Carbon-Pricing Clubs Could Cut Global Emissions, But Differences in Burdens and Capabilities Require Tailored Incentives 

CARBON LEAKAGE – when emissions reductions in one country are offset by increased emissions elsewhere – is a key challenge to unilateral efforts to reduce carbon emissions. New research published in Environmental Research Letters explains how this can happen when a country imposes a carbon price. As carbon-intensive goods produced domestically become more expensive, consumers may turn to cheaper imports from countries without similar climate policies. This can increase production and emissions in those exporting countries, offsetting some of the emissions reductions achieved by the country that introduced the carbon price.

The authors, including those from the Harvard-China Project on Energy, Economy, and Environment—based at the Harvard John A. Paulson School of Engineering and Applied Sciences—and Tsinghua University in Beijing say that one way to address this problem is to form carbon clubs of countries willing to impose carbon prices. These clubs could help reduce leakage by allowing members to trade freely with each other while imposing a “carbon tariff” on imports from outside the club. The tariff would be designed to offset the effect of the higher carbon price on production costs. The most prominent example is the European Union’s CBAM (Carbon Border Adjustment Mechanism), which is now being phased in.

The paper notes that a climate club made up of just the EU and the US would do little to reduce global emissions, while a broader coalition that includes major emerging economies such as China and India could make a much bigger difference. Even a “leaders club” of wealthy countries using EU-CBAM rules, with a carbon price rising to $120 per ton of CO₂, would cut global emissions by less than 1.5% by 2040, largely because more than 50% of the reductions would be offset by leakage. The economic cost of this policy for club members would be relatively modest, at around -0.2% of GDP.

The leakage falls dramatically when China and India are included. In the researchers’ simulations of the global economy, this “swing-states” coalition reduces global emissions by 13.5% by 2040 and cuts emissions leakage to below 20%. However, the economic costs for the larger club are higher—and vary considerably across countries. China would see a 1.4% reduction in GDP, compared with just a 0.04% reduction for the European Union.

“Getting the major economies into a carbon-pricing coalition is essential if the goal is meaningful global emissions reductions,” said Dr. Mun S. Ho, Senior Economist with the Harvard-China Project. “But the middle income and developing countries that the world most need to participate likely face much higher costs. The carbon club structure needs to be flexible and include some compensation, or incentives, for these countries to join.”

"The countries who most need to participate likely face much higher costs. The carbon club structure needs to include some compensation, or incentives, for these countries to join.”
 – Dr. Mun S. Ho

Countries have different reasons for joining

The researchers created a Carbon Pricing Incentive Index to compare countries' ability and willingness to join a carbon club based on three factors: economic capacity to adopt carbon pricing, political readiness to bear the costs, and vulnerability to climate change. This Index shows that countries don’t fit neatly into “developed” and “developing” categories when it comes to carbon pricing.

The United States, for example, has the economic capacity to adopt carbon pricing but appears to have relatively low political readiness. China has strong economic and technological capacity and falls somewhere between countries that are well positioned to lead and lower-income countries that may need greater incentives to participate. India, meanwhile, is highly vulnerable to climate change but has less capacity to absorb the economic costs of carbon pricing.

To account for these differences, the researchers examine how more flexible clubs, in which countries set different carbon prices, can reduce the economic costs for important swing states and give them greater incentives to join, even if this means somewhat smaller CO₂ reductions. Under this approach, China’s GDP loss is more than halved, while India’s loss turns into a gain. The authors also suggest financial support, technology sharing, greater access to markets, joint infrastructure projects, and research partnerships to make participation more attractive to these key potential members. 

Climate coalitions have trade consequences

The study also discusses how bigger coalitions change global trade patterns. Trade shifts toward club members and away from countries outside it. Those non-club countries would then strengthen trade with one another, creating new patterns of economic cooperation. If non-club countries retaliate to the CBAMs, their new tariffs could make these divisions even stronger.

Research Cited: Xian Hu, Chen Xiang, Mun Ho, and Jing Cao. 2026. “Scaling Carbon Clubs under CBAM: Incentives and Asymmetric Burdens”. Environmental Research Letters. Publisher’s Version.