Grubb et al., 2022). In the existing large
industries, trade associations are making efforts to define near-zero emission standards, such as worldsteel,
which is defining CO2 emission measurement methodologies for discrete product types. In international
shipping and aviation, energy efficiency and carbon intensity standards are already governed by UN bodies
(IMO and ICAO, respectively) – although these do not supersede or require enforcement through nationallevel regulations (Bodansky, 2018; ICAO, 2022). Broad criteria for sustainable fuels in these sectors are
relatively new, although a range of such measures have recently been defined at national, regional and global
levels (e.g. SSI, 2021).
Importantly, if the Climate Club aims to accelerate the definition and uptake of new international standards,
the processes by which those are developed must be transparent, open, inclusive and consensus-based. The
importance of these principles in the context of international standard-setting has consistently been affirmed
by the WTO membership (WTO, 2022). The technological agnosticism of performance standards
is advantageous here for not discriminating between countries on the basis of their best options
for decarbonisation.
Therefore, Club members could align on near-zero emissions measurement standards in choice sectors, and
set targets for products to meet minimum thresholds according to those measurements. The IEA could
support this work, as it has already begun for the G7 in proposing thresholds for steel and cement (IEA,
2022b). For example, countries could promote a common threshold defining ‘green’ ammonia according to
a single methodology, while also applying an emissions intensity requirement to buyers of fertiliser. Another
opportunity is to harmonise regulations on embodied carbon in new buildings, which would stimulate
demand for low-carbon products across the steel and cement sectors. Finally, seeking alignment on lowcarbon hydrogen could see the Club collaborating with the International Partnership for Hydrogen and Fuel
Cells in the Economy and other stakeholders, like the Hydrogen Council, to agree a common standard
for clean hydrogen. The EU has already taken steps to recognise low-carbon fuels and remove crossborder tariffs to facilitate trade (EC, 2021), which could become the basis of discussions to harmonise with
further countries.
69

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

6.3.4

Green procurement

Public procurement is the use of governments’ purchasing power, which could be directed to favour products
with low lifecycle emissions. Its advantage is that it can create lead markets for these products even before
the comprehensive implementation of subsidies, carbon pricing or standard-based regulation. Green public
procurement initiatives must define the type of target purchased goods have to meet (ranging from adoption
of environmental reporting through to product-level performance targets) and set rules on enforcement
mechanisms for suppliers that do not meet their obligations (Hasanbeigi et al., 2021). There is synergy
between procurement and endorsement of standards, because governments will need to determine relevant
metrics and methods for identifying which types of products are eligible for purchase. The use of
procurement can therefore encourage firms in relevant industries to develop capacity to measure embodied
emissions of their goods and thereby, indirectly, engender transparency that also furthers climate action.
Private procurement commitments can play a similar role to create demand for burgeoning green products;
governments could incentivise companies to make such commitments through fiscal instruments.
A public procurement alliance already exists: the aforementioned Industrial Deep Decarbonisation Initiative
(IDDI), convened by members of the Clean Energy Ministerial. However, its membership is narrow at only
five country governments (as of July 2022) and its sectoral focus is limited to steel and cement. In addition,
the First Movers Coalition consists of over 50 companies making voluntary commitments, with nine country
governments involved as ‘partners’ committed to creating an enabling environment, although with no clear
binding obligations.
The Climate Club’s added value could be to help scale up these initiatives: through attracting more countries
to join the IDDI and to support the First Movers Coalition, thereby catalysing more companies to join the
latter; potentially by serving as a forum for negotiations around further complementary measures to
incentivise companies to join; and generating political momentum and resolving any barriers to expand green
public procurement to more industries, such as ammonia.
6.3.5

State support for near-zero emissions production

Members will also need to set rules for public financial support to industries to advance the goals of sectoral
agreements. Public finance could target demonstration projects (to accelerate innovation) or the deployment
of more mature technology among market participants. Subsidies are also available to support lead market
creation, such as several countries have achieved for electricity generation from renewables (e.g. Nicolini
and Tavoni, 2017).
Carbon contracts for difference (CCfD) are a promising mechanism for supporting roll-out: governments
would guarantee to pay any difference in the cost of production for greener products – with the advantage
of greater certainty for recipients that their investments would be covered over time than afforded by a
short-term, fragmented use of untargeted subsidies (IEA, 2022b). If a group of countries in the Club agreed
to undertake aligned CCfD policies or pool funds for joint investment to support new demonstration projects,
they would achieve more available finance and a stronger market signal than would a single country doing
so alone.

70

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Where governments provide public investment that affects the cost of production, there may be
consequences for competitiveness and trade patterns, which could create political tension and impact
coordination negatively in the medium term. For instance, the Inflation Reduction Act passed in August 2022
by the US Senate has provisions for new and enhanced tax credits to incentivise domestic production of
products throughout the clean energy value chain, including CCUS and hydrogen, and as such may have
consequences for diplomacy with trading partners (Ji et al., 2022). As noted in previous chapters, tradedistortive subsidies may be subject to challenge (or unilateral remedies) under WTO law, where they have
sufficiently serious adverse effects on foreign competitors. In addition, export contingent subsidies and local
content subsidies are prohibited under WTO law, regardless of their environmental purpose. There is
therefore a potential role for a Climate Club in seeking to build consensus on acceptable forms of green public
investment, in terms of a common understanding on the types of activities or firms that could receive finance.
Specific public investment modalities could also feature as conditional uses of financial support provided
under the Club’s first pillar.

Efforts within the Climate Club to build consensus on
acceptable forms of green public investment should
complement initiatives elsewhere, especially within the WTO.
The WTO’s Committee on Trade and Environment is an
The Climate Club should
important venue for multilateral discussions of this kind, with
seek alignment on
which the efforts of the Climate Club should be closely
coordinated. The WTO’s notification procedures – including its
roadmaps, standards, and
Environmental Database – can also play an important role in
public finance interventions
ensuring transparency of relevant measures, offering an
to create lead markets and
opportunity for sharing experiences of and best practice in
efficient policies, and for addressing eventual trade concerns
drive investment and
through relevant WTO committees and bodies (WTO,
innovation in key sectors.
forthcoming). It may also be possible for a critical mass of WTO
members to move ahead on a plurilateral basis – there has
been progress on plurilateral initiatives within the WTO, for example in the areas of digital trade and trade
in information technology products (e.g. Hoekman and Sabel, 2021), though it is recognised that rules on
subsidies are difficult to progress plurilaterally. To complement these efforts, and to reduce the potential
threat to the stability of the international trade regime posed by reactions to divergent climate policy, there
is potential for the Club to host a holistic political debate, seeking to balance and navigate trade-offs across
a suite of policies affecting competitiveness and trade. This activity could be carried out through a working
group explicitly linking the second and third pillars (see 5.4).

6.4 Summary and recommendations
Policy alignment for the transformation of heavy industry or other sectors represents a different value
proposition compared to the Climate Club’s first two pillars. Whereas partnerships require members with
greater means to assist those without, and managing policy diversity involves a give and take over the
incidence of different policies and border measures, under sector approaches countries primarily stand to
enjoy mutual benefits from strategic complementarities. Here, the value of the Climate Club is revealed in its
potential to create linkages, both internally – across the different pillars of the Club and the diversity of
national interests that they represent, and externally – with existing multilateral and plurilateral institutions
set up to drive climate action and sustainable development across a number of sectors.
Rather than seeking to forge new agreements that would bind countries to decarbonisation targets (and
which therefore face significant political hurdles), the pillar would likely function best as a dynamic,
multidimensional forum where countries are free to form sub-groups on industries of importance to their
71

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

national strategies. In the near term, heavy industries like steel, cement or ammonia and ascendent resources
like hydrogen represent a clear target for coordination. Once the Club has been established and its
institutional form stabilised, member countries may also turn their focus to other sectors across energy, land
use or transport, and align on a similar mixture of push and pull policies to scale up key innovations,
investment and infrastructure.
Policymakers seeking to initiate a Climate Club, including the G7 members, should therefore identify and
prepare proposals for internationally coordinated action in sectors salient to their own country’s national
interest. They should also create an institutional framework open enough to accommodate initiatives in other
sectors that may not hold the same value from their own perspective, but that will nevertheless be
instrumental in creating a broad, inclusive alliance to deliver the global public goods of robust climate action,
innovation, investment, trade and sustainable growth.

72

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

7. Conclusions
Action on climate change is urgent. It must be at scale and across all countries and sectors. The science is
clear. Step by step, the world has been coming together behind the climate and temperature goals of the
Paris Agreement and a common vision of transformation. But progress is too slow. Collective ambition must
match the size and urgency of the challenge, and ambition must translate into more rapid action. The
establishment of a Climate Club, as announced in the G7 Leaders’ Statement of 28 June 2022, can give critical
momentum to that shared agenda.
Such a Club must be an alliance of leaders in more ways than one. It will require government leaders to be
engaged because the climate transformation cuts across departmental briefs and investor confidence will
depend on clarity of commitment at the highest level. The climate transformation drives and is indeed
inseparable from the economic transformation towards a new, sustainable, resilient and inclusive model of
growth and development. This is a positive agenda of change, not retrenchment. Climate leadership is
sustainable growth leadership.
As the G7 statement rightly stresses, this is a Club that must be inclusive. An initiative that does not aim for
ambition lacks rationale and legitimacy and would add little to existing processes. But an initiative to
accelerate climate action that does not include countries accounting for most future greenhouse gas
emissions would lack relevance. In fact, the ‘Club’ label, which conveys exclusion, is misleading. ‘Alliance of
(Climate) Leaders’ would better project the spirit of this initiative.
An inclusive Club/Alliance must be so from the start so that it can reflect a diverse membership in its design
and organisation. In particular, it would be counterproductive to invite developing countries to join a ‘rich
men’s club’ not of their making. The last few years have seen a deepening loss of trust, in part stemming from
the handling of the COVID-19 pandemic and the symbolically important failure to deliver on the $100 billion
climate finance target. There is a need for an expressly, intensely cooperative approach. Membership criteria
must reflect this inclusiveness, recognising different starting positions, capabilities, and paths. It is the change
in ambition that matters.
An inclusive Club/Alliance must also accommodate countries with a range of different climate policies.
Various combinations of policies, corresponding to country-specific circumstances, can be effective at
delivering climate ambition. It would be wrong, therefore, to focus the Club/Alliance’s purpose solely on
establishing common carbon pricing, important though that is, and carbon-related trade barriers. Such an
approach would not capture the full range of climate policies and exclude important partners, and it would
risk splitting the global community on the one goal on which it should (and can) come together.
A Club/Alliance would be respectful of international rules, as emphasised in the G7 statement. It should
operate in support of the Paris Agreement and the UNFCCC process, not displace it. It would seek to reinforce
rather than duplicate the deliberations and commitments on climate action across a wide range of fora and
institutions. And it should, in its decisions or the actions it encourages, observe international trade rules. The
rules-based international system has been the bedrock of global progress for more than half a century. It
remains central to international cohesion. Climate goals can be pursued within the rules-based system, taking
great care to avoid their misuse or the perception of misuse for protectionist ends.
A Club/Alliance that promotes ambition with inclusiveness would be one in which countries come together
in a way that otherwise they would not. It would be an aspirational, cooperative structure, building on the
momentum of countries’ net zero commitments and where everyone recognises the urgent need to act. The
Club/Alliance would be an arrangement for discussing mutual challenges and finding mutually beneficial
responses and solutions. It would have a dynamic purpose. It would not seek to agree international treaties
– that would not be a realistic aim with a diverse membership and broad dimensions for action. This
73

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Club/Alliance is an altogether different proposition than a club for insiders that is based around sanctions
for outsiders.
Instead, the Club/Alliance would sit within an architecture of existing coalitions and initiatives, but in
combining top-level political engagement with shared ambition, critical mass, an exclusive focus and
comprehensive coverage of the climate, it would fill a crucial gap in that architecture. The whole set of
climate, sustainability and resilience strategies for development would benefit from the attention and the
traction that an alliance of leaders can bring. Recognising the different interests of a diverse membership,
the work of the Club/Alliance would be organised around three pillars:

Building partnerships.The agenda under this pillar is about collective ambition and enhancing the
ability of countries to deliver on their ambition, to solidify and reinforce commitments. The focus
would be on finance, technology, market access and analytical and action partnerships in support of
climate change mitigation, adaptation and resilience, plus biodiversity objectives.

Managing policy diversity. The agenda under this pillar is to help unblock policy ambition by offering
a framework for handling concerns related to diversity in policy stringency, especially around carbon
leakage and competitiveness in high-emission traded industries. The focus would be on metrics and
on mutual principles, which might be pursued under the WTO umbrella. The principles would include
foundation in evidence; simplicity; focus; and transparency.

Fostering sectoral alignment. The agenda under this pillar is the acceleration of decarbonisation
of high-emission sectors by placing the combined weight of the membership behind mutually agreed
standards and technological pathways. The focus would be on cooperation in fostering change
and overcoming obstacles to discovery and innovation largely through existing public and
private initiatives.

Progress in each of these areas, and throughout the climate and development agendas, will materialise
through investments and technologies. The governance of investments and of technology adoption in each
country, including the investment climate and institutions, are therefore a crucial aspect of the common
endeavour. The Climate Club/Alliance is also a governance alliance.
With respect to the Club/Alliance’s institutional structure, the Club should draw on the experience of the G20
and the Coalition of Finance Ministers for Climate Action (CoFM). On membership, the CoFM model does not
set strict or quantitative entry criteria but has an expectation of commitment to rising climate ambition and
action over time. On leadership, the CoFM’s co-chairing by an advanced economy and an emerging
market/developing economy provides a sense of inclusion and of a focus on the collective agenda. With its
broad agenda, the Club/Alliance needs sponsorship and commitment from the top, rather than from a
particular department within national administrations.
Institutional partners play an important role in the functioning both of the G20 and the CoFM, which have
set up working groups bringing together relevant countries and institutional partners to cover the breadth of
their agendas. The Club/Alliance must ensure that its institutional partners have the trust of the diverse
membership. Finally, an ambitious Climate Club would need a continuous secretariat drawn perhaps from
international institutions but that is organisationally independent of them.
Table 7 on the following page provides an overview of the different building blocks of the Club, with their
core components or focus areas. This report does not presume to provide an exact blueprint for design
features that would be the outcome of diplomatic engagement and bargaining over the foundation of a Club,
and indeed evolve through learning-by-doing. However, Table 7 does propose additional design
considerations to guide the foundational work and future direction of the Club in its first few years.
74

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Table 7: Overview of action areas for the Climate Club
Block
Membership
criteria

Governance

Operations

Pillar 1

Components
• Ambition (progressively
stronger NDCs)
• Action (mix of policies,
comparable and
monitorable)
• Collaboration (clear
commitment to
cooperate)
• Co-leadership by G7 and
non-G7 members from
inception
• Member forum as central
decision-making forum
• Working groups
(standing and ad hoc) for
specific issues
• Core secretariat provided
by IOs and/or founding
member countries but
organisationally
independent
• Participation from
academic institutions and
scientific bodies



Pillar 2

Pillar 3


Strategy, roadmaps,
priorities
Climate and
development finance
Technology partnerships
Technical assistance

Measurement and
monitoring of climate
policy impacts
Forum for agreeing
principles for setting and
updating climate-related
border measures
Incentives to align
roadmaps
Agreements on lowcarbon standards,
knowledge sharing,
public spending
Contribution to
orchestration efforts
among other initiatives

Considerations
• NDC and policy requirements will respect differentiated
approaches across countries.
• Through initial diplomacy, explore options or combine:
1) prioritising a core of the largest countries with most
significant impact on emissions and trade;
2) embracing full diversity and enabling a transformation
across wider international community.

Variable geometry of sectors and policies under
consideration will require careful planning and guidelines
for commitments by members to ensure coherence.
Ministerial forum should be convened at a time and
location to complement other international groupings,
e.g. G20, Coalition of Finance Ministers, Clean Energy
Ministerial.

Establish an organisational core capable of analytical and
logistical support for the member forum, centred on
measurement and monitoring.
• Teams to work closely in step with each other, to
maximise cross-pillar benefits. May require dedicated
staff to ensure coordination.
• Agenda must be dynamic and responsive, setting interim
targets and longer-term working goals in conjunction with
other initiatives (e.g. UNFCCC Breakthrough Agenda).
Initial workstreams could include:
• Bilateral and plurilateral agreements, such as country
platforms.
• Agreements on trajectories for sustainable private finance
regulation.
• Voluntary carbon market access strategies for host
countries and regulatory principles for buyer countries.
• Collective action through multilateral institutions.
Initial workstreams could include:
• Establishing adaptation and revision mechanisms to
reduce legal risk: mechanisms to include non-member
concerns.
• Agreeing assistance required to meet administrative
burdens for CBAMs (in line with WTO compliance).
• Standing WG to support WTO negotiations on subsidies.
Initial workstreams could include:
• Endorsement of key standards developed in conjunction
with specialist organisations: hydrogen, ammonia, steel,
buildings.
• Standing working groups to seek wider member
engagement with LeadIT, MI, IDDI.
• Agreements on aligned public finance policies for a
specific time period, such as contracts for difference.
• Standing working group to support WTO talks on
subsidies.

75

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

References
Agora Industry (2022). International climate cooperation for energy-intensive industry: A (realistic)
proposal.
Aklin M, Mildenberger M (2020). Prisoners of the Wrong Dilemma: Why Distributive Conflict, Not Collective
Action, Characterizes the Politics of Climate Change, Global Environmental Politics (2020) 20 (4): 4–
27.
Barrett S, Dannenberg A (2022). The decision to link trade agreements to the supply of global public goods.
Journal of the Association of Environmental and Resource Economists, 9(2), 273-305.
Bhattacharya A, Stern N (2021a). Our last, best chance on climate. Washington, DC: International Monetary
Fund.
Bhattacharya A, Stern N (2021b). Beyond the $100 billion: financing a sustainable and resilient future.
London: Grantham Research Institute on Climate Change and the Environment, London School of
Economics and Political Science, and Washington, DC: Brookings Institution.
Bhattacharya A et al. (2022). Financing a big investment push in emerging markets and developing economies
for sustainable, resilient and inclusive recovery and growth. London: Grantham Research Institute
on Climate Change and the Environment, London School of Economics and Political Science, and
Washington, DC: Brookings Institution.
Bhattacharya A, Kyriakopoulou D, Stern N (2022). The G20’s Crucial Role in Mobilising Climate Finance.
Observer Research Foundation.
Bierbrauer F, Felbermayr G, Ockenfels A, Schmidt K M, Südekum J (2021). A CO2-border adjustment
mechanism as a building block of a climate club (Research Report No. 151). Kiel Policy Brief.
https://www.econstor.eu/handle/10419/232523.
Blended Finance Taskforce (2019). Better Finance Better World.
Blended Finance Taskforce (2022). Making Climate Capital work: Unlocking $8.5bn for South Africa’s Just
Energy Transition.
BMF (2021). Steps towards an alliance for climate, competitiveness and industry – building blocks of a
cooperative and open climate club. BMF, AA, BMWi, BMU and BMZ.
Bodansky D (2007). International sectoral agreements in a post-2012 climate framework. Pew Center on
Global Climate Change Working Paper. Doi: 10.2139/ssrn.1028187.
Bodansky D (2018). Regulating greenhouse gas emissions from ships: The role of the International Maritime
Organization. In Ocean Law Debates (pp. 478-501). Leiden, The Netherlands: Brill | Nijhoff.
Böhringer C, Balistreri EJ, Rutherford TF (2012). The role of border carbon adjustment in unilateral climate
policy: Overview of an Energy Modeling Forum study (EMF 29). Energy Economics. The Role of Border
Carbon Adjustment in Unilateral Climate Policy: Results from EMF 29. 34S97–S110.
Boyce JK (2018). Carbon Pricing: Effectiveness and Equity. Ecological Economics, 150.
Branger F and Quirion P (2014). Would border carbon adjustments prevent carbon leakage and heavy
industry competitiveness losses? Insights from a meta-analysis of recent economic studies.
Ecological Economics, 99I:29–39.
Buchanan J (1965). An Economic Theory of Clubs, Economica, 32(125): 1–14.
Buchner B et al. (2021). Global Landscape of Climate Finance 2021. Climate Policy Initiative
Cannan E, Pigou A C (1921). The Economics of Welfare, The Economic Journal, 31(122): 206–213.
76

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Carney M (2021). Country Platforms Action Plan.
Chakrabarti S, Bains M, Prizzon A (2022). Future directions for the World Bank and the broader MDB system:
some reflections. Overseas Development Institute Insight.
Chateau J, Jaumotte F, Schwerhoff G (2022). Economic and environmental benefits from international
cooperation on climate policies, International Monetary Fund Departmental Paper Series, March.
Clean Energy Ministerial (2022). Industrial Deep Decarbonisation. Web page.
https://www.cleanenergyministerial.org/initiatives-campaigns/industrial-deep-decarbonisationinitiative/
Climate Action Tracker (2021). Glasgow’s 2030 credibility gap: net zero’s lip service to climate action.
Warming Projections Global Update November 2021. Climate Analytics and New Climate Institute.
Climate Action Tracker (2022). Global reaction to energy crisis risks zero carbon transition: Analysis of
government responses to Russia’s invasion of Ukraine. https://climateactiontracker.org/
documents/1055/CAT_2022-06-08_Briefing_EnergyCrisisReaction.pdf.
Cosbey A, Droege S, Fischer C, and Munnings C (2019). Developing Guidance for Implementing Border
Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature. Rev. Environ.
Econ. Policy, 13(1), 3–22.
CRU (2021). Leveraging a Carbon Advantage: Impacts of a Border Carbon Adjustment and Carbon Fee on
the US Steel Industry. Report for the Climate Leadership Council.
https://clcouncil.org/reports/leveraging-a-carbon-advantage.pdf?v1 Droege S and C Fischer (2020).

Pricing Carbon at the Border: Key Questions for the EU, ifo Institute, Munich, 2020, DICE Report 18
(1): 30-34.

Dechezleprêtre A, Sato M (2017). The Impacts of Environmental Regulations on Competitiveness. Review of
Environmental Economics and Policy, 11(2).
EC [European Commission] (2022). Hydrogen and decarbonised gas market package. Web page.
https://energy.ec.europa.eu/topics/markets-and-consumers/market-legislation/hydrogen-anddecarbonised-gas-market-package_en
EC [European Commission] (2021). Proposal for a Regulation of the European Parliament 15 and of the
Council establishing a carbon border adjustment mechanism. Brussels, Belgium.
Ecologic (2022). What Role for a Climate Club under the German G7 Presidency? Options and
Recommendations for a Climate Club. Policy Brief, February 2022.
ETC [Energy Transitions Commission] (2020). Making Mission Possible: Delivering a Net zero Economy.
ETC [Energy Transitions Commission] (2021). Making the Hydrogen Economy Possible: Accelerating Clean
Hydrogen in an Electrified Economy. https://www.energy-transitions.org/publications/makingclean-hydrogen-possible.
Eskander S, Fankhauser S (2021). The impact of climate legislation on trade-related carbon emissions, 1997–
2017. Centre for Climate Change Economics and Policy Working Paper 395/Grantham Research
Institute Working Paper 367, London School of Economics and Political Science.
Falkner R, Nasiritousi N, Reischl G (2021). Climate clubs: politically feasible and desirable? Climate
Policy 22(4). https://doi.org/10.1080/14693062.2021.1967717
G20 (2020). First G20 Finance Track meeting discusses development finance.
G20 Eminent Persons Group on Global Financial Governance (2018). Making the Global Financial System
Work for All.
G20 Panel (2022). Boosting MDBs’ Investing Capacity, An Independent Review of Multilateral Development
Banks’ Capital Adequacy Framework, submitted to G20 Finance Ministers July 2022.
77

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

G7 (2022a) The outcomes at a glance. https://www.g7germany.de/g7-en/current-information/g7-summitoutcomes-2058314.
G7 (2022b) Statement on Climate Club. http://www.g7.utoronto.ca/summit/2022elmau/220628-climateclub.html.
Gaspar V, Mauro P, Parry I, Pattillo C (2019). Fiscal Policies to Curb Climate Change, IMF Blog, October 10,
2019, https://blogs.imf.org/2019/10/10/fiscal-policies-to-curb-climate-change/.
GCCA [Global Cement and Concrete Association] (2022a). Key Facts. Web page.

Key Facts


GCCA [Global Cement and Concrete Association] (2022b). Concrete Future: The GCCA 2050 Cement and
Concrete Industry Roadmap for Net Zero Concrete. https://gccassociation.org/concretefuture/.
GFANZ – Glasgow Financial Alliance for Net Zero (2021). The Glasgow Financial Alliance for Net Zero: Our
progress and plan towards a net-zero global economy.
GFANZ – Glasgow Financial Alliance for Net Zero (2022). Towards a Global Baseline for Net-zero Transition
Planning.
Global Commission on Adaptation (2019). Adapt Now: A Global Call for Leadership on Climate Resilience.
Rotterdam and Washington, DC: Global Center on Adaptation and World Resources Institute.
Global Investors for Sustainable Development (2021). Increasing private finance mobilization:
Recommendations for development banks and the global development community.
Grubb M, Jordan ND, Hertwich E, Neuhoff K, Das K, Bandyopadhyay KR, van Asselt H, Sato M, Wang R, Guan
D, Pizer B, Oh H (2022). Carbon leakage, consumption and trade. Annual Review of Environment
and Resources 47:1.
Hagen A, Schneider J (2021). Trade sanctions and the stability of climate coalitions, Journal of
Environmental Economics and Management, 109.
Hasanbeigi A, Nilsson A, Mete G, Fontenit G, and Shi D (2021). Fostering industry transition through green
public procurement: A “How to” guide for the cement & steel sectors. Leadership Group for Industry
Transition, United Nations Industrial Development Organisation, and Clean Energy Ministerial.
https://www.cleanenergyministerial.org/initiatives-campaigns/industrial-deep-decarbonisationinitiative/.
Hermwille L, Lechtenböhmer S, Åhman M, van Asselt H, Bataille C, Kronshage S, Trollip H (2022). A climate
club to decarbonize the global steel industry. Nature Climate Change, 1-3.
HMG [Government of the United Kingdom] (2022). COP26 World Leaders Summit – Statement on the
Breakthrough Agenda. Department for Business, Energy and Industrial Strategy (BEIS), and Prime
Minister’s Office. Policy paper. https://www.gov.uk/government/publications/cop26-worldleaders-summit-statement-on-the-breakthrough-agenda-2-november-2021/cop26-world-leaderssummit-statement-on-the-breakthrough-agenda.
Hoekman B, Sabel C (2021). Plurilateral cooperation as an alternative to trade agreements: Innovating one
domain at a time. Global Policy, 12: 49-60.
Holzer K (2014). Carbon-related Border Adjustment and WTO Law. World Trade Institute, University of
Bern, Switzerland.
Humphrey C (2020). All hands on deck. Overseas Development Institute Briefing Paper.
Hydrogen Council (2020). Path to Hydrogen Competitiveness. https://hydrogencouncil.com/wpcontent/uploads/2020/01/Path-to-Hydrogen- Competitiveness_Full-Study-1.pdf.
78

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

ICAO [International Civil Aviation Organization] (2022). About ICAO. Web page. https://www.icao.int/abouticao/Pages/default.aspx.
ICS [International Chamber of Shipping] (2021). Reduction of GHG Emissions from Ships: Comments on a
proposed draft MEPC resolution on zero emission shipping by 2050, and revision of the IMO GHG
Strategy. Submission paper, October. https://www.ics-shipping.org/press-release/shippingindustry-sets-out-bold-plan-to-global-regulator-to-deliver-net zero-by-2050/.
IEA [International Energy Agency] (2019). Energy Technology Innovation Partnerships. Paris: International
Energy Agency. https://www.iea.org/reports/energy-technology-innovation-partnerships.
IEA (2021). COP26 climate pledges could help limit global warming to 1.8 °C, but implementing them will be
the key. Paris: IEA. https://www.iea.org/commentaries/cop26-climate-pledges-could-help-limitglobal-warming-to-1-8-c-but-implementing-them-will-be-the-key.
IEA (2022a). World Allocation of Emissions from Electricity and Heat. [Data extracted on 14 July 2022 from
UKDS.Stat.]
IEA (2022b). Achieving Net Zero Heavy Industry Sectors in G7 Members. Paris: IEA.
https://www.iea.org/reports/achieving-net zero-heavy-industry-sectors-in-g7-members.
IEA (2022c). Ammonia Technology Roadmap. Paris: IEA. https://www.iea.org/reports/ammonia-technologyroadmap.
IFC [International Finance Corporation] (2021a). A green reboot for emerging markets.
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/climate+bus
iness/resources/a+green+reboot+for+emerging+markets.
IFC (2021b) Mobilization of Private Finance by Multilateral Development Banks and Development Finance
Institutions.

https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publicati
ons_listing_page/mobilization+of+private+finance+by+multilateral+development+banks+and+develo
pment+finance+institutions+2019.

Imbabi MS, Carrigan C, McKenna S (2012). Trends and developments in green cement and concrete
technology. International Journal of Sustainable Built Environment, 1, 194–216, doi:
10.1016/j.ijsbe.2013.05.001.
IMF [International Monetary Fund] (2021). Reaching Net Zero Emissions, Report by the IMF Staff submitted
to the G20, June 2021.
IMO [International Maritime Organization] (2020). Fourth Greenhouse Gas Study 2020. London:
International Maritime Organization. https://www.imo.org/en/OurWork/Environment/Pages/
Fourth-IMO-Greenhouse-Gas-Study-2020.aspx.
IPCC [Intergovernmental Panel on Climate Change] (2022a). Summary for Policymakers. In: Pörtner H-O et
al. (eds.) Climate Change 2022: Impacts, Adaptation, and Vulnerability. Contribution of Working
Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
Cambridge, UK and New York NY, USA: Cambridge University Press. pp. 3-33.
doi:10.1017/9781009325844.001
IPCC (2022b). Summary for Policymakers. In: Climate Change 2022: Mitigation of Climate Change.
Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on
Climate Change [Shukla PR et al. (eds.)]. Cambridge University Press, Cambridge, UK and New York,
NY, USA. Doi: 10.1017/9781009157926.001.
Ji SI, Kerschner S, McCormick CS, Pullins T, Rodgers M, Dunham C (2022). Inflation Reduction Act Offers
79

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Significant Tax Incentives Targeting Energy Transition and Renewables. Insight, White & Case.
https://www.whitecase.com/insight-alert/inflation-reduction-act-offers-significant-tax-incentivestargeting-energy-transition.
Johnson O, Shawoo Z, Talebian S, Sanchez F, Machlowska M (2022). Industry Transition Tracker. Stockholm
Environment Institute (SEI). https://www.industrytransition.org/industry-transition-tracker/.
Lankes H P, Soubeyran E, Stern N (2022) Acting on climate and poverty: if we fail on one, we fail on the
other. London: Grantham Research Institute on Climate Change and the Environment and Centre
for Climate Change Economics and Policy, London School of Economics and Political Science.
Lankes H P (2021). Blended finance for scaling up climate and nature investments. Report of the One Planet
Lab. London: One Planet Lab and the Grantham Research Institute on Climate Change and the
Environment.
Leonidas P, A Mandel, K Fragkiadakis, P Fragkos, J Hinkel and Zoi Vrontisi (2019). Climate clubs and the
macro-economic benefits of international cooperation on climate policy, Nature Climate Change,
542(9): 542–546.
McKinsey & Company (2018). Decarbonization of industrial sectors: the next frontier. McKinsey
Sustainability: https://www.mckinsey.com/business-functions/sustainability/our-insights/howindustry-can-move-toward-a-low-carbon-future.
MDB Joint Climate Statement (2021). https://ukcop26.org/mdb-joint-climate-statement/.
MDB Joint report on Multilateral Development Banks’ Climate Finance (2021).
https://www.miga.org/sites/default/files/2021-08/2020-Joint-MDB-report-on-climatefinance_Report_final- web.pdf.
Mehling MA, Asselt H van, Das K, Droege S and Verkuijl C (2019). Designing Border Carbon Adjustments for
Enhanced Climate Action. American Journal of International Law. 113(3):433–481.
Mission Innovation (2022). Industry Roadmap For Zero-emission Shipping. 1st Edition, April. Mission
Innovation: http://mission-innovation.net/missions/shipping/.
Mission Possible Partnership (2021). The Next Wave: Green Corridors. Special report for the Getting to Zero
Coalition. Mission Possible Partnership and World Economic Forum.
https://missionpossiblepartnership.org/the-next-wave-green-corridors-can-get-the-ball-rolling-onthe-transition-to-zero-emission-shipping/.
Munnings C, Acworth W, Sartor O, Y. Kim YG, Neuhoff K (2019). Pricing carbon consumption: synthesizing an
emerging trend. Clim. Policy, 19(1): 92–107.
Neuhoff K et al. (2015). Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing
Mechanisms. Climate Strategies policy paper.
https://www.diw.de/documents/dokumentenarchiv/17/diw_01.c.523297.de/policy-brief-ioc.pdf
Neuhoff K. et al. (2021) Closing the Green Deal for Industry. Climate Friendly Materials Platform.
Net Zero Tracker (2022). Net Zero Stocktake 2022: Assessing the status and trends of net zero target setting
across countries, sub-national governments and companies.
Nicolini M, Tavoni M (2017). Are renewable energy subsidies effective? Evidence from Europe. Renewable
and Sustainable Energy Reviews, 74: 412-423. doi: 10.1016/j.rser.2016.12.032.
Nordhaus W (2015). Climate Clubs: Overcoming Free-riding in International Climate Policy, American
Economic Review, 105(4): 1339–1370.
80

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Obergassel W, Wang-Helmreich H, Hermwille L (2019). A sectoral perspective on climate clubs. COP21:
Results and Implications for Pathways and Policies for Low Emissions European Societies,
Deliverable 4. Wuppertal Institute.
https://epub.wupperinst.org/frontdoor/deliver/index/docId/7547/file/7547_Climate_Clubs.pdf.
Oberthür S, Hermwille L, Rayner T (2021a). A sectoral perspective on global climate governance: Analytical
foundation. Earth System Governance, 8: 100104.
Oberthür S, Khandekar G, Wyns T (2021b). Global governance for the decarbonization of energy-intensive
industries: Great potential underexploited. Earth System Governance, 8, 100072.
OECD (2021). Financial Markets and Climate Transition: Opportunities, Challenges and Policy Implications.
Paris: Organisation for Economic Co-operation and Development.
Okonjo-Iweala N (2021). Adopting a global carbon price is essential. Financial Times, 14 October.
https://www.ft.com/content/b0bcc93c-c6d6-475e-bf32-0d10f71ef393.
Oreskes N, Conway EM (2012). Merchants of Doubt. London: Bloomsbury Publishing Plc.
Osterkamp P, Smith T, Søgaard K (2021). Five percent zero emission fuels by 2030 needed for Paris-aligned
shipping decarbonization. Global Maritime Forum.
https://www.globalmaritimeforum.org/content/2021/03/Getting-to-Zero-Coalition_Five-percentzeroemission-fuels-by-2030.pdf.
Our World in Data (2021). Future Population Growth. https://ourworldindata.org/future-population-growth
Oxley JE, Sampson RC (2004). The scope and governance of international R&D alliances. Strategic
Management Journal, 25(8‐9): 723-749.
Paroussos L, Mandel A, Fragkiadakis K, Fragkos P, Hinkel J and Vrontisi Z (2019) Climate clubs and the
macro-economic benefits of international cooperation on climate policy. Nature Climate Change 9:
542–546. https://doi.org/10.1038/s41558-019-0501-1
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.
Patt A, Lilliestam J (2018). The Case against Carbon Prices, Joule, 2(12).
Quitzow R, Walz R, Köhler J, Rennings K (2014). The concept of “lead markets” revisited: Contribution to
environmental innovation theory. Environmental innovation and societal transitions, 10: 4-19. doi:
10.1016/j.eist.2013.11.002.
Rayner T, Oberthür S, Hermwille L (2021). A sectoral perspective on international climate governance: key
findings and research priorities. Earth System Governance, 8: 100105.
Rissman J, Bataille C, Masanet E, Aden N, Morrow III W R. et al. (2020). Technologies and policies to
decarbonize global industry: Review and assessment of mitigation drivers through 2070. Applied
Energy, 266: 114848.
Royal Society (2021). The role of hydrogen and ammonia in meeting the net zero challenge. Climate Change:
Science and Solutions, Briefing 4 June. Royal Society. https://royalsociety.org/topicspolicy/projects/climate-change-science-solutions/.
Sandler T (2015) Collective Action: Fifty Years Later. Public Choice 164(3/4): 195–216.
http://www.jstor.org/stable/24768825
Sandler T and K Hartley (2001). Economics of Alliances: The Lessons for Collective Action, Journal of
Economic Literature Vol. XXXIX: 869–896.
81

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Schwab, K (2016). Die Vierte Industrielle Revolution, Pantheon Verlag, Munich 2016.
Sembene D, Lee N, Plant M (2022). Country Platforms and Delivery of Global Public Goods. CGD Policy Paper
249. Washington DC: Center for Global Development.
Shawkat A, A Cosbey, O Sartor (2022). International climate cooperation for energy-intensive industry, Agora
Industry.
Shawkat A, Sartor O (2022). Cooperative Carbon Alliances: Defining an Agenda for Global Industrial
Decarbonisation. Wirtschaftsdienst, 102(1): 61-64. doi: 10.1007/s10273-022-3174-8.
SSI [Sustainable Shipping Initiative] (2021). Defining sustainability criteria for marine fuels: Fifteen issues,
principles and criteria for zero and low carbon fuels for shipping. London: Sustainable Shipping
Initiative. https://www.sustainableshipping.org/resources/defining-sustainability-criteria-formarine-fuels/.
Stern N et al. (2021). G7 leadership for sustainable, resilient and inclusive economic recovery and growth:
An independent report requested by the UK Prime Minister for the G7. London: London School of
Economics and Political Science.
Stiglitz JE et al. (2017). Report of the High-Level Commission on Carbon Prices. Carbon Pricing Leadership
Coalition.
Swalec C, Shearer C (2021). Pedal to the Metal: No Time to Delay in Decarbonizing the Global Steel Sector.
Global Energy Monitor. https://globalenergymonitor.org/report/pedal-to-the-metal-no-time-fordelay-in-decarbonizing-global-steel-sector/.
Systemiq (2021). The Paris Effect- COP26 Edition: How Tipping Points can Accelerate and Deliver a
Prosperous Net Zero Economy, London November 2021, https://www.systemiq.earth/wpcontent/uploads/2021/11/The-Paris-Effect-COP26-edition-SYSTEMIQ.pdf.
Tagliapietra S, Wolff G B (2021). Conditions are ideal for a new climate club, Energy Policy, 158.
Task Force on Climate, Development and the International Monetary Fund (TCD-IMF) (2022). Global Impact
of EU’s Carbon Border Adjustment Mechanism: A Quantitative Assessment.
UNCTAD (2021). A European Union Carbon Border Adjustment Mechanism: Implications for developing
countries. United Nations Conference on Trade and Development.
UNEP (2021). Addendum to the Emissions Gap Report 2021: A preliminary assessment of the impact of new
or updated nationally determined contributions, other 2030 pledges and net zero emissions pledges
announced or submitted since the cut-off dates of the Emissions Gap Report 2021.
https://wedocs.unep.org/bitstream/handle/20.500.11822/37350/AddEGR21.pdf.
von Lüpke H, Neuhoff K and Marchewitz C (2022) Bridges over troubled waters: Climate clubs, alliances, and
partnerships as safeguards for international cooperation? Berlin: The German Institute for
Economic Research – DIW Berlin.
WEF [World Economic Forum] and Wyman O (2021). Financing the Transition to a Net zero Future.
https://www.weforum.org/reports/financing-the-transition-to-a-net zero-future.
WEF (2021). Shaping an Equitable, Inclusive and Sustainable Recovery: Acting Now for a Better Future, WEF
Briefing Paper, September 2021; with Stern, Lankes, Pierfederici, Grantham Research Institute,
London School of Economics and Political Science.
WEF (2022a). A New Era for Investment, Finance and Internationalism: Action Now to Deliver a Sustainable,
Resilient and Inclusive Future, Davos White Paper, May 2022; with Stern, Lankes, Pierfederici,
Grantham Research Institute, London School of Economics and Political Science.
WEF (2022b). The Choreography Needed for Net Zero Industry Transition. https://www.weforum.org/
82

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

whitepapers/the-choreography-needed-for-net zero-industry-transition/.
World Bank (2015). From Billions to Trillions: MDB Contributions to Financing for Development.
World Bank (2019) State and Trends of Carbon Pricing 2019. Washington, DC: World Bank.
https://openknowledge.worldbank.org/handle/10986/31755.
World Bank (2022) World Bank Group approaches to mobilize private capital for development: an
independent evaluation. Washington DC.
https://openknowledge.worldbank.org/handle/10986/35040
worldsteel [World Steel Association] (2022). December 2021 crude steel production and 2021 global crude
steel production totals. https://worldsteel.org/media-centre/press-releases/2022/december-2021crude-steel-production-and-2021-global-totals/.
WTO [World Trade Organisation] (1947) The General Agreement on Tariffs and Trade.
https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm.
WTO (1947b). WTO rules and environmental policies: GATT exceptions.
https://www.wto.org/english/tratop_e/envir_e/envt_rules_exceptions_e.htm.
WTO (2020) Short Answers to Big Questions on the WTO and the Environment.
https://www.wto.org/english/res_e/publications_e/envirqapublication_e.htm.
WTO (2022). Principles for the Development of International Standards, Guides and Recommendations.
Web page. https://www.wto.org/english/tratop_e/tbt_e/principles_standards_tbt_e.htm.
WTO (forthcoming). World Trade Report 2022 – Climate Change and Trade.

83

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Appendix 1. Profile of key existing institutions in the climate arena
The climate challenge is pervasive and a wide variety of international fora and institutions, public and private,
are creating climate objectives. Nevertheless, and despite notable progress, commitments and action are far
from sufficient to meet the Paris climate goals. Existing arrangements may lack the top-level engagement to
break through logjams; they may be held back by members who lack ambition; they may not have the critical
mass, in terms of control over greenhouse gas emissions, to make enough of a difference; they may deal with
a variety of topics and urgent developments can side-line the climate; and/or they may have responsibility
for only one or a few climate and sustainable-growth related subjects, which makes it harder to internalise
‘gains from trade’ across different areas and opportunities.
To be effective at driving collective ambition with greater urgency and scale, arrangements would need to
combine strengths in each of these five areas. Specifically, they would need:
• Engagement at the top leadership level
• Shared member ambition
• Critical mass
• A focus on the climate agenda
• Comprehensive coverage of climate topics.
The heat map on the next page classifies key existing international fora and institutions by the degree to
which they satisfy these criteria, with the scoring factors set out beneath the heat map. Darker colours reflect
a stronger match, lighter colours indicate lesser strength. It is left implicit in this table that a Climate Club,
to be effective and add value to the existing institutional architecture, would need to score strongly on all
these dimensions.

84

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Heat map showing the degree to which international institutions and fora satisfy criteria for driving
climate ambition
Institution/
forum

Top political
engagement

Shared
ambition

Critical mass

Focus on climate

Comprehensive
coverage of
climate

G20
NDC Par’ship
UNEP
UNIDO
OECD
IEA
IMF
COFM
WTO T&E
Committee
NGFS
GFANZ

n/a

n/a

n/a

n/a

n/a

n/a

Breakthrough
Agenda
Mission
Innovation
Clean Energy
Ministerial
LeadIT
Mission Possible
Partnership
First Movers
Coalition

The scoring criteria used to generate the heat map and respective colour coding are as follows.
Top-level political engagement: relates to the political level in key member states at which agendas are set
and agreements reached.
1. Technical / sub-ministerial level responsibility
2. Ministerial (or equivalent) level responsibility
3. Responsibility at level of head of state or government

85

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Shared member ambition: relates to the extent to which membership is conditioned on (or aligned with) an
express commitment or ambition to meet climate stretch targets explicitly aligned with the most ambitious
Paris goals – i.e. going beyond existing NDCs towards achieving 1.5°C pathways or aligning supportive policies
or financial portfolios with net zero.
1. Membership is not conditioned on ambition, and reflects varying levels of commitment
2. Membership reflects shared ambition but is not conditioned on commitment to specific targets
3. Membership limited to countries and entities with credible commitment to ambition defined by
specific targets
Critical mass: relates to the extent to which decisions by the membership would impact global
climate outcomes.
1. Membership represents < 20% of global greenhouse gas emissions 2. Membership represents 20-50% of global greenhouse gas emissions 3. Membership represents >50% of global greenhouse gas emissions
Focus on the climate agenda: this reflects the extent to which climate (and sustainable development and
growth) represents the core of the agenda.
1. Climate is one of several priorities and may be side-lined depending on events
2. Climate and sustainable development and growth is one of a small number of priorities
3. Climate and sustainable development and growth is the exclusive focus
Comprehensive coverage of climate topics: this relates to the breadth of the climate agenda for which the
forum/institution/initiative takes responsibility, including sectoral topics and considering process goals.
1. Focus is on one particular or a small set of climate-related topics
2. Fairly wide range of topics covered, but nevertheless excluding important aspects
3. In principle, full range of climate topics covered (i.e. unrestricted by sector, government function,
etc.)

86

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Appendix 2. Carbon pricing and leakage
Internalising the cost of greenhouse gas emissions has been considered by many economists and
policymakers as the most cost-effective way to mitigate emissions. Carbon pricing captures what are known
as the external costs of carbon emissions, costs that are paid by the public – e.g. in the form of impacts from
climate change – and shift the burden for the damage back to the polluters who are responsible for it (Pigou,
1920; Stiglitz et al., 2017; Boyce, 2018). In addition, it provides incentives to reduce energy use and shift to
cleaner fuels and it is an essential price signal for redirecting new investment to clean technologies.
In the case of explicit carbon pricing, it can also generate useful public revenues during the transition to a
green and sustainable economy (World Bank, 2019a). When the resulting revenues are sensibly deployed,
carbon pricing can be part of a tax system that is progressive overall and therefore contribute to addressing
the distributional issues associated with the low-carbon transition (Klenert and Mattauch, 2016).
Article 6 of the Paris Agreement provides a basis for facilitating international recognition of cooperative
carbon pricing approaches. Many of the plans submitted to the UNFCCC recognise the important role of
carbon pricing, with about 100 countries planning or considering carbon pricing mechanisms in their intended
NDCs (United Nations, 2021).

Carbon pricing regimes and models
Different types of policies and measures put an explicit or implicit price on greenhouse gas emissions.
Examples of explicit carbon pricing instruments include:


Carbon taxes and emissions trading systems (ETS)
Crediting mechanisms
Shadow carbon prices and internal carbon fees.

Examples of implicit carbon pricing include:



Renewable energy and energy efficiency support measures
Codes and standards
Fossil fuel energy taxes
Fossil fuels subsidies (that act as a negative carbon price).

Below we provide a brief overview of the main carbon pricing instruments.
Explicit carbon pricing
Carbon taxes and emissions trading systems (ETS)

Explicit carbon pricing mechanisms are usually enacted by a government mandate and take the form of either
a carbon tax or an ETS. In the case of a carbon tax, the government determines the price on greenhouse gas
emissions, generally by levying a tax, levy or charge on fossil fuels, and lets market forces determine the
quantity of emissions reductions. In the case of an ETS, a market price for greenhouse gas emissions is
established, by creating supply and demand for emissions units. The two main types of ETS are cap-and-trade
and baseline-and-credit:

Cap-and-trade systems apply a cap on the emissions within the ETS. Emissions allowances are
allocated, for free or through auctions, for the amount of emissions equivalent to the cap. It provides
certainty about the emissions reduction, but the price remains flexible and determined by the
market.

87

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Baseline-and-credit systems define baseline emissions levels for individual regulated entities, with
credits issued to entities that have reduced their emissions below this level. These credits can be sold
to other entities exceeding their baseline emission levels.

Compared to an ETS, a carbon tax is administratively less complex, but can often face strong social opposition.
Crediting mechanisms

Crediting mechanisms create tradable credits from voluntarily implemented emission reduction or removal
activities. Credits can be issued by governments or alternatively under international mechanisms, like the
Article 6.4 mechanism under the Paris Agreement. They can also be generated through independent
standard-setting organisations.
Credits can be used by companies to meet their obligations under a carbon tax or ETS or as part of a
company’s net zero strategy. The sum of credit transactions used for voluntary commitments is commonly
referred to as the ‘voluntary carbon market’.
Internal carbon pricing

Internal carbon pricing is a tool used voluntarily by different organisations to guide investment decisions and
raise revenues for other mitigation/adaptation programmes. An increasing number of organisations are using
internal carbon pricing:

Private companies use internal carbon price – often as an internal carbon fee where different units
pay a carbon price – to support corporate investment decisions and shift to lower-carbon business
models (CDP, 2021).
Some governments use internal carbon pricing as a tool in their procurement process or assess the
costs and benefits of policies. Multilateral development banks, including the World Bank, use an
internal carbon price when evaluating public investments.
Financial institutions have also begun using internal carbon pricing to assess their project portfolio.

Climate governance initiatives and the resulting corporate climate commitments encourage the adoption of
an internal carbon price.
Implicit carbon pricing

Greenhouse gas emissions can also be implicitly priced through other policy instruments such as the removal
of fossil fuel subsidies, energy taxation, support for renewable energy or standards and regulations.
Theoretically it is possible for many non-price-based policies to estimate the associated equivalent monetary
value per tonne of carbon (World Bank, 2019; OECD, 2019), known as the implicit carbon price. This could
enable a comparison of the stringency of different mitigation policies across countries. Nevertheless, the
debate around the quantification approach and the methodology for estimating implicit carbon pricing and
comparing price-based and non-price-based policies is still open (see Box 5, Chapter 5
on equivalences).

88

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Table A1: Carbon pricing initiatives implemented at national/federal level

1

Jurisdiction
covered

Type

Share of
jurisdiction’s
GHG emissions
covered

Sectors and/or fuels covered

Argentina

Carbon tax

20%

All sectors with some exemptions; almost all liquid fuels and some
solid products (mineral coal and petroleum coke).

Austria

ETS

40%

Power, Industry, Buildings, Road Transport; Coal, Natural Gas,
Gasoline, Diesel, Other (LPG, kerosene etc).

Canada

ETS

7%

Industrial facilities that emit 50 ktCO2e per year or more and are
engaged in specific activities in emissions-intensive and tradeexposed sectors; industrial facilities that emit above 10 kt CO2e per
year can apply to participate voluntarily. It is a baseline-and-credit
ETS that comes into effect, in whole or in part in any province or
territory that requested it or that does not have a price on carbon
in place that meets the federal standard.

Canada

Carbon tax

22%

21 types of fuel delivered, transferred, used, produced, imported
or brought into a province and territory where the federal fuel
charge applies; plus combustible waste (e.g. tyres, asphalt
shingles). 1

Chile

Carbon tax

29%

Power and industry sectors (installations with an installed thermal
power exceeding 540 MW between boilers and turbines); all fossil
fuels.

China

ETS

33%

Power sector, including combined heat and power and captive
power plants from other sectors.

Colombia

Carbon tax

23%

All sectors with some minor exemptions; all liquid and gaseous
fossil fuels used for combustion.

Denmark

Carbon tax

35%

Buildings and transport sectors; all fossil fuels.

EU, Norway,
Iceland,
Liechtenstein

ETS

41%

Power sector, manufacturing industry, and aviation (including
flights from the EEA to the UK).

Estonia

Carbon tax

6%

Industry and power sectors; all fossil fuels used to generate
thermal energy.

Finland

Carbon tax

36%

Industry, transport and buildings; all fossil fuels except peat.

France

Carbon tax

35%

Industry, buildings and transport sectors; all fossil fuels.

Germany

ETS

40%

Buildings and road transport; all fossil fuels.

Iceland

Carbon tax

55%

All sectors with some exemptions; liquid and gaseous fossil fuels.

Ireland

Carbon tax

40%

All sectors with some exemptions; all fossil fuels.

Japan

Carbon tax

75%

All sectors with some exemptions.

Kazakhstan

ETS

46%

Power, centralised heating, certain industry sectors.

Canada implements carbon pricing nationally through a mix of federal, provincial and territorial carbon pricing systems. The Government of Canada
sets minimum national stringency requirements that all pricing systems in Canada must meet. This table only reports on Canada’s federal carbon
pricing system, which only applies in those jurisdictions that do not have a provincial or territorial system in place. Analyses have found that across
Canada, approximately 78% of total greenhouse gas emissions are covered under carbon pricing systems.
89

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Korea, Republic
of

ETS

73%

GHG emissions from the industry, power, buildings, domestic
aviation, public sector and waste sectors.

Latvia

Carbon tax

3%

Industry and power sectors not covered under the EU ETS; all fossil
fuels except for peat.

Liechtenstein

Carbon tax

81%

Industry, power, buildings and transport sectors; all fossil fuels.

Luxembourg

Carbon tax

65%

Fossil fuels used for transportation and heating.

Mexico

Carbon tax

44%

All sectors; all fossil fuels except natural gas.

Mexico

ETS

40%

Power and industry sectors.

Netherlands

Carbon tax

12%

Industry, waste; All fossil fuels.

New Zealand

ETS

49%

GHG emissions from the industry, power, waste, transport and
forestry.

Norway

Carbon tax

63%

GHG emissions from all sectors with some exemptions; liquid and
gaseous fossil fuels.

Poland

Carbon tax

4%

GHG emissions from all sectors with some exemptions; all fossil
fuels and other fuels leading to GHG emissions.

Portugal

Carbon tax

36%

Industry, buildings and transport sectors with some exemptions; all
fossil fuels.

Singapore

Carbon tax

80%

Direct emissions from facilities emitting 25 ktCO2e or more in a
year, covering all sectors.

Slovenia

Carbon tax

52%

GHG emissions from buildings and transport sector; natural gas and
all liquid and solid fossil fuels.

South Africa

Carbon tax

80%

Industry, power, and transport sectors.

Spain

Carbon tax

2%

Fluorinated GHG emissions only from all sectors with some
exemptions.

Sweden

Carbon tax

40%

Transport and buildings sector; all fossil fuels.

Switzerland

ETS

11%

GHG emissions from the industry and power sectors.

Switzerland

Carbon tax

33%

All fossil fuels used in heating and industrial processes.

United Kingdom

Carbon tax

21%

Power sector; all fossil fuels.

United Kingdom

ETS

28%

Energy-intensive industries, power sector, and aviation within the
UK and European Economic Area.

Ukraine

Carbon tax

71%

Industry, power, and buildings sectors; all fossil fuels.

Uruguay

Carbon tax

11%

Gasolines for any use.

Notes: In classifying carbon pricing initiatives we follow the approach of the World Bank’s Carbon Pricing Dashboard: initiatives are
classified as ETSs and carbon taxes according to how they operate technically; the local terminology may differ from this classification.
ETS does not only refer to cap-and-trade systems, but also baseline-and-credit systems such as in British Columbia.
The table covers only carbon pricing initiatives implemented at the national level. As of 1 April 2022, the World Bank had mapped a
further 36 subnational initiatives, implemented in the US, Canada, China, Japan and Mexico.
Source: https://carbonpricingdashboard.worldbank.org/map_data

90

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Global trends in carbon pricing
Carbon taxes and emissions trading systems (ETS)

As of 1 April 2022, a total of 68 carbon pricing initiatives (ETSs and carbon taxes) were in operation around
the world (including 46 countries and 36 subnational jurisdictions), covering over 20% of global greenhouse
gas emissions, 36 of which are carbon taxes and 32 of which are emissions trading schemes (World Bank,
2022).
In 2020 the carbon pricing instruments generated globally $53 billion in revenue, a 17% increase in revenue
from the previous year, mostly due to the increase in the EU allowance price. However, the full potential of
carbon pricing remains largely untapped (World Bank, 2021).
Within the G7, the EU countries, Japan, Canada and the UK have national carbon prices. The US has a partial
carbon pricing system.
G20 economies priced 49% of CO2 emissions from energy use in 2021, up from 37% in 2018. The increase
was mostly driven by new emissions trading systems (ETS) in Canada, China and Germany, new carbon levies
in Canada, and a new carbon tax in South Africa, as well as Mexico’s introduction of carbon taxes at the
subnational level. Currently, 13 G20 economies have explicit carbon pricing instruments in place or
participate in the EU ETS. The share of emissions covered by carbon prices varies substantially across G20
economies with Korea in the lead at 97% of emissions priced. G20 emissions pricing is highest in road
transport, where 94% of emissions are covered by fuel excise taxes) (OECD, 2021).
New carbon pricing initiatives:



China launched its national ETS in February 2021, becoming the world’s largest carbon market,
initially covering 30% of its national greenhouse gas emissions.
The UK and Germany both launched national carbon markets and carbon taxes in the Netherlands
and Luxembourg came into operation.
Some significant changes have been proposed to the EU ETS, including the reduction of the emissions
from the EU ETS sectors by 61% by 2030, compared to 2005 levels; the extension to emissions from
maritime transport and the introduction of a carbon border adjustment mechanism (CBAM).
In March 2022, Indonesia established the legal framework for a domestic emissions trading system.
Pilot ETSs are being considered in a number of countries, including Colombia and Thailand.

Crediting mechanisms

As of 1 April 2021, there were 26 carbon crediting mechanisms under implementation, while five carbon
crediting mechanisms were under development. The year 2020 has seen significant growth in carbon credit
markets, with the number of registered projects increased by 11% in 2019–2020. The number of credits
issued also increased by 10% over the same period (World Bank, 2021).
Internal carbon pricing

At the corporate level, more than 850 companies globally across different sectors are using an internal carbon
price. Nearly half of the largest 500 companies in the world by market value already have an internal carbon
price or intend to adopt one in the coming two years. While internal carbon prices fall short of Paris
Agreement aligned prices, it often exceeds regulatory prices (World Bank, 2021).

91

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Figure A1: Carbon pricing map (2021)

Notes: The large circles represent cooperation initiatives on carbon pricing bet ween subnational jurisdictions. The small circles
represent carbon pricing initiatives in cities. In previous years, Australia was marked as having an ETS in operation. However, the
Safeguard Mechanism functions like a baseline-and-offsets program, falling outside the scope of the definition of ETS used in this
report. Therefore, the system was removed from the map. Rio de Janeiro and Sao Paolo were marked as considering the
implementation of an ETS based on scoping work done in 2011 and 2012 respectively. Given there have been no updates since, the
these were removed from the map.
Carbon pricing initiatives are considered “scheduled for implementation” once they have been formally adopted through legislation
and have an official, planned start date. Carbon pricing initiatives are considered “under consideration” if the government has
announced its intention to work towards the implementation of a carbon pricing initiative and this has been formally confirmed by
official government sources. The carbon pricing initiatives have been classified in ETSs and carbon tax es according to how they
operate technically. ETS not only refers to cap-and-trade systems, but also baseline-and-credit systems as seen in British Columbia.
The authors [World Bank, 2021] recognise that other classifications are possible.
Source: World Bank (2021)

92

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Figure A2. Carbon prices as of 1 April 2021

Notes: Nominal prices on April 1, 2021, shown for illustrative purpose only. China national ETS, Mexico pilot ETS and UK ETS are not
shown in this graph as price information is not available for those initiatives. Prices are not necessarily comparable between carbon
pricing initiatives because of differences in the sectors covered and allocation methods applied, specific exemptions, and different
compensation methods. *The 2020 carbon price corridor is the recommendation of the World Bank’s 2017 High-Level Commission.
Source: World Bank (2021).

Recommendations on carbon pricing
For a carbon pricing mechanism to work, there are some conditions that need to be met: it must be
sufficiently ambitious; account for distributional issues; be adapted to the different countries’ context; and
be part of a broader policy package.
Ambition and equity

The High-Level Commission on Carbon Prices (Stiglitz et al., 2017) suggested that prices would need to be in
the $40–$80/tCO2e range by 2020 and $50–$100/tCO2e range by 2030 to meet the ‘well below 2°C’
temperature goal of the Paris Agreement. So far, the observed carbon prices in the recommended range
cover less than 5% of global emissions (World Bank, 2021). Among the carbon pricing schemes implemented
worldwide, only 13 have carbon prices above $40. These include ETS implemented in the EU, UK, Switzerland
and New Zealand, as well as carbon taxes implemented in some European countries (World Bank 2022).
Although necessary for transitioning to a carbon neutral world, higher carbon prices are likely to pose social
equity issues and resistance (Huang et al., 2019; Wang et al., 2019; Hourcade et al., 2018). When designing a
carbon pricing mechanism, it would be important to assess the distributional impacts of the policy and adopt
measures that account for distributional effects. A sensible allocation of revenues from carbon pricing or
from anti-leakage measures can increase the fairness of the instrument and allow for higher political and
social acceptability.
93

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Country context

To be effective, carbon pricing needs to be adapted to the different countries’ context. The choice of which
carbon pricing instrument to implement – and whether to implement it at all – should be based on a country’s
economic and social circumstances and be aligned with the broader policy priorities. ETSs and carbon taxes
are increasingly being used in complementary ways within the same country, with features of both
types often combined. Some initiatives also allow the use of credits from offset mechanisms as flexibility
for compliance.
The country context should also be factored in when identifying the appropriate carbon price levels. In some
developing countries the appropriate price range might be lower than in advanced economies, partly because
complementary policies may be less costly than carbon pricing and distributional issues more prominent
(Stiglitz et al., 2017).
Some countries have struggled to reach political agreement on carbon pricing at the national level. It is
important then to acknowledge the difficulty of achieving social and political consensus on carbon pricing
and recognise the possibility for different jurisdictions to follow different avenues in the achievement of
climate goals. This might entail combining price- and non-price-based measures in a broader policy mix.
A broader policy package

There is a broad agreement that carbon pricing alone is unlikely to drive down emissions sufficiently and
equitably. Instead, carbon pricing should be part of a broader policy package. A well-designed and
comprehensive policy mix could combine carbon pricing, standards and regulations as well as
complementary policies to support innovation, investments and address distributional impacts.

Impacts of carbon pricing
Impact on emissions

The full effectiveness of climate policies in the industrial sector is still poorly known as the sector has
been largely sheltered from the impacts of mitigation measures due to concerns on competitiveness and
carbon leakage.
Nevertheless, some analysis of carbon pricing mechanisms show that they generally lead to emissions
reductions, even in sectors that receive free allocation (Bayer and Aklin, 2020; Narassimhan et al., 2018;
Martin et al., 2016; Haites et al., 2018; Metcalf, 2019). However, those emissions reductions might be
modest, due to low carbon prices (Dechezleprêtre et al., 2018). As shown above, most carbon prices are still
well below the levels needed to reach net zero emissions.
Impact on technology development

In terms of technology development, there is evidence that long-term carbon pricing can incentivise
investment and low carbon innovation (Calel and Dechezleprêtre, 2016; Rogge, 2016), with higher innovation
occurring in developing countries, where carbon pricing can help correct some of the energy inefficiency
(Pigato, 2019). Nevertheless, some studies show that carbon pricing promotes mainly incremental low-cost
technologies, rather than investments in radical technical change (Rosenbloom et al., 2020; Stiglitz 2019;
Vogt-Schilb et al., 2018; Grubb, 2014).
Impact on competitiveness and carbon leakage
Carbon leakage

Fragmentation of carbon pricing mechanisms and climate policies across countries has been raising concerns
about competitiveness and carbon leakage.
94

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Policy-related carbon leakage refers to the situation where, due to international differences in climate
policies, companies relocate emissions-intensive operations to jurisdictions with weaker emission
regulations. This practice can undermine the effectiveness of mitigation policies as well as the legitimacy of
claimed national emissions reductions. 2
The risk of carbon leakage is mainly linked to the carbon intensity of production and the ability to pass
through carbon costs to product prices (Sato et al., 2014). Carbon intensive activities are highly concentrated,
with two-thirds of industrial emissions, or roughly 25% of global greenhouse gas emissions, linked to the
production of basic materials. Consequently, the risk is considerably higher in emissions-intensive, tradeexposed (EITE) sectors – e.g. cement, steel, and aluminium – where highly emitting industries are unable to
pass costs downstream due to international competition (Mehling et al., 2019).
Despite widespread concerns, studies continue to find no evidence that domestic climate legislation has
increased international carbon leakage over the past two decades (Eskander and Fankhauser, 2021). This is
primarily because key industrial sectors remain largely shielded from significant CO2 costs through
exemptions, free allocation and historically low carbon prices, like in the case of the EU ETS (Naegele and
Zaklan, 2019; Verde 2020; Branger et al., 2016; Dechezleprêtre et al., 2018). It must be noticed that most
studies on the EU ETS have focused on the first and second trading period of the EU ETS, and that even studies
using recent data have not factored in the much higher current EU ETS prices (Verde, 2020).
Competitiveness

Empirical literature on the EU ETS shows that firms have experienced minimal impact on competitiveness or
profitability (Verde, 2020), though a few sectors have faced some impacts (Dechezleprêtre et al., 2018). One
main explanation is again the large (over-)allocation of emissions allowances. Moreover, firms were able to
pass costs on to consumers in some sectors which partly generated windfall profits (Joltreau and
Sommerfeld, 2018). Nevertheless, results from empirical studies on cost pass-through and competitiveness,
can differ widely (see World Bank, 2019b for a summary of empirical analyses).
While the majority of studies focus on short-term competitiveness and leakage impacts associated with trade
flows, very little is explored on whether the EU ETS has had long‐term effects on the economy via investment
leakage or firm dynamics (Verde, 2020). Indeed, energy-intensive sectors are characterised by high fixed
plant costs and immobile physical capital, which make it hard to relocate factories. What seems more realistic
is leakage occurring through shifting new investments abroad, but this process is harder to detect due to the
challenge of getting firm-level data and the fact that the impact of investment decisions can take several
years to occur. In terms of impact of investment decisions, these impacts were also found to be small and
concentrated in only a few sectors. Furthermore, some studies conclude that other factors – including access
to raw material or transport costs – have played a more significant role than carbon pricing on a firm’s profits
and competitiveness (Dechezleprêtre and Sato, 2017).
Export-related leakage

A form of leakage that is often overlooked is export-related leakage, which occurs when carbon leakage
results from lack of competitiveness in export markets, where the exported product is replaced by more
carbon-intensive products from jurisdictions with less stringent carbon constrains. Ex-ante literature has
shown higher leakage rates if exports are not addressed (Branger and Quirion, 2014). An EU survey showed
that exports are material in terms of their share of total EU production in each related sector, and that by

2

According to the ‘production emission accounting’, in principle a country can take credit for territorial emissions reductions by outsourcing the
production of goods that are consumed domestically. This poses questions around allocating the responsibility of emissions increases in some
developing countries that are exporting to advanced economies. Some suggested a consumption-based accounting as a way to address the fairness
concerns in allocating responsibility for current emissions.
95

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

not addressing exports there is a high likelihood that foreign production replacing EU exports may result in
carbon leakage (ERCST, 2022).

References
Bayer P, Aklin M (2020). The European Union Emissions Trading System reduced CO2 emissions despite low
prices. Proc. Natl. Acad. Sci. U. S. A., 117(16).
Boyce JK (2018). Carbon Pricing: Effectiveness and Equity. Ecol. Econ., 150.
Branger F, Quirion P (2014).Would border carbon adjustments prevent carbon leakage and heavy industry
competitiveness losses? Insights from a meta-analysis of recent economic studies, Ecological
Economics, 99 (2014): 29-39.
Branger F, Quirion P, Chevallier J (2016). Carbon Leakage and Competitiveness of Cement and Steel Industries
under the EU ETS: Much Ado about Nothing. Energy Journal 373 (3): 109–35.
Calel R, Dechezlepretre A (2016). Environmental policy and directed technological change: evidence from the
European carbon market. Review of Economics and Statistics, 98 (1): 173-191.
CDP (2021). Putting a price on carbon. The state of internal carbon pricing by corporates globally.
Dechezleprêtre A, Nachtigall D, Venmans F (2018). The joint impact of the European Union emissions trading
system on carbon emissions and economic performance, OECD Economics Department Working
Papers 1515, OECD Publishing.
Dechezleprêtre A, Sato M (2017) The Impacts of Environmental Regulations on Competitiveness. Review of
Environmental Economics and Policy 11(2). https://doi.org/10.1093/reep/rex013
ERCST (2022) Border Carbon Adjustment in the EU: Treatment of Exports in the CBAM.
Eskander S, Fankhauser S (2021) The impact of climate legislation on trade-related carbon emissions, 1997–
2017. Centre for Climate Change Economics and Policy Working Paper 395/Grantham Research
Institute on Climate Change and the Environment Working Paper 367. London: London School of
Economics and Political Science.
Grubb M (2014). Planetary Economics. Routledge.
Haites E et al. (2018) Experience with carbon taxes and greenhouse gas emissions trading systems. Duke
Environmental Law & Policy Forum.
Holzer K (2014) Carbon-related Border Adjustment and WTO Law. Cheltenham, UK and Northampton MA,
USA: Edward Elgar.
Hourcade JC, Pottier A, Espagne E (2018). Social value of mitigation activities and forms of carbon pricing. Int.
Econ.: 155, 8–18.
Huang H et al. (2019). Emissions trading systems and social equity: A CGE assessment for China. Appl. Energy,
235, 1254–1265.
Klenert D, Mattauch L (2016). How to make a carbon tax reform progressive: The role of subsistence
consumption. Economics Letters 138: 100-103.
Martin R, Muûls M, Wagner UJ (2016). The impact of the European Union emissions trading scheme on
regulated firms: What is the evidence after ten years? Rev. Environ. Econ. Policy.
96

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Mehling MA, Asselt H van, Das K, Droege S, Verkuijl C (2019). Designing Border Carbon Adjustments for
Enhanced Climate Action. American Journal of International Law, 113(3):433–481.
Metcalf GE (2019). On the Economics of a Carbon Tax for the United States. Brookings Papers on Economic
Activity.
Morgenstern R, Aldy J, Herrnstadt E, Ho M, Pizer W (2007). Competitiveness Impacts of Carbon Dioxide Pricing
Policies on Manufacturing. Issue Brief 7. Washington, D.C.: Resources for the Future.
Naegele H, Zaklan A (2019). Does the EU ETS cause carbon leakage in European manufacturing? J. Environ.
Econ. Manage. 93:125–47.
Narassimhan E, Gallagher KS, Koester S, Alejo JR (2018). Carbon pricing in practice: a review of existing
emissions trading systems. Clim. Policy, 18(8): 967–991.
OECD (2019). Taxing Energy Use 2019: Using Taxes for Climate Action. Paris: OECD.
OECD (2021). Carbon Pricing in Times of COVID-19: What Has Changed in G20 Economies? Paris: OECD.
Pigato M (ed). (2019). Fiscal Policies for Development and Climate Action. International Development in Focus.
A World Bank Group Study. Washington, D.C.: World Bank Group.
Pigou C (1920). The economics of welfare.
Rogge K (2016) Reviewing the Evidence on the Innovation Impact of the EU Emission Trading System. SSRN
(SWPS 2016–09).
Rosenbloom D, Markard J, Geels FW, Fuenfschilling L (2020). Why carbon pricing is not sufficient to mitigate
climate change – and how “sustainability transition policy” can help. Proceedings of the National
Academy of Sciences of the United States of America, 117.
Sato M, Neuhoff K, Graichen V, Schumacher K, Matthes F (2014). Sectors Under Scrutiny: Evaluation of
Indicators to Assess the Risk of Carbon Leakage in the UK and Germany. Environ. Resour. Econ.
60(1):99–124.
Stiglitz JE et al. (2017). Report of the High-Level Commission on Carbon Prices. Carbon Pricing Leadership
Coalition.
Stiglitz JE (2019). Addressing climate change through price and non-price interventions. Eur. Econ. Rev., 119,
594–612.
Joltreau E, Sommerfeld K (2018). Why does emissions trading under the EU Emissions Trading System (ETS)
not affect firms’ competitiveness? Empirical findings from the literature. Climate Policy, 19(4).
United Nations (2021). Handbook for Carbon Taxation for Developing Countries, New York, 2021.
Verde S (2020). The impact of the EU emissions trading system on competitiveness and carbon leakage: the
econometric evidence. J. Econ. Surv. 34(2):320–43
Vogt-Schilb A, Meunier G, Hallegatte S (2018). When starting with the most expensive option makes sense:
Optimal timing, cost and sectoral allocation of abatement investment. J. Environ. Econ. Manage.
Wang Q et al. (2019). Distributional impact of carbon pricing in Chinese provinces. Energy Econ., 81(44): 327–
340.
World Bank (2019a). State and Trends of Carbon Pricing 2019. Washington, D.C.: World Bank.
97

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

World Bank (2019b). Report of the High-Level Commission on Carbon Pricing and Competitiveness.
Washington, D.C.: World Bank.
World Bank. (2021). State and Trends of Carbon Pricing 2021. Washington, D.C.: World Bank.
World Bank (2022). Carbon Pricing Dashboard | Up-to-date overview of carbon pricing initiatives,
https://carbonpricingdashboard.worldbank.org/

98

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Appendix 3. Policies to address carbon leakage
As noted in Appendix 2, so far there has been little evidence of an impact of environmental policies on carbon
leakage and competitiveness. Nevertheless, as countries seek greater climate ambition, higher carbon price
levels could potentially lead to more significant impacts for EITE industries. This revives the need to find
viable policy options to address carbon leakage. On the other hand, as more countries implement climate
policies and create linkages between carbon markets, differences in carbon prices should narrow, lowering
carbon leakage risks.
Several policies have been identified as potential tools to address carbon leakage. Here we review the main
approaches proposed by the literature.

Exemptions and free allocation of emissions allowances
To date, the most widely used anti-leakage measures are exemptions or free allocation of emission
allowances for sectors at high risk of carbon leakage. EITE industries are typically allowed exemptions and
receive provisions that shelter them from any significant cost increase in virtually all pricing schemes
(Haites, 2018).
The absence of observed carbon leakage tends to suggest that free allocation is effective. Domestically, free
allocation enhances the political feasibility of emissions trading because it avoids imposing burdens on highly
mobilised producer groups.
However, free allocation hinders the industrial transition to climate neutrality, by removing incentives to
switch to climate-neutral production processes, material efficiency and recycling. Another downside is that
it can result in over-compensation and consequent windfall profits (Anger et al., 2016) while it forgoes
auction revenues to potentially fund climate action. According to some studies, free allocation will become
unsustainable beyond 2030, since the higher carbon prices will make it prohibitively expensive (Sartor et al.,
2022). Some questions have also been raised about whether this is an ‘actionable subsidy’ under WTO law,
which could lead trade partners to challenge the measure (Rubini and Jegou, 2012), though in practice no
complaints have yet been brought to the WTO.

Carbon border adjustment mechanism (CBAM)
CBAMs are trade-based mechanisms designed to ‘equalise’ the carbon costs for domestic and foreign
producers. They are increasingly being considered by policymakers to address carbon leakage and
competitiveness losses for products produced in jurisdictions with no, or lower, carbon price. CBAMs could
take on the form of a tax, a tariff, or an obligation to procure emissions permits (Mehling et al., 2019).
On 14 July 2021, the European Commission adopted a proposal for a CBAM that requires importers of
aluminium, cement, iron and steel, electricity and fertiliser to buy certificates at the ETS price for the
emissions embedded in the imported products (European Commission, 2021).
The CBAM has been welcomed by many as an effective tool to allow for the phase down of free allocation
(like in the case of the EU ETS), while addressing the risk of leakage. It can contribute to a significant source
of revenue that can be channelled to support decarbonisation. CBAMs could also play a role in incentivising
decarbonisation in third countries that are affected by the border adjustment (Sartor et al., 2022).
Nevertheless, CBAMs have shortcomings that could undermine their effective implementation (Grubb et al.,
2022). These include the numerous challenging regulatory choices (i.e. which policies, goods, sectors,
countries to include), technical challenges around the methodology for estimating the price adjustments
(see Box 5, Chapter 5, on equivalences), how to treat export-related leakage (see Box A1) and the high
administrative burden.
99

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Another challenge is the potential risk of resource shuffling. If the CBAM is based on the use of actual
embodied emission values, producers could export high-carbon products to countries that do not price the
carbon content of imports and sell low-carbon products to countries implementing a CBAM. The result would
be that countries implementing a CBAM would lose domestic market share, while the global greenhouse gas
emissions would not change (Grubb et al., 2022; Sartor et al., 2022).
There are also legal challenges associated with WTO compliance, as a CBAM could be perceived as a
protectionist measure violating the principle of non-discrimination under the regulations of WTO. To increase
the likelihood that a CBAM will be compatible with international trade law, studies suggest that CBAMs would
need to have a clear environmental rationale (i.e. reduce carbon leakage) and exclude export rebates.
Box A 1: Export-related leakage
A key design question is whether a CBAM should only be applied to imported products, or whether it should
also address carbon leakage occurring when exporters lose market share to more carbon-intensive foreign
competitors. From a purely climate-related perspective, including exports in CBAMs reduces global emissions,
compared to a CBAM considering only imports (Monjon and Quirion, 2011). In line with this, the European
Commission finds that the EU CBAM proposal, which does not address exports, would be associated with a
6.8% export market loss (European Commission, 2021). Different solutions have been proposed to date to
address carbon leakage related to exported goods, ranging from exemptions to export rebates in the form of
monetary reimbursements or free allowances for exported goods, with multiple variants for each option.
Export rebates
One option would be to provide an explicit rebate for carbon costs at the border. A meta-analysis (Branger
and Quirion, 2014) finds that for exporters, rebates are important for addressing leakage: for example, without
export refunds, at a carbon price of €30/t, around 30% of EU exports would face cost increases exceeding
the criteria used internally to define sectors eligible for free allowances to address carbon leakage risks in the
EU ETS.
However, the legal literature suggests that such measures are likely to run afoul of international trade law, as
a ‘prohibited subsidy’ under the WTO Agreement on Subsidies and Countervailing Measures (SCM) (Mehling
et al., 2019; Holzer, 2014). An export rebate could also be seen as reducing the incentive for industry to
decarbonise production dedicated to exports, with the unintended consequence of producers dedicating ‘dirty
products’ to exports (ERCST, 2022).
Free allocation for exports
A second, and probably administratively simpler alternative to an export rebate might be to provide free
allocation to installations producing CBAM products for an amount equivalent to their exported products each
year. Some studies show that free allocation could help support the cost competitiveness of domestic products
that are exported outside the CBAM area. While combining an import CBAM with free allocation for exports
can increase the risk of legal challenges, such risks may be reduced with an appropriate design (Evans et al.,
2020).

Some countries, including China, Brazil, India and South Africa, have noted that the CBAM could also be seen
as conflicting with the principle of common but differentiated responsibilities and the architecture of the
Paris Agreement grounded in Nationally Determined Contributions. Therefore, some have highlighted the
need to implement special treatment for the least developed countries (UNCTAD, 2021).

100

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Potential reactions from trading partners

A range of responses to the introduction of CBAMs are possible, and Ecologic (2022) found many of these
are under consideration. Trade partners might accept the CBAM; retaliate against imports coming from the
country implementing the CBAM; challenge the CBAM at the WTO level; or negotiate exemptions, e.g. by
acknowledging the costs of climate policies on the exported good. Another potential reaction could be trade
partners adopting their own CBAMs. Following the EU announcement, the US recently introduced a form of
CBAM through the Clean Competition Act, 30 while Canada 31 is considering it.

Common global carbon price
These challenges have persuaded some experts to find alternatives to the CBAM as a measure to address
carbon leakage. For many years, economists argued that a common global carbon price would be the most
effective way to incentivise decarbonisation, while addressing concerns about WTO compliance,
competitiveness and carbon leakage.
However, such a policy would run into political constraints and face significant implementation challenges. It
would also go against the principle of common but differentiated responsibilities and preclude participation
of countries where explicit carbon pricing is currently difficult to implement. And as poor households spend
more of their income on energy, it would be a regressive instrument, between and within countries.

Carbon price floor
To tackle those issues, the IMF proposed an International Carbon Price Floor (ICPF), where countries
implement a minimum carbon price, while having the flexibility to set higher prices if needed to achieve
mitigation pledges. The proposal would accommodate equity considerations, by setting lower price floor
requirements 32 for emerging market economies (EMEs) and allowing emissions-equivalent non-pricing
approaches to be used to meet the requirements. To facilitate negotiation, the price floor would initially be
applied to a small number of countries responsible for the majority of global emissions (Parry et al., 2021a).
The proposal faces many challenging design issues (e.g. choice of initial set of countries, emissions coverage,
price levels, equivalences) that might make it very difficult for countries to agree on it. But according to
proponents, an initial CBAM approach could be a lever to induce global cooperation on a carbon price floor,
with the potential to eventually make the CBAM superfluous (Parry et al., 2021b).

Consumption charges and climate excise contribution
Another alternative is the application of consumption charges (Munnings et al., 2019; Neuhoff et al., 2015;
Grubb et al., 2022), whose implementation, however, is challenged by the need for product emissions
traceability. A solution put forward to deal with emissions tracking is the application of default values, with
the option for importers to prove their higher performance (Grubb et al., 2022). Another instrument to
address carbon leakage is a climate excise contribution (Neuhoff et al., 2021; Climate Strategies, 2021; Grubb
et al., 2022). This could be attractive as it maintains free allocation at the full benchmark for longer than the
CBAM while offering the option of an export rebate. However, it has been argued that this instrument would
add enormous administrative complexity and would be less effective at preventing carbon leakage, due to
its dependence on continued free allocations (Sartor et al., 2022).

Congress Introduces US CBAM: The “Clean Competition Act”


https://www.canada.ca/en/department-finance/programs/consultations/2021/border-carbon-adjustments/exploring-border-carbonadjustments-canada.html
32 A 2030 price floor of $75 a ton for advanced economies, $50 for high-income emerging market economies such as China, and $25 for lower-income
emerging markets such as India would keep warming below 2°C with just six participants (Canada, China, European Union, India, United Kingdom,
United States) and other G20 countries meeting their Paris pledges.
101
30
31

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Impacts of CBAMs on leakage, international trade and equity
Although CBAMs have yet to be implemented at the country level, there is already a substantial body of
modelling literature that has attempted to estimate their potential implications in terms of carbon leakage
and distributional and equity consequences.
Impact on carbon leakage

Many studies have analysed the effect of implementing a CBAMs to prevent carbon leakage. Meta-analyses
of different studies have found that introducing a border adjustment tax results in carbon leakage reductions
(Monjon and Quirion, 2011; Branger and Quirion, 2014; Böhringer, et al., 2012). In terms of coverage and
efficiency, the extension of CBAMs to all sectors and the inclusion of export rebates would seem to be the
most efficient ways to reduce the leakage ratio (Branger and Quirion, 2014). In the case of the EU, relative to
a carbon tax-only scenario, the CBAM could reduce carbon leakage and enhance European Union exports
(UNCTAD, 2021).
In terms of empirical findings, the only real-world experience with a CBAM is in California’s electrical sector.
In this case one study argues that the system has not reduced carbon leakage due to “resource reshuffling”
(Pauer, 2018).
Impacts on international trade and equity

The effects of CBAMs on international trade and equity will depend on trade patterns, countries’ carbon
intensity of production, and the carbon policies of trade partners.
Studies show that carbon tariffs can create adverse distributional effects for countries subject to the measure
(Branger and Quirion, 2014) and exacerbate regional inequality (Böhringer et al., 2012). In the case of the EU
CBAM, estimates indicate that if the CBAM was applied to all the goods covered by the ETS, up to $16bn of
developing country exports to the EU could face an additional charge. Given that the emissions imported
from these economies represents only a small proportion of the carbon embodied in the total imports of the
EU, a study suggests exempting these economies from the CBAM (Lowe, 2021).
In the case of steel, China and Russia would be more affected due to high carbon intensity in production. At
the same time, Turkey and India would become more attractive due to low-carbon production processes in
this sector (Boston Consulting Group, 2020).
Figure A3 shows the list of countries with the highest levels of exports to the EU in sectors included in the
CBAM. Russia, China, Turkey and the UK are the countries most exposed to the mechanism. While among
developing countries the most exposed to the CBAM would be India, Brazil and South Africa, Mozambique
would be the most exposed LDC (UNCTAD, 2021).

102

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Figure A3. Exports to the EU in selected sectors likely to be considered in the CBAM, 2019 (billion $)

Source: UNCTAD (2021), A European Union Carbon Border Adjustment Mechanism: Implications for developing countries, by Durant
et al., © 2021 United Nations. Reprinted with the permission of the United Nations.

In terms of lower-income countries, an analysis found that the economies most affected by the EU CBAM
would be African fuel-exporting countries such as Cameroon, Egypt and Nigeria. Other African economies
such as DR Congo, Ghana, Morocco and Zimbabwe would also be affected due to the relative importance of
their exports affected by the CBAM (Zimmer and Holzhausen, 2020).
Some analysis also indicates that the CBAM generates a gap between developing and developed countries in
terms of GDP and welfare (UNCTAD, 2021; TCD-IMF, 2022).
While those studies seem to reach the same conclusion that the EU CBAM may worsen the income
distribution between advanced and poor economies, it should be noticed that these analyses were
conducted before the release of the EU plan for the CBAM and therefore do not reflect the detailed
specifications of the proposal.

Use of revenues in a CBAM
Using the revenues from a carbon price and CBAMs to address the socioeconomic impacts of the two
instruments could be a way to ensure acceptability. Some developing countries indeed have indicated that
they may be more willing to accept the EU CBAM if the revenues were to benefit them (Germanwatch, 2021).
In 2017/18 the majority of global carbon pricing revenues were allocated to either environmental or
development objectives (53%). Other revenue allocations included assigning revenues to the general budget
(38%), cuts to other taxes (6%) and direct transfers to households and businesses (3%) (World Bank, 2019).
In the context of CBAMs, the equity implications could be partly addressed by allocating the revenues
generated by the CBAM to accelerate technology transfer and capacity-building, as well as returning the
revenues to less developed countries in the form of international climate finance.

103

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

References
Anger N, Asane-Otoo E, Böhringer C, Oberndorfer U (2016). Public interest versus interest groups: a political
economy analysis of allowance allocation under the EU emissions trading scheme. Int. Environ.
Agreements Polit. Law Econ. 16(5):621–38.
Böhringer C, Balistreri E J, Rutherford T F (2012). The role of border carbon adjustment in unilateral climate
policy: Overview of an Energy Modeling Forum study (EMF 29). Energy Economics. The Role of Border
Carbon Adjustment in Unilateral Climate Policy: Results from EMF 29. 34S97–S110.
Branger F, Quirion P (2014). Would border carbon adjustments prevent carbon leakage and heavy industry
competitiveness losses? Insights from a meta-analysis of recent economic studies. Ecological
Economics. 99(C):29–39.
Boston Consulting Group (2020). How an EU Carbon Border Tax Could Jolt World Trade.
Climate Strategies (2021). A Design of the Carbon Border Adjustment Mechanism for an Inclusive Transition
to Climate Neutrality Policy Proposal from the Climate Friendly Materials Platform.
Cosbey A, Droege S, Fischer C, Munnings C (2019). Developing Guidance for Implementing 38 Border Carbon
Adjustments: Lessons, Cautions, and Research Needs from the Literature Review. Environ. Econ. Policy,
13(1): 3–22.
Ecologic (2022). What Role for a Climate Club under the German G7 Presidency? Options and
Recommendations for a Climate Club. Policy Brief, February 2022.
ERCST (2022). Border Carbon Adjustment in the EU: Treatment of Exports in the CBAM.
European Commission (2021). Proposal for a Regulation of The European Parliament 15 and of the Council
establishing a carbon border adjustment mechanism.
Evans S, Mehling MA, Ritz RA, Sammon P (2021) Border carbon adjustments and industrial competitiveness
in a European Green Deal, Climate Policy, 21:3, 307-317.
Fowlie M, Petersen C, Reguant M (2021). Border Carbon Adjustments When Carbon Intensity Varies across
Producers: Evidence from California. AEA Pap. Proc., 111: 401–405.
Germanwatch (2021). More Cooperation, Less Confrontation.
Grubb M, Jordan ND, Hertwich E, Neuhoff K, Das K, Bandyopadhyay KR, van Asselt H, Sato M, Wang R, Guan
D, Pizer B, Oh H (2022). Carbon leakage, consumption and trade. Annual Review of Environment and
Resources, 47:1.
Haites E (2018). Carbon taxes and greenhouse gas emissions trading systems: what have we learned? Clim.
Policy, 18(8).
Lowe S (2021) The EU’s carbon border adjustment mechanism: How to make it work for developing countries.
Centre for European Reform.
Mehling MA, Asselt H van, Das K, Droege S, Verkuijl C (2019). Designing Border Carbon Adjustments for
Enhanced Climate Action. American Journal of International Law, 113(3):433–481.
Monjon S, Quirion P (2011). Addressing leakage in the EU ETS: Border adjustment or output-based allocation?
Ecological Economics 70: 1957-1971.
Munnings C, Acworth W, Sartor O, Y. Kim YG, Neuhoff K (2019). Pricing carbon consumption: synthesizing an
emerging trend. Clim. Policy, 19(1): 92–107.
104

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Neuhoff K et al. (2015). Inclusion of Consumption of Carbon Intensive Commodities in Carbon Pricing
Mechanisms. Climate Strategies policy paper.
https://www.diw.de/documents/dokumentenarchiv/17/diw_01.c.523297.de/policy-brief-ioc.pdf
Neuhoff K. et al. (2021) Closing the Green Deal for Industry. Climate Friendly Materials Platform.
OECD (2020). The Climate Challenge and Trade: Would Border Carbon Adjustments Accelerate or Hinder
Climate Action? OECD. Background Paper for the 39th Round Table on Sustainable Development.
OECD.
Parry I, Black S, Roaf J (2021a) Proposal for an International Carbon Price Floor among Large Emitters. IMF
Staff Climate Notes 2021/001. Washington, D.C.: International Monetary Fund.
Parry I, Dohlman P, Hillier C, Kaufman M, Kwak K, et al. (2021b). Carbon Pricing: What Role for Border Carbon
Adjustments? Washington, D.C.: International Monetary Fund.
Pauer SU (2018). Including electricity imports in California’s cap-and-trade program: A case study of a border
carbon adjustment in practice. The Electricity Journal. Special Issue: Energy Policy Institute’s Eighth
Annual Energy Policy Research Conference. 31(10):39–45.
Rubini L, Jegou I (2012). Who’ll Stop the Rain? Allocating Emissions Allowances for Free: Environmental Policy,
Economics, and WTO Subsidy Law. Transnatl. Environ. Law. 1(2):325–54.
Sartor O, Cosbey A, Shawkat A (2022). Getting the Transition to CBAM Right: Finding pragmatic solutions to
key implementation questions. Agora Industry.
Task Force on Climate, Development and the International Monetary Fund (TCD-IMF) (2022). Global Impact
of EU’s Carbon Border Adjustment Mechanism: A Quantitative Assessment.
UNCTAD (2021). A European Union Carbon Border Adjustment Mechanism: Implications for developing
countries. United Nations Conference on Trade and Development.
World Bank (2019) Using Carbon Revenues. Partnership for Market Readiness Technical Note No. 16.
Washington, D.C.: World Bank.
Zimmer M, Holzhausen A (2020). EU Carbon Border Adjustments and developing country exports: Saving the
worst for the last. Allianz.

105

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Appendix 4: Selected existing partnerships and initiatives in support of climate goals
Scaling up finance to deliver on climate ambition can be supported by a closer partnership across the official sector (represented by the Climate Club), the MDBs
(and Climate Club members in their capacity as shareholders), and the private sector. Strategic alignment across target sectors among Climate Club members will
be best delivered by supporting and building on existing initiatives for sectoral governance. These include intergovernmental, public–private, and private-only
groups. This Appendix presents existing finance and sectoral initiatives across several realms that the Climate Club can look to leverage and partner with.

Public institutions and initiatives
Table A2: Official finance institutions and initiatives
Name

Founders

Date

Objective

Approach

Impact

Green Climate
Fund (GCF)

Formally established at COP16 in
Cancun as a fund within the
UNFCCC framework.

2010

To support developing countries
raise and realise their Nationally
Determined Contributions (NDC)
ambitions towards low-emissions,
climate-resilient pathways.
Achieved through investing in four
transitions: environment; energy
and industry; human security;
livelihoods and wellbeing and
land-use, forests and ecosystems.

Four-pronged approach:

The GCF works with National
Designated Authorities (NDAs)
from across 147 countries, and
aims for a 50:50 balance between
mitigation and adaptation
investments over time.

Headquarters in Incheon, South
Korea

Transformational planning and
programming (promoting
integrated strategies, planning
and policymaking to maximise the
co-benefits between mitigation,
adaptation and sustainable
development)
Catalysing climate innovation:
investments in new technologies,
business models and practices to
establish a proof of concept.
De-risking investment to mobilise
finance at scale: aimed at
crowding-in private finance at the

106

As of May 2022, a total of 45
countries, 3 regions and 1 city had
made a pledge to the GCF during
the Initial Resource Mobilisation
(IRM) period for a total of
$10.3bn, with $8.31bn confirmed.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

‘frontier’ (adaptation, naturebased solutions LDCs and SIDS).
Mainstreaming climate risks and
opportunities into investment
decision-making to align finance
with sustainable development:
promoting methodologies,
standards and practices that
foster new norms and values.
Global
Environment
Facility (GEF)

Established ahead of the Rio
Earth Summit as a $1bn pilot
programme by the World Bank,
with the WB, United Nations
Environment Programme and the
United Nations Development
Programme as the three initial
projects.

1991

To enable developing countries to
invest in nature and to support
the implementation of major
international environmental
conventions including on
biodiversity, climate change,
chemicals and desertification.

It now brings together 184
member governments in addition
to civil society, international
organisations and private sector
partners.






Biodiversity
Climate Change (mitigation
and adaptation)
Chemicals and waste
International waters
Land degradation
Sustainable forest
management/REDD+

The GEF is the largest multilateral
trust fund focused on enabling
developing countries to invest in
nature. It has provided more than
$22bn in grants and blended
finance and mobilised an
additional $120bn in co-financing
for more than 5,200 projects
across 162 countries over the past
30 years.
It acts as the financial mechanism
for three of the UNEP’s11
Multilateral Environmental
Agreements, and to a further two.

Headquarters in Washington DC,
USA
Adaptation Fund
(AF)

Focus on six areas of work:

2010

To finance projects and
programmes that help vulnerable
communities in developing
countries adapt to climate
change.
107

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Coalition of
Finance
Ministers for
Climate Action

Governments from 39 countries

2018

To promote cohesion between
domestic and global action on
climate change, boost ambitions,
reaffirm commitments and
accelerate actions to implement
the Paris Agreement.

Five working areas based on the
Helsinki Principles:



Central Banks
and Supervisors
Network for
Greening the
Financial System
(NGFS)

The central banks and
supervisors of the UK, France,
Germany, the Netherlands,
Sweden, China, Singapore and
Hong Kong
Now 116 members and 19
observers.

2017

To share best practice and
contribute to the development of
environment and climate risk
management in the financial
sector, and to mobilise
mainstream finance to support
the transition towards a
sustainable economy.

108

Alignment of policies with
the Paris Agreement
commitments
Sharing of experience and
expertise to promote
collective understanding
Carbon pricing measures
Embedding climate change
in macroeconomic policy,
fiscal planning, budgeting,
public investment
management and
procurement practices
Preparation of Nationally
Determined Contributions

Six areas of work:





Publication of reports and guides

Supervision
Scenario design and analysis
Monetary Policy
Net Zero for Central Banks
Nature-Related Risks
Capacity Building and
Training

Publication of reports and guides

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Table A3: Selected multilateral development bank finance initiatives and instruments
Name

Initiated by

Date

Objective

Approach

Impact

MCPP One
Planet

IFC

2013

To attract institutional capital and
support the achievement of the
UN SDGs.

Offers investors access to the IFC
pipeline.

$10bn total MCPP funds raised

Connects investors to IFC’s global
origination capacity.

11 investors
8 facilities

Alignment of interests through coinvestment approach.
Long-term partnership and ease
of administration.
Risk-return diversification.
Enhanced sustainability and
impact reporting.
Scaling Solar

World Bank and IFC

2015

To create viable markets for solar
power in client countries.

Creates a ‘one stop shop’ to
enable collaboration between
project developers and
governments, offering fair
execution, cost optimisation and
security through coordination and
management by the World Bank
and IFC.

Projects across developing
economies including in Zambia,
Senegal, Togo, Madagascar,
Uzbekistan and Ivory Coast.

Green Bond
Programme

IFC

2010

To help catalyse the market and
unlock investment for private
sector projects that support
renewable energy and energy
efficiency.

Projects eligible for green bond
financing selected from the IFC’s
climate-related loan portfolio, and
following the IFC’s investment and
due diligence process. Proceeds

Over $10.6bn across 178 bonds in
20 currencies.

109

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

set aside in a special sub-portfolio
within the IFC Treasury and
invested in eligible projects
including renewable energy,
energy efficiency and other
climate-related projects in
developing countries.
Table A4: Official sectoral decarbonisation initiatives
Name

Initiated by

Date

Objective

Approach

Impact

Breakthrough
Agenda – Race to
Zero

UNFCCC Race to Zero,
Climate Champions, UK
COP26 Presidency

2021

A framework international clean
technology plan for all actors to
follow

Five goals, each focused on
achieving ‘tipping points’ in a
broad sector:

Brings together over 40
countries, representing over 70%
of global GDP, around common
ambitions.

1.

110

Clean power the most
affordable and reliable
option for all countries to
meet their power needs
efficiently by 2030.

2.

Zero emission vehicles are
the new normal for road
transport – accessible,
affordable and sustainable
in all regions by 2030.

3.

Near-zero emission steel
the preferred choice in
global markets, with
efficient use and near-zero
emission steel production
established and growing in
every region by 2030.

4.

Affordable renewable and
low carbon hydrogen
globally available by 2030.

Countries commit to work
together on near-term actions in
the crucial decade of 2020-2030,
including a global policy
framework and domestic action
towards the targets.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

5.

Climate-smart, sustainable
agriculture the most
attractive and widely
adopted option for farmers
everywhere by 2030.

A ‘global checkpoint process’,
beginning in 2022, will track,
measure and review progress.
Signposts other leading global
initiatives that will contribute to
achieving the goals.
Energy Transition
Council

United Kingdom COP26
Presidency

2020

Enable effective dialogue
between countries that require
support for energy transition and
major international actors
offering support.

Country dialogues at working and
senior levels.
Regional discussions on common
energy transition issues at
roughly quarterly Ministerial
meetings.

Positive feedback from countries
and partners led to extension
until at least COP30 in 2025.
Between March and November
2021, the RRF responded to 24
requests.

‘Rapid Response Facility’ (RRF)
enables existing programmes and
some additional resources to
respond rapidly to requests for
technical, commercial, regulatory
or policy assistance.
Industrial Deep
Decarbonisation
Initiative (IDDI)

Clean Energy Ministerial, led
by United Kingdom and India,
other members include
Germany, Canada and the
United Arab Emirates

2021

Create market demand for lowcarbon industrial materials,
especially steel and cement.

111

Objective for 10 countries to
commit to green public
procurement in these sectors by
2024.

Milestones are set out to achieve
within a three-year timeframe,
including:

Standardised reporting
mechanisms

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

IDDI is housed under the Clean
Energy Ministerial (CEM) and
coordinated by UNIDO. MPP,
LeadIt, IRENA, and World Bank all
participate to facilitate the
coalition.
Collaboration on a set of targets
by 2030 to be launched by mid2022.
Mission
Innovation (MI)

Twenty countries at COP21

2015;
2021 relaunched as
2.0

Accelerate public and private
global clean energy innovation
with the objective to make clean
energy widely affordable,
attractive and accessible to all.

During its first phase, countries
committed to:


double governmental or
state-directed clean energy
R&D investment
work closely with the
private sector
collaboration with each
other and international
institutions
transparent, effective, and
efficient implementation,
including roadmaps and
annual information on R&D
efforts.

The second phase expanded MI’s
mandate, including to catalyse

112


Evaluation processes and
tools
Consistent minimum
standards

Limited membership to date,
compared to CEM membership of
29 country governments and the
European Commission, with 25
further ‘participants’.
Two countries (Austria, Finland)
and the European Union joined as
members, and Mexico joined as
observer, between initial launch
and 2.0.
Members now represent 90% of
global public investments in clean
energy investment.
Collective public R&D investment
rose from $8.1bn to $13bn by
2020. However, a majority of
members did not achieve the
doubling target. Subsequent
increases have been slower, likely
owing to the pandemic.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

global action through public–
private ‘missions’.
Members are intended to
describe National Innovation
Pathways setting out:



energy transition scenarios
and innovation needs
plans to address needs
measurement of innovation
outcomes
preferred modes and
methods of collaboration.

Missions include:






Leadership Group
for Industry
Transition (LeadIT)

India and Sweden, supported
by the World Economic
Forum

2019

Provides an arena for public–
private collaboration, evidence
and leaning on industrial
transitions

113

renewable power
generation
zero-emissions shipping
clean hydrogen
carbon dioxide removal
urban transitions
net zero industries.

Supports governments and
industries to co-produce
roadmaps and pathways for
transformation of specific
industries, including through an
interactive tool.

Now includes 18 countries and 19
companies.
LeadIT analysis shows that 85% of
parties that submitted an
updated NDC prior to COP26
included industry transition in the
scope of the NDC, compared to
69% in the first round.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Convenes high-level dialogues
between policymakers and
stakeholders.
Analysis and tools, including
trackers for national, regional and
global roadmaps, and case study
insights on specific industries and
geographies, aim to promote
transparency and knowledge
sharing on policies.

Private sector-oriented initiatives
Table A5: Private sector-oriented sustainable finance initiatives
Name

Founders

Date

Objective

Approach

Glasgow Financial
Alliance for NetZero (GFANZ)

Led by Mark Carney and Nigel
Topping

2021

Bring together the financial
sector to accelerate the
transition to a net zero economy.

GFANZ covers 7 key areas:






114

Sectoral pathways
Real economy transition
plans
Financial institution
transition plans
Portfolio alignment
measurement
Mobilising private capital
Policy
Building commitment.

Impact

GFANZ is a whole financial
sector umbrella that unites
for the first time leading
sub-sectoral net zero
initiatives that are in the
UN’s Race to Zero
campaign.
Members include nearly
300 financial firms
responsible for assets of
roughly $90 trillion.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Finance to
Accelerate the
Sustainable
TransitionInfrastructure (FAST
Infra)

Started under the auspices of
the One Planet Lab as a
collaboration between HSBC,
the OECD, the IFC, GIF (World
Bank) and CPI

2020

Evolved as a broad-based
private-public partnership
involving banks, asset
managers, governments, MDBs,
NDBs, academics and NGOs

Develop sustainable
infrastructure into a deep
liquid asset class.
Scale-up investment in
sustainable infrastructure
in EMDEs.

Develop a consistent, globally
applicable labelling system for
sustainable infrastructure assets.
Develop 4 market mechanisms
to mobilise private investment at
sale for the financing of labelled
projects:


Integrity Council for
the Voluntary
Carbon Market (ICVCM)

Established as governance body
for carbon credit standards by
the Taskforce for Scaling
Voluntary Carbon Markets
(initiative established by Mark
Carney and Bill Winters, 2020)

2022

Establish ‘Core Carbon Principles’
(CCPs) that will act as a
benchmark for high-integrity
carbon credits

Technology-Enabled
Platform
Global Revenue Guarantee
Open-sourced Managed
Co-Lending Portfolio
Programme
Sustainable Financing
Facility for National
Development Banks

A group with varied expertise
from across the voluntary carbon
market ecosystem including
scientific, financial, corporate,
NGO, policy, indigenous, local
representatives.
CCPs and an Assessment
Framework (AF) are drafted by
an expert panel and put to public
consultation, for planned release
in Q4 2022.

115

Rally over 50 global entities,
representing governments at all
levels, the financial sector,
investors, DFIs, insurers, rating
agencies and NGOs are now
actively participating in
developing the FAST-Infra
initiative.

Public consultation on the CCPs
and AF concluded in September
2022.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Existing, private voluntary
standards will need to align with
the CCPs, as will individual
projects, to be deemed
compliant by IC-VCM.
Voluntary Carbon
Markets Integrity
Initiative (VCMI)

Climate Action 100+

Co-funded by the Children’s
Investment Fund Foundation
(CIFF) and the UK Government
Department for Business,
Energy and Industrial Strategy
(BEIS)

Coordinated by five partner
organisations: Asia Investor
Group on Climate Change
(AIGCC); Ceres; Investor Group
on Climate Change (IGCC);
Institutional Investors Group on
Climate Change (IIGCC) and
Principles for Responsible
Investment (PRI)

2021

Multi-stakeholder platform to
drive credible, net zero aligned
participation in voluntary carbon
markets.
Aim to ensure carbon offsets are
underpinned by real actions to
reduce GHG emissions and help
developing countries access
climate finance generated by the
market.

2017

Engage with the world’s largest
corporate GHG emitters to curb
emissions, strengthen climaterelated financial disclosures and
improve governance on climate
change.

Immediate priorities are to:

In signing up to Climate Action
100+, investors commit to
engaging with at least one of 167
focus companies that are
strategically important to the net
zero emissions transition and to
seek commitments on the
initiative’s key asks:

116

Develop high integrity
guidance for buyers of
carbon credits, including
on climate claims by
businesses.
Support access to high
integrity voluntary carbon
markets and monitor
broader supply-side
integrity efforts.

Implement a strong
governance framework on
climate change
Take action to reduce
greenhouse gas emissions
across the value chain

Public consultation on a Code of
Practice for net zero claims
concluded in August 2022.

615 investors engaging the
world’s largest GHG
emitting companies.
$60 trillion in assets
managed by investors
participating in the
initiative.
167 companies being
engaged through the
initiative across the planet.
80%+ global industrial
emissions estimated to be
covered by focus
companies.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7


Climate Finance
Leadership Initiative
(CFLI)

Michael R. Bloomberg formed
the CFLI at the request of the
United Nations SecretaryGeneral António Guterres

2019

Convene leading companies to
mobilise and scale private capital
for climate solutions.

Areas of work:

Global Investors for
Sustainable
Development (GISD)

GISD’s work is supported by UN
system partners (DESA,
UNCTAD, Global Compact, PRI,
UNEP FI, UNDP, UNCDF and the
Regional Commissions) and
others like the World Bank
Group

2019

Deliver concrete solutions to
scale-up long-term finance and
investment in sustainable
development.

Provide enhanced
corporate disclosure.

Supporting policymaking
to mobilise private climate
finance
Mobilising investments for
sustainable infrastructure
in emerging markets.

Areas of work:

Mobilise finance and
investment
Scale-up investment
solutions in developing
countries
Enhancing the impact of
private investment on
sustainable development.

Key accomplishments include
creating a Sustainable
Development Investing (SDI)
definition, and launching the
UNDP-GISD SDG Investor
Platform (digital portal that
enables investors to identify
investment opportunities in
developing and frontier markets

117

Members of the CFLI include
Allianz Global Investors, AXA,
Bloomberg, Enel, Goldman
Sachs, Japan’s Government
Pension Investment Fund (GPIF),
HSBC, and Macquarie.

Rally 30 leaders of major
financial institutions worth $16
trillion.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

that support sustainable
development).
Sustainable Markets
Initiative (SMI)

Former HRH The Prince of
Wales

2020

Its vision is a sustainable future
for Nature, People and Planet.
Its mission is to build a
coordinated global effort to
enable the private sector to
accelerate the transition to a
sustainable future

The Terra Carta, a charter for
change, provides a roadmap to
2030 for businesses to move
towards sustainable markets.

This is organised across three
strands:
It aims to encourage three major
transformations:
1.

Task Force on Climaterelated Financial
Disclosures (TCFD)

Financial Stability Board

2015

To develop consistent climaterelated financial risk disclosures
for use by companies, banks and
investors in providing
information to stakeholders.

118

The initiative is gathering a
‘coalition of the willing’ who
share its vision.

A dramatic shift in
corporate strategies and
operations

2.

A reformed global
financial system

3.

An enabling environment
that attracts investment
and incentivises action.

Publication of recommendations
and encouragement of wide
adoption by companies in the
financial and non-financial
sectors.

1.

Task Forces of private
sector CEOs that set
priorities and oversee
progress made by working
groups.

2.

Country engagement,
linking countries to
expertise and investment.

3.

Founding and Strategic
Partnerships, including
representatives from
across public, private and
philanthropic sectors to
help accelerate a
sustainable future.

The TCFD has grown to over 450
members from over 85 countries,
covering almost half of global
banking assets and a quarter of
global insurance premia.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Table A6: Private sector-oriented initiatives for industrial or sectoral decarbonisation
Name

Initiated by

Date

Objective

Approach

Impact

First Movers Coalition

United States State
Department and World
Economic Forum

2021

Send a market signal to
commercialise zero-carbon
technologies in hard-to-abate
sectors.

Assembles ambitious corporate
purchasing pledges across heavy
industry and long-distance
transport. Actions include:

Since founding by 35 companies,
at least 20 companies have
joined as new members.
Companies have a collective
market value of approx. $8.5
trillion.

Supplier workshops to
connect members with
suppliers
Hosting best practice
sharing sessions, creating
templates for offtake
agreements, and engaging
with financial institutions
for de-risking purchase
agreements
Tracking infrastructure,
where possible through
existing frameworks.

Country governments may also
join and commit to enabling
sector-specific efforts. So far 9
countries have joined as
‘partners’.
Mission Possible
Partnership

World Economic Forum,
Energy Transitions
Commission, Rocky
Mountain Institute, We
Mean Business Coalition;

2021

Accelerate several pathways for
decarbonising heavy industry
and transport.

119

Developing sector transition
strategies for seven sectors
across industry and transport.
Builds on work since 2019 (as
Mission Possible Platform).

Example commitments include:

Steel purchasers set a
target that at least 10% of
their annual primary steel
procurement volumes by
2030 meets or exceeds the
First Movers Coalition
definition for low-CO2
primary steel
Technology firms
Alphabet, Microsoft and
Salesforce collectively
pledged $500m to CO2
removal.

Sectoral transition strategies
published or forthcoming for
multiple sectors, and platforms
created with industry
associations (e.g. Global

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

Funded by Bezos Earth
Fund and Breakthrough
Energy

Steel Zero

Climate Group, Responsible
Steel

2020

Harness purchasing power and
influence of members to shift
global markets and policies

400 company members, as well
as stakeholders among
financiers, customers, and
suppliers.

Cement and Concrete
Association).

Member organisations make a
commitment to procure 100%
net zero steel by 2050 and an
interim commitment to
procuring, specifying or stocking
50% of its steel requirement by
2030.

Commitments from 25 large
companies.

New coalitions facilitated (e.g.
Getting to Zero Coalition in
shipping, Clean Skies for
Tomorrow in aviation).

Policy position supports:





Concrete for Climate
Action

Global Cement and
Concrete Association,
World Economic Forum

2021

Make low-carbon production
investable, stimulate demand for
low-carbon cement and
120

Global standard and
definition on low-emission
and net zero steel
Support public sector
demand for low emission
and net zero steel
Measure and report
carbon emissions
Encourage recycling
Set expectations
Create a level playing field

A platform for stakeholders to
align on a net zero transition
pathway for the industry and

Published a net zero industry
roadmap, under the auspices of
the GCCA.

Collaborating and Delivering on Climate Action through a Climate Club
An independent report to the G7

concrete, and advance a
circularity approach

shape a favourable environment
for investment in
decarbonisation solutions.
Advocating for policy levers to
support all three goals.

Member companies have
committed to advocate for
policies, contribute to 2030
milestones and targets, and
report on progress.

40 manufacturers pledged to
CO2 emissions by 25% by 2030
from 2020 levels.
Getting to Zero
Coalition

Global Maritime Forum,
World Economic Forum

2019

Commercially viable deep sea
zero emission vessels powered
by zero emission fuels into
operation by 2030

Industry insights and analysis
including mapping of pilot and
demonstration projects and cost
profiles of alternative fuels.
Call for policy actions, such as
contracts for difference, and
lobbying the IMO for a net zero
2050 target.
Insights identifying specific
country opportunities.
Over 200 organisations, including
160 companies within the
maritime, energy, infrastructure
and finance sectors.

121

Published the first net zero
industry roadmap.
Reports published on major
EMDE (Indonesia, Mexico, South
Africa) opportunities.