Scholz treads on thin ice with push for international “climate club”

Scholz treads on thin ice with push for international "climate club"

German Chancellor Olaf Scholz has expressed his desire for a G7 climate club, but at the same time needs to get a handle on the complex legislation surrounding the CO2 cap and trade tax. [EPA-EFE/MARKUS SCHREIBER / POOL]

German Chancellor Olaf Scholz has called for the creation of a "climate club" that would bring together major economies seeking more ambitious climate protection measures. But while the EU is pushing for a CO2 tariff at its border, Scholz is skating on thin ice.

As part of Germany’s G7 presidency, Scholz is trying to form an international alliance to push for more ambitious climate policies.

"We will use our G7 presidency to make this group the core of an international climate club," Scholz said Wednesday (19. January) during a speech at the World Economic Forum in Davos.

Its announcement reflects a long-held desire that Scholz had expressed during his tenure as finance minister under the previous Merkel IV cabinet.

"The idea of a climate club has long been a favorite project of Scholz," says Johanna Lehne, senior policy advisor at E3G, a think tank.

Olaf’s Scholz vision can be summed up by the acronym "ABC" – an alliance of Ambitious, Bold and Cooperative (ABC) countries working to tackle climate change.

Ambition would be achieved "if members commit to the 1.5-degree target and climate neutrality by 2050 at the latest," he said in Davos.

Courageous hereafter means that "we act now to achieve these goals," he added, citing carbon pricing as an important policy tool. After all, being cooperative means "being open to all countries and respecting WTO rules," he added.

With three EU countries members of the G7 already committed to the same climate goals, Olaf’s Scholz Climate Club is primarily aimed at the remaining members – Canada, Japan, the United Kingdom and the United States.

According to proponents, trading within a climate club would create a level playing field for participating countries, which would be bound by similar carbon pricing rules.

Others, however, consider this insufficient. A climate club is "not a credible stand-alone option," writes Berlin-based think tank Agora Energiewende.

"It is highly unlikely that the EU’s key international partners will agree on a single global carbon price by 2030," notes Oliver Sartor, senior industry advisor at Agora.

Scholz treads on thin ice with push for international "climate club"

German government wants to establish international climate club

Germany wants to give climate protection a boost worldwide: The federal cabinet decided on Wednesday to establish an international climate club. Climate club aims to get world’s biggest emitters on board.

Complications in world trade

Until now, EU industry has been relatively well shielded from foreign competition thanks to a system of free emissions allowances distributed to companies under the EU Emissions Trading Scheme (ETS).

Allocating free carbon credits is an attempt to counter the "carbon leakage" problem – the relocation of CO2 emission sources from Europe to countries where environmental regulations are more lax.

Some European companies have even been allocated more emissions allowances than necessary, giving them generous market position gains.

"Steel and iron get more free allowances than they pollute," said energy analyst Thierry Bros. "This is practically a hidden subsidy," he wrote on Twitter.

In view of the European Commission’s efforts to move the EU to net-zero emissions by 2050, free emissions allowances for industry will be phased out.

To ensure a level playing field after the scheme expires, the Commission has proposed the establishment of a carbon border adjustment mechanism (CBAM) that would put a carbon price on imports of carbon-intensive goods such as steel, fertilizers and aluminum.

There is only one problem: CBAM will not compensate EU industry for the production of goods exported outside Europe, unlike the current system, which is based on the free allocation of emission allowances for all production.

"You know we are very hesitant when it comes to CBAM," said Joachim Lang, chief executive of the influential German industry association BDI. "We are concerned about retaliation, for example, from the U.S. or China," he warned on 13. January.

Newly appointed Vice Chancellor Robert Habeck sought to allay skeptics’ concerns, saying on 18. December told industry representatives that CBAM "should not be allowed to trigger a new trade war as a hidden tariff".

"Given the enormous importance of exports for German industry, CBAM is a highly sensitive issue," Johanna Lehne of the think tank E3G. The German coalition is still trying to find a unified position on the proposal, she told EURACTIV.

"An effective CBAM must also provide adequate protection for exporters," writes Agora Energiewende, whose former head Patrick Graichen now works for Vice Chancellor Habeck.

Scholz treads on thin ice with push for international "climate club"

EU emissions trading reform plan under fire

CDU MEP Peter Liese’s proposal to keep free CO2 credits in case they are not replaced by a CO2 cap and trade tax was criticized by his colleagues in the European Parliament.

French-German priorities overlap?

Despite German reservations, CBAM is a key component of the European Commission’s "Fit for 55" climate package, which aims to reduce EU CO2 emissions by 55 percent from 1990 levels by 2030.

It’s also a key demand of France, which has been pushing for the introduction of such a system at the EU level for many years to protect its industry from environmental dumping from countries like China.

"The European Commission’s CBAM proposal from last year is a good compromise between the concerns of trading partners and the need to provide clearer incentives for domestic industry to decarbonize," Lehne said. Eventually, CBAM will become a central part of the EU’s climate policy arsenal, she added.

This is where the climate club envisioned by Scholz comes into play. If enough countries join, CBAM would essentially not apply under the European Commission’s proposal.

Establishing climate clubs "is helpful as long as major emitters China and the U.S. go along," BDI said in November 2021. Given industry’s aversion to CBAM, climate clubs seem a more realistic alternative.

Despite industry concerns about CBAM, "we have not yet seen the German government explicitly call for replacing the EU CBAM with its push for a climate club at the G7 level," Lehne said.

According to Lehne, Germany "definitely intends to use the club as a vehicle to start talks with trading partners on pursuing a joint CBAM". At this stage, Lehne added, "Germany still supports the parallel pursuit of an EU CBM".

And given the overlap between Germany’s G7 presidency and France’s EU presidency, some believe the two are actually complementary.

"The proposed ‘climate club’ could be useful as a complement to a CBAM," Agora Energiewende wrote in a report on 18. January, giving advice on how to reconcile France’s and Germany’s two pet projects.

The combination of CBAM and Scholz’s climate club could put the EU in a stronger position "to achieve meaningful cooperation with trading partners if it has the credible alternative of a CBAM," the authors write.

Scholz treads on thin ice with push for international "climate club"

EU parliamentarian presents ‘complete overhaul’ the CO2 limit levy

EU lawmakers in charge of negotiating the upcoming European levy on carbon-intensive imports have recommended drastic changes, such as a faster rollout and the inclusion of more products.

A hydrogen club for the global south?

Another surprising aspect of Scholz’s climate club idea is the link to Germany’s emerging "hydrogen diplomacy".

"We want to work out a common understanding of what we mean by green hydrogen within the framework of the climate club," Scholz said in Davos. "And we will coordinate our investments in green hydrogen internationally," he added.

With its strong industrial base and energy needs, Germany is a natural consumer of green hydrogen, which can be produced in large quantities in developing countries using solar energy, Scholz said.

Lehne said she was "surprised that Scholz mentioned green hydrogen in his speech in Davos in connection with the climate club". "While the offer of technology sharing and mutual benefit is positive, we see a real danger that this will become a purely extractive policy if we are not careful with it," she said.

So far the German efforts in the field of hydrogen diplomacy were received with scepticism in Kiev. It remains to be seen whether Scholz’s offer to the developing countries will be more acceptable to them.

Scholz treads on thin ice with push for international "climate club"

Germany’s "hydrogen diplomacy meets with incomprehension in Ukraine

While the situation on the Ukrainian border continues to tighten, the German foreign minister’s visit to Kiev revolved excessively around Germany’s intention to import large quantities of hydrogen from Ukraine.

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