Scaling carbon clubs under CBAM: incentives and asymmetric burdens

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is the first large-scale climate-trade instrument with the potential to reshape global carbon pricing incentives. Its implementation pressures countries without explicit carbon prices to reconsider their domestic strategies and their positions in emerging climate clubs. Yet it remains unclear whether CBAM can anchor an expanding carbon pricing coalition, and at what environmental, economic, and distributional cost. Here we develop a Carbon Pricing Incentive Index—a composite measure of economic capacity, political readiness, and climate vulnerability—to classify countries’ willingness and capacity to price carbon, and integrate it into a dynamic computable general equilibrium model to simulate how different club configurations affect global emissions, economic outcomes, and trade patterns. Small clubs deliver little: an EU-only or leaders-only coalition cuts 2040 emissions by under 1.5% with leakage over 50%. By contrast, expanding to include emerging economies such as China and India is transformative, with global emissions falling by 13.5% and reducing leakage to below 20%. Yet this expansion generates sharply asymmetric economic burdens. China faces a 1.4% GDP loss upon entry, compared with only 0.04% for the EU—an economic penalty that creates strong disincentives for late entrants. Broader membership also fragments global trade, as commerce is redirected away from non-members and toward club members, thereby hardening new economic blocs. These dynamics highlight the dual nature of carbon clubs: they can accelerate decarbonization but also fracture global trade. The central challenge is therefore not merely technical efficiency, but designing governance that ensures equitable burden-sharing and manages fragmentation.