now loading...
Wealth Asia Connect Treasury & Capital Markets Europe ESG Forum TechTalk
G7 Climate Club, giant step in race to net zero
Bold, powerful initiative promises to play role as climate-action policy ‘enforcer of sorts’
Bayani S. Cruz 30 Jun 2022

The Group of Seven’s (G7) announcement committing to the creation of an international Climate Club by the end of year came as a bit of a surprise at the end of the 48th summit of G7 heads of state held on June 26-28 in Krun, Germany.

It was a victory of sorts for German Chancellor Olaf Scholz who first brought up the idea in August 2021 when he was still finance minister. At that time, his proposal to form a club of “ambitious, bold and cooperative” countries “with large amounts of emissions, especially China and the US”, important EU trade partners, countries with a price on carbon-dioxide emissions, and those with a large industrial sector.

With last week’s announcement, he managed to get commitment from the US and his EU trade partners, no mean feat considering the commitment was made during a summit of heads of state (instead of, for example, just a meeting of finance ministers).  

China, India, Russia and other countries with large industrial sectors, however, also need to be part of this club for it to be successful. But considering the current political crisis between China and the G7 countries, and tensions between Russia and them over its invasion of Ukraine, this is not likely to happen soon.

Incidentally, Argentina, India, Indonesia, Senegal, South Africa and Ukraine, represented by their respective heads of state, also attended the summit, hosted by Scholz, as his guests.

In any case, with just the G7 countries leading the initiative, the Climate Club promises to be a powerful body that can act as an “enforcer of sorts” of policies enshrined in the Paris agreement to limit the world to a 1.5 degrees Celsius temperature rise and transition to climate neutrality by 2050.

This ambition was clearly stated in the opening paragraph of the G7 announcement, which effectively acknowledges that there is a lack of enforcement mechanisms for implementing the goals of 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,” its states. “We aim to establish a Climate Club to support the effective implementation of the Paris agreement by accelerating climate action and increasing ambition, with a particular focus on the industry sector, thereby addressing risks of carbon leakage for emission-intensive goods, while complying with international rules.”

Carbon border tax

The immediate value of the Climate Club will be as a platform for a “user-friendly” implementation of the European Union’s carbon border adjustment mechanism (CBAM), a system that penalizes third-country imports not subject to the union’s strict climate protection regime.

Also known as the EU’s “carbon border tax”, the CBAM is heavily protectionist and will be potentially onerous to Asian, as well as African, exporters to the EU, unless it is implemented properly. It is scheduled for implementation on December 2021.

The establishment of the G7 Climate Club is intended to provide a platform for non-EU countries with sufficient levels of climate protection to be exempt from the CBAM.

Apart from the CBAM, the Climate Club can also act as a platform for similar issues as the EU proceeds to implement strict regulatory requirements aligned with the Paris agreement that would impact non-EU countries as well.

The next step is to proceed with creating a secretariat that will provide the day-to-day operations of the Climate Club and a budget for its operations.

If the G7 can get the Climate Club running within the next six months, this promises to be major step in the race towards net zero.

Pradyumna Agrawal
Pradyumna Agrawal
managing director, blockchain investment
In-person roundtable
What next for digital assets
View Highlights
Woon Shiu Lee
Woon Shiu Lee
managing director, group head of wealth planning family office & insurance solutions
DBS Private Bank
5th ESG Summit
Swinging into action
View Highlights