The EU and Germany have set ambitious climate policy goals with the Green Deal. A central element is pricing the emissions of carbon dioxide that producing companies within the European Union or Germany must bear. This means a clear competitive disadvantage compared to competitors producing in other parts of the world. The "Carbon Border Adjustment Mechanism" (CBAM), currently under discussion at the EU level, would only partially address this structural disadvantage, while bringing numerous problems.

Creating fair competitive conditions

The CBAM concept is based on a key insight: achieving greater climate protection requires simultaneously ensuring fair competitive conditions for companies in competition. Otherwise, the relocation of emission-intensive production to third countries – the so-called "Carbon Leakage" – and thus a doubly negative effect are threatened: regions with high climate standards, such as Europe, lose economic value creation to other regions of the world with lower standards. Europe loses prosperity without improving the global climate balance.

The likelihood of Carbon Leakage has already significantly increased since Russia's attack on Ukraine. Now Europe must purchase the more expensive LNG gas compared to pipeline gas. Its remaining competitive advantages over Asian suppliers have therefore disappeared.

Avoiding unilateral actions

The current EU border adjustment concept aims to counteract the Carbon Leakage risk somewhat. However, it overlooks the fact that European entrepreneurs also compete with competitors from other parts of the world outside EU borders. This strongly affects industrial nations like Germany. Therefore, it is important that the EU does not act alone on climate protection. Rather, the Union needs as many and as large allied states as possible beyond its borders – for example, in the form of an international climate club that agrees on similar standards and compensation mechanisms. A current unilateral approach to a border adjustment mechanism could also be interpreted by other regions of the world as isolation and further escalate the already problematic spiral of protectionism rather than de-escalate it.

The German government wants to advance the approach of a climate club as part of its G7 presidency. This goal is also of paramount importance for prosperity and climate protection from the perspective of the German Chamber of Commerce and Industry (DIHK): EU countries currently generate around one-fifth of the global economic output. The G7 alliance, which includes the USA, Canada, Japan, and Great Britain, collectively accounts for nearly half of the world’s national income and represents a large market. This could make it possible to establish the climate club as a pioneer and attract other significant members.

Three prerequisites

Ideas for such a climate club still differ widely internationally. They range from loose alliances dedicated to a common goal – such as phasing out coal – to ambitious commitment communities with set timeframes and the avoidance of "Carbon Leakage." From the perspective of the German Chamber of Commerce and Industry (DIHK), such a climate club must meet three prerequisites to achieve the desired impact: