Chairman’s Message

Tatsuya Terazawa

Tatsuya Terazawa
Chairman and CEO
The Institute of Energy Economics, Japan

Chairman’s Message
G7 Ministerial Communiqué
“Common Goal, Various Pathways”

Message for May 2023

The G7 Ministers of Climate, Energy and Environment met in Sapporo on April 15 & 16 and issued their communiqué on April 16. This communiqué provides one of the major building blocks for the G7 Leaders’ Meeting which will be held in Hiroshima on May 20 & 21. As the communiqué is 36 pages long, I can only highlight several points in this month’s message. I hope to shed light on topics that were largely missed by the international media reports.

<Main Points>

  • Common goals can be achieved through various pathways that reflect the unique circumstances of each country.
  • Security of clean energy supply chains including critical minerals is highlighted.
  • Less focus on energy access/affordability leaves questions from the Global South.
  • “Transition Finance” & “Avoided Emissions” complement “Green Finance”.
  • Instruments addressing carbon leakage must be consistent with the rules and principles of the WTO.

  • 1. Common Goal, Various Pathways
    The major achievement stressed and emphasized by Yasutoshi Nishimura, Minister for METI, was to convince the Ministers that pursuing a common goal can be achieved through various pathways that reflect the unique circumstances of each country among the G7- and beyond- G7 members. Being the only Asian member within the G7 process, it was very important for Japan that the different national circumstances of Asian countries be recognized in their choice of pathways toward carbon neutrality.
    The use of hydrogen & ammonia was acknowledged as a means to reduce CO2 emissions from thermal power generation. Their acceptability for use should be determined by carbon intensity and not colors.
    The opportunity to collectively reduce the G7 vehicle stock’s CO2 emissions by at least 50% by 2035, relative to 2000, was noted. In addition to electric cars, it was recognized that pathways that include fuel cell and plug-in-hybrid vehicles, as well as cars that use synthetic or bio fuels would contribute to the achievement of this objective.
    Carbon management was recognized as essential to counterbalance residual emissions. Among a broad portfolio of decarbonization solutions, CCU/carbon recycling, including recycled carbon fuels and gas (RCFs) such as e-fuels and e-methane, and CCS were recognized as important components.

    2. Energy Security
    In light of the current energy crisis the world is facing, it was quite natural for Japan to stress the need to enhance energy security in a broader context.
    One of the major achievements in this regard was to highlight the need to enhance security of clean energy supply chains and to diversify our sources of critical minerals. These are the energy and economic security concerns that would inevitably emerge as we pursue the energy transition.
    The role of nuclear was recognized, albeit not unanimously, as enhancing energy security and grid flexibility while providing a low-carbon source of baseload energy.
    As the current energy crisis is most serious regarding natural gas and LNG, energy security in these sectors certainly had to be specifically addressed and the need to coordinate plans to mitigate the risks associated with the unpredictability of Russia’s exports of gas was recognized. The importance of continuing to monitor the situation was also noted. Recognizing that high energy prices and inflation have had negative impact on the economies and people’s lives all over the world, especially in the Global South, investment in the gas sector (if implemented in a manner consistent with the climate objectives) was acknowledged as appropriate to address the potential market shortfalls provoked by Russia.

    3. Energy Access/Energy Affordability and the Global South
    Compared with the very strong sense of urgency concerning global warming, there seems to be far less focus on energy access or energy affordability. It appears as if the G7 Ministers believe that the energy transition, especially the deployment of renewable energies, would lead to energy access, energy affordability and energy security.
    The communiqué stresses the need to globally phase out all fuel subsidies that are inefficient or inconsistent with the goals of the Paris Agreement. Although it is clear that the G7 members should take the lead in eliminating such subsidies, how could the developing countries abolish them if stability of energy prices is not achieved?
    Stability and affordability of energy prices cannot be achieved without sufficient supply capacity. According to the IEA report recently submitted to the G7, IEA acknowledges that there are large variations and uncertainties in the supply and demand outlook of natural gas among different scenarios for the future. In the Stated Policy (STEPS) and the Announced Pledges (APS) scenarios, the report recognizes that new investments in upstream gas supply would remain necessary and that investments in new LNG infrastructure are needed in emerging and developing economies.
    In the event of a shortage of supply capacity, the Global South would be more seriously impacted than its counterpart. The South has less capability to absorb the shocks of future energy crises and will depend on fossil fuels for much longer than the developed world. To avoid such an eventuality, steady investment in fossil fuel, including natural gas and LNG, during the long transition period would be necessary. Unfortunately, except for a “modest and conditional” reference made in the communiqué regarding investments in the gas sector, insufficient attention was paid to this serious problem.
    The global climate change and the energy crisis are not specific concerns affecting only the G7; they also affect the Global South. As those issues cannot be addressed without an active participation from the Global South, Prime Minister Modi of India, invited to the G7 Leaders’ meeting as the chair of G20, will certainly be presenting the views of the Global South. I believe that energy access and affordability issues should be addressed much more at the leaders’ level. This should lead to discussions on how to realize price stability of energy markets through steady investment.
    We must have high aspirations for the future but should not forget that a shortage of energy supply during the long transition period could be painful for the people especially in the Global South.

    4. Transition Finance & Avoided Emissions
    Green Finance is typically oriented towards supporting investments in renewable energies. While this is very important, many paths will be necessary to reduce CO2 emissions. Energy efficiency measures and fuel switching may not realize zero emissions right away but could reduce CO2 emissions substantially. “Transition Finance” is conceptually providing financial support to a broader range of activities than Green Finance. The recognition of “Transition Finance” is a significant achievement of the G7 Ministerial communiqué which has not been sufficiently covered by the international media.
    Reducing CO2 emissions in your own entity is certainly necessary but helping others reduce their own emissions by providing decarbonization solutions is just as important. This contribution is captured through the concept of “Avoided Emissions”. The recognition of this concept is another significant achievement of the G7 Ministerial communiqué which was overlooked by the international media.
    I am convinced that these two recognized concepts could complement and broaden the existing financial flows.

    5. Instruments to address carbon leakage
    Several countries/regions are introducing instruments to address carbon leakage caused by differences in climate policies adopted by trading partners. While the purpose is understandable, there have been concerns about the narrow range of climate policies recognized as acceptable and the possible impacts of those instruments on international trade.
    The G7 Ministerial communiqué addressed these concerns by highlighting the necessity to consider the diverse and wide-ranging climate mitigation policy approaches deployed by each country. Not only explicit carbon pricing, but new regulations and tax policies should be considered in assessing the possibility of avoiding carbon leakages. The communiqué also stressed the need to maintain consistency with WTO rules and principles and the need to support trade relations while reducing potential international frictions.

    6. The way forward
    The G7 Ministerial communiqué is very comprehensive and incorporates many significant new policy concepts. It is vital for the G7 Leaders’ Meeting to reaffirm the achievements made at the Ministerial meeting and, especially in view of the concerns of the Global South, strengthen its weaker elements such as energy access/affordability and energy price stability.
    The concepts of “Transition Finance”, “Avoided Emissions” and the expectations for the instruments to address carbon leakage are just a few of the significant G7 Ministerial communiqué announcements that were largely overlooked by the international media. These announcements should be built upon with further discussions in the international community, especially in the financial and trade sector.