On May 20, the Group of Seven (G7) finance ministers and central bank governors released a communique stating their intent to explore a “climate club,” a formal alliance between like-minded countries to harmonize carbon emissions reductions. Such an agreement has the potential to accelerate decarbonization and promote sustainable development. It can also create a competitive advantage for more efficient U.S. businesses at home and greater demand for their products globally.
The G7 are the world’s largest and wealthiest liberal democracies: the U.S., Canada, France, Germany, Italy, Japan, and the UK. Upon assuming the G7 presidency at the start of the year, Germany committed to advancing a climate club among G7 members and other willing countries as part of a joint strategy to address climate change.
The primary goal of the club as proposed by Germany is to accelerate the implementation of the Paris Agreement in the following ways:
G7 members should:
- Agree on uniform standards for the pricing of CO2
- Agree on common measures for supporting countries that implement ambitious climate protection measures
- Promote the transfer of knowledge and technology to non-G7 club members
- Support climate policy reform in non-G7 club member countries
- Accelerate the just, global transition towards sustainable and climate-neutral societies
- Enhance research on tackling climate change
- Align climate aspects with the Global Sustainable Development Goals and with security policy as it relates to climate change as a risk multiplier
In the global market today, emissions associated with the production of internationally-traded goods go largely unpriced, giving an unfair advantage to the dirtiest, most unregulated economies. Trade policies that account for the carbon emissions embodied in goods would flip the incentives, rewarding producers who adopt cleaner practices.
A climate club would “turn climate action from a cost factor into a competitive advantage – by agreeing on joint minimum standards,” German Chancellor Olaf Scholz said at the World Economic Forum in January. Depending on how those standards are defined, a climate club could enhance the trade of cleaner goods across the economies of the G7, as well as spur decarbonization in non-G7 countries.
America stands to gain from such a shift. Energy-intensive, globally traded commodities such as steel are made with less carbon emissions in the U.S. than most other regions in the world, especially outside the G7 countries. By joining a climate club with other G7 countries, carbon-efficient U.S. companies would realize a competitive advantage domestically and see greater demand for their products globally.
A climate club made up of some of the world’s cleanest economies and wealthiest consumer markets can also be a powerful engine for decarbonization. At present, much of the growth in global emissions is fueled by export-oriented economies whose economies have carbon intensities several times that of the G7 economies. If all imports to the U.S., EU, UK, Japan, and Canada were produced with a similar carbon intensity to their domestic markets, annual global emissions would be roughly 5.4%, or 1.8 billion tons of CO2, lower.
The climate club envisioned by Germany would be open to developing countries. As club members, emerging economies could have access to climate finance and technology transfer, ensuring industrialization and development is underpinned by lower-carbon technologies and infrastructure. With the right incentives in place, G7 countries can also support emerging economies in developing key commodities for export, such as manufactured metals used in solar and wind energy and electric vehicle batteries. This will strengthen the security of clean energy supply chains and ensure economic development in emerging markets is aligned with promising G7 consumer economies.
The discussion around climate clubs is the latest example of an emerging effort to harness trade relationships and geopolitical alliances towards faster decarbonization. By working in coordination, the U.S. and our G7 partners can unlock substantial climate benefits, create new opportunity for cleaner firms, demonstrate that climate ambition and economic success go hand-in-hand, and promote more robust international trade consistent with deep decarbonization.