Why Carbon Border Adjustment Mechanisms Will Not Save the Planet But a Climate Club and Subsidies for Transformative Green Technologies May

We find that both economic theory and empirical results show that carbon border adjustment mechanisms (CBAMs) will be ineffective at meeting global carbon emissions goals. The consensus of 12 computable general equilibrium (CGE) model estimates is that CBAMs can be expected to reduce (but not eliminate) carbon leakage. However, global carbon emission goals require carbon reduction in most countries in the world, not simply the absence of carbon leakage. Our case study of the Russian Federation finds that the impact of the CBAM of the European Union will have only a small effect on Russian carbon emissions, but economy-wide carbon pricing by Russia would induce a very substantial reduction in its carbon emissions. We elaborate two complementary proposals that hold much greater promise for meeting climate goals: (i) a Climate Club; and (ii) a 0.2 percent of GDP subsidy by high-income countries for transformative research designed to make green energy cheaper than fossil fuels. We propose a realistic approach to adoption of a Climate Club within the rules of the World Trade Organization