Towards an inclusive Climate Alliance with a balance of carrots and sticks

T7 Task Force Climate and Environment. Policy Brief As G7 countries generate 25% of world greenhouse gas emissions, an open and cooperative G7 climate alliance can accelerate international climate policy in a transformative and inclusive manner. Building upon a proposal of the German Government (2021), we propose the following design elements for such an alliance: 1. Membership conditions that benefit all members and are sufficiently ambitious to enable a pathway to genuine ‘net zero’ Reaching ‘net zero’ emissions globally by mid-century is key to enable limiting global warming to 1.5°C – the core objective of the Paris Agreement. The alliance must adopt membership conditions that keep the aim of 1.5°C alive. These include: - a differentiated carbon price with a common floor, e., an effective price set in accordance with criteria that reflect different economic capacities, with a floor at 50 € in 2025 and 100 € in 2030. - common energy sector policies consistent with a pathway to genuine net zero, including a 2024 removal of fossil fuel subsidies, a 2030 phase-out date for coal-fired electricity generation for OECD members that join the alliance and a commitment to immediately end the new development of upstream coal, oil and gas supply infrastructure; - a joint effort sharing mechanism to achieve emission reductions based on Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC). 2. Apply a ‘carrot and stick’ approach based on Article 6 and a differentiated CBAM to encourage alliance participation ‘Carrots’ should be designed as an open means to incentivize decarbonization outside of the alliance and encourage participation in the alliance. We recommend using international carbon markets under Article 6 of the Paris Agreement as a carrot, providing an additional financial incentive to non-members of the alliance for low carbon development. A differentiated carbon-border adjustment mechanism (CBAM) is the crucial ‘stick’ to avoid carbon leakage, with differentiation based on development status and clear exemptions for Least Developed Countries (LDCs). Additional carrots should include differentiated carbon border levy refunds as well as targeted industry and energy partnerships. 3. Use a ratcheting mechanism to raise ambition A roadmap to ratchet-up the ambition of measures within and beyond the alliance is essential. Such roadmap should align with five-year NDC update cycles under the Paris Agreement, adjustable to align with national and global net zero targets and set clear milestones for expansion regarding sectors (from heavy industry and energy to land use) as well as countries (from G7 to G20 and beyond). Ensuring institutional continuity of the alliance requires a legally binding agreement that is independent from annually changing G7 presidencies and governed by a secretariat hosted by one or more volunteering member states, with a slim administration and explicit inclusion of a wide range of civil society representatives