Rich countries are in Debt Default

COP28 traps and blind spots

Good morning from Dubai at COP28!

Climate finance requires a minimum of $2.4 trillion of transformative grant-based investment and transfer of technology for climate adaptation and mitigation by 2030. We are nowhere near that target at the end of COP28. Climate finance is a climate debt owed by the historic polluters of the Global North to Global South countries that are on the front lines 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 favorable terms. You outsource another $10 worth of low value-added added manufacturing to produce cheap consumer goods for you. None of this should count as climate finance. It is a climate debt default green-washed with neocolonial debt traps.

We can stop paying our debt too

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 US banking 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. This must change now before COP28 goes down as yet another failed climate finance event for the Global South.

The biggest blind spot of COP28

The debate about reforming the global financial architecture to create a fit for purpose climate finance model is encouraging, but it needs to recognize 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 voting overwhelmingly for a UN Tax Convention.

We are also finally having a serious discussion about transforming the global financial architecture. At COP28, 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, decarbonize the economy, and protect nature. This is, of course, a promising initiative to help redesign the global economic architecture.

However, this leave the rules of international trade and investment as the main blind spot in the COP28. There is no mention of the World Trade Organization (WTO), no mention of unfair bilateral trade agreements that are unfavorable to the Global South, no mention of reforming the Trade-Related 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 EU’s Carbon Border Adjustment Mechanism (CBAM) regulations that was introduced this year. It is the other side of the coin of a neocolonial so-called “green industrialization.” Low value-added assembly line manufacturing that is no longer needed in Europe will be outsourced to Africa and manufactured via low labor 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 consumer a cheaper cost of living. In other words, CBAM coupled with this type of “green industrialization” is simply a neocolonial inflation protection strategy for the EU that can cost Africa $25 billion per year.

Green “Industrialization”

There is a lot of excitement about green industrialization at COP28, which is wonderful, except for the fact that there is a spectrum of industrialization 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 "industrialization” that takes advantage of low-cost labor 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 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 the clean transportation infrastructure across the continent and its urban centers. In other words, we want the high-end of the green industrialization spectrum to be our policy target so we can escape the bottom of the global value chain.

There is more to unpack from COP28 as we reach the final stretch of the negotiations, especially on phasing out fossil fuels, climate finance, and avoiding dangerous false solutions, but I need to de-COP-le for now and head to my next destination. Again, a lot of the analysis above is discussed in the Just Transition report (available in English & French) that we publish last May (published by The Independent Group of Experts on Just Transition & Development). Check it out.

I will write again soon. Bye for now! مع السلامة

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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. He has recently served as Under-Secretary-General for Financing for Development at the Organisation of Southern Cooperation in Addis Ababa, Ethiopia. Dr. Kaboub is an expert on designing public policies to enhance monetary and economic sovereignty in the Global South, build resilience, and promote equitable and sustainable prosperity. His recent work focuses on Just Transition, Climate Finance, and transforming the global trade, finance, and investment architecture. 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). He has held a number of research affiliations with the Levy Economics Institute (NY), the John F. Kennedy School of Government at Harvard University (MA), the Economic Research Forum (Cairo), Power Shift Africa (Nairobi), and the Center for Strategic Studies on the Maghreb (Tunis). He is currently based in Nairobi, Kenya and is working on climate finance and development policies in Africa. You can follow him on Twitter @FadhelKaboub and you can read his Global South Perspectives on substack where he blogs regularly.