Climate club FAILS – implicit pricing FAILS – and the AFF doesn’t solve US, EU barriers it just EXCLUDES THE EU! We read Blue.

Many discussions on how to establish an international climate club center on carbon pricing. The idea is simple: members agree on a common (minimum) carbon price and impose sanctions on countries below the price threshold. Members receive protection from carbon leakage and enjoy barrier-free access to fellow members’ markets (and potentially other “club goods”), while the sanctions make joining the club attractive to non-members. Many influential international organizations – among them the OECD, the WTO and the IMF – have advocated for some kind of international coordination on carbon pricing. A global carbon price could be combined with another policy instrument popular in the climate clubs discussion: the border carbon adjustment (BCA). BCAs apply a price on imports that corresponds to their carbon intensity. They are designed to preserve the competitiveness of industries that face costly carbon prices or regulation by levelling the playing field between them and foreign counterparts that face lower climate-related production costs (in essence, combatting carbon leakage). A BCA includes many design options that, when harmonized across multiple countries, could give the coordinated instruments the function of a climate club. Countries could jointly determine which goods to cover, a system for calculating products’ embodied emissions, how to use revenue, and which countries (if any) to exempt. The mechanism also links neatly with carbon pricing; the implementing country uses its domestic carbon price as the basis for the fee it charges exporters. If exporting countries have a carbon price of zero, they pay the full fee; if their carbon price is lower than the importing countries, their fee is adjusted to reflect the difference. As with the BCA design features, member countries could jointly establish a minimum carbon price on which membership to the climate club is predicated. A climate club premised on carbon pricing, though appealing in its simplicity, overlooks significant implementation problems. For many countries, putting an explicit price on carbon, either through a carbon tax or an emissions trading system, may not be a feasible approach to decarbonization. For some economies, achieving Paris Agreement goals may be better achieved through standards and regulation; for others, carbon pricing is a political impossibility. In the United States, pricing carbon is politically infeasible for the foreseeable future, and a climate club that predicates membership on a carbon price would either face strong opposition from the US (likely hindering the club’s establishment) or exclude one of the world’s largest economies and greatest emitters (diluting the club’s efficacy and the incentive to join). An alternative to basing a climate club on an explicit carbon price would be to instead use an implicit carbon price. Low-carbon standards and regulations impose compliance costs on producers, increasing their goods’ prices. An implicit carbon price captures these costs: it is the difference between the price of a good facing regulation and the price of that good without regulation. Allowing membership to extend to countries with implicit carbon prices would make the climate club more inclusive, broadening the scope of countries that could join and not appearing punitive against countries that, for legitimate reasons, have not implemented carbon pricing policies. Furthermore, implicit carbon pricing can still be combined with a BCA, leaving this potential framework for a club intact. However, club membership predicated on any type of carbon price may still be unrealistic. Beyond concerns of carbon pricing making a climate club too exclusive or unattractive to potential members, coordination on both explicit and implicit carbon prices poses a host of considerable administrative and methodological problems. Carbon taxes and emissions trading systems vary greatly in their design, making it difficult to directly compare one carbon price to another. An implicit carbon price presents an even greater challenge, as it is unclear how such a price would be calculated. No jurisdiction has yet to devise such a metric, and even if various countries did establish implicit carbon prices, they would face the same comparability problems as explicit ones. Many have argued that the transatlantic space has the potential to host the world’s first climate club. After the development of the EU CBAM, Canada announced in fall 2020 that it would start a consultation on establishing a BCA and working “with like-minded economies” on its implementation. Shortly afterwards in 2021, two US congressmen introduced the FAIR Transition and Competition Act, which would establish a BCA on carbon-intensive imports. However, though the EU, Canada and the US are considering implementing similar mechanisms, their harmonization presents immense logistical and political difficulties. To begin, the EU seems poised to only recognize explicit carbon pricing for exemption from its CBAM (though the Commission’s draft proposal seems to leave the door open for bilateral agreements with third countries on crediting for foreign climate policies). While Canada has carbon pricing policies in place, the US does not and is unlikely to have a carbon price anytime soon. The US’s BCA, in contrast, would calculate its fee based on the cost of regulatory carbon compliance (an implicit carbon price). Furthermore, the US proposal explicitly states it will provide exemptions to the BCA only to countries that “[do] not impose a border carbon adjustment on products produced or manufactured in the United States.” This effective singling out of the EU – the only jurisdiction with a BCA in proposed legislation – suggests a BCA-based climate club involving the US and EU is not on the horizon.