Unilateral Methods To Tackle Climate Change Can Adversely Impact The Developing Countries, Says Raghuram Rajan

While the EU and the US compete to promote clean energy with subsidies, it is not possible for a developing country to match them in providing such incentives for sustainable development. 

For the developing countries, in addition to the direct price of implementing green energy getting higher, the ‘opportunity cost of devoting scarce funds to green energy is increasing’.  

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When it comes to climate change, uncoordinated actions, even if well-intentioned, can be disastrous for countries with poor or negligible means. This argument has been made by former RBI Governor Raghuram Rajan in his opinion piece titled, ‘Unilateral action on climate change can have unintended consequences’. 

The opinion feature, published in the Financial Times on India’s 77th Independence Day questions the balance of power and affordability between countries when it comes to tackling climate change. Rajan states in his feature, that developed regions like the European Union and the United States are leading the charge in promoting clean energy and tackling climate change with a curb on carbon emissions. 

EU’s carbon border adjustment mechanism (CBAM) levies a border tariff on imported goods, proportional to untaxed emissions on the imports. This mechanism has been adopted by the EU to ensure that EU companies don't lose out to foreign firms after paying carbon tax and are discouraged from shifting their bases abroad. The CBAM targets both the direct emissions generated by the company’s production and the emissions generated by it due to it’s power usage, the feature explains.

While the United States, on the other hand, has adopted the approach of providing subsidies for clean energy instead of taxing carbon emissions, through tax incentives, grants, and loans. While both these regions are trying to compete to encourage companies to stay with them and at the same time reduce their carbon footprint, the same is not the case with the developing countries.

The feature argues that developing countries still struggling to rise from the aftermath of the pandemic and inflation, are finding it difficult to tackle climate change at any front. 

Rajan argues that the developing countries in the South will bear the brunt of the changing climate and it’s disruptions, therefore, it makes sense for them to invest first in helping their people adapt to the changes ahead. Shifting populations to higher grounds, reviving traditional water storage techniques and many such options are the priority for the developing world rather than investing in reducing emissions. 

The former governor argues that individually, all these steps make sense, but together, they create a harmful ripple effect. While the EU and the US one-up each other on promoting clean energy with subsidies and carbon taxes, it is not possible for a developing country to match them in providing such incentives for sustainable development. 

Therefore, the CBAM, while well-intentioned, increases the opportunity cost for other countries to fund ‘green investment’. For the developing countries, in addition to the direct price of implementing green energy getting higher, the ‘opportunity cost of devoting scarce funds to green energy is increasing’.  

Rajan, therefore, argues that in an ideal world, “Countries emitting carbon per capita above the global average should pay into a fund, and those below the global average should receive.” He notes that this scheme would allow the high carbon emitters, which are mainly rich countries,  to pay for the emissions and the poor countries to use these funds to invest in migration and adaptation. The feature concludes by stressing for a better strategy for the industrial world, to ensure the unintended consequences don’t harm the poor people the most.