The G20, climate action and economic globalisation: An agenda

7 June 2017

The German Presidency of the Group of Twenty (G20) in 2017 takes place under conditions of uncertainty with regards to the outlook for both the global economy and international policy cooperation. Almost a decade after the Group was launched in its current iteration, G20 economies continue to struggle with the factors that led to the Great Recession of 2007 and losses that resulted from shortcomings in domestic and international governance are still to be recovered.

 

This moment in time is characterised by some revival of dynamism in the world’s largest market, the US economy, and stubborn sluggish growth in most of the developed world, coupled with slowdown in China and volatility and abrupt loss of momentum in other emerging markets, caused by the so-called commodities super-cycle, now at its tail end. With trade growing at 1.7 percent, and at a consistently lower rate than output in the past few years, 2016 marked the slowest pace of trade and output growth since the financial crisis.

All this coincides with a third consecutive year of record-high temperatures, record de-icing of large extents of Arctic and other glacier surfaces, and more unequivocal evidence of the dramatic effects of climate change.

Addressing Trade and Climate Change in the G20

In the context of a highly integrated world, with a hyper-interconnected population, facing unmitigated risks derived from massive youth unemployment, growing inequality, a surge in migration, and the threat of climate change, the G20 agenda of conventional macroeconomic focus would be ineffective unless further actions were taken.

Thus by 2013 the International Monetary Fund (IMF) urged the G20, whose members account for 74 percent of global greenhouse gas (GHG) emissions, to adopt decarbonisation strategies and confront climate change as an integral policy objective in their coordination. The Fund’s Managing Director, Christine Lagarde, famously stated that climate change “is by far the greatest economic challenge of the 21st century … Make no mistake: without concerted action, the very future of our planet is in peril. … This is one reason why getting carbon pricing right and removing fossil fuel subsidies are so important.”

The G20 has indeed consistently called for reform of inefficient fossil fuel subsidies as a matter of sound fiscal policy. In recent years, and in the run-up to the 2015 Paris climate conference, fossil fuel subsidies reform and a larger policy package around climate change were explicitly embraced by the G20.

In the private sector, there is a growing understanding and a great deal of manifest support for cooperation and action on climate change. In February 2017 a group of influential investors and insurers called on the G20, to “phase out fossil fuel subsidies by 2020 in order to accelerate green investment and reduce climate risk.” Moreover, the Financial Stability Board established by the G20 in 2008 to reduce risks in global financial markets has now set up a task force to highlight the need for climate-related finance. The German Presidency of the G20 has declared as an objective to work towards meeting the almost US$50 trillion estimated by the International Energy Agency (IEA) as needed in investments for an effective transition to a low-carbon energy world that meets the 2°C target agreed in Paris.

Under the 2016 Chinese Presidency the G20 moved from crisis management and avoiding protectionism through policy monitoring to a vision-oriented agenda that responds to concerns about growth and its quality. In doing so, it identified the sustainability of trade and investment policies as a critical focus for cooperation. Some of the outcomes, carried over to the German Presidency and beyond, have to do with principles for foreign direct investment that ensure alignment with a sustainable development agenda, including a transition to a low-carbon economy.

Scope for Global Economic Integration

The enthusiasm over successes of United Nations summits in 2015, resulting in the universal undertaking of the Agenda 2030 and the Paris Agreement, has been greatly diminished by vitriolic electoral political rhetoric and debate, questioning furtherance of global integration, introducing high degrees of polarisation in the conduct of international relations, and jeopardising prospects for global cooperation. In this context, the G20 has suddenly faced the challenge of containing the potential for serious erosion and the possible deconstruction of the complex system of cooperation built in the post-war period.

In the trade and investment arena, the past decade had seen an organic progression of deeper economic integration of national economies into global markets advancing towards what looked like convergence, all building on the principles and contractual obligations of the multilateral system.

Whilst the negotiation function of the World Trade Organization (WTO) has remained stalled since 2001, with a few notable exceptions in the area of trade facilitation and information technology, efforts to address negative spill-over effects of domestic policies in a globalised world had, until recently, sped up at the bilateral and regional level through increasingly comprehensive cooperative schemes. Agreements between several economies of substantive weight complementing the WTO had emerged in the Asia-Pacific region, across the Atlantic, and practically all over the globe. The leading schemes had moved towards a race-to-the-top on social and environmental standards, with some of them specifically addressing climate matters. Within the Asia-Pacific Economic Cooperation (APEC) and the WTO, efforts were launched among like-minded countries to act on the need to press forward to tackle inefficiencies and barriers to the production and deployment of low-carbon technologies.

All these efforts have now, in the past year, fallen victim to policy uncertainty tossed around from political processes across the Atlantic. 2016 saw dramatic changes in the political discourse, particularly stemming from Washington, and within Europe, the centres that had traditionally championed the principled and liberal economic international order. Voters in the UK made a choice to leave the EU, a beacon of economic integration and a lead innovator in cooperative climate change policies. Ironically, Brexit, as this vote is known, has shown a UK committed to further trade integration and cooperation on decarbonisation. This stands in contrast to the very mixed 2017 electoral debate in continental Europe, where, affected by persistent low growth and massive migration, voices distrustful of the possibilities of benign global integration conducive to resolving global challenges have been threatening further disruption. Results in Austria, the Netherlands and recently France, demonstrate a dominance of belief in European and global integration. In the US, elections resulted in an administration that has proposed to overhaul from a nationalistic and mercantilistic stance the prevailing international trade and investment models, and expressed scepticism of—if not open hostility to—addressing climate change. The emergence of sudden disruptions is a clear sign of how such momentum, and what looked like a trajectory of progress, cannot be taken for granted.

Auspiciously, at least two-thirds of the G20 countries, including large emitters and heavyweights in the world economy such as Argentina, Australia, Brazil, Canada, China, India, Japan, South Korea, and others, have reiterated their strong commitment to furthering global integration. A large number of so-called middle powers, across high-, middle-, and low-income economies, are also busily seeking ways to ensure the resilience of the current order. A common element of their aspirations appears to be the wish to strike a fitting balance between such progress and the need for even-handed outcomes in relation to social and environmental concerns.

A Way Forward for the G20

Against this backdrop, in between perilous proposals, strong will and commitment to make progress, and a rapidly ticking clock on climate change, the G20 is now expected to provide decisive leadership that ensures that the globalised economy delivers on specific areas where concerted action is vital—economic progress and climate sustainability are at the core. Hence, it becomes urgent to make a case for G20 action on trade and climate change and to specifically identify key items for G20 engagement in these areas.

As a contribution to this end, ICTSD has recently published Making the Global Economy Viable for the Future: A Trade and Climate Agenda for the G20. The paper identifies a broad set of opportunities across areas where the G20 could make progress on the climate–trade interface. Importantly, these would lead to more efficient allocations of scarce economic resources, address negative externalities and could, if carefully designed, contribute to job creation and green growth. In sum, there is not a trade-off between climate action and trade-led growth.

Among these opportunities, three main pillars are identified:

1). The G20 must keep its commitment to open trade.

When doing so, they should favour trade in clean energy- and energy efficiency technologies, including services. This will be instrumental for addressing climate change, while supporting the creation of green jobs and stimulating growth and a truly sustainable development.

2). The G20 must get the price signals right in the area of energy.

The G20 should maintain its leadership in the area and fulfil its commitment to phasing out fossil fuel subsidies, including through making use of existing or improved instruments in the WTO tool box. This would make economic sense, it would make an important contribution to climate action, and it would be coherent with G20 members’ undertakings with respect to the Sustainable Development Goals as well as the Paris Agreement.

In addition, G20 members must move on putting a price on carbon, collaborating so as to enhance action while reducing concerns with respect to carbon leakage and to distortions in competitiveness as outlined in the paper.

3). The G20 should make use of its unique nature to take on issues in the trade-climate intersection which are sensitive and not always well understood, and which tend to fall between chairs.

This should include initiating a process towards developing a scientifically sound, practical, and internationally recognised approach for calculating the levels of embedded carbon between net exporters and net importers; and to eventually craft an exception at the WTO that would enable countries to distinguish products based on the carbon emitted during production.

Similarly, there is a glaring governance gap in emissions of black carbon, in particular in international transport including seaports and airports, which G20 countries, both major sources of black carbon particulate matter and major recipients of black carbon deposits, could step up efforts in addressing.

 

Ricardo Meléndez-Ortiz is Chief Executive of ICTSD and Co-Chair of the T20 Task Force on Trade and Investment under the German Presidency.

This post was originally published on the T20 Blog, an initiative of the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and the Kiel Institute for the World Economy (IfW).