This article is part of a Synergies series on Next generation trade arrangements for environment and sustainable development. The views and opinions are those of the author(s).

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As the emissions gap places the world on a trajectory towards 2.8°C of warming by 2100, a mosaic of “climate club” arrangements is emerging to advance international climate cooperation in areas that have struggled to achieve progress in multilateral fora. By prioritizing climate policy coordination and the development of carbon standards and emissions accounting methodologies, climate clubs can support higher ambition in mitigation actions. They can also accelerate sectoral decarbonization. For example, the Climate Club launched by the G7 in 2023, which now counts 50 members, is currently focused on steel and cement decarbonization.

At the same time, climate clubs might also serve as an avenue to coordinate approaches to the imposition of trade-related climate measures such as border carbon adjustments (BCAs) among members with carbon pricing mechanisms in place (e.g. countries with emissions trading systems that are either linked or comparable in ambition). In this context, club members would apply a (common) BCA only against imports from non-members as a means to address carbon leakage concerns arising from lower or otherwise less stringent carbon prices prevailing outside the club, and to ultimately encourage non-members to adopt similar carbon pricing policies to join the club.

Climate clubs were first theorized by William Nordhaus drawing from public goods theory and collective action literature. In his view, the transformational effects on states’ incentives to tackle climate change could be achieved when club members would adopt a uniform carbon price and coordinate tariffs on non-members’ imports based on their embedded carbon, as a form of sanction for not adopting a similar carbon price. Based on this theory, a sanction-based model would motivate non-members to join and deter free riding. 

Economists have long debated on what the perfect climate club should look like, but political feasibility has proven hard to achieve, particularly concerning the sanctions-based element of economic climate clubs à la Nordhaus. At the same time, their compatibility with the rules of the World Trade Organization (WTO) remains uncertain. The trajectory of the European Union's Carbon Border Adjustment Mechanism (CBAM)—which, in conjunction with the EU Emissions Trading System (ETS), is considered the closest real-life approximation to a de facto sanctions-based climate club—illustrates these challenges. The introduction of the CBAM has fuelled tensions within the trade community, leading to a WTO dispute (still pending), but also risked disrupting global climate negotiations as several developing countries have criticized the mechanism as a unilateral trade measure forcing countries to adopt similar carbon pricing policies and a new form of climate protectionism in disguise.

Against this backdrop, the recent launch of the Open Coalition on Compliance Carbon Markets by Brazil, the EU, and China offers a potentially important alternative, collaborative model of economic climate club. The Declaration, endorsed at COP30 in Belém by 18 countries, including both developed and developing economies, centres on “coordination on development and enhancement of compliance carbon markets” and deliberately avoids the contentious issue of sanctions-based climate governance. Instead, the coalition prioritizes cooperation on carbon pricing mechanisms, monitoring, reporting, and verification (MRV) systems, and carbon accounting methodologies as a precondition to ensure interoperability of regulated carbon markets. Significantly, the Declaration also envisages cooperation on the definition of rules on “the potential use of high integrity offsets.”

Commenting on the initiative, the EU Commissioner for Energy and Climate Action, Dan Jørgensen commented that the coalition “can establish a benchmark to fully integrate relevant standards into final national targets and the design of domestic carbon markets.” This aspect is particularly noteworthy in light of the EU’s longstanding opposition to the use of offset credits within the EU ETS, which accounts for more than 80% of the total global carbon market value. Meanwhile, the EU Commissioner made clear that any use of offsets would remain subject to stringent conditions, emphasizing that “the use of high-quality credits must align with the standards and principles established under the Paris Agreement.” 

Article 6 of the Paris Agreement can play a crucial role in facilitating the operationalization of a climate club intended as an instrument to support the progressive integration of carbon markets. Article 6 provides the legal basis for voluntary cooperative arrangements among Paris Agreements’ parties committed to achieving higher climate ambition. Countries can either cooperate directly through the creation and transfer of internationally transferred mitigation outcomes (ITMOs) under Article 6.2, or implement activities that generate Article 6.4 emissions reductions (A6.4ERs) in the context of the Paris Agreement Crediting Mechanism (PACM).

Countries are free to decide whether to accept Article 6 credits against domestic, mandatory carbon pricing schemes. They are also free to decide whether to authorize emission credits created by private carbon market programmes, which are collectively referred to as voluntary carbon market (VCM). This means that Article 6 credits exist alongside emission allowances from national compliance markets and with the emission credits from the VCM. Fungibility is conditional and currently remains severely limited by regulatory constraints imposed, for example, on the type and use of eligible credits (e.g. quantitative and/or qualitative limits on the use of authorized credits for compliance in national ETS schemes), oftentimes amounting to de jure or de facto barriers to domestic carbon markets. 

Although overlaps and connections among different carbon market segments are gradually emerging (e.g. several countries have either already integrated or are considering ways to integrate the use of certain types of emission credits in their domestic ETS schemes, including China, Japan, Brazil, Indonesia, and South Korea; credits can be used against carbon taxes in Colombia, Singapore, and South Africa; or national level compliance markets are linked, such as the EU ETS and the Swiss ETS), carbon markets remain highly fragmented, largely because of differences in the real or perceived quality and integrity of carbon credits and the standards governing them across several dimensions, from additionality to permanence and measurability of co-benefits.

In this context, a climate club that develops principles and rules for determining fungibility between different types of carbon units grounded on Article 6 mechanisms could help prevent discrimination and foster interlinkages across different carbon market segments. Achieving this objective, however, would require a robust MRV regime capable of supporting mutual recognition and/or equivalence pathways across carbon accounting methodologies. Progress in these areas could, in turn, lay the ground for interoperability across national approaches of club members—an issue that is increasingly urgent to address, especially given that key jurisdictions, including the EU, are preparing to use ITMOs in their nationally determined contributions and possibly also other Article 6-aligned credits for CBAM compliance purposes.

By leveraging the mechanisms established under Article 6 of the Paris Agreement, governments can move beyond confrontational, sanctions-based models of climate clubs towards a cooperative model of a “club of carbon markets.” Such a model would prioritize interoperability while recognizing the diversity of national circumstances among its members, in keeping with the principle of common but differentiated responsibilities and respective capabilities.

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Ilaria Espa is Associate Professor of International Economic Law, Università della Svizzera italiana (USI); and Fellow at the World Trade Institute (WTI). 

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