Carbon Pricing Policy Developments

G7 Summit: Political Agreement Still Some Way off

A G7 summit was held in Elmau, Germany from June 26 to 28. The outcome of the summit was of key importance given the need for global cooperation on climate change. We begin by summarizing the references to climate change in the G7 summit communique.

References to Climate Change in G7 Summit Communique

  • Urges greater ambition from countries with 2030 targets not aligned with 1.5°C pathway ahead of COP27
  • Commitment to promote sales of zero-emission vehicles over next decade, achieve highly decarbonized road sector by 2030
  • Demonstrate progress toward goal of $100bn in financing for developing nations through 2025 ahead of COP27 to reinforce confidence that this goal will be met in 2023
  • Pledge concrete amounts to international biodiversity finance before Convention on Biological Diversity (CBD) COP15.2
  • Calls on multilateral development banks (MDBs) to develop methodologies for Paris alignment before COP27 and pledge concrete amounts to international biodiversity finance before CBD COP15.2
  • Reaffirm commitment to elimination of inefficient fossil fuel subsidies by 2025
  • Endorse goals of open and cooperative international Climate Club, will work with partners towards establishing it by end of 2022
  • Welcome the EU's decision to explore with international partners ways to curb rising energy prices, including the feasibility of introducing temporary import price caps where appropriate
  • Will support developing countries' just transitions to clean energy, supported by G7 Partnership for Global Infrastructure and Investment (PGII)
  • Commit to end new direct public support for the international unabated fossil fuel energy sector by the end of 2022
  • Commit to achieving fully or predominantly decarbonized power sector by 2035
  • Recognizing coal power generation as single biggest cause of global temperature increase, commit to prioritizing concrete and timely steps towards goal of accelerating phase-out of domestic unabated coal power generation
  • Submit revised and enhanced National Biodiversity Strategies and Action Plans by CBD COP16
  • Commit to leading global effort on protection, conservation, restoration, and sustainable and equitable use of global ocean including by conclusion in 2022 of legally binding instrument under UN Convention on the Law of the Sea
  • Endorse G7 Ocean Deal and ask Environment Ministers to report back on progress by end of year
  • Through more circular economy, contribute to resilient and sustainable supply chains particularly with regard to critical minerals and raw materials
  • By 2025, increase share of ODA employment and skills promotion programmes directed specifically towards green sectors and greening traditional sectors

Note: Shows our summary of References to Climate Change in G7 Summit Communique.
Source: Nomura, based on G7 website and Japan Ministry of Foreign Affairs materials

(1) Promoting Initiatives Consistent with Limiting Temperature Rise to 1.5°C.

The November 2021 COP26 shifted the target of the global climate response from 2°C to 1.5°C given that national targets were already aligned with 2°C. While this is only a long-term target, we think it is important that the G7 is maintaining its commitment to tackling climate change issues despite growing global concerns about energy and food security.

(2) Moves to Decarbonize the Power and Road Sectors

While governments remain committed to climate initiatives, as we noted in point (1), it appears that conflicts of interest are beginning to sap the momentum of debate on individual items. We note that the sharp rise in energy prices since summer 2021 and changes in external conditions, such as the escalation of the Ukraine conflict in late February, may have caused the global response to climate change to stall.

(3) Moves to Step up Collaboration with Developing Nations

The communique notes that the G7 will deliver on its goal of expanding climate finance to $100bn annually by 2023, and will demonstrate progress with this ahead of COP27. This is not in itself novel. The key points, however, are China's greater use of coal-fired thermal power, India's increase in Russian oil imports, and the growing difficulty of strengthening alliances between developing nations and the EU and other developed nations amid concerns about a power crisis. We think there are long-running concerns about the clash between developed and developing nations on climate measures.

(4) Initiatives to Establish a Climate Club

Initiatives aimed at establishing a Climate Club are also important from the perspective of the relationship with developing nations. This is partly because the idea of a Climate Club is linked with the carbon border adjustment mechanism (CBAM), which could affect emerging market economies. Given that it is also closely linked with carbon pricing, we look below at the comments regarding the Climate Club in the G7 communique. The most we can say is that the key points were the confirmation of the Climate Club as a framework for countering carbon leakage, and a future focus on policies for strengthening emissions measurement and reporting mechanisms.

Climate Club Outcomes at Recent G7

Support effective implementation of Paris Agreement by accelerating climate action and increasing ambition, with particular focus on industry sector, thereby addressing risks of carbon leakage for emission intensive goods, while complying with international rules.

Three key pillars of Climate Club:

  • (1)Advancing transparent climate mitigation policies to reduce emissions intensities of participating economies by strengthening emissions measurement and reporting mechanisms and countering carbon leakage at the international level. In this regard, members would work towards a common understanding of assessing ways to compare the effectiveness as well as the economic impacts of mitigation policies.
  • (2)Transforming industries jointly to accelerate decarbonization, including through taking into account the Industrial Decarbonisation Agenda, the Hydrogen Action Pact, and expanding markets for green industrial products.
  • (3)Boosting international ambition through partnerships and cooperation to promote a just energy transition. Potential to leverage Just Energy Transition Partnerships (JETPs) in achieving this.

Timeline for establishment:
By end-2022

Asks OECD, IMF, World Bank, IEA, and WTO to support establishment of Climate Club. Look forward to contribution from OECD’s Inclusive Forum on Carbon Mitigation Approaches (IFCMA).

Source: Nomura, based on G7 website and Japan Ministry of Foreign Affairs materials

Summary from “Nomura ESG Monthly (July 2022)”

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