Rich countries are in (climate) debt default

The Global South is effectively owed a climate debt of some $2.4 trillion by the historical polluters of the North. What it’s getting instead is a mix of financial crumbs, structural traps and dubious promises of ‘green industrialisation’.

Fadhel Kaboub

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CLIMATE finance requires a minimum of $2.4 trillion of transformative grant-based investment and transfer of technology for climate change adaptation and mitigation by 2030. We are nowhere near that target. Climate finance is a climate debt owed by the historical polluters of the Global North to Global South countries that are on the frontlines of climate change. The Global North is in default and is refusing to pay its debt.

If you owe me $100, you are supposed to pay me. Instead, you give me a $10 loan with conditionalities to control how I use my money. You give me another $10 in exchange for having control over my forests (aka carbon markets). You invest another $10 in green electricity that I must export to you on favourable terms. You outsource another $10 worth of low-value-added manufacturing to produce cheap consumer goods for you. None of this should count as climate finance. It is a climate debt default greenwashed with neocolonial debt traps.

If a Global South country defaults on its external debt, the Southern District of New York court will allow Wall Street private banks to confiscate any financial assets that country has in the US banking system, including export revenues that pass through the system. We need to establish a climate debt court in the Southern District of the Globe, staff it with the most qualified legal minds from the Global South, and start prosecuting climate debt cases using legal precedents that have been used to impoverish and abuse the people of the Global South.

We are owed at least $2.4 trillion in climate finance by 2030, so we need to withhold and confiscate the equivalent of that debt in cash and in kind until the debtors come forward and pay their debts in the form of unconditional grants and transfer of technology. Unfortunately, the Global South has yet to build an unbreakable united front. Instead, we see countries settling for bilateral deals that amount to financial crumbs and structural traps.

The biggest blind spot of COP 28

The debate about reforming the global financial architecture to create a fit-for-purpose climate finance model is encouraging, but it needs to recognise that the financial architecture is a subset of a global economic architecture that also includes the international trade, investment and taxation architecture. We are making some progress on transforming the global tax architecture thanks to a recent Global South victory at the United Nations General Assembly, which voted overwhelmingly for a UN Tax Convention.

We are also finally having a serious discussion about transforming the global financial architecture. At COP 28, Colombia, Kenya and France announced the establishment of an independent expert review on debt, nature and climate. The expert group will examine the way sovereign debt is limiting the fiscal space needed to take climate action, decarbonise the economy and protect nature. This is, of course, a promising initiative to help redesign the global economic architecture.

However, this leaves the rules of international trade and investment as the main blind spot in COP 28. There is no mention of the World Trade Organization (WTO), no mention of unfair bilateral trade agreements that are unfavourable to the Global South, no mention of reforming the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in the context of transfer of technology for climate action on adaptation and mitigation, no mention of the need to overhaul the investor-state dispute settlement (ISDS) mechanism or investment court system (ICS) through which Global South countries can be sued by foreign investors if the state takes action that interferes with the investor’s (extractive) business plans.

The carbon tax Trojan horse

Polluters are being cornered thanks to the mounting pressure from civil society around the globe. So they are now willing to accept a tax rather than being regulated, because they know they can either pass the tax burden on to consumers or avoid it altogether via loopholes they lobby for or by using ‘creative accounting’ and transfer-pricing techniques. Taxation alone is not going to work. We need to tax and regulate pollution out of existence.

Furthermore, carbon tax is now a trade weapon Trojan horse against developing countries. Consider the European Union’s Carbon Border Adjustment Mechanism (CBAM) regulations that were introduced in 2023. It is the other side of the coin of a neocolonial so-called ‘green industrialisation’. Low-value-added assembly-line manufacturing that is no longer needed in Europe will be outsourced to Africa and undertaken via low labour cost and cheap renewable energy produced in Africa. Those products from Africa’s green industrial zones will be exempt from the CBAM tax, thus offering European consumers a cheaper cost of living. In other words, CBAM coupled with this type of ‘green industrialisation’ is simply a neocolonial inflation protection strategy for the EU that can cost Africa $25 billion per year.

There was a lot of excitement about green industrialisation at COP 28, which is wonderful, except for the fact that there is a spectrum of industrialisation ranging from low- to high-value-added content and technological sophistication. Yes, we want manufacturing to be powered by clean energy produced in the Global South and we do want to create millions of jobs with decent wages, good working conditions, and strong social and environmental protections. But we do not want to be once again locked at the bottom of the global value chain, and we do not want the type of ‘industrialisation’ that takes advantage of low-cost labour and fiscal incentives in order to take clean energy away from local people who live without access to electricity and to export low-cost consumer products to the Global North instead of manufacturing desperately needed products to raise the quality of life in the Global South.

Africa’s manufacturing priorities should be to produce and deploy the clean energy infrastructure to serve the 600 million people who currently have no access to electricity, to manufacture and deploy clean cooking technology to protect the 970 million people (mostly women and children) who are inhaling toxic fumes on a daily basis, and to manufacture and deploy clean transportation infrastructure across the continent and its urban centres. In other words, we want the high end of the green industrialisation spectrum to be our policy target so we can escape the bottom of the global value chain.                   

Fadhel Kaboub is an associate professor of economics at Denison University (on leave) and the president of the Global Institute for Sustainable Prosperity. He is also a member of the Independent Expert Group on Just Transition and Development, and serves as senior advisor with Power Shift Africa. His most recent co-authored publication is Just Transition: A Climate, Energy, and Development Vision for Africa (May 2023, published by the Independent Expert Group on Just Transition and Development). The above is reproduced from his Global South Perspectives newsletter on Substack (globalsouthperspectives.substack.com/).

*Third World Resurgence No. 358, 2024/1, pp 31-32