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Issues with the climate finance mechanisms

GS Paper 2

Syllabus: Effect of Policies and Politics of Developed and Developing Countries on India’s Interests

 

Source: IE

 Context: The industrialised countries have not walked the talk of financing the climate mitigation and adaptation efforts of the poorer countries.

  

Why does the burden lie on industrialised countries? Historical responsibility

  • A bulk of the accumulated GHGs, the reason for global warming, have come from a group of about 40 rich and industrialised countries, usually referred to as Annex I countries in the 1992 UNFCCC.
  • The contribution of the poorer countries (the Global South) was negligible.
  • Additionally, countries in the Global South were already struggling to pay their external debt, exacerbated by the pandemic.

  

Mechanisms that made industrialised countries liable:

  • The Kyoto Protocol (1997) recognised the “common but differentiated responsibilities” in the fight against climate change.
  • The Paris Agreement (2015) asked countries to set voluntary emission targets but required the richer countries to make financial transfers to the developing economies.
    • It set a floor of $100 billion per year (that the developed countries had committed to raising from 2020) for these transfers.

 

Concerns:

  • In the definition of climate finance, commercial loans should not be counted.
  • In 2020, $83 billion was paid into the climate finance fund to be transferred to the countries of the Global South.
  • Out of this, less than $25 billion was in the form of grants.

 

Recent efforts to boost climate finance:

 

CBAM:

  • This involves imposing tariffs on imports from other countries that are seen to be using carbon-intensive methods of production.
  • This mechanism, starting in 2026, will cover products such as cement, steel, aluminium, oil refinery, paper, glass, chemicals and electricity generation.

 

The CBAM is expected to achieve three objectives: Reduce the EU’s emissions, for the EU not lose competitiveness in carbon-intensive goods and to make the targeted countries reduce the carbon intensity of their exports.

 

Issues with CBAM:

  • The CBAM is a unilateral move, against the spirit of multilateralism.
  • It could be used for protectionism.
  • Equity considerations, are designed to help rich countries avoid paying for creating the climate problem.
  • It targets production processes (not the product itself) that the WTO does not approve of.

 

How will it affect the Global South? This mechanism seeks to penalise “free riders” – one who is not contributing, although has the means to do so.

 

Most affected:

  • Only 3 of the 12 exporters to the EU have a mechanism for “pricing carbon”.
  • The countries most affected will be Russia, Ukraine, Turkey, India and China.

 

Way ahead:

  • A global price for carbon to redress the global “externality”.
  • Clarity on the following before CBAM is implemented:
    • First, which countries will be exempt? These are likely to be those that possibly have a national emissions cap or a sectoral cap or are the poorest countries.
    • Second, which emissions are included in the levying of the import tax?
    • Finally, which products are to be included? Possibly, a narrow coverage with high trade and carbon exposure.

 

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The Bonn climate change conference