An independent report requested by the UK Prime Minister for G7

by Nicolas Stern (June 2021)

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OVERVIEW

Challenge, vision and overarching strategy at a critical moment in history

The COVID-19 pandemic is a continuing human tragedy. It has exacerbated the risks and vulnerabilities that had been building in the global economy. It follows a decade that was characterised by reduced investment, by slowing growth of productivity, by faltering employment, by weakening social cohesion, by increasing pressure on public finances, and by an accelerating destruction of natural capital.

The world is consequently confronting an interwoven set of challenges: the devastating health and social costs of the pandemic; the diminished prospects for economic growth and employment against a backdrop of rising public debt; the mounting threats of climate change, environmental degradation and biodiversity loss; growing inequality that has been exacerbated by the pandemic; and disrupted education for 90% of the world’s children. A failure to act on any of these dimensions will weaken progress on the others.

The Carbis Bay Summit offers a unique opportunity for the G7 to take bold action to ‘build back better’ – to realise the growth and jobs story of the 21st century and ensure environmental sustainability. The transition to a net-zero emissions, climate-resilient world represents not a cost or a burden but the greatest of economic, business and commercial possibilities in modern times. If the world fails to seize this opportunity, the dangers and fragilities of the old economic model that were mounting before the COVID-19 crisis will become ever more severe. There could be a lost decade for development in poor countries and weak or stuttering recovery and growth for the world as a whole. This is therefore a special moment in history, offering the chance, indeed duty, for the G7 to lead a globally coordinated recovery,driven by sustainable investment and innovation by both the private and public sectors.

At the heart of the proposed vision for the economic response to the pandemic and the climate crisis is a coordinated global programme of investment for recovery, reconstruction and transformation that canboost all forms of capital – human, physical, natural and social – and create strong and sustainable growth. This programme of investment, involving sustainable infrastructure development, the preservation and restoration of nature, and greater focus on innovation and skills, can provide strong economic multipliers to increase activity and jobs in the shorter run, and unleash discovery andproductivity growth in the medium term.

The programme of investment will be inclusive in its new job opportunities and stronger growth, in its attention to the management of change, in its reduced pollution, and in its internationalism. And the growth and revenues will enable the strong investment in education and health that are central to justiceand well-being and are critical to sustained recovery and growth.

Delivery of the requisite scale and quality of investment will require a broad commitment and concertedactions on policy measures and on finance. These include:

• A supportive but prudent macroeconomic framework that enables a strong recovery in investment, while at the same time responsibly managing debt and deficits over the medium term, including through enhanced international tax cooperation.
• Structural policies that set expectations and a clear sense of direction. These must include making faster progress on carbon pricing, the phasing out of fossil-fuel subsidies, introducing supporting regulations that accelerate the drive to net-zero emissions, valuing natural capital, and building climate and environmental resilience into all policies.

Innovation will be central to change and can be directly supported through well-oriented andcreative R&D and innovation institutions such as Mission Innovation and the International Solar Alliance. Standards and regulations can play a powerful role in complementing innovation policy. So too the design of cities and the development of circular economies and similar frameworks that are crucial to innovation at both individual and system levels. The key systems are cities, energy, transport, and land.

• Labour market and other policies to foster a just transition to a net-zero emissions and climate resilient economy will also be crucial as rapid change will involve dislocation, in both production and consumption, requiring investment in and support for people and places.
• The realignment of the financial system to support sustainable growth, climate action, and responsibilities towards the environment and biodiversity.
• An urgent, concerted and enhanced international effort to tackle the debt, fiscal and financing constraints of emerging market and developing countries.

Acting together, based on a shared vision and strategy, will be critical in an interconnected world. Strong international cooperation around stimulating demand for goods and services, job creation, policy directions, technology and finance is an integral part of this vision. nd services, job creation, policy directions, technology and finance is an integral part of this vision. By acting together, the world will benefit from stronger demand expansion and investment recovery, economies of scale, learning by doing, lower costs for new technologies and the necessary collective actions on climate and biodiversity that are urgently needed. Global collaboration on tackling the health, economic and financial challenges of COVID-19, including on vaccines and debt/finance, particularly in support of the poorest countries, will be both crucial to the recovery and a key test of the multilateralism that is vital to the transformation to new forms of growth. Much of the action in this strategy will be greatly enhanced by, or require, more effective use of international institutions, which must be enabled to act on the necessary, and sustained, scale; they will be crucial catalysts and vehicles for building a better world.

Priorities for action

The Carbis Bay Summit provides a crucial opportunity to set specific priorities and targets as part of anintegrated global agenda. It must give momentum to a shared international vision for strong recovery and sustainable growth; provide policies for delivery; and mobilise finance for action.

Shared international vision for strong recovery and sustainable growth

• Ensure a timely, effective and global roll-out of vaccines and treatments based on principles of common humanity, mutual responsibility and self-interest. An immediate priority is closing the $20 billion funding gap of COVAX and providing adequate support to developing countries so that effective vaccines and treatments would be available everywhere no later than the end of 2022.
• Deliver credible pathways to meet the stepped-up commitments made by the G7 at President Biden’s Leaders Summit on Climate and the Major Economies Forum on Energy and Climate on net-zero emissions by 2050 and emission reduction targets by 2030. This must include: the preparation and submission of well-specified nationally determined contributions (NDCs) ahead of COP26; and putting in place sufficiently strong and green recovery programmes for delivery; recognising the dangers from attempts to ‘backload’ action.
• Support a global target for nature with the protection of 30% of land and ocean areas by 2030, accompanied by appropriate domestic targets.
• Set a collective goal to raise annual investment by 2% of GDP above pre-pandemic levels for this decade and improve the quality of investment to support a strong recovery and transformational growth. For the seven countries, this would amount to an additional investment of around $1 trillion per year from now until 2030. That investment, if well executed, would have high returns in terms of productivity, new opportunities and the environment.

Policies for delivery

Commit to putting the right price on carbon and to eliminating fossil-fuel subsidies no later than the target date of 2025. This could include consideration of an international carbon price floor among large emitters such as the G20, and border adjustments for energy-intensive trade exposed sectors.

• Lead in the global energy transition by setting targets for zero-carbon power and road transport; investing strongly in clean energy and energy efficiency at home and in developing countries; phasing out unabated coal power generation domestically by 2030; ending overseas support for fossil fuel investments, starting with coal power generation; and defining a clear phase-out strategy for fossil fuels other than coal, in line with the goals of the Paris Agreement. Foster and share research and development in energy and beyond.
• Commit to a ‘just transition’; ensure that the benefits and opportunities are shared widely; protect those that are most vulnerable to economic losses.

Finance for action

• Strengthen international tax cooperation to help bolster public finances and provide clarity on the global tax regime, including through the consideration of a minimum tax rate on corporate profits of 21%.
• Accelerate the shift in the financial system by working together and with the private sector to improve the availability of consistent, comparable, and reliable information on climate-related financial risks, including by supporting mandatory disclosure, strengthening risk management, supporting efforts to identify opportunities for green investments, and encouraging financial institutions to align their portfolios with the Paris Agreement goals.
• Act strongly to alleviate the debt constraints of low-income and vulnerable countries. This could include extending the Debt Service Suspension Initiative, requiring comparable treatment of the private sector and tackling over-indebtedness by strengthening the G20 Common Framework for Debt Treatments, reprofiling and reducing the cost of official debt, and considering the potential of debt-for-nature and debt-for-climate swaps.
• Make a collective commitment to double climate finance, improve its quality, and raise the proportion of grants, to deliver on and go beyond the $100 billion per year target that is critical to the success of COP26 and adequate support for climate action by developing countries.
• Following the agreement of a new allocation of Special Drawing Rights of $650 billion, support re-allocation mechanisms that can widen financing options for recovery programmes in low income and vulnerable countries, support effective vaccination and health campaigns, and promote green transitions.
• Enable the multilateral development banks (MDBs) to scale up support for a green recovery, the drive to net-zero emissions and climate adaptation/resilience, and the fight against biodiversity loss through: an accelerated IDA replenishment in 2021; more effective use of MDB balance sheets; enhanced private-sector finance mobilisation; accelerated alignment with the Paris Agreement; and proactive MDB capital increases within a requirement to work better together.

The clarity of vision, the credibility and coherence of policies, the availability of appropriate finance andinternational cooperation have never been more important. Delay is dangerous. Ambition will be less risky than caution and strong progress will require decisive leadership and effective collaboration. There has never been a more crucial moment for leadership from the G7.

The G7 has the opportunity now to chart a clear course of action for the next three years, working closely with the Italian G20 Presidency and reaching out to the G7 and G20 presidencies that will follow in 2022 and 2023. 2021 can be a turning point towards a more prosperous and sustainable future.

 

About this report

An independent report requested by the UK Prime Minister and prepared for the 2021 G7 Presidency by the London School of Economics and Political Science.

This report sets out an overarching and integrated strategy for recovery and growth as a contribution tothe preparation of the G7 Summit to be held in Carbis Bay, Cornwall on 11–13 June 2021:

• Part One highlights the global challenges ahead and the significant potential opportunities and benefits arising from the transition to a net-zero emissions and climate-resilient economy, including stronger growth, increased employment opportunities across the economy, more robust biodiversity, a healthier population, and reduced risks of pandemics.
• Part Two sets out a vision for sustainable, resilient and inclusive recovery and growth, and a strategic approach to achieve this vision.
• Part Three identifies the specific components of a strategy driven by investment and innovation supported by enabling economic policy and financial measures.