Building a Sustainable Future: Climate Reparations and Financial Strategies for Climate Justice

“Laws and institutions no matter how efficient and well-arranged must be reformed or abolished if they are unjust”

-John Rawls (1971)

Author: Navaneeth M S. (msnavu@gmail.com)

The spectre of climate change looms large, portending a seismic shift in the very fabric of economic development. The traditional paradigm, once centred on alleviating scarcity, has given way to a far more sinister reality. The pressing concern is no longer one of mere deprivation, but of existential vulnerability. As the frequency and ferocity of shocks escalate, be they localised or global in nature, the very foundations of our societies are threatened. Households, communities, and governments alike are unprepared to safeguard their hard-won gains, leaving them perilously exposed to the whims of an increasingly capricious environment.

The Global Debate on Mitigation Responsibilities

The international debate on climate change has always hinged on the question of development: Should development needs be compromised in the fight against climate change? In order to find a middle way between the compulsions of growth and urgency of climate action, the global consensus crystallised in three major stages: First, the principle of Common but Differentiated Responsibilities (CBDR) affirmed the historical trajectory of the developed world contributing to emissions and consequently assigned a greater role for the Global North in climate mitigation. Second, was the Kyoto Protocol that laid down binding emission reduction targets for the developed nations. Finally, it culminated in the Paris Agreement, which led to voluntary reduction targets for all countries, termed as Nationally Determined Contributions (NDCs).

It is a proven fact that climate change disproportionately affects the poorest and most vulnerable communities in the developing world. The question comes forth is whether the mitigation strategies are enough to secure a sustainable future for the poor and disadvantaged populations? The answer seems to be a resounding no, as evident from the increasingly shrinking solution space. The window of opportunity for many of the Shared Socioeconomic Pathways (SSPs) to limit global temperature rise to 1.5°C is rapidly narrowing. Clearly there are gaps in the mitigation strategies. The gradual shift from the CBDR principle to the NDCs has fallen short of adequately addressing intra- and inter-generational equity.

The issue of emission is deeply entangled with the question of equity. The case of historical emissions points at the Great Divergence, which traces the gap in incomes between the West and the rest of the world, right from the Industrial Revolution (Jones, 2017). In terms of the available global carbon space, it means that the West had a head start in terms of emissions, and colonialism had stunted the growth in much of the current developing world due to its exploitative history. In addition, the debt laden model of development prescribed by the global financial institutions to the developing world after the Second World War led to a lot of detrimental outcomes, the most glaring one being the rising inequality.

Contention from the Developed Word

At all climate summits, one can see a recurring trend of evading the most important question: Who will bear the financial burden of mitigation? The developed nations continue to exert pressure on the developing countries to contribute equally to mitigation efforts while neglecting their own historical contributions. Their approach is to focus on carbon-intensive systems of energy production and doing away with them will ensure climate mitigation. Unfortunately, it is based on two faulty assumptions: First, that such supply-side changes will ensure climate mitigation and no demand side management is needed. Second, this transition will miraculously ensure effective climate adaptation. Apart from these issues, this approach does not take into account the domestic disparities and forces developing nations to divert resources from their immediate development needs. One strand of thought, resonated in multiple climate summits, was that the developed nations should reduce emissions based on their population, while underdeveloped countries can increase emissions proportionally, ultimately equalizing the per capita emissions (Meyer, 2005). Although it was rejected by the developed countries, this solution shines light at the persisting dominance of the ‘grow now, clean up later’ development model.

In order to limit global warming to 1.5°C, meeting the 2050 net-zero emissions target is vital. But it makes it difficult for the Global South to achieve their development goals as it requires a major shift in technology, as well as considerable financial support. Ambitious targets, as set by the Kyoto Protocol, have been met with significant delays, especially from the USA. This has affected global mitigation efforts. Significant emission cuts were realised only between 2008-2012. This tough balance between the calls by the Global South for climate equity and the reservations about the same by the Global North is noticeable in the debates at COP28 as well.

Need to Reimagine Economics

One needs to understand that a complex global issue like climate change challenges our conventional notions. This includes economics, as market-based solutions often fail to provide an efficient outcome in the climate sector. Solutions that can work in a localised context often falter to give the aggregate benefits when the impact ought to be measured in a transnational setting. For illustration, take the example of Clean Development Mechanism (CDM), through which the developed countries supported emission reduction projects in developing nations. While in India the ‘laissez-faire’ approach to CDM skewed the projects in favour of industrialised regions, China's coordinated national strategy achieved a more equitable CDM project distribution (Urpelainen, 2012). In addition to this disparity in allocation of these projects, the CDM as a whole has a questionable reputation with regards to whether they actually reduced emissions at all. This shows us how comprehensive and coordinated national planning is required for effective mitigation efforts, instead of relying on market forces alone.

Incorporating justice within the efforts against climate change is crucial as the poor and the socially disadvantaged groups suffer the most due to the environmental risks (Tsosie, 2007). People who live in informal settlements in the Global South are particularly exposed to catastrophic weather events and their repercussions, such as floods, landslides, and fire. Seasonal and tropical storm induced flooding pose a danger to coastal communities. The need for climate justice becomes imperative as the populations and authorities in these locations lack the resources and expertise to plan for or manage these consequences. Thus, we can see that accelerating climate change exacerbates the structural and social inequalities.

These issues put forward the need for critical investments in food systems, infrastructure and public health services to protect the poor and vulnerable groups across the globe. Climate finance lies at the heart of the efforts in addressing climate change, encompassing strategies for both mitigation and adaptation. These financial resources are generally derived from various sources including the public sector, private sector, and alternative funding mechanisms, with a significant portion coming from the Global North.

Towards a Practical Solution

A general solution like climate reparations, while seemingly justified according to historical injustices, will not go beyond the discussion tables owing to the inter-temporal nature of climate mitigation and the inequalities that exist within the developing world. Instead, such discussions lead to stonewalling of the entire process without any practical solutions being developed.

A general approach that often succeeds with regards to environmental treaties are ‘glocal’ solutions which are characterised by both local and global considerations. One such solution is seen in growing consensus that the need to transition to net zero greenhouse gas (GHG) emissions by around the middle of the century need to be supplemented via adequate carbon pricing mechanisms, which can take the form of a carbon tax or emissions trading schemes. But the problem with such taxes is that carbon-based fuels take away a larger portion of household income within low-income groups, as they spend a larger proportion of income on energy-intensive products and lack options as substitutes.

An alternative mechanism that can act as a substitute to reparations and meet the financial requirements to make vulnerable groups resilient is a 1% global income tax on the top 10% earners of each nationality that ought to be invested in making vulnerable groups resilient. This proposal will be effective owing to two reasons:

First, the top earners of any nationality are also the highest emitters within the sub-group and thus need to pay for their fair share. Second, it shields the low-income groups across the globe from cutting their consumption needs, overcoming a common refrain of populist politicians to backtrack any climate treaties. This tax comes well in excess of more than $270 billion globally per year which is sought to augment the critical gaps that exist in supporting climate adaptation strategies across the Global South.

Taxes are generally considered a deadweight and when it comes from the top earners of an economy, it is bound to have some negative demand side effects owing to a fall in consumption. Thus, this global tax revenue can be redesigned as ‘investments towards green bonds’ that will support climate mitigation. Green bonds have been suggested as a means to bridge financing gaps, but their effect is limited owing to the structural limitations of capital markets (Siddiqui and MS, 2023). Hence, this tax which is collected nationally needs to be put within a global corpus which can be effectively used as a fund house to finance climate mitigation needs anywhere. Given the fact that the richer countries would naturally contribute a greater portion of funds and most of the vulnerable sections are in the poorer parts of the globe, the flow of funds would be naturally be towards the Global South .This is an attractive option as it provides funding to the Global South with concessional interest rates. Now this requires developing robust mechanisms to tag and monitor the end use of such funds, but we can already see a rapidly evolving recognition to curb greenwashing and growing appetite for green financing (Climate Bonds Initiative, 2020).

The proceeds from this taxation will create positive second order effects as flow of funds to the tune of $270 Billion annually will create the potential for a significant shift in existing R&D towards mitigation and adaptation, as well as flow of further funds towards green industries. Further, the investment in such instruments should be agnostic to their returns as it might hinder development of infrastructure in regions that are seen as ‘risky’. Projects or sectors for investment can be prioritised using available impact measurement frameworks (Serfilippi & Ramnath, 2018). Therefore, the deadweight issue can be resolved since these bond proceeds would mean the initial tax payments would be returned to their original creditors, though with lower returns. This would be an acceptable trade-off since there is a rising trend of investors happily sacrificing on returns if the investment is in green assets, according to a Wharton study (Knowledge at Wharton Staff, 2020) .

Concluding Thoughts

While financing is a crucial step in making fighting climate change a truly inclusive and collaborative endeavour, it’s only a part of the puzzle. A study by IEA claims that a majority of emission reduction towards the net-zero target stem from innovative technologies (Marois et al., 2023). Hence, technology transfers are critical for fast tracking the carbon abatement and adaptation efforts. The Global South needs to seek a more flexible approach in accessing green technologies given that the USA, Japan, South Korea, and Germany collectively hold 75 percent of green patents and the current Intellectual Property regime acts as a barrier in the transfer and widespread use of these technologies. Addressing these barriers through the lens of climate reparations is vital, as it underscores the responsibility of developed nations to support developing countries in their climate resilience efforts, ensuring that those who have historically contributed the least to climate change are empowered to combat the repercussions effectively.

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