The European Union (EU) has been a frontrunner in curbing greenhouse gas emissions, having established in 2005 the Emission Trading System (ETS) and having adopted in July 2021 a proposal for a Carbon Border Adjustment Mechanism (CBAM). This essay explains how the design of the EU CBAM proposal complies with World Trade Organization (WTO) rules, in particular with the principle of non-discrimination. It then discusses how the EU can cooperate with other countries that share similar climate ambitions to decarbonize industrial sectors and achieve the aims of the Paris Agreement. The essay argues that autonomous measures and international cooperation initiatives can work as complementary tools to attain climate neutrality.

Assessments of the relationship between trade agreements and the climate regime often focus on the potential for normative conflict. Concerns that trade commitments may prevent the adoption of measures to curb climate change, or at least that these are two regimes that “point in different directions,”1 are often voiced to suggest that taking climate action requires fundamentally modifying, and maybe getting rid of, current trade agreements. In this essay, we argue that allegations of conflict disregard longstanding World Trade Organization (WTO) jurisprudence on policy-justified trade measures. As a matter of principle, this alleged conflict has been essentially overcome since the 1998 Appellate Body report in United States – Shrimp.2 Focusing on potential conflict distracts from the real challenges and dilemmas involved in designing and implementing a global carbon regime, including through the trade instruments known as carbon border adjustment mechanisms (CBAMs and so-called “climate clubs”), for which the legal parameters provided by trade agreements may be instrumental.

The European Union (EU) recently proposed the introduction of a carbon border adjustment mechanism (CBAM) and suddenly transformed into reality an almost two decade-long debate over the hypothetical use of CBAMs as antidotes to uneven carbon prices. The European Commission presented the scheme as a climate measure aimed at reducing the risk of carbon leakage for energy intensive and trade-exposed industries facing the cost of increased climate ambition.1 At the same time, however, it listed the mechanism among the instruments that support a “competitive [green] transition” for EU businesses in the context of the new industrial strategy supporting the EU Green Deal.2 This ambiguity risks undermining the credibility of the scheme as a legitimate climate response unless it can be shown that the equalization of carbon costs (i.e., the fair competition/industrial component) is instrumental to achieving higher emission reduction levels than could have been achieved otherwise (i.e., the carbon leakage/climate component). While the exact balance between climate- and industrial-informed features is ultimately an issue of design, this essay argues that making the scheme (as) compatible (as possible) with the rules of the World Trade Organization (WTO) improves its environmental effectiveness and accordingly contributes to reconciling the CBAM with its stated climate purpose.

The European Union's (EU) proposed Carbon Border Adjustment Mechanism (CBAM) underscores that the introduction of climate-motivated trade measures is no longer just a matter of academic debate. With countries ramping up domestic climate action at different speeds and levels of ambition, the likelihood of other countries following the EU's lead and adopting a border carbon adjustment (BCA)1 of their own will only increase. International cooperation can help avoid a fragmented landscape of varying BCA designs, mitigate concerns about trade protectionism, and ensure that the further development of BCAs leads to stronger global action on climate change. Some countries have begun to show an interest in pursuing international cooperation involving joint trade measures through “climate clubs.” Yet such international cooperation also raises new questions concerning the legal form, the forum through which cooperation should be pursued, and the (normative) substance of any international agreement on BCAs. The answers to these questions matter not only for the development and implementation of BCAs, but may also affect the future trajectory of the international legal regime for climate change and trade.

The climate is changing, and so is climate diplomacy. Global treaties may be failing, while unilateral actions are proving to be contentious both within the climate and the trade regime. At the same time, countries need to be given the right incentives to participate in the fight against climate change and to start curbing their emissions substantially. The European Union's (EU) decision to introduce a Carbon Border Adjustment Mechanism (CBAM) and the momentum around carbon pricing may be the perfect opportunity to revisit these ideas in the form of clubs. What if small groups of countries got together and set the pace for a new era in climate diplomacy? What if they relied on trade measures to do so? Clubs are not new in international law, let alone in international climate law. Compared to global approaches, they may avoid freeriding; compared to unilateral ones, they may reduce the risk of trade frictions. And not all major emitters need to participate right away. As few as two parties could start a climate club, a sort of club within the club, gradually catalyzing or influencing action on climate change. In this essay, we argue that climate clubs enable like-minded countries to assume more ambitious commitments and gradually pull in other countries with them.