10 February 2023
In June 2022, G7 leaders – spearheaded by Germany - agreed to establish a Climate Club of like-minded states to reach net-zero emissions. The club was officially established in December, with focus set now to be on industrial decarbonization and interest growing among partner governments, the final details are falling into place on the structure and mandate of the club.
In parallel to the Climate Club discussion, Canadian Prime Minister Justin Trudeau announced the launch of a Canadian international climate initiative – the Global Carbon Pricing Challenge (GCPC) – which aims to rally nations into tripling international coverage of carbon pricing to 60% of global emissions by 2030.
Both the GCPC and the Climate Club are steps towards reducing global greenhouse gas (GHG) emissions and could prove vital to limiting global warming to 1.5°. To do this, however, both initiatives must embark on immense climate diplomacy efforts to garner global support.
In a panel hosted by the Embassy of Canada in Berlin and the Transatlantic Climate Bridge, high-level officials and experts from Canada and Germany came together to discuss the two initiatives, to see if they are mutually supportive, and advocating for the expansion of carbon pricing as a vital step toward net zero by 2050.
Jennifer Morgan, State Secretary and Germany’s Special Envoy for International Climate Action kicked off the event with a keynote address where she highlighted the necessity to take us past our COP27 resolutions to create more sectoral targets, more net zero targets, and align all financial flows for better targeted and more just climate policy. The keynote was followed by a moderated discussion between Catherine Stewart, Canada’s Ambassador for Climate Change; Prof. Dr. Ottmar Edenhofer, Chief Economist of the Potsdam Institute for Climate Impact Research; and Birgit Schwenk, Director-General of Climate Action at the German Ministry for Economy and Climate Action. Stefano De Clara, Head of Secretariat at the International Carbon Action Partnership (ICAP), moderated. The discussion focused on public acceptance of carbon pricing, steps on creating an inclusive system for emerging economies, and harmonization of Canada and Germany’s initiatives.
Reduction of global emissions: a global problem requires a global solution
Climate change, energy security, and freedom are closely linked. And though 2022 brought with its significant challenges in all three areas, it also revealed – made especially clear at COP27 – that multilateralism on climate ambition can function, even amidst times of crisis.
The world must build off of the momentum created in Sharm el-Sheikh and give stronger commitments to phasing out fossil fuels, establishing just energy partnerships, and defining clear sectoral targets. Carbon pricing can be one of the most robust tools in the policy mix to help achieve international climate targets, and, as such, it will feature as part of the discussions that the Climate Club, as a forum, will lead on industrial decarbonization. However, making carbon pricing work for a wide variety of countries requires international coordination.
Incentives and security needed for global implementation
For carbon pricing to bring about deep decarbonization around the world, it needs global implementation. The GCPC aims to accelerate action by creating synergies through close discussions between existing carbon pricing initiatives such as the CPLC, PMI and ICAP. As the Challenge takes off, Canada’s first step is to bring as many international leaders as possible to the table to discuss implementing some kind of carbon pricing scheme – either a carbon tax or an emissions trading system (ETS) – back home. Canada in particular wants to include emerging economies in the discussion, learning what these countries need for carbon pricing to be accessible and implementable for their policy landscapes.
Any international implementation of carbon pricing, however, will only be achieved if emerging economies are incentivized to come on board, some experts argue. An international fund to compensate countries that are less able to shoulder the policy burden could be such an option.
Incentives to bring actors on board are not only at the country-to-country level, but they also exist within implementing jurisdictions – even the most climate ambitious. Public buy-in is critical to the establishment and longevity of carbon pricing systems. Here Canada can serve as a model. Canada has increased public acceptance by creating a direct link between the carbon price paid and benefits citizens receive in return. Canadians receive a Carbon Action Incentive Payment directly into their bank accounts to help offset the costs of federal pollution pricing. The lower the income, the higher the benefit. Many lower-income households, in fact, receive more back than they pay in the first place.
Germany is looking into recycling revenues in the same way as Canada, with funds going directly to citizens. As of now, revenues from its ETS are transferred to the newly developed Climate and Transformation Fund, which will finance Germany’s energy transformation. This includes funding for the building sector, developing electric mobility, expanding the hydrogen market and promoting energy efficiency.
In addition to incentives, certainty is critical for carbon pricing. For industries, certainty over the carbon price is of utmost importance and as a tool, drives innovation. In Canada, for example, industrial actors have become more accepting due to the commitment of the pan-Canadian carbon price that is due to rise to $170 per ton by 2030. While not implemented (yet), mechanisms such as Carbon Contracts for Difference (CCFDs) have also been explored by Canada and Germany to address the price certainty gap for industrial actors. Long-term carbon pricing commitments give investment security for the private sector and, as a result, lower the costs and risks of low-carbon investments for industries.
Possibilities for mutual support
The GCPC and the Climate Club stand to benefit from supporting one another as a coordinated effort between two large nations ambitious on climate action.
2023 will be a decisive year for these initiatives’ development. Canada will continue to encourage fellow countries to adopt carbon pricing toward a collective goal of covering 60 percent of global emissions by 2030. Germany has initiated a Climate Club Taskforce with interested partner governments and will provide more information this year. However, for it to be successfully in including other nations, the Club must be account for the wide variety of climate policy landscapes across the world and not prescribe a specific path towards decarbonization. Carbon pricing is a crucial tool for the world to achieve net zero; however, it’s not the only mechanism to reduce emissions, and the climate club must reflect this.
Both initiatives also closely connect to the increasingly hot topics of industrial decarbonization and the development of green technology. The high level of subsidization in the United States’ Inflation Reduction Act and the European Union’s plan to establish a Green Deal Industrial Plan in response, underscore the significance of decarbonizing hard-to-abate sectors in the international climate policy landscape. A pillar of the planned Climate Club, industrial decarbonization can also be greatly accelerated by carbon pricing, both by sending the adequate price signal and investment security to companies as well as by phasing out old and less-effective capital stock. That is to say, they need each other. New efficient stock does not necessarily dictate phase-out of the old carbon intensive ones; and carbon pricing alone may not be enough to get the new technology built.
As the world fights to keep 1.5° alive, rapid and robust international coordination on climate policy is critical. Canada’s and Germany’s initiatives aim to accomplish just this. With their own goals and tools, the initiatives aim to bring all economies into the fold of fast and ambitious climate policy. Canada and Germany face an opportunity to build up different but complementary initiatives.