G7 backs incentives, market driven GHG emissions cuts

The G7 group of industrialised nations is looking to make the most of incentives and carbon pricing mechanisms to drive the global energy transition towards a 2050 net zero emissions goal.

The G7 clean energy economy action plan, which was published on 20 May at Hiroshima, Japan during the G7 leaders' summit, outlined the necessity of providing new incentives and enhancing market schemes to tackle climate change and spur sustainable growth.

"Our joint efforts to lead the transition to a clean energy economy will be based on our collective commitments to engage in policies that effectively incentivise partners", the action plan said. The G7 recognises achieving the goals of the UN Paris climate agreement urgently requires significant new incentives along with industrial policies and public-private investments to lower costs globally.

The incentives should ensure achieving an ambitious clean transition of their economies, lifting workers, supporting marginalised communities, protecting the environment and upholding and strengthening the rules-based multilateral system.

G7 leaders separately promised to support the policy mix of carbon pricing and non-pricing mechanisms to effectively tackle greenhouse gas (GHG) emissions reduction. "We reaffirm the important role of high-integrity carbon markets and carbon pricing to foster cost-efficient reductions in emission levels, drive innovation and enable a transformation to net zero, through the optimal use of a range of policy levers to price carbon", the G7 leaders' communique said.

But they failed to form a co-ordinated measure to implement those policies as "these could vary reflecting country-specific circumstances".

The G7 also agreed to use trade policy as drivers to accelerate decarbonisation "by spurring markets to account for embedded emissions in traded goods", the action plan said, adding that "environmental standards should not be lowered to unfairly gain competitive advantage".

Such trade policies are in line with import regulations independently under way.

Japan, which hosted the 19-21 May G7 leaders' summit at Hiroshima, has enacted its so-called green transformation bill. This will allow Tokyo to issue energy transition bonds along with its carbon pricing scheme, such as the carbon levy on fossil fuel imports and a carbon emissions trading system.

The European Parliament on 18 May approved its carbon border adjustment mechanism (CBAM). The CBAM will be introduced gradually over 2026-34, initially covering aluminium, cement, iron, steel, electricity, fertilizers, ammonia, hydrogen and certain downstream products. The US is also working on a carbon border tariff bill for energy-intensive imports.

The G7 consists of Canada, France, Germany, Italy, Japan, the UK and the US. The EU is a non-enumerated member.

By Motoko Hasegawa and Yusuke Maekawa