After the G-20 Summit: Global Governance Reform Is Needed in Energy and Climate Too

November 13, 2008 9:45 AM

The November meeting of G-20 leaders in Washington reflects the important role of emerging economies in the global financial system and the need for the G-7 to adjust to this reality. But trade and finance are not the only areas in which the G-7's dominance of global activity has faded. After two decades of rapid resource demand growth in the developing world, the G-7 today accounts for only a third of global energy demand and CO2 emissions. And just as the Bretton Woods institutions built by the financial powers of the post-War period need updating, the current approach to global energy and environmental governance needs to be rethought.

Over the past two decades, the G-7's share of global economic activity has fallen from 68 percent to 55 percent and its share of global trade from 60 percent to 39 percent. The G-20 on the other hand, by including large developing countries like China and India, covers 80 percent of global trade and 90 percent of global economic output.

Like the G-7, the International Energy Agency (IEA), formed by rich world energy importers in response to the 1970s oil crisis, may also be outmoded as a vehicle to deal with energy problems. The IEA is charged with coordinating management of strategic oil reserves in the event of a supply disruption, collecting data, and promoting energy efficiency. While it performs these tasks well, IEA members account for a rapidly declining share of global energy demand. In its annual World Energy Outlook released just before the summit, the IEA predicts that over the next two decades, OECD countries (the group of leading market economies) will account for only 12 percent of the growth in energy consumption worldwide, further reducing their share from 46 percent today to 36 percent by 2030. And despite the current drop in oil prices, the report forecasts very tight energy markets because of underinvestment in new production, suggesting that future energy security challenges lie far beyond what the IEA is equipped to handle, both in terms of membership and responsibility. Countering OPEC's growing market dominance and ensuring stability in energy-producing parts of the world will require both new tools and more partners.

Given our current dependence on fossil fuels, growth in energy demand translates directly into growth in CO2 emissions. The World Energy Outlook predicts that unless there is a major change in policy, global CO2 emissions will grow from 28 gigatons today, to 41 gigatons in 2030, a trajectory that would result in "catastrophic and irreversible damage to the global climate." Of this growth in emissions, 97 percent is projected to come from developing countries. This creates major challenges for the UN-led international framework charged with tackling the issue.

The UN Framework Convention on Climate Change (UNFCCC), signed in 1992 and ratified by 192 countries, including the United States, differentiates responsibility for reducing emissions between developed countries (those listed in Annex II of the convention) and developing countries. This principle of "common but differentiated responsibilities" is meant to reflect the higher per capita emissions of developed countries and their greater ability to pay to reduce their emissions. But categorizing countries as either "developed" or "developing" doesn't reflect the way the world has changed since 1992. While it's true that the United States alone released more CO2 over the past century than the whole of the developing world, by 2030 China's annual emissions alone will rival those from all OECD countries combined. And while per capita emissions today are low in the developing world on average, key emerging economies are rapidly closing the gap with their rich world peers. The IEA projects that per capita emissions in both China and the Middle East will surpass those in Europe around 2020 and that Russia will surpass the United States on a per capita basis by 2030. And that's without the adoption of climate policy in Annex II countries.

The bottom line is that while everyone agrees that little can be expected from the developing world until the United States makes a serious effort to reduce emissions, we are all cooked unless large emerging economies peak, and then reduce emissions shortly thereafter. Negotiating this type of sequencing of commitments is extremely difficult within the current UNFCCC framework, as large emerging economies have little incentive to differentiate themselves voluntarily from 168 countries lumped together into the "developing" column.

What does this have to do with the G-20 summit? The meetings this weekend will rightfully focus on the crisis at hand. There is more than enough to keep everyone busy for months to come. In addition, the lame-duck American presidency is certain to limit ambitions. That said, if the G-20 ends up creating working groups to explore the possibility of a "Bretton Woods II" they should think about global institution building more broadly. The future stability of the financial system can't be tackled by the G-7 alone. Ensuring future energy security and stability of the earth's climate is impossible without the help of key emerging economies. If these countries are given a greater role in shaping global markets and institutions on which their future economic growth relies, they should expect to play a similarly commensurate role in managing the energy and environmental challenges that growth implies.

Such a bargain would not only help the international community to address specific issues (for example, roadblocks in climate negotiations under the UNFCCC), but also reflect the need for a broader scope in managing today's global economy than the one established in 1944.

Trevor Houser, a visiting fellow at the Peterson Institute for International Economics, is director of the energy and climate practice at the Rhodium Group, LLC. He is a coauthor of Leveling the Carbon Playing Field, published in 2008 by the Peterson Institute for International Economics and the World Resources Institute.