Agencies
Jayant Sinha
Chairman, standing committee on finance in Parliament
Dealing with climate change is foremost on every country's agenda. The G20 must immediately take the lead in forging an effective climate club. While the 'common but differentiated responsibilities' (CDR) principle remains relevant, all G20 countries - accounting for well over 80% of greenhouse gas emissions - need to start decarbonising as fast as possible.
Long-term modelling studies have shown that even if the rich among the 23 G20 countries begin emissions reductions in 2025 at an annual reduction rate of 3%, the rest must also start at the same rate by 2030 to reach global net zero by 2050. Therefore, a CDR-based climate agreement is needed that will enable all G20 countries to adapt to a rapidly warming planet, while also decarbonising rapidly.
Today's climate agreements have failed. They simply cannot deal with the classic free rider problem that arises when parties want to share in the benefits of a public good without paying for the costs. As comprehensively described by 2018 Economics Nobel laureate William Nordhaus, without the necessary incentives and penalties, some countries will continue to free ride on the decarbonisation commitments of others. As a result, all parties come out of the agreement worse off.
The Kyoto Protocol and Paris Agreement were voluntary commitments without statutory backing. Both witnessed withdrawal by key nations like the US without any negative consequences. These agreements simply did not provide the concrete incentives needed to ensure compliance while setting up disincentives to prevent from free riding.
Nordhaus' proposed solution to the free rider problem is a multi-country climate club bound together by specific membership commitments, and with the right set of incentives to comply. Membership and incentives drive each other - the stronger the incentives, the more committed the membership, and vice versa.
Various groups of countries are attempting to create such clubs. Recently, the Council of the European Union agreed to a EU climate club, 'Fit for 55', for its 27 members. This policy package aims to reduce EU carbon emissions by 55% by 2030 and to net zero by 2050. Along with various decarbonisation policies, an emissions trading system and a massive fiscal transfer programme, Fit for 55 also includes a Carbon Border Adjustment Mechanism (CBAM).
Targeting carbon-intensive products imports, CBAM imposes a carbon tax on specific industries in non-EU countries that are not decarbonising. Another climate club proposal is being developed by Germany as part of its G7 presidency. It extends the EU climate club by establishing ambitious targets for non-EU countries, suggesting bold policy packages for various industries, and promising financial cooperation among countries. Germany proposes that membership be open to all. However, the current proposal includes little information on why anyone would want to join this climate club.
The Nordhaus model is too simple, the EU-only Fit for 55 programme too exclusionary, and the German G7 proposal too broad. We need better club models to provide powerful incentives for developing countries to join alongside developed ones in making legally-binding net- zero agreements. The G20 is best suited for this. However, it must develop a win- win climate club that provides sufficient financial and technological assistance flowing from the developed to the developing countries.
Such a climate club can be defined by working through six key levers. One, differentiated carbon prices, or equivalent decarbonisation policies, need to be implemented. An objective carbon pricing formula could be developed based on cumulative emissions per capita or some other fair metric.
Two, WTO-compliant border adjustment mechanisms could be implemented to prevent free riding by high-carbon countries by exporting high-carbon products and services into the climate club. A differentiated CBAM would focus on directly carbon-emitting industries, provide concessions to developing nations and impose penalties on non-participants.
Three, developed G20 economies would have to provide substantial financing and technology support to developing ones. If the right blended capital measures are implemented, the bulk of green financing could be driven by private capital from developed countries.
Four, legally binding statutory commitments from each member nation are required to prevent free riding. These must include clear deliverables on technology and fund transfers from developed countries. Five, while there can be different policy packages for member nations upon entry into the club, carbon emissions trajectories must be agreed upon. Finally, there must be disclosure, monitoring, compliance and dispute resolution processes to govern the functioning of the G20 climate club.
India assumes the G20 presidency in November 2022. The International Solar Alliance (ISA) has already been a success and shown that India can forge ground-breaking global agreements. India now has a historic opportunity to develop a win-win climate alliance through its G20 leadership.
Long-term modelling studies have shown that even if the rich among the 23 G20 countries begin emissions reductions in 2025 at an annual reduction rate of 3%, the rest must also start at the same rate by 2030 to reach global net zero by 2050. Therefore, a CDR-based climate agreement is needed that will enable all G20 countries to adapt to a rapidly warming planet, while also decarbonising rapidly.
Today's climate agreements have failed. They simply cannot deal with the classic free rider problem that arises when parties want to share in the benefits of a public good without paying for the costs. As comprehensively described by 2018 Economics Nobel laureate William Nordhaus, without the necessary incentives and penalties, some countries will continue to free ride on the decarbonisation commitments of others. As a result, all parties come out of the agreement worse off.
The Kyoto Protocol and Paris Agreement were voluntary commitments without statutory backing. Both witnessed withdrawal by key nations like the US without any negative consequences. These agreements simply did not provide the concrete incentives needed to ensure compliance while setting up disincentives to prevent from free riding.
Nordhaus' proposed solution to the free rider problem is a multi-country climate club bound together by specific membership commitments, and with the right set of incentives to comply. Membership and incentives drive each other - the stronger the incentives, the more committed the membership, and vice versa.
Various groups of countries are attempting to create such clubs. Recently, the Council of the European Union agreed to a EU climate club, 'Fit for 55', for its 27 members. This policy package aims to reduce EU carbon emissions by 55% by 2030 and to net zero by 2050. Along with various decarbonisation policies, an emissions trading system and a massive fiscal transfer programme, Fit for 55 also includes a Carbon Border Adjustment Mechanism (CBAM).
Targeting carbon-intensive products imports, CBAM imposes a carbon tax on specific industries in non-EU countries that are not decarbonising. Another climate club proposal is being developed by Germany as part of its G7 presidency. It extends the EU climate club by establishing ambitious targets for non-EU countries, suggesting bold policy packages for various industries, and promising financial cooperation among countries. Germany proposes that membership be open to all. However, the current proposal includes little information on why anyone would want to join this climate club.
The Nordhaus model is too simple, the EU-only Fit for 55 programme too exclusionary, and the German G7 proposal too broad. We need better club models to provide powerful incentives for developing countries to join alongside developed ones in making legally-binding net- zero agreements. The G20 is best suited for this. However, it must develop a win- win climate club that provides sufficient financial and technological assistance flowing from the developed to the developing countries.
Such a climate club can be defined by working through six key levers. One, differentiated carbon prices, or equivalent decarbonisation policies, need to be implemented. An objective carbon pricing formula could be developed based on cumulative emissions per capita or some other fair metric.
Two, WTO-compliant border adjustment mechanisms could be implemented to prevent free riding by high-carbon countries by exporting high-carbon products and services into the climate club. A differentiated CBAM would focus on directly carbon-emitting industries, provide concessions to developing nations and impose penalties on non-participants.
Three, developed G20 economies would have to provide substantial financing and technology support to developing ones. If the right blended capital measures are implemented, the bulk of green financing could be driven by private capital from developed countries.
Four, legally binding statutory commitments from each member nation are required to prevent free riding. These must include clear deliverables on technology and fund transfers from developed countries. Five, while there can be different policy packages for member nations upon entry into the club, carbon emissions trajectories must be agreed upon. Finally, there must be disclosure, monitoring, compliance and dispute resolution processes to govern the functioning of the G20 climate club.
India assumes the G20 presidency in November 2022. The International Solar Alliance (ISA) has already been a success and shown that India can forge ground-breaking global agreements. India now has a historic opportunity to develop a win-win climate alliance through its G20 leadership.
( Originally published on May 09, 2022 )
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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