Club governance formats such as the G20 and G7 have an important role to play in raising the level of ambition to effectively combat climate change and achieve the Sustainable Development Goals (SDGs). This was the key message that came out of a virtual expert conference organised by the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in cooperation with the Center for Strategic and International Studies (CSIS), Indonesia, and the Sustainable Development Solutions Network Europe (SDSN Europe). The conference brought together key experts and policy makers from G7 and G20 countries, assessed the outcomes of the G7 Carbis Bay summit and looked ahead not only to the upcoming G20 summit in Rome but also the G7 and G20 presidencies in 2022 chaired by Germany and Indonesia respectively.
The Carbis Bay G7 summit in June 2021 resulted in a number of substantial outcomes, in particular assessed against the background of deep disagreements on issues such as climate action in the past four years that plagued both the G7 and G20. Experts, however, agreed that the G7 still needs to live up to its past and present commitments, let alone to what is necessary. For example, the additional 1 billion doses of Covid-19 vaccines that were pledged at the G7 summit in addition to the 1 billion that the G7 had already funded or donated represent only about 20 per cent of the doses needed globally.
The legitimacy of the G7, as well as of the G20, depends on whether their members commit and implement, both domestically and globally, what is necessary for the global common good. As a club governance format of self-declared like-minded countries, the G7 should prove that it is instrumental for multilateral solutions, e.g. by making its initiatives helpful to and connectable with the G20 processes. Just consider the “Build Back Better for the World (B3W)” partnership that was announced at Carbis Bay. While such an initiative should be welcomed, in particular if it leads to more investments in ‘quality’ infrastructure through higher standards and sustainability criteria, the way the initiative was presented suggests that it is rather pursued as a means to another end, namely as a tool to counter China’s Belt and Road initiative. The U.S. government, for example, makes little effort to downplay the role of the B3W initiative in its strategic competition with China. The G7 should not go down that conflictive path and should rather seek to build bridges to the G20.
Experts agreed that more ambitious commitments by the G20 leaders’ summit in Rome at the end of this week are needed to bring the COP26 climate negotiations to a successful conclusion. Crucially, G20 leaders need to make progress on issues such as international climate finance, phasing-out of coal as a source of energy production as well as the removal of fossil-fuel subsidies (which, by the way, the G20 committed to already in 2009). Another key area where a void needs to be filled by the G20 is the availability of additional Covid-19 vaccines.
Key areas for global action
The upcoming G20 presidency of Indonesia in 2022 as well as the German G7 presidency in 2022 present opportunities to make progress on several issues to ensure a green and just recovery from the Covid-19 pandemic and use it as a catalyst for transforming socio-economic systems compatible with the demands of the 2030 Agenda for Sustainable Development and the Paris Climate Agreement. At our conference, we have identified and discussed three crucial areas for the G20 and the G7.
Public investment and regulating the financial sector are key levers to achieve a transformation towards more sustainability. Experts discussed the importance of more fiscal space for funding such a transformation. In this respect, increasing levels of indebtedness are a major concern and debt relief initiatives should be used to create space for investment in climate action and sustainable development. Another important source for transformative investments in low and middle income countries are the Special Drawing Rights issued by the International Monetary Fund that should be redirected not only to fund the recovery from the pandemic but also for purposes of climate action or social protection.
Moreover, the incentive structure for private and public investments needs to be changed and the adoption and dissemination of environmental and social governance (ESG) standards is crucial in this respect. In other words, it will be necessary to set the framework right to move investment flows from brown to green sectors and make the economy more inclusive. Last but not the least, the G20 and G7 should support initiatives that aim at better internalising climate risks, making them an integral part of economic forecasting, guiding both public and corporate decisions. Furthermore, there is need for a mechanism in de-risking the green investment in developing countries. Phasing-out fossil fuel subsidies is another case in point: it would reshape incentives and free up fiscal space for climate action.
Climate clubs to support strong climate action by its members are an option, but only a second best to a functioning multilateral system, as they could provoke counter-reactions by non-members. The challenge therefore is to design climate clubs in a way that they produce benefits for their members without disadvantaging non-members.
Several key areas of discussion related to how climate clubs can facilitate ambitious carbon pricing regimes while avoiding free riding and carbon leakage. The European Union has announced to put forward a carbon border adjustment mechanism (CBAM) that allows to impose a levy in case the CO2 content of imports exceeds the level of domestically produced strategic products. Experts were of the opinion that CBAMs should be designed very carefully to ensure that their effects on developing countries, and LDC in particular, are not damaging, and that they are in line with the non-discrimination principle of the World Trade Organization. The creation of climate clubs should also involve developing countries in the discussion and design process. These countries should, furthermore, be supported through capacity building, financing and transfer of green technologies.
In addition to carbon pricing schemes, climate clubs can lead to multiple ambitious climate actions. Among other things, this could be the joint development and sharing of climate-friendly technologies, climate finance or research cooperation. Given the ambivalent potential of climate clubs (support ambitious climate action vs. harm to international cooperation), the G20 and the G7 should be used as platforms of cooperation, dialogue and policy coordination on climate clubs.
Inclusive socio-economic transitions
All climate and sustainability-oriented policies have distributional effects, on top of already large inequalities in income and wealth distribution. The expert conference discussed a number of effective ways to avoid trade-offs between the environmental and social dimension of sustainability. Policy design should favour just transition pathways to sustainable and inclusive economies and societies, especially in fossil-fuel dependent regions and countries. For example, revenues generated by carbon pricing regimes or the removal of fossil fuel subsidies should be used for targeted transfers to poorer households, both domestically and internationally. Furthermore, these funds should support climate-proof infrastructure as a public good benefitting the poorer parts of societies. Experts called on the G20 and G7 to reform climate policy instruments and funds to allow them to proactively include social protection policies in support of climate change mitigation as well as adaptation.
G20 and G7 leaders need to act fast. It is only 8 years until we reach 2030, a key milestone both for the achievement of the 2030 Agenda and the transition towards climate-neutral societies and economies. G20 and G7 leaders in 2022 and beyond are faced with high expectations to deliver on recovery processes that are in line with the goals of a green and just transition, as well as enhancing global resilience. The main issue here is delivering on previously made commitments. So, how to ensure that what’s been agreed at the negotiation table will be implemented on the ground? One way to do this is to rely on and encourage wider stakeholder communities, involving non-governmental organisations, business, labour and think tanks, beyond the G20 and G7 governments.
At the same time, geopolitical rivalries and intra-societal conflicts are acute and need to be taken into account. The G20 and G7 processes under Indonesian and German leadership should both spur each other and work hand in hand to adopt globally-accountable summit agendas that are focused on furthering the global common good rather than domestic interests.
- Axel Berger is Senior Researcher and Head of the G20 Policy Research Group at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE).
- Yose Rizal Damuri is Head of the Department of Economics at the Center for Strategic and International Studies (CSIS).
- Medelina K. Hendytio is Deputy Executive Director at the Center for Strategic and International Studies (CSIS).
- Anna-Katharina Hornidge is Director of the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and holds a professorship for Global Sustainable Development at the University of Bonn.
- Adolf Kloke-Lesch is Co-Chair of the Sustainable Development Solutions Network Europe (SDSN Europe).
- Imme Scholz is Deputy Director of the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and Deputy Chair of the German Council for Sustainable Development
- Philips J. Vermonte is Executive Director at the Center for Strategic and International Studies (CSIS).