The COP29 summit in Baku, Azerbaijan (November 2024) emphasized the challenges of financing climate change mitigation and adaptation. High-income countries pledged $300 billion annually until 2035 to support lower-income nations, but this commitment faced criticism by several lower-income nations, calling the pledged sum as inadequate and inequitable. A key issue lies in the mode of financing, with most funds disbursed as loans, exacerbating debt burdens for vulnerable countries already struggling with economic instability. In 2022, lower-income nations repaid $59 billion in debt while receiving only $28 billion in climate finance, much of it loan-based. The establishment of a centralized global carbon credit market under the UN at COP29 offers a potential solution, enabling lower-income countries to generate revenue through emissions trading. However, operational challenges and market volatility remain obstacles. Until such challenges are weeded out, developing nations must strengthen regional collaboration through coalitions like ASEAN, BRICS, or IPEF to advocate for equitable financing mechanisms and influence the global carbon-credit trading system's implementation.
The COP29 summit held in Baku, Azerbaijan in November 2024 highlighted the growing challenges of financing climate change mitigation and adaptation. At the heart of the debate was a financial pledge of USD 300 billion to be paid annually till 2035 by high income countries such as the United States, Russia and the European Union, to lower income ones. The financial pledge is intended to fund the needs of lower income countries dealing with the threats of climate change (WMO, 2024). However, the monetary commitment met with sharp criticism from several participants including India, countries from Africa and smaller island nations, which described the pledged sum as inadequate, unfair and unambitious (BBC, 2024). With the reluctance of high income nations to meet their financial obligations, there are growing concerns around how lower income countries will finance climate-related challenges.
While USD 300 billion may seem significant, lower income countries argue that it falls short of the scale of assistance needed to address the various challenges posed by climate change. These countries often bear the brunt of climate disasters despite contributing less to global emissions. Research shows that the average person in a high-income country emits more than 30 times as much carbon dioxide in the atmosphere as a person in a low-income country (Ritchie, 2023). Yet, the burden of lowering carbon emissions falls equally on high and low income nations. Because of this, the latter demands that at least USD 1 trillion be paid annually till 2035 for climate adaptation, mitigation, loss and damage recovery in vulnerable regions - a sum which is much closer to meeting their financial needs (Economic Times, 2024).
The key point of contention is not only the amount of money pledged, but also the way in which these funds are disbursed. Climate financing through loans can deepen the financial burden of lower income countries, dampening their economic growth. However, in the past, much of the pledged funding for climate financing was delivered through loans rather than grants. For instance, in 2022, developed countries did meet their financial pledge of USD 100 billion, however, 70 percent of the funds were disbursed through loans (Oxfam, 2024). The 2024 finance agreement has the same issue, where funding is to be provided through a combination of public and private sources, including debt issued by public and private entities.
Research by the International Institute of Environment and Development (IIED) shows that lower income countries, which are either part of the Least Developed Countries (LDCs) or Small Island Developing States (SIDS), are spending more than twice as much on repaying their debts as they receive to fight the climate crisis (IIED, 2024). In 2022, 58 such countries paid a total of USD 59 billion in debt repayments and received USD 28 billion in climate finance. Just over half the amount received was provided through loans rather than grants. The research highlights that the debt repayments are growing at a faster rate than climate support provided to lower income nations. The cost of borrowings can also be seven times higher for lower income countries as they are riskier places to invest in (The International Energy Agency, 2021). This means that several developing countries are at high risk of defaulting their loans or are already in a debt crisis such as Pakistan, Sri Lanka and Bangladesh, making it increasingly difficult for them to invest in climate adaptation.
The establishment of a centralised global carbon credits market under the United Nations (UN), which was approved under Article 6 at COP29, is possibly a better alternative for lower income countries to generate funds for climate mitigation and adaptation (Invest India, 2024). It is expected to reduce the cost of implementing national climate plans by USD 250 billion per year (COP29, 2024).
The carbon credits system allows emissions reducing projects to generate tradable carbon credits, which can be sold or traded with other countries or companies (Invest India, 2024). In this way, regions that have lower emissions can trade their carbon credits with other entities, generating revenue and incentivizing local businesses to lower their carbon emissions.
India has already made significant advancements in carbon credits. In 2022, the Indian government amended the Energy Conservation (Amendment) Act, 2022 to allow the central government to specify a carbon credits trading scheme and issue carbon credit certificates (Ministry of Power, PIB, 2023). According to the Bureau of Energy Efficiency in India, Indian agencies have also registered the second largest number of Clean Development Mechanism (CDM) projects globally, a voluntary UN program that facilitates investments in emission reducing projects in developing countries (United Nations, n.d.).
However, a key concern with the carbon credits trading system is that it is voluntary. In 2022, carbon credits received significant momentum, with several companies interested in implementing carbon-neutral strategies (Centre for Strategic and International Studies, 2024). However, in 2023-24, carbon credit prices plummeted as several entities backed out of the market, leading to an overall pessimistic sentiment towards carbon credits trading. The establishment of a centralised, international carbon trading system is expected to resolve this issue, however its operationalisation may take a few more years, allowing developed countries to continue to dictate the terms of climate financing.
In the meantime, developing nations must strengthen regional collaboration. Countries such as India, along with others in Africa and South East Asia, can establish a dedicated coalition to pool resources, share best practices and collectively advocate for clearer mechanisms and greater accountability in future climate agreements. Such a coalition may also have a stronger influence in the operationalisation of the cross-border carbon-credit trading system. Platforms like the Indo-Pacific Economic Framework (IPEF), ASEAN and BRICS could provide a useful stage for such initiatives, lending greater negotiating power to developing countries.