Paris, October 26, 2022 - With COP27 approaching in an increasingly uncertain geopolitical environment, we face an alarming climate reality. In this difficult context, Institut Montaigne is publishing a policy paper titled “Welcome to the Climate Club: Prospects for Europe and East Asia”, authored by Joseph Dellatte, Research Fellow for climate, energy, and environment at Institut Montaigne’s Asia Program

In response to the initiative discussed at the G7 summit in June 2022, this policy paper analyzes the political feasibility of a climate club between Europe and Northeast Asia, the world’s largest emitting region.

This research paper also provides recommendations for an open “Climate Forum” which will foster the inclusion and deeper participation of large emitters such as China and India in the long run.

“The war in Ukraine has triggered an inconceivable reshuffling of the global energy scene, bringing back old energy security patterns in favor of emission-intensive coal. Finally, China’s decision to cancel climate policy discussions with the United States after Nancy Pelosi’s August visit to Taiwan is yet another barrier to multilateral climate cooperation. This geopolitical situation casts a pall over COP27 and questions the capacity of countries to accelerate climate policy ambition.”, underlines Joseph Dellate.

The main challenges of a climate club

In this unprecedented geopolitical context, G7 members, encouraged by Olaf Scholz and the German presidency, started discussions about establishing a climate club that would enable the “effective implementation of the Paris Agreement by accelerating climate action and increasing ambition”. More specifically, a climate club would provide a framework for “minilateral” dialogues and cooperation between members to create common rules adapted to the climate objectives. Since the G7 Leaders' Summit, this initiative has remained under discussion, and the details of its concrete implementation are not yet known.

There are significant differences of opinion between the countries studied in this paper, particularly regarding crucial decarbonization issues such as carbon pricing, carbon leakage, and the use of carbon border adjustment mechanisms (CBAM).

Although carbon border adjustment has the potential to become the compliance mechanism of a climate club, opinions on this measure differ significantly. While European policymakers understand it as the most efficient mechanism to tackle carbon leakage, Northeast Asian ones have reservations. China, for instance, considers this measure discriminatory. Similarly, European, Chinese, Japanese, and Korean visions of carbon pricing are radically different.

Despite these divergences, cooperation remains possible on a number of crucial issues. Sectoral climate clubs, for instance, are increasingly seen as the only option for decarbonizing high-intensity industrial sectors, such as steel and aluminum. This reality is widely understood in Europe and Northeast Asia and is the most commonly agreed upon aspect of climate club discussions. This convergence suggests the possibility of cooperation between both regions in a climate club.

Climate Forum: a format to accelerate climate action

This policy paper puts forward the creation of a climate club that would take the form of a Forum promoting efficient measures to raise ambitions gradually. This “Climate Forum” builds on the previous G7 initiative, which has the greatest potential for climate action.

In order to achieve the largest participation possible, the Forum should take a proactive stance, accept some risk of confrontation to encourage greater ambition over time, and assume competition between countries. The paper proposes to create a flexible Climate Forum, enabling sub-groups of members to form. Specifically, members would be able to choose the sectors in which they wish to cooperate, decide which members they want to cooperate with, and the time frame of this cooperation.

This flexibility will encourage the inclusion of large emitters such as China and India, which are a priori reluctant to join a climate club based on the G7 initiative. By enabling them to cooperate in specific sectors they deem crucial for their decarbonization, the Forum would incentivize countries to increase their participation gradually.

Recommendations

1. Governance: design an open and inclusive Climate Forum

2. Pricing carbon: the achievable establishment of a compliance mechanism in a Climate Forum

3. Labels and revenues: the financial and trade incentives

4. Industrial decarbonization: industrial policies in the club