Global South unprepared for climate policy-driven trade conflicts

THE Global South is unprepared for an era of trade friction, caused by climate policies that are increasingly driven by geopolitical competition, which is choking off financing needed for climate-change mitigation.

In the past year, clean energy investment that was on the verge of being deployed in emerging markets from India to Indonesia was suspended almost overnight. Capital flows were instead diverted by companies to benefit from the United States’ Inflation Reduction Act, the world’s largest climate policy that relies largely on tax sops, incentives and green subsidies.

Term sheets for projects in sectors from green hydrogen to battery storage and biofuels were torn up, at a time when emerging economies are expected to need nearly US$3 trillion annually by 2030 to adapt to climate change, according to the International Finance Corp. Additionally, countries in Asia-Pacific face a shortfall of at least US$800 billion in climate financing, according to the International Monetary Fund (IMF).

Meanwhile, the emergence of cross-border carbon taxes, led by the European Union’s Carbon Border Adjustment Mechanism, is already laying the groundwork for tough bilateral negotiations with the region’s largest trading partners, who view the move as a green trade barrier and green protectionism.

This has set the stage for trade frictions to heat up. In July, the Basic bloc of four newly industrialised countries – Brazil, South Africa, India, and China – called carbon border taxes and trade-distorting subsidies of rich nations “discriminatory”, and some countries plan to challenge these policies at the World Trade Organization (WTO).

For emerging economies, principles of fairness and equality underpin the global response to climate change and the push for a just energy transition. But trade barriers are inherently divisive. There is no equity in a trade war, only self-interest.

Cross-border carbon taxes will create tariffs that penalise many small countries that rely on exports of a few commodities or products to run their economies. Cutting off these revenue streams that support local economies pushes them back into poverty with no means to finance basic energy access, let alone expensive energy transition projects.

Climate finance dries up

Most poor countries are struggling with debt to simply maintain growth.

The IMF and United Nations Development Programme have identified 79 countries that are exposed to the risk of debt distress, and 60 of them have also been designated highly climate-vulnerable by the Notre Dame Global Adaptation Initiative’s climate index, said an April report by the Center for Economic Policy and Research (CEPR).

The same countries which are most exposed to climate change and are likely to incur the most economic damage from it, are the same ones that can least afford to put systems in place to adapt to or mitigate climate change.

For most climate-vulnerable countries, debt service takes precedence over making the necessary investments in building resilience, and most climate finance provided by wealthy countries responsible for the crisis has come in the form of additional loans with heavy interest, CEPR said.

Developed nations have yet to cough up the US$100 billion promised every year from 2020 onwards to assist developing countries in mitigating climate change. The funds were promised at the COP15 climate change conference in Copenhagen in 2009 and will still be a topic of discussion 14 years on at COP29 this year.

Meanwhile, other sources of climate finance such as carbon markets have been impaired by the ongoing campaign against the use of carbon offsets that focuses on criticising the accounting framework for emissions reductions, and ignores the billions of dollars of financing that were flowing into poorer countries.

Where will nearly US$3 trillion in annual climate funding by 2030 eventually come from?

Lacking clout

In July 2024, the World Resources Institute published a report saying that climate initiatives are largely dominated by developed countries and the top emitters from each sector that contribute to emissions, such as transport, energy supply, industry and agriculture.

It said that representation from the Global South was critically low across many of these sectors. Only a few climate initiatives in the energy sector engage over 10 per cent of countries from most groups in the Global South, the report noted.

It said the industrial sector had the least representation, with 130 governments not participating in any initiative, and that 73 per cent of these initiatives do not include least developed countries (LDCs).

Representation of the country groups – Small Island Developing States, Eastern Europe and Central Asia, and LDCs – was critically low in most sectors except agriculture and forests, it added.

It is not surprising that poor countries that lack leverage have not received much of the US$100 billion of promised climate finance, and often end up with unfavourable carbon-policy frameworks or policies.

Poor countries not only lack influence and bargaining power in climate policy, but also in global trade.

Global South nations in Asia-Pacific, South America and Africa have historically lacked leverage at organisations such as the WTO due to structural inequalities that favour wealthier nations, and weaker governmental and financing frameworks to build and train large groups of bureaucrats and experts.

Wealthier nations have been criticised for forcing poorer countries to adopt market liberalisation and open their markets for big multinational corporations in exchange for developmental loans. But they still impose high tariffs that prevent poor countries from exporting their products – a trend common in agricultural commodities.

This is also the reason that big consumer brands are visible in low-income countries in South-east Asia or South Asia. Yet these countries face high tariffs in exporting textiles and garments to the US, which highlight trade imbalances and unequal trade agreements.

The only way to boost exports is to sign long-winded free trade agreements (FTAs), that come with geopolitical caveats and other prerequisites. Most countries do not have the size of China’s market to use as a bargaining chip.

Over time, wealthier nations have used various reasons from pollution to human rights to maintain these trade barriers. For instance in 2023, the EU implemented a deforestation regulation barring imports of commodities such as timber, cattle, cocoa, coffee, palm oil, rubber and soy from regions where deforested land has been used. An Indonesian minister accused the EU of “regulatory imperialism”.

It is not entirely inconceivable that FTAs of the future will start to incorporate discussions over carbon taxes, emissions intensity and the cost of carbon. As fractures in climate policies devolve into trade wars, poor and developing countries will lack the clout to fight on both fronts.

The writer is LNG and energy transition lead editor at S&P Global Commodity Insights