Industrial decarbonisation in a fragmented world: an effective carbon price with a ‘climate contribution’

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This report argues that Europe’s climate policymakers must prepare options to ensure the resilience of its industrial strategy in a global context of increasing fragmentation, and proposes a ‘climate contribution’ approach. In particular, the EU’s Carbon Border Adjustment Mechanism (CBAM) may not be sufficient to provide a level playing field if other countries do not pursue comparable carbon pricing strategies.
The report is authored by a group of academics from institutions across Europe,[i] led by Karsten Neuhoff and Misato Sato, and published by the Grantham Research Institute with DIW Berlin and the Centre for Economic Transition Expertise (CETEx).
Main messages
- A straightforward charge in the form of a ‘climate contribution’ would complement emissions trading and the EU’s CBAM (and the UK’s, once it is introduced in 2027). It would be non-discriminatory, as it would be levied on domestically produced and imported carbon-intensive basic materials like steel, cement and plastic, and be based on standardised values equal to the value of free allowance allocation to conventional production.
- Unlike a CBAM, the climate contribution would be product-based, thus a relief for exports would be possible, in line with World Trade Organization (WTO) rules. The standardised value avoids resource shuffling and allows consistent application along the value chain.
- The climate contribution could help fill the funding gap left by free allocation of emissions allowances during the transition period of the CBAM, ensuring stable revenues to finance Carbon Contracts for Difference (CCfDs) for example, which are critical for green industrial investments.
- It offers the flexibility to extend free allocation if progress in advancing global carbon pricing proves slow, without compromising climate and industrial objectives.
- The authors recommend introducing the climate contribution as a bridging instrument to complement emissions trading and ensure investment stability and incentives for green industry during the CBAM transition period.
- In summary, the climate contribution provides a practical, WTO-compliant solution to address carbon leakage risk, ensure investment stability, and support industrial decarbonisation in the face of global policy fragmentation.
[i] Authors: Karsten Neuhoff (DIW Berlin; Technical University Berlin), Misato Sato (Grantham Research Institute on Climate Change and the Environment, LSE), Fernanda Ballesteros (DIW Berlin; Technical University Berlin), Christoph Böhringer (Carl von Ossietzky University of Oldenburg), Simone Borghesi (European University Institute; University of Siena), Aaron Cosbey (Small World), Katsuri Das (Institute of Management Technology, Ghaziabad, Delhi-NCR), Roland Ismer (University of Potsdam), Angus Johnston (University of Oxford), Pedro Linares (Institute for Research in Technology; Comillas Pontifical University), Sini Matikainen (Grantham Research Institute on Climate Change and the Environment, LSE), Stefan Pauliuk (University of Freiburg), Alice Pirlot (Geneva Graduate Institute), Philippe Quirion (CNRS, CIRED), Knut Einar Rosendahl (Norwegian University of Life Sciences), Aleksander Sniegocki (Reform Institute, Warsaw), Harro van Asselt (University of Cambridge) and Lars Zetterberg (IVL Swedish Environmental Research Institute).