Context (from https://en.wikipedia.org/wiki/Non-standard_model_of_arithmetic#From_the_incompleteness_theorems):
The incompleteness theorems show that a particular sentence G, the Gödel sentence of Peano arithmetic, is not provable nor disprovable in Peano arithmetic. By the completeness theorem, this means that G is false in some model of Peano arithmetic. However, G is true in the standard model of arithmetic, and therefore any model in which G is false must be a non-standard model.
I roughly understand the above, but some finesses about first vs. second order logic escape me. "G is true in the standard model" is related to the use of the second order logic, but how exactly? I am looking for high level explanations/considerations/examples rather than technicalities.
Question 1: The "Peano arithmetic" is a first order theory which, if augmented with the second order axiom of induction, yields exactly the "standard model of arithmetic". Is it correct? What are the major differences between both theories (typical statement whose proof requires the second order induction)?
Question 2: Why is G true in the standard model of arithmetic, whereas it may or may not be true in the Peano arithmetic? Does the Gödel encoding requires the standard model of arithmetic? What part of the argument (proof of Gödel's incompleteness theorem) fails in the Peano arithmetic?
I think you may be confused about the difference between models and theories. A theory is simply a set of sentences, while a model is a set with interpretations for all relevant symbols. E.g. in this context:
A key difference is that models have to have an opinion on every formula, since we have a way of assigning truth values to any formula. However, theories do not - it is possible that both $\psi$ and $\lnot\psi$ could be consistent with some theory. Such a theory is called incomplete.
Now, to answer your questions:
PA is indeed a first order theory. It is not categorical, meaning that it has non-isomorphic models (the so-called nonstandard models of arithmetic). If you add the second-order induction axiom, you get a categorical theory, since the only model is $\mathbb{N}$. However, PA$^+$ and $\mathbb{N}$ are not the same - the former is a theory, while the latter is the unique model of that theory.
G is true in $\mathbb{N}$ just cause it happens to be - remember every formula has to be either true or false in a given model. However, both G and its negation are consistent with PA, i.e. there are models of PA+G (such as $\mathbb{N}$), and also models of PA+(not G) - a nonstandard model. Therefore, just from PA we can't decide if G is true or false - it's consistent either way.
I think the Gödel encoding can be done in PA (hence in nonstandard models), so it wouldn't require the standard model $\mathbb{N}$.
The actual proof of Gödel's theorem happens in some "metatheory" which is outside of arithmetic. So, it's wrong to ask about the proof of GIT failing in PA, since the proof is not carried out in PA. The formula G is a formula in the language of arithmetic which is not provable from PA. However, note that G is not the proof of GIT, but just an object constructed as part of this proof.