What the G7 Climate Club means for carbon markets

G7 Climate Club

What exactly is a climate club, and how can the one recently announced by the G7 influence the world’s decarbonization?

At the end of the G7 meeting in Germany last week, Canada, France, Germany, Italy, Japan, the UK and the US announced the formation of a climate club aiming to “advance ambitious and transparent climate change mitigation policies towards climate neutrality”. But what exactly does a climate club consist of, and how will it influence global decarbonization? 

What is a climate club?

Though this is a relatively new concept, a climate club generally consists of a group of countries committed to climate action, who take measures together to fight carbon leakage from countries outside the club. As a reminder, carbon leakage is when production is moved from a country with a strict carbon policy to a country where it is cheaper to pollute, and therefore no emissions reduction is achieved.

The idea is to create a low-carbon market big enough to incentivize companies to reduce their emissions and improve their climate performance.

Who is in the G7 Climate Club?

The G7 Climate Club is formed of all the countries included in the Group of 7: Canada, France, Germany, Italy, Japan, the UK and the US. In 2020, these countries accounted for over 50% of global net wealth (US$418 trillion), 32 to 46% of global GDP, about 25% of global emissions, and approximately 770 million people or 10% of the world’s population. Needless to say, the G7 Climate Club is big enough and economically powerful enough to make a difference in the global fight against climate change. 

Three of these countries (France, Germany and Italy) are part of the European Union, which has a mandatory carbon market (the EU ETS) in place and is already planning to implement a Carbon Border Adjustment Mechanism – effectively a carbon tax for products entering the EU – to fight carbon leakage. Of the other four, Canada has a carbon tax set at C$50 per ton of CO2-equivalent and due to increase to C$170 by 2030; Japan has a carbon tax of around US$2.80 per ton, but is looking at implementing a US$56/ton tax on the shipping industry starting from 2025; the UK has an emissions trading system similar to that of the EU; and the US currently has no federal carbon tax.

However, the G7 Climate Club is not closed: instead, founding members are inviting other countries with strong climate ambitions to join by the end of the year, when the G7 expects the club to be fully established.

More on this topic:

What will the G7 Climate Club do?

According to a G7 statement on the Climate Club, it is built on three pillars: 

1) Advancing ambitious and transparent climate mitigation policies to reduce emissions intensities of participating economies on the pathway towards climate neutrality, by making policies and outcomes consistent with the club’s ambition, strengthening emissions measurement and reporting mechanisms, and countering carbon leakage at the international level. 

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 encourage and facilitate climate action and unlock socio-economic benefits of climate cooperation and to promote just energy transition.

Members of the Climate Club would share best practices and work together to compare the effectiveness and economic impacts of each of their mitigation policies, such as explicit carbon pricing, other carbon mitigation approaches and carbon intensities.

They would also use their influence to incentivize developing countries to increase climate transparency and decarbonize their energy and industrial sectors, including through financial, technical capacity support and technology transfer development and deployment.

How will the Climate Club shape carbon markets?

The biggest impact the Climate Club is expected to have on global carbon markets is by setting a minimum carbon price, below products imported by club members will be submitted to an adjustment tax. This will allow climate leaders to move ahead on policy and accelerate global decarbonization, even if no consensus can be found amongst all Paris Agreement signatories – as was observed at COP26 on the topic of coal.

In fact, the Climate Club is intended to com­pensate for the lack of enforcement mech­anisms in the Paris Agreement: “We note with concern that currently neither global climate ambition nor implementation are sufficient to achieve the goals of the Paris Agreement by reducing greenhouse gas emissions. We aim to establish a Climate Club to support the effective implementation of the Paris Agreement by accelerating climate action and increasing ambition,” says the G7 statement on the topic.

What are the challenges?

In pushing for the global implementation of the Paris Agreement, and considering the G7’s economic power on the global stage, the Climate Club must ensure it takes the basic principles of climate justice into consideration. While all countries must take action to combat the climate crisis, differences in levels of economic development and historical carbon emissions must be recognized, and “punitive” mechanisms like carbon taxes and carbon border adjustment mechanisms must come with financial and other forms of support for developing countries’s net zero transition.

Let’s remember that developed economies’ 2009 pledge to provide US$100 billion of climate finance to developing countries every year by 2020 was never fulfilled. The best way for the Climate Club to address climate justice would be to dedicate revenue from the Carbon Border Adjustment Mechanism to climate finance, both for developing countries and for communities within its own countries that are most vulnerable to the effects of climate change.

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