The G7 Missed a Crucial Ingredient for a Green and Equitable Future. Here’s a Way Forward.
17 June 2021
Last weekend leaders of the G7 group of wealthy countries recommitted to the value of democratic, open societies and declared lofty ambitions around the pandemic response, economic recovery, climate change and global infrastructure. But they left out a crucial element. Improved governance in resource-rich countries is essential for the billion people who live in poverty in countries abundant in oil, gas and minerals. Without it, they will be excluded from the “clean, green growth” needed for an effective global energy transition. Fortunately the major gatherings in the months ahead—notably the G7 interior ministers meeting in September and the COP26 climate summit in November—offer an opportunity for G7 governments to address the gap in their plans.
Here are five ways they can correct their course:
Wind down fossil fuel production and support low-income producer countries on governance fundamentals needed for the transition to clean energy
The G7 “advanced economies” have yet to fulfil their pledge to mobilize $100 billion in public or private funding to support energy transition in developing countries. Low-income resource-rich countries need support to transition to a future in which fossil fuel extraction delivers dramatically less income. At the same time, enabling them to decarbonize and diversify into renewables will require a major shift in incentives. G7 governments should:
Promote a core set of government and company disclosure requirements on fossil fuel projects in all countries; this will enable the public to assess every project’s viability under different climate scenarios.
Support accountability and economic planning capacity in low-income countries, to help align political incentives and capabilities around a sustainable path forward. G7 countries must fund the identification of options for lower-income countries that are more attractive than fossil fuel extraction.
Lead by example and take more decisive action to wind down their own countries’ production of oil, gas and coal. It is unrealistic, and unfair, for wealthy countries to expect low-income countries to abandon the sector when G7 countries continue to license new petroleum fields.
Enact and support global standards on critical minerals governance
The G7 meeting and communiqué rightly touched upon the importance of resilience in the global supply chain of critical minerals from the perspective of economic recovery and jobs in their own countries, and called for sharing of best practice to address threats to supply. However, addressing governance and corruption risks in producing countries were missing from the G7 conclusions. Failing to address these risks will impact reliability of supplies and thereby threaten the clean energy transition which relies on increased use of minerals such as cobalt and lithium; it will also diminish the potential for citizens of producer countries to benefit from the extraction of these minerals. G7 governments should:
Prioritize transparency, accountability, anticorruption and support to civil society in their assistance to low-income critical mineral producer countries.
Deploy the new infrastructure initiative with an emphasis on financial support, accountability and debt transparency
Last weekend the G7 announced a new approach to financing the significant infrastructure needs of low- and middle-income countries. The aim is to enable these countries to build back better post-pandemic, with a focus on quality infrastructure supporting “clean and green growth” based on the principles of transparency, sustainability and collaboration. (In recent decades, many resource-rich countries have financed infrastructure upgrades with opaque resource-backed loans, often from China.)
The initiative has been cast in the media, and will likely be viewed from low-income countries, as an attempt to compete with China, given the important role that the country has played in financing infrastructure in much of the world. Developing countries will likely view this increased interest and competition around infrastructure as positive. However, no announcements of specific financial support accompanied the G7’s plan.
In order for their new infrastructure initiative to succeed, the G7 governments should:
Raise the bar on sovereign debt transparency, so that citizens can assess the impact of different financing options, including on resource-backed loans. Publication of key loan terms and loan agreements is essential. Greater transparency in direct G7 country lending will be important, as will a broader G7 push for transparency from private creditors. (In resource-producing countries, loans from commodity trading firms are often even more opaque than those from Chinese lenders and have destabilized whole economies.)
Support borrower countries in adopting transparent debt approval and management processes.
Follow through on the commitment to consult openly and collaborate with developing country governments, including as part of the new proposal development taskforce.
Commit significant funding in the near term to get the initiative off the ground.
Include the concerns of resource-rich developing countries in global tax reforms
Tax avoidance and evasion are longstanding challenges for resource-producing countries. The G7 acknowledged the need to end the “40-year race to the bottom” on international tax—a welcome step. However, the G7 commitment doesn’t serve resource-rich developing countries. The proposed global minimum corporate tax rate of 15 percent is likely too low to prevent profit shifting in the extractive sector as producer country tax rates for the sector are often significantly higher. Developing countries are also unlikely to acquire much additional revenue from applying the 15 percent rate to profits booked in low-tax jurisdictions as the G7 is silent on who collects those, suggesting that most will go to multinational companies’ headquarters jurisdictions, as per an OECD proposal. The emphasis on allocating taxation rights to “market countries” (i.e., where goods or services are consumed) rather than producer countries also means that resource-rich countries may even end up with less revenue than they collect now unless the sector is exempted (as was previously agreed in the OECD context).
G7 governments should integrate the concerns of resource-rich developing countries into the OECD/G20 Inclusive Framework when these tax reforms are refined later this year.
Tackle fossil fuel sector corruption, state capture and kleptocracy—with a climate lens
Corruption is an overlooked threat to a successful energy transition. In fossil fuel-producing countries, corruption and narrow political agendas can mean that leaders invest more in oil, gas and coal projects; lavish these industries with subsidies; and block progress on greener energy—even when doing so runs counter to climate goals and citizens’ economic and environmental interests. Elites behind fossil fuel company lobbying and campaign donations can (often legally) influence or even direct energy and climate policy.
Half of the world’s oil is produced by 13 authoritarian countries, including several run by kleptocratic regimes with few incentives to move away from fossil fuel production. Meanwhile, as we have discussed above, the boom in demand for minerals required for clean energy could also trigger surges in corruption like those associated with past oil booms. G7 governments, including the G7 interior ministers meeting in September with their focus on strengthening international action against corruption and kleptocracies, should:
Explicitly acknowledge the extractive sector as high-risk and recognize that strong action on anticorruption in fossil fuels and critical minerals is also good climate policy.
Build on the commitment to greater beneficial ownership disclosure by requiring greater transparency in areas where the fossil fuel industry and governments interact, such as lobbying and government contracting, commodity trading, subsidy payments and national oil company finance.
Seek fresh responses and modes of cooperation, including punishment for Western enablers who help kleptocrats to profit and thrive.
Leaders of G7 countries must turn their rhetoric into reality in the months ahead; they can do so by urgently prioritizing the governance of fossil fuels and critical minerals in producer countries, and making concrete commitments as described here. The “green revolution” cannot otherwise succeed.