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G7 leaders punt on pushing green growth for developing countries

14 June 2021 Amena Saiyid

G7 leaders will not be in a position to inform developing countries about their proposal for helping fund "build back better" infrastructure that is both "clean and green" until this autumn at the very earliest.

In a joint communique issued at the conclusion of a three-day summit on 13 June, the heads of the G7 countries said they will first establish a task force that would report back in the autumn with "practical proposals." These proposals will enable the leaders of Canada, France, Germany, Italy, Japan, the UK, and the US—which make up the G7—to meet the goals of the newly announced global infrastructure scheme known as Build Back Better World (B3W).

US President Joe Biden announced the B3W initiative on the G7's behalf two days prior as the democratic and climate-friendly alternative to countering not just Chinese influence and investment across developing and emerging economies, but "a contest with autocrats, autocratic governments."

"The point is that what's happening is that China has this Belt and Road Initiative, and we think that there's a much more equitable way to provide for the needs of countries around the world," Biden told news reporters 13 June.

Narrowing the funding gap

As explained by Biden during the press conference, the B3W scheme, in alignment with the 2015 Paris Agreement goals, would focus investment in four areas—climate, health access, digital technologies, and gender equality—and help narrow the more than $40-trillion infrastructure gap in the developing world, which has been exacerbated by the COVID-19 pandemic.

That said, G7 leaders did—for the first time—formally commit to accelerating efforts to cut GHGs while keeping the 1.5 degrees Celsius global warming threshold within reach. The leaders also reaffirmed a call made a month earlier by their environment ministers to end investment in new "unabated international coal generation," but not domestic generation, by the end of 2021, eliminate inefficient fossil fuel subsidies, and phase out carbon-intensive fossil fuel generation "as soon as possible" except under limited circumstances. The communique did not spell out those circumstances.

"At the heart of our agenda for economic growth and recovery is a green and digital transformation that will increase productivity, create new decent and quality jobs, cut greenhouse gas emissions, improve our resilience, and protect people and the planet as we aim for net zero by 2050," the communique said.

Possible positive impact in Asia

According to Biden, even those countries that are not members of G7—such as Australia, India, South Korea, and South Africa—but are participating in the summit as visitors "have also agreed that they should work in that direction as well" to end international financing of coal-fired generation.

None of these visiting heads of state have issued any statements following the summit to reiterate that commitment though.

According to Xizhou Zhou who leads IHS Markit's global power and renewables practice, the G7 pledge to stop financing for international coal-fired power generation would have "a positive impact in South and Southeast Asia, which depend heavily on fossil fuel generation."

However, he pointed out that "Japan, South Korea, and China remain the biggest financiers of energy projects in this region, so a commitment for Japan (G7 member) and South Korea (also a party to this G7 communique) to withdraw government support beyond 2021 could decrease new coal-fired project pipeline."

But he also noticed that the communique only mentions official government support. "This means private companies from the G7 plus three countries may still continue to invest in coal-fired power in the region.

The communique doesn't extend its commitment to end investment in domestic coal-fired power. However, IHS Markit data show that Japan, which is ranked sixth for global GHG emissions, and South Korea, which holds the eleventh spot for GHGs, are on track to build unabated coal-fired generation domestically, with 12.5 GW under construction and 4.3 GW in planning between the two countries.

And India, which the World Resources Institute rates as the world's fourth-largest emitter of GHGs, obtains more than 80% of its power from fossil fuels, with coal providing the lion's share.

No actual funds

The unwillingness of G7 countries to contribute to fully fund the long promised $100 billion pool of funds for developing countries to transition from a fossil fuel-reliant economy did not go unnoticed by UN Secretary General António Guterres, who brought it up during a virtual 11 June press conference at the summit.

"Finance is the key instrument" needed to help developing countries reach ambitious GHG reduction targets "and for them to be able to address the huge challenges that populations are already facing due to the impacts of climate change," Guterres said.

Guterres reminded G7 leaders that developed countries have not delivered on promises under the 2015 Paris Agreement to mobilize $100 billion each year for developing countries.

"And, so, one of the things that I believe is very important from the point of view of the G7 and the G7 countries is to clarify how this $100 billion will materialize," Guterres said. "In 2020, it did not happen. It must happen in 2021 and onwards, and this is a very important element to make sure that we have a successful COP26 and we need to mobilize the entire world without excuses and without pretexts for a true net-zero coalition before the middle of the century."

As the invited guest to the G7 summit, Indian Prime Minister Narendra Modi also reiterated that developing countries need better access to climate finance to reach net-zero carbon goals.

The International Energy Agency in a recent report made the same point, saying that $1.2 trillion per year will be needed in the developing world to support the clean energy transition, and that most of that funding will need to come from the developed world, both public and private investment.

Elaborating further on the source of funding, Zhou commented that funding from multiple competing sources, including China's government, should be seen as a plus because it will deliver better energy services to the population.

IHS Markit is of the view that current multilateral financing sources like the World Bank or Asian Development Bank are simply not enough. "China's BRI [Belt and Road Initiative] has provided significant new capital to building out the infrastructure for development countries, and that it has spurred B3W from the G7 should be welcomed as an augmentation to that," Zhou said.

What's more, Zhou said, "more players and competition will make global supply chains more resilient and secure, provide consumers more options, and most importantly, continue to drive cost downward for new technologies that would allow more and more countries to adopt clean energy,"

Going forward, Julian Havers, programme leader for public banks with E3G, a European climate think tank, said G7 countries have to figure out how to go beyond the anti-China rhetoric and "develop an offer that is practical and that finds a thoughtful approach to work alongside Chinese investments in the space."

The scenario where high environmental standards drive a race to the top can only materialize if the offer by G7 offer is perceived as attractive by host countries, Havers told IHS Markit on 13 June.

Groups disappointed

The G7's decision to wait for the task force proposals also disappointed public interest groups that were expecting an immediate flow of funds for developing countries that are emerging from the economic hardship caused by pandemic-induced lockdowns.

This is despite G7 leaders acknowledging that "significant infrastructure needs" exist across low- and middle-income countries, which have been exacerbated by the pandemic. They also agreed on several principles that included the need for carrying out infrastructure development, implementation, and maintenance "in a transparent and financially, environmentally, and socially sustainable manner."

On the infrastructure front, "the communique fell short on its commitment to provide actual funding to help developing countries to transition to low-carbon solutions," Havers said.

"This G7 taskforce now needs to develop an actionable agenda to set in motion a revamp of the system of international financial institutions to make them fit for purpose for the low-carbon transition," Havers said.

"Leaders are not finished", Havers said, "They have given themselves homework to do before COP26."

Climate investment funds

In the interim, G7 leaders issued a call to scale up investment in the technology and infrastructure to facilitate a "clean and green transition" and to reverse a loss in biodiversity and increase in desertification. They also reaffirmed the pledge made by developed countries to provide $100 billion each year through 2025 to developing countries that lack the funds to switch from fossil fuel generation.

The communique's only recorded collective commitment of $2 billion was made by Canada, Germany, the UK, and US to the Climate Investment Funds (CIF) to accelerate the transition from unabated use of coal-fired power in developing countries.

CIF, which is a $8-billion multi-donor fund run by multilateral institutions such as the World Bank, would put these funds to use in its Accelerating the Coal Transition and Integrating Renewable Energy programs in developing countries, according to the communique.

Also, at the summit, Canada, which has been faithfully adding its share to the $100-billion pot of money, agreed to double its contribution to C$5.3 billion ($4.36 billion) over a five-year period to be spent on helping communities adapt to climate impacts as well as the energy transition. The UK agreed to set up a $500-million pot of funds for marine pollution impacts.

Green rhetoric

Environmental groups, such as the Sierra Club and the Friends of the Earth US, criticized G7 leaders for not matching their commitments with funding or widespread use of low-carbon solutions, such as electric vehicles, energy storage, and renewables.

Sierra Club International Climate and Policy Director Cherelle Blazer said the G7s actions would amount to "green rhetoric" unless investment in clean energy solutions is increased.

Friends of the Earth US (FOE US), though pleased with the G7 pledge to end public support for coal, rued the leaders did not take the opportunity to end support for all fossil fuels, notably oil and gas, "as science and justice require."

"G7 commitments to phase out fossil fuels are looking like swiss cheese: full of holes," FOE US International Policy Campaigner Luisa Galvao said in a 13 June statement.

Posted 14 June 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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