The Kiel Institute for the World Economy sees itself as the research institute in Germany for globalization issues. Its researchers investigate the drivers and effects of international economic activity, the integration and disintegration of global markets as well as the opportunities and limits of political action in open economies. The Institute analyzes the world economy not just as the sum of individual national economies, but rather as a global economic area that must be understood and shaped. The institute has tasked itself with identifying emerging global economic challenges and developing practical solutions that are compatible with open markets and competition while also taking account of everyone’s standard of living.
The recently agreed upon global minimum corporate tax will, from 2023, set a minimum tax rate of 15% on profits of large multinationals. We recommend that such a landmark progress in global taxation cooperation be accompanied by a landmark advancement in global solidarity. We urge G7 countries to devote half of the revenues they will collect from this tax (approximately $75bn) to the establishment of a Global Citizen Fund. The main purpose of such a Fund would be to pay out a universal global basic income equal to the international poverty line of $1.90 daily (adjusted for Purchasing Power Parity). This sum would enable to take approximately 260million poor people worldwide out of poverty (about a third of the people estimated to fall under the poverty line by the World Bank). Such a transfer could be progressively extended to become a global universal basic income. This policy would provide an automatic safety net against the occurrence of major economic shocks and natural hazards, as well as empowering the least advantaged individuals to fully realise their capacities. The now widespread tool of electronic money could be used as a means to provide cash transfers. The Global Citizen Income would be a step forward toward the creation of global social cohesion, and would be the most natural way to tackle the global crises that are looming. It would also be a way for global institutions like the G7 to reclaim trust and legitimacy.
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:
- 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).
- 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.
- 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.