On 12 December, 2022, the G7 released the ‘Terms of Reference for the Climate Club’, building upon the ‘G7 Statement on Climate Club’ released in June this year. The Terms of Reference delineate the objectives and scope of the climate club, provide further information on the three thematic pillars first identified in the G7 Statement, and lay down some initial next steps leading to a full launch in 2023, prospectively by COP28.
The climate club will be aimed at supporting “the upward alignment of increased climate ambition and its implementation through policies and actions”, with participation open to countries committed to the Paris Agreement and to limiting the increase of temperature to 1.5°C, as well as to the acceleration of the transition to net-zero by - or around - mid-century, and the acceleration of sectoral decarbonisation, particularly for the industry.
The first pillar (“Advancing ambitious and transparent climate change mitigation policies”) focuses on an exchange of knowledge and best practices on price-based and non-price-based climate change mitigation instruments, as well as a “strategic dialogue” and potential cooperation on industrial carbon leakage mitigation. The second pillar (“Transforming Industries”) is aimed inter alia at aligning with existing initiatives for industrial decarbonisation, sharing best practices, finding common definitions and markets for near-zero-GHG-emission materials, and exploring a common accounting system for hydrogen GHG footprints. The third pillar (“Boosting international climate cooperation and partnerships”) aims at enhancing multilateral and bilateral cooperation between members with regard to the first and second pillar.
This analysis delves into the progress made by the Terms of Reference in advancing the concept of a climate club while also identifying gaps that should be filled to develop such an alliance further.
- Enabling plurilateral engagement on climate policy: An alliance such as a climate club can play an important role in accelerating progress on the goals of the Paris Agreement through a focused approach on key topics and sectors. The Terms of Reference note that “[s]ome activities as set out in the three pillars of the Climate Club may only involve a subset of members, wanting to move ahead and cooperate more closely”, resulting in some activities of the club proceeding “with only a subset of members”. Implicit in the statement is the recognition of new forms of cooperation to increase ambition. The club architecture allowing for different focus areas to be cooperation pillars for different constellations of countries will be a valuable format for plurilateral engagement on specific topics, alongside the multilateral framework offered by the Paris Agreement.
- Knowledge-sharing: The Terms of Reference express an openness to “price-based and non-price-based climate change mitigation instruments”, continuing to signal a departure from the classic Nordhaus-style climate club, thereby reflecting a more strategic utilisation of political capacity to move away from a top-down carbon-pricing-based approach, and open the membership of the club to a wider set of countries. The efforts to create a strategic dialogue on industrial carbon leakage measures may help fill a gap in open and transparent communications between the developed and developing countries on the topic. The role of the climate club in sharing best practices, sectoral strategies and finding common definitions and accounting standards on a variety of policies, also going beyond carbon pricing and carbon leakage measures, is an important function, which can help policy diffusion and convergence. At the same time, the vague nature of the commitments to developing countries (see point 5 below) may mean that there is less incentive for developing countries to join.
- The modalities of cooperation remain unclear: The Terms of Reference are useful in clarifying further focus areas for industrial cooperation, such as the alignment of methodologies, standards, sectoral strategies, and the expansion of markets for green industrial products. At the same time, the exact sectors in question are not clearly identified (with the exception of a reference to hydrogen). Some sectors identified as candidates for cooperation in the climate club in our analysis include steel, cement, chemicals, and agriculture. The underlying narrative in the Terms of Reference largely represents the motivation of industrialised countries, which may be different from the immediate priorities of developing countries seeking to decarbonise their industry alongside other challenging transitions. Further, it also remains unclear if more ambitious targets through climate change mitigation policies will be based on legally binding targets agreed to by the members of the climate club.
- Inadequate focus on the specific requirements of developing countries: The text on the cooperation with developing countries, which finds a place under Pillar 3 (“Boosting international climate cooperation and partnerships”) has been watered down in comparison to the avowed commitment in the G7 Statement in June to “partnerships and cooperation to encourage and facilitate climate action and unlock socio-economic benefits of climate cooperation and to promote just energy transition”, particularly through the exploration of synergies with the Just Energy Transition Partnerships (JETPs). Instead, the Terms of Reference now couch the cooperation with emerging economies and developing countries in the following terms: “[t]he Climate Club will provide a platform for alignment, matchmaking on a voluntary basis and creating synergies between cooperation and funding instruments. ”While the Terms of Reference are more detailed on the elements of cooperation on industrial decarbonisation (forming the basis of the club), details on how partnerships between industrialised and developing countries for industrial decarbonisation will be formed are scant and such partnerships are characterised as optional. The Terms of Reference provide that the climate club seeks to provide a forum to “discuss how to align existing multi- and bilateral cooperation and how to address gaps in cooperation in line with involved developing countries’ needs for example by discussing options for joint activities and pooled funding” but falls short of concretising this in terms of action, and shies away from linking this with the sectoral focus for industrial decarbonisation. The potential of the climate club should be harnessed for improving financial instruments and flows for sector-specific policies and technologies. The setting of more ambitious industrial decarbonisation targets should have been accompanied by a clearer recognition of the principle of common but differentiated responsibilities. In the absence of a clearer commitment to support developing countries, it may be challenging to get sufficient buy-in, which is required for the critical mass to form such an alliance. Lessons can be drawn here from past successes in international climate cooperation, for example, the Montreal Protocol on Substances that Deplete the Ozone Layer (1987), an international treaty focused on ambitious goals and recognising the special status of developing countries, which led to emission reduction.
- Further development of the governance mechanism: The establishment of an interim secretariat involving international bodies - the Organisation for Economic Cooperation and Development and the International Energy Agency, which will also liaise with other relevant international organisations and initiatives - instead of the G7 is a step in the right direction to garner greater legitimacy for the initiative. This is most notably a signal that the club is not a mere G7 project, even as the G7 played the role of a political incubator. It must, however, be noted that Germany will retain the chair position of the envisaged Climate Club Task Force, together with another Climate Club member outside of the G7. It is not yet clear if the leadership of the Task Force is envisaged to be shared between G7 and non-G7 countries by rotation. Alongside the governance structure, it is also necessary to develop common principles for the process of engagement and agreement between the members, some examples of which we provide in our discussion paper.
- The climate club framework needs to be further developed in an inclusive manner: It is important that the future agenda and cornerstones of the climate club are formulated inclusively, and further concretised through consultation and inputs from other non-G7 countries, particularly developing countries, who should be involved right from the beginning in the deliberations on the vision and framework of the climate club.
The Terms of Reference for the Climate Club take the discussion on such an alliance further, identifying concrete activities such as standard-setting and knowledge-sharing between the member countries, as well as the first steps towards its governance arrangements. The aim to set ambitious targets for industrial decarbonisation would need to be accompanied by the setting of binding targets in due course. The narrative of the climate club, although emphasized to be open and inclusive, represents predominantly the interests of the industrialised countries in the G7, with support for partnerships with developing countries relegated as a secondary – and more voluntary – endeavour. As a next step, the setting up of the climate club should involve potential members from developing countries in the formulation of clear and binding goals, accompanied by greater prominence for meaningful partnerships with developing countries.
For more perspectives on the design of the climate club, see our Discussion Paper “Alliance-building to strengthen international climate cooperation”.