Standing at the junction of major global shifts, the current year could prove decisive for long-term collaborative climate action
Last year will carry a legacy of shaking up the world. While still in recovery from the jolt of a debilitating global pandemic, Russia’s military action in Ukraine early in the year once again threw the world off balance. The recalibration of global politics and the economic sanctions aimed at Russia triggered widespread economic disruptions. Energy and commodity markets spiralled in reaction to huge supply chain uncertainties. It didn’t take long for the contagion from the energy and food crises to spread. The inflationary pressures from the energy and food crises and the monetary tightening by central banks around the world in response, and particularly in the US, has put it on the brink of a global economic recession.
Last year was also a year of contradiction. While energy insecurity propelled the adoption of renewables, it also forced a choice between future objectives and immediate imperatives. Faced with the prospect of out-of-control living expenses and crippling energy shortages, several nations (most notably in Europe) reactively hit pause on their climate ambitions. The dissonance was most visible in Europe. While the European Parliament deliberated emission cut targets for the decade, nations within the bloc were putting in motion plans to roll back curbs on coal. The search for alternatives to Russian oil and gas has led to an increase in demand from oil producers and expansion of exploration and drilling in new locations, potentially locking in fossil fuel emissions for several decades to come.
If there is one thing that has become painfully clear over the years, it is that climate change does not pause, no matter what else the world is dealing with. Last year was yet more proof of that, as a multitude of extreme weather events provided constant reminder of the worsening impacts of climate change. The concurrence of crises on several fronts, meant that the added burden of climate impacts could no longer be swept under the rug. Saddled with huge debts and challenging economic conditions, the demand for separate redressal measures to deal with the disastrous impacts of climate change. The catastrophic floods in Pakistan, which has a sizeable role to play in country’s current economic woes, was ostensibly the straw that broke the camel’s back and led to perhaps the biggest moment in the climate story of 2022. With demands for a separate and independent funding mechanism to address loss and damage growing too loud to ignore, the decision to set up such a mechanism was finally adopted at the COP27 in Egypt in November last year. What shape this fund will ultimately take will depend on a series of deliberations over coming months and years. The fund though represents a small part of a much wider demand of financial reform in a way that takes challenges from climate change into account. As momentum builds for such reforms amidst a backdrop of deep economic uncertainty, it is becoming more than likely that the global financial system will be forced the reckon with the climate question that looms overhead.
The shape of global ambition
At the junction of these crises and the fragilities they have exposed, India has found the contours of its global ambitions. Late last year, in the midst of this global shuffle, India assumed the presidency of the G20. The grouping of the world’s 20 major economies accounts for around three-fourth of all international trade and around four-fifths of global emissions, and so holds considerable sway in the shaping of global policy. For India, stewardship presents an opportunity to become a key facilitator in global problem solving. The G20 presidency has also seemingly catalysed an amp up of India’s claims as the ‘voice of the Global South’, with this week witnessing a virtual summit of 120 developing countries with an objective to strengthen strategic cooperation, particularly at international forums like the G20. Importantly, the Indian government is mulling a move to push the elevation of the 55-nation African Union as a permanent member of the G20, a move that has received endorsements from the US and Japan.
The Indian government will also look to find space for domestic developmental imperatives in any new economic paradigm that takes shape, and in the process attract foreign investments into the country. Importantly, a successful presidency could go some way in demonstrating the country’s influence in a fluid geopolitical and economic arena. To a political end, a claim to raising India’s global stature could pay impressive dividend for the ruling NDA coalition in the run up to next year’s general election.
The Centre has pulled out all stops to showcase the significance of its G20 presidency. Host cities of G20 meetings have been generously peppered with hoardings and government adverts publicising the presidency. Beautification projects have surged as cities attempt urgent facelifts in anticipation of visiting delegates. As far as the meetings go, India’s priorities are heavily derived from the fragilities exposed by last year’s poly-crises. Incidentally, overlaps with the sphere of climate action are unmissable.
While the “Sherpa Track” of G20 deliberations has 13 separate workstreams, India’s stated priorities broadly reflect climate change and collaborative climate action as a unifying theme. Separately, the “Finance Track” of the G20 schedule includes a workstream on Sustainable Finance. Acknowledging the centrality of developmental challenges posed by climate change and climate action, S Jaishankar, India’s Minister for External Affairs, stated that G20 presidency will look to establish a “Green Development Pact” at last week’s virtual Global South Summit with a view to map out actions over the next decade.
Food, Fuel, Finance
Such a pact will likely go through questions surrounding food security and energy transition. Dating back to 2014, the G20 has a Food Security and Nutrition Framework to mobilise investments in sustainable food systems and facilitate reform in trade regimes. Food security has been high on the G20 agenda since the global COVID-19 pandemic began in 2020. The Indian presidency will look to build on significant decisions taken in the last two years which have called for reforms in international agricultural trade. Last year’s Bali Declaration asserts its “support for open, transparent, inclusive, predictable, and non-discriminatory, rules-based agricultural trade based on WTO rules.” This strand is likely to be picked up for further deliberation in India, where along with other developing countries in attendance, will look to sustain pressure for changes in WTO rules pertaining to farming subsidies in developed economies to improve equity in agricultural markets.
On the energy transition front, Indonesia’s G20 presidency last year delivered the significant ‘Bali Energy Transitions Roadmap’ for the decade, which is a set of twelve action points aimed at increasing energy access, scaling up clean and efficient energy technologies, and increasing energy transition finance. The first component of the roadmap is the two-page ‘Bali Compact’ containing nine voluntary principles for smooth and effective energy transitions. India’s task in the current year will be to build on the progress made in Indonesia. While the ‘Bali Compact’ commits to the phasing down of unabated coal power, the Roadmap is explicit in its clarity that the transition will be subject to national circumstances, needs and priorities. Emphasis is rather on “diversifying energy systems and mixes as well as lowering emissions from all energy sources…” This offers India some space on the contentious issue of coal, and also room to pivot on more amenable issues of energy efficiency, alternate fuels and renewable energy supply chains— all areas in which the country has expressed some global ambition.
Finance for the global energy transition is a prominent feature of the Bali Compact and the larger Energy Transition Roadmap. Although there is ample recognition of the need to scale up finance, the mechanisms to ensure the requisite flows are still being figured out. Just Energy Transition-Partnership or JET-P deals have been the most visible in terms of financial support, but these have come with their own issues. Although India has been a prominent candidate for a JET-P deal since its announcement at COP26 in Glasgow, India’s Coal and Power ministries are wary of conditions of reform that may come attached with any such deal. This will be a key challenge that the Indian presidency will look to address. International donors and multilateral financial institutions have begun to look at future energy related investments from the lense of phasedown or phaseout of coal. Just Energy Transition Partnership (JETP) announced by G7 countries under the leadership of Germany is based on this premise… As G20 President, India will have the challenge to ensure that the expansion of JETP does not hinge on a plan whose sole aim is to facilitate withdrawal of coal related investments. A plan of transition based on this strategy would be harmful for India’s energy security and stability of the power sector in the short term,” writes former Indian climate negotiator RR Rashmi.
Much of the reform needed to drive significant changes in financing structures, however, lies with the Sustainable Finance Working Group which meets under the Finance Track of the G20. Going by the timeline agreed under the Sustainable Finance Roadmap adopted in Italy, India’s presidency is likely to be a significant one. With the Indian government rolling out its Sovereign Green Bonds and preparing a sustainable taxonomy to drive investments, the question of global interoperability of sustainable finance regulations will be an important one for the G20 to tackle. Perhaps more important is clarity on the reform that is needed at the level of multilateral development banks (MDBs). MDB reforms with a view to reflect climate and sustainability risks have long been under discussion, and actions are due to be finalised this year as per the timeline agreed under the Sustainable Finance Roadmap. As the G20 president, India has a big opportunity to play a key role in resolving the MDB stalemate.
The dam is about to break
It is not just from the G20 that the MDBs are under pressure. Increased indebtedness in vulnerable countries due to and the growing burden of climate impacts have brought conventional lending practices and financial structures under scrutiny. Poor and developing countries are disproportionately recipients of short-term debt with unfavourable repayment conditions. The demand for large financial facilities and institutions to reflect key climate risks and liabilities was articulated in the ‘Bridgetown Agenda for the Reform of the Global Financial Architecture’ spearheaded by Barbados Prime Minister Mia Mottley. The declaration for the initiative consists of a three-step action plan for MDBs to incorporate climate risks and expand lending to vulnerable countries.
The catastrophic floods in Pakistan, apart from galvanising the demand for a separate fund to address loss and damage associated with climate impacts, is also turning out to be a key pressure point for reform in financial systems. Last week, on the sidelines of a conference in Geneva, Pakistan PM Shahbaz Sharif met with IMF Chief Kristalina Georgieva to appeal for relaxations in repayment conditions as the country waits for the next tranche of IMF funds for the cash-strapped country. Whether Pakistan will ultimately succeed in its plea or not, the devastating economic fallout which could eventually push the country to default on its debt has rung alarm bells in other developing and vulnerable countries.
The current year is likely to be a big one when it comes to developments in climate finance. Key annual meetings of the IMF and World Bank in April and October will be punctuated by a summit on the Bridgetown Agenda in June being jointly hosted by France and Barbados. Outside of the front pages of most newspapers, tight monetary conditions globally, rising costs of climate impacts and the rapidly growing need for mitigation finance is culminating into unprecedented pressure for climate-responsive financial reform. This year could very well be the year the dam finally breaks.
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