In the card game of bridge, spades followed by hearts are the top scoring suits. They can trump diamonds and clubs. Whilst clubs are the lowest ranking suit in bridge, climate clubs hold some promise for our escape from the ineffective progress of international climate policy. In this, the fifth in our Climate Calculus series, Jonathan Shopley examines how lowly clubs can revitalise climate action.

Climate Calculus Series: The next era of climate leadership—clubs trump hearts in spades

Our last Climate Calculus article relied heavily upon economics Nobel laureate William Nordhaus’s analysis1 of the Kyoto and Paris climate agreements which concluded they are doomed to failure unless there are consequences for nations that fail to adhere to requirements. Presently, there are no consequences for nations that don’t step up or cheat the system. Rampant free-riding and back-sliding lies at the heart of our international failure to deal with climate change.

While global pacts are failing to gain traction, there is one club of nations—the EU—that is bidding high with its climate commitments in the hope of persuading others to follow suit. That could have a significant ripple effect … if the EU maintains the political will to tough it out on the international stage. Further, voluntary action growing within and across the private sector is supporting the development of a global price of carbon which is the second important design feature of Nordhaus’s climate club proposal.

 

All is not lost

In Nordhaus’s own words: “The key to an effective climate treaty is to change the architecture, from a voluntary agreement to one with strong incentives to participate…. Successful international agreements function as a kind of club of nations. A club is a voluntary group deriving mutual benefits from sharing the costs of producing a shared good or service (in this instance, a stable climate). Gains from a successful club are sufficiently large that members will pay dues and adhere to club rules to get the benefits of membership.”

An effective Climate Club2 will have members agree to undertake harmonised emission reductions in line with climate science. It will impose penalties upon members that do not meet their obligations, and non-members that have chosen not to take on obligations. Nordhaus proposes that club membership is most effectively defined by the acceptance and deployment of a single, unambiguous carbon price. That removes all the complications of allocating emission reduction targets amongst members which may have widely differing starting points. It also simplifies negotiations by making them all about a single figure—the price of carbon. A single carbon price has more clout and certainty than other climate target candidates—be it a 1.5oC or 2oC rise in average global temperatures or a date for peak emissions.

The challenge to all of this, of course, is setting the appropriate price on carbon. I’ve talked before about the role that companies can play in leading by example on carbon pricing through voluntary carbon markets. Businesses can currently benefit from an array of mitigation opportunities at different price points—and in so doing, open carbon markets can signal how price-sensitive business will be to regulated pricing.

 

Nation states as climate clubbers

The obvious candidates for ‘club captain’ are, in order of their global emissions: China, the USA and the EU. Together they account for over 50% of global emissions. The United States is in no shape to call the club to order—not unless and until its commitment to the Paris Agreement is restored. China can call out some impressive developments in domestic carbon pricing and growth in renewable power generation. At home, China has committed to carbon pricing, primarily through its emission trading scheme, and to cutting coal’s share of the country’s total energy capacity to 50% by 2030. However, abroad China funds more than 70% of all coal facilities built today3. So, not club captain material.

That leaves the EU. Already a club of 27 nations (down one with the UK’s departure), it is quite used to the concept. Currently, those nations are debating a revised Nationally Determined Contribution (NDC) under the Paris Agreement; an upgraded 50-55+% emission reduction target for 2030; a net zero target for 2050; and, a US$40bn ‘Just Transition Fund’ to help all members get comfortable with the economic pain these measures may entail.

With a nod in the direction of Nordhaus’s climate club thesis, the incoming EU Commissioner for the Economy announced in September last year that: “Should differences in levels of ambition worldwide persist … the Commission will propose a carbon border adjustment mechanism (i.e. an import tax referenced to a proposed carbon price) … designed to comply with World Trade Organisation rules and other obligations of the EU”.

So, we have the makings of the first ‘country climate club’. Not that it will be easy to build it out. The EU has tried this once before—in the aviation sector. When it attempted to include international aviation within its EU-wide Emission Trading Scheme (EU ETS), China threatened to cancel a substantial Airbus order, and the EU quickly backed down. Perhaps this time around, the EU’s opening bid may receive more support as the notion of a global green recovery attracts international support.

 

Corporates and climate clubs: not getting left out

As country climate clubs contemplate border carbon tax adjustments to persuade others of the benefits of progressive climate action, the ears of business leaders should perk up.

Progressive corporations with carbon neutral products and services have the potential to align voluntary action with club requirements, ensuring license-to-operate in different markets and the free trade of low-carbon goods and services. With the International Standards Organisation (ISO) considering an ISO standard for carbon neutrality, there is real potential for the pioneering work by companies committing to carbon neutral products and services to evolve into a compliance grade approach to certification. Carbon neutral certified products ought to be able to seek exemption from border carbon taxes. That will enable a pragmatic response to the control and reduction of embedded carbon in the international trade of goods and services. That will be a good outcome, because addressing the decarbonisation of international trade will become as important, if not more so, than decarbonising individual corporate footprints.

While decisive government action is the best-case scenario—both because it will have the greatest positive climate effects and it will create more operational certainty for business—the private sector is not completely at the mercy of policy and regulation. In my next article, I will address how corporate climate leadership is more than a race to zero. The private sector clearly has an important role at the table and will be a critical structural support in the bridge to a stable climate.

 

1William Nordhaus, “The Climate Club: How to Fix a Failing Global Effort”, Foreign Affairs, May/June 2020

2Not to be confused with The Climate Cocktail Club, first established by Natural Capital Partners' colleagues, entirely for the purpose of enhancing climate optimism.

3Quartz, “Chinese coal financing continues aboard”, Qz.com, 2020.