G7 Addresses Energy and Climate Change

Tatsuya Terazawa: These two objectives of realizing decarbonization, realizing carbon neutrality and ensuring growth and market stability for the Global South. I don't think these two should be contradicting each other. We should find a path to realize those two legitimate and important goals. And these are the great responsibilities for the leaders of the G7.

Lisa Hyland: Hello and welcome to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I'm your host, Lisa Hyland. This week, we look at the G7 to highlight the energy and climate issues on their agenda. In April, Japan hosted the G7 Ministers' Meeting on Climate, Energy, and Environment, held in advance of the next full G7 summit to be held in just a few days on May 19th through 21st in Hiroshima.

My colleague Jane Nakano sat down with Tatsuya Terazawa, chairman and CEO of the Institute of Energy Economics, Japan, IEEJ. Jane and Mr. Terazawa, walk through some of the key issues addressed by the minister at last month's meeting, including what the communique says on energy security and climate action, and they also look at what's some of the priorities were for Japan going into the meetings and for the upcoming summit and what climate and energy issues are likely to be highlighted when the G7 ministers meet in Hiroshima later this week. Here's Jane now, to lead the discussion.

Jane Nakano: It's really great to have you, Terazawa-san, join our podcast. This is a really interesting and also important year for Japan, as Japan is the president of the G7. It was about a little over a year ago when Russia invaded Ukraine and it really affected the global energy market and very much reminded many of us how important energy security is.

It's not to say that other issues and priorities are less important, but I think, in many ways, we have become so accustomed to having supply security for many of these resources that run our economy. So, I wanted to really start with this question of how the notion of energy security figured when ministers met in Sapporo in April under the climate, energy, and environment ministers' meeting under G7?

Tatsuya Terazawa: Well, certainly, the ministers touch upon the issue of energy security and we can find a reference made to energy security mainly in the three parts. The first part relates to natural gas and LNG, and this is obvious because of the Russian invasion to Ukraine, natural gas and LNG was the most affected sector.

And the communique recognized the need to coordinate clients to mitigate risks associated with unpredictability of Russia's exports of gas. And the communique also stressed the need to continue to monitor the situation. And additionally, the communique acknowledged the role of investment in the gas sector, I think, which was very significant.

The second area relates to clean energy supply chains and critical minerals. The communique stresses the importance to enhance the resilience of the clean energy supply chains, and also stresses the importance to diversify the sources of supply for critical minerals. The third part relates to nuclear. The communique points out the role that nuclear can play to enhance energy security.

So, as I said, energy security is being highlighted in the communique, but my overall impression is that compared with the very strong sense of urgency that the ministers are expressing concerning the global warming, the reference or the highlighting of energy security is relatively modest. That is my impression.

Jane Nakano: You just mentioned sort of geopolitics, how European nations are really trying to address their overdependence in Russia, especially on gas, is really an important context. But I think also in the context of energy transition, the critical mineral supply chains are another one where geopolitics sort of intersects. How would you assess how geopolitics became part of this energy ministers' meeting?

Tatsuya Terazawa: Well, geopolitics certainly is a major part when we talk about energy security and the communique starts with the condemnation of Russia's invasion into Ukraine. That's the first long paragraph of this communique. So, geopolitics is certainly a major part but looking at the whole 36-page-long communique, I don't find too many references made to geopolitics with the possible exception of the part related to the clean energy supply chain, and also the critical minerals. And also, references made in the part of natural gas and LNG.

It is natural to see Russia being mentioned in the natural gas and LNG, and as is described, the unpredictability of Russian export of gas is the major reason why the communique is stressing that the G7 members should coordinate their plans to mitigate the risks. And the emerging new energy security issue is the clean energy supply chain in critical minerals. And without naming any country, the communique is stressing that we should not have an overdependence on a limited number of suppliers to enhance the security of critical minerals and other cleaning energy technologies. And clearly, geopolitics is behind this point.

Jane Nakano: You mentioned natural gas and some of the other sort of focus of the communique, but could you tell us a little more about, first, what are some of the priorities that different countries had as they met in Sapporo to talk about this dual challenge of pursuing decarbonization while also ensuring energy security?

Tatsuya Terazawa: Well, I’ve thought about that point reading through the 36-page-long communique, and as I said at the beginning, the reference made to energy security is much less than the strong sense of urgency expressed towards global warming. And it appears to be that many members of the G7 have considered that the answer to energy security is through accelerating the energy transition, in particular deploying more renewable energies.

And it appears that those countries believe that by making the energy transition, deploying more renewable energies, and decarbonizing their energy sector, this will automatically enhance energy security and reduce dependence on Russian energies. So, it appears that those countries do not see a specific reason to highlight energy security separately. . I think those people believe or those countries believe that the energy transition would resolve the energy security issue, so it will come as a result of the energy transition.

On the other hand, Japan has a very strong view about energy security. Japan has always attached great importance to energy security. Japan has always considered that energy security deserves a very separate and special focus. And probably, the biggest difference between those countries in Japan is that Japan believes that when we talk about energy security, energy transition and decarbonization is certainly important in the long term. But in the long transition period, fossil fuels, especially natural gas, and LNG, will continue to play a major role.

And when we talk about energy security, Japan believes that we have to talk about the security of natural gas and LNG. And I think that is a reason that Japan pushed for stronger language in the natural gas and LNG, and according to the press reports, in spite of reluctance by some of the other members, Japan succeeded in making reference to acknowledge the importance of investment in the gas sector. So, this is probably the biggest difference that I can find among the members in the G7.

Jane Nakano: Would it be fair to say that Japan's focus on the role of natural gas as energy security provider is in part because it's in this region that is still much more energy hungry than probably many other economies that gathered in Sapporo? I mean, when we look at many of the Asian economies, obviously, they do have their own platforms, whether it's G20 or et cetera, but I think there is quite a bit of a difference in terms of how much of certain resources that the economies can afford.

Right at the moment, there's a lot of attention on how to shift away from coal, whether they can go to gas or whether they sometimes have to wait for renewables, although renewables are certainly expanding their roles. And I wonder if there is some extent, some unique view that Japan brings to a forum such as G7 because of where it's located?

Tatsuya Terazawa: Well, Jane, that's a very important point. Japan is the only Asian member of the G7 process, and Japan has always considered that one of the most important roles for Japan in the G7 process is to represent the views and situation of Asia. And as you described, the situation concerning energy is very different between Asian countries and North America or Western Europe. One of the biggest differences, as Jane suggested, is that economic growth is very different. Asia is growing strongly, and their standards of living are still in the process of being enhanced.

So, if you put a strong amount of growth and rising living standards, that will lead to a very substantial increase in the demand for energy, whereas in many parts of Western Europe in particular, the growth is rather slow and they have already achieved a very high level of living standards so they can reduce the energy consumption. And when you have a decrease or reduction in your energy demand, it'll be much easier to decarbonize your energy supply, but when you have a substantial increase in the energy demand to support the growth and the enhancement of the living standards, the decarbonization will be very difficult.

While the Asian countries will be pushing for renewable energies, renewable energies by themselves will not be sufficient to supply the growing demand for energy, so energy in Asia would require both not just renewable energies but also the fossil fuel in order to reduce CO2, it's not coal, it would be natural gas or LNG. That's one point. And the second difference is that when I talk with my European friends, they'll also often mention that "Why not use wind power more?" But European countries, especially in Western Europe, have high latitude, and with high latitude you typically get a stronger wind, but for most parts of Asia, you don’t get such a stable strong wind. That’s problem number one.

And then the next question is, "What about solar panels?" The problem is that solar panels require so much land, and Asia, very densely populated. The land use is very tight, so the installment of solar panels would have to compete with other land use. And in addition, Asia has a very long rainy season, like the monsoon seasons, so in those seasons, there will be no power generation from solar panels. So, you would have to have dispatchable power cells to offset that drop in the power generation.

Additionally, Europe's coal-fired power plants are very old, easy to retire. But for most parts of Asia, the coal-fired power plants are very young. In fact, probably 60% of the coal-fired power plants are less than 10 years old, so they cannot be retired easily. So, these differences would lead to a different approach for energy policy. And I think one point that Japan was stressing, which was probably one of the most important objectives of Japan, was to stress that while there is a common goal, the pathways to reach that common goal should be different according to the unique circumstances that each country faces. This common goal, multiple pathways, is probably the most important message that Japan wanted to send out and to which Japan was successful in the communique.

Jane Nakano: And it's interesting in that, I mean, there is quite a diversity of resources and also that what is the land mass and population density. And I definitely think that it's important to recognize different paths, but it's also challenging to make sure that then you don't allow some countries to just fall behind and use that as sort of an excuse. Also, I looked at the communique and I certainly noted that there was a frequent reference to the global efforts, and in many ways, G7 needs to show leadership, but then also while recognizing that countries have different paths.

But then, at the same time, the idea is to keep marching forward, trying to really get to net zero and decarbonization. It was really the balancing, just reading through all these paragraphs, how to maintain that balance, it certainly seemed like a major task. Terazawa-san, another thing that caught my attention was under the critical minerals-related discussions, there was this call for more in-depth examination under, I think, five-point plan? Would you tell us a little more about how that came about and where you think the work will be going?

Tatsuya Terazawa: Well, I talked about the communique was 36 pages long, but in addition to that 36-page document, there were six annexes attached to communique. And one of the annexes was the Five-point Plan for Critical Mineral Security. And it is important, I believe, that in addition to highlighting the importance of critical minerals, a specific annex was dedicated to this question of critical mineral security. . I think this is the first time that the G7 produced a specific separate annex to cover this issue of critical mineral security.

And I think this is very important because many people consider that if we make the energy transition, we'll be free of the energy security problems. And I watched one comment made by the UK minister making an announcement with UK's new energy strategy plan UK is now free from the concerns of energy security, but this is not true. Well, eventually, after decades, if we succeed in decarbonization, we may be relieved of the energy security concerns arising from the supply of fossil fuels, but the energy transition will lead to massive, massive demand for critical minerals such as lithium and nickel that will be used for batteries and EVs and solar panels and wind power generation.

And so, we have to start thinking about this issue. And we often talk about the concentration of supply of oil and gas from Middle East, but the concentration of supply, especially if we think about the processing of critical minerals, the domination of supply is much more serious than oil and gas. So, before it's too late, we have to start addressing this question of how we can enhance resilience, how can we diversify the source of critical minerals? And this cannot be done by one country alone because we are talking about the global supply and demand. Even if one country does its best, you cannot really change the global demand and supply for critical minerals.

So, this is an excellent example of the need for collective action, and the G7 leaders would be in a special position to promote this aspect. The five-point plan calls for having a forecast for long-term supply and demand, which is essential because people have not really thought about what the long-term demand for critical minerals would be. They talk about the long-term demand for EVs, but not talking about critical minerals. So, this is an important aspect, and the G7 has asked IEA to work on this. And this is very significant because IEA in the past has focused more on the typical energy, especially oil and gas in the past. But now, the G7 is commissioning IEA to expand their coverage to look into the long-term demand and supply for critical minerals.

Point two is to develop resource and supply chains responsibly. What it means is that the processing of or the extraction of critical minerals has been in many cases against the regional environment, and in some cases, they did not adhere to the global labor or human rights standards. It is important that in addition to getting the critical minerals, those critical minerals would qualify as consistent with our ESG concerns.

Point three is recycle more and share capabilities, and it's very important. We should strengthen our recycling efforts so that we don't have to keep on consuming our critical minerals. Point four is save with innovations, we have to be more efficient in the use of critical minerals to produce the same battery, if we can use less critical minerals, it'll be much better for this purpose. And finally, point five was to prepare for supply disruptions.

And just as we had SPR, Strategic Petroleum Reserve for crude oil, we need to have a stockpiling and sharing our critical minerals in case of crisis or disruption. And we started this 50 years ago with crude oil in response to the first oil crisis, and now, facing a potential disruption for critical minerals, it is time for the G7 members to work together to prepare for a contingency.

So, this annex Five-point Plan for Critical Mineral Security is very important. And this is the starting point, this is not the conclusion. Just as 50 years ago countries and leaders succeeded in enhancing the security for crude oil, now it's time to start enhancing the security for critical minerals.

Jane Nakano: Terazawa-san, are you suggesting that perhaps the International Energy Agency in Paris may take on some sort of a coordinated approach to stockpiling critical minerals and even potentially coordinated use?

Tatsuya Terazawa: Well, this five-point plan is not that clear. As I said, this is just a starting point. I believe this would be very important and starting with encouraging members of the G7 to stockpile critical minerals so that each country will be prepared against a contingency. But the next step is to have a sort of coordination, a share of critical minerals when one country faces disruption. And maybe a third stage is to have a minimum standard leading to a strategic reserve, but that's down the road. This is only the starting point.

But looking at the current energy crisis, relatively speaking, crude oil problem was less severe than natural gas or LNG. And one of the major reasons is that following the first oil crisis 50 years ago, countries together with the IEA... Oh, IEA was created in response to the first oil crisis. We did a great job in enhancing the security for crude oil.

The challenge is that one, which was not really reflected in the communique, is that we need to strengthen the security for natural gas and LNG, which is much weaker than crude oil. And also, we have to start preparing for the third issue, which is critical minerals. So, in the long term, I would hope a similar development as we experienced in crude could take place with a collective action from the G7 to enhance the security for critical minerals. And in the meantime, I also want to see a strengthened enhancement of security for natural gas and LNG as well, but this is something hopefully the leaders will discuss as well.

Jane Nakano: Thank you. No, I really appreciate your giving us both sorts of historic context, but then in the energy landscape where different fields have had a different sort of a journey in terms of supply security. No, thank you so much for that response.

A couple things that occurred to me that I really wanted to get a little more of your thought is, one, hydrogen. Japan has been a leader in promoting hydrogen use. I think there's been a lot of discussion in the G7 context, how do you think that the hydrogen gain sort of a policy support or sort of a political will enhance the will to deploy, to help decarbonize harder-to-abate sectors?

Tatsuya Terazawa: I think the important role of hydrogen or ammonia, in particular addressing the hard-to-abate sector, was stressed in the communique, which is an achievement in itself. But probably, what was more important in the communique is that in using hydrogen ammonia, the communique made it clear that it would be the intensity of carbon that would be used to determine which hydrogen or ammonia to be used. There have been people who might be arguing the colors of hydrogen ammonia would be the decisive element in choosing which hydrogen ammonia to use, those people would prefer a strong, prefer green hydrogen, hydrogen produced from renewable energies over blue hydrogen, hydrogen produced from fossil fuel such as natural gas and to use CCS technology to take away the CO2.

But rather than giving to the discussion about different colors by focusing on carbon intensity, which is neutral technology, as the criteria to determine which hydrogen or ammonia to use, I think that was a major, major achievement of the G7 administrator meeting.

Secondly, while there was a debate concerning this point, the communique mentioned and acknowledged that there could be a role for hydrogen and ammonia in reducing the CO2 emission from thermal power generation. And I think this was very important from Japan's point of view because as I described, the Asian countries have a very young fleet of coal-fired power plants. They cannot retire them early because of commercial reasons, and also in order to ensure a sufficient supply of power.

 So, while maintaining those young coal-fired power plants, we need to reduce CO2 emission, and that's where hydrogen ammonia can be used to reduce CO2 emission. And the fact that this was acknowledged in the communique, well, there were many conditions attached to this, but the reference to this was, I think, another major significant achievement of the communique.

Jane Nakano: No, that's definitely one of the things where I see some difference of emphasis between, I guess some of the Asian economies and certainly in Europe. I mean, within the United States, we're also, I guess, more looking at the emissions' intensities rather than feed stocks, as you said, sort of calling them by colors. But I definitely thought that was one of the, I guess, takeaways from the communique.

This just quickly, I think it's interesting, one of the things that are fairly underappreciated about Japan's energy when I chat with a lot of folks that follow a lot of the energy issues, but not particularly familiar with Japan's energy situation, is that Japan, I think, has the third largest installed solar power. I think that's often not known. I think China by far is the largest, the United States is number two and I believe number three is Japan.

But there's not that there hasn't been interest. It's not that there isn't acknowledgement that renewables are important, but as you said, I think there's a lot of, I guess, terrain-related constraints, also population density. But anyways, obviously, the Sapporo Ministry Meeting happened and now we're looking at the G7 Summit. So, what are the key issues out of Sapporo, key messages that you think will be highlighted when G7 leaders meet in Hiroshima?

Tatsuya Terazawa: Well, from the outcome of the Sapporo meeting, it is quite clear that the leaders would express their strong sense of urgency about the global warming. They would describe this decade as the critical decade to address the global climate change challenge. And they will probably note that there is a substantial gap between the current trajectory for the NDC, the nationally determined contributions, and the path necessary to realize the 1.5 degrees Celsius temperature increase within reach, and they would urge stronger action among themselves. But in particular to the world, as Jane mentioned, that the global climate issue cannot be resolved by the G7 countries alone.

Much more CO2 is being emitted by the non-G7 members, especially the non-G7 major countries. So, the communique is stressing that other countries whose commitments or goals are not consistent with the 1.5 degrees path or the 2050 net zero, the G7 leaders would urge them to strengthen their NDCs or their long-term goals. I think that is something that the G7 members' leaders can easily agree upon because it is urging others to do more. And that is, I think, one of the discussions that will be highlighted at the G7 meeting for the leaders' meeting in Hiroshima.

But if we are to ask other countries, especially the emerging and developing countries, we have to recognize and address their concerns as well. And this leads us to the question about fossil fuel. The reality is that as of now, more than 80% of the energy globally is provided through fossil fuel. So, while we want to decarbonize the energy sector and we want to realize carbon neutrality, it will take quite a long time before we succeed in that, and the transition period would be quite long. And this is especially true for the emerging and especially the developing world. It'll take much longer.

And especially for the Global South, in addition to having a very long transition period, they will be affected much more by the price increase of energy. So, to ensure that the Global South will not be damaged by continuous energy crisis during the transition period, which will be very important for the people in the Global South, it is important to ensure that there will be stability in the energy market throughout the long transition period. And this would require that we should avoid a situation in which we may have a shortage of supply capacity for fossil fuel, especially for natural gas and LNG.

And this would require steady investment in gas and other fossil fuel. This is not to prolong or expand the use of fossil fuel, but it is facing the reality that while we make the energy transition and we do decarbonization of the whole energy system, we need to ensure that there will be sufficient supply for fossil fuel to avoid occasional price hikes which would affect the Global South.

And one of the weaknesses of the communique is that compared with the strong urgency about global warming, there's very little reference made to energy access or energy affordability or the market stability. And Global South is not mentioned that often in the communique. One of the points that we have to think about is that Prime Minister Modi of India as the next G20 chair will be invited to join the G7 leaders' meeting in Hiroshima. So certainly, Prime Minister Modi would emphasize the views from the Global South, and I would assume he would stress that the Global South would need to grow and that would require energy.

And while they'll be pursuing renewable energies, renewable energies alone will not be sufficient, so they will have to have access to fossil fuel during the transition period. And that would require market stability and sufficient investment. And this point, I think, was missing in the G7 ministers' meeting. And when the leaders meet with a greater viewpoint, not just in the energy environment and not just among the G7 countries, but looking at the world globally, I think this is a point that the leaders would have to discuss.

And I don't think these two objectives of realizing decarbonization, realizing carbon neutrality and ensuring growth and market stability for the Global South, I don't think these two should be contradicting each other. We should find a path to realize those two legitimate and important goals, and these are the great responsibilities for the leaders of the G7.

Jane Nakano: I'm so glad that you actually brought up the Global Southeast issue, I cannot agree more with you. And as you said, I think the journey for energy transition for Global South countries is likely to be longer. In Hiroshima, I think the context is a lot larger, and obviously, my understanding is the foreign minister's meeting in Karuizawa also talked about some of the energy-related issues, resource concerns, etc...

So, it's in this bigger context that I really do hope that G7 leaders will be able to show stronger, not just results certainly, but then also signal of the direction and commitment we have in engaging many of the countries that may not have as many resources. This was a fantastic conversation. Thank you so much for your insights.

Lisa Hyland: Thanks to Mr. Terazawa and Jane for breaking down the important takeaways from the Ministers' Meeting on Climate, Energy and Environment, and for highlighting what to watch at the upcoming G7 meeting. You can find more episodes of Energy 360 wherever you listen to podcasts and at csis.org. For updates, follow us on Twitter, @CSISEnergy. And as always, thanks for listening.