Image Courtesy of Midia Ninja (Creative Commons)
There was a lot at stake for developing countries at this year’s climate change conference held in Baku. At the top of the agenda was the critical issue of climate finance, setting out the level of finances developed countries would be providing to their developing counterparts for climate action in the upcoming years, as well as the means through which they would be delivered.
The outcome, however, turned out to be a predictable yet bitter disappointment.
The dominant headline in the aftermath of the conference was a so-called “tripling of climate finance” by developed countries by 2035. But not only does the designated sum represent a fraction of what developing countries would need for effective climate action, loose wording in the final text means that even this minimal commitment is not fully guaranteed. Instead, the bulk of the total climate finance on offer is to come in the form of private capital, further exacerbating a debt burden that is already reaching record levels in many developing countries. Overall, only a small, unspecified amount of the total money on offer is to come in the form of grants, which is what developing countries urgently need.
As the final verdict of the conference was becoming clear, Panama’s climate envoy expressed her dissatisfaction in no uncertain terms. “This very low level of finance … means death and misery for our countries,” said Juan Carlos Monterrey. Meanwhile, Pakistan’s top envoy for climate change claimed that developing countries were being forced into debt to manage the consequences of climate change. “The climate crisis is turning into a debt crisis” said Romina Khurshid Alam, “because the means of implementation are not clear”.
However, the disappointing outcome of COP29 overshadowed another UN decision occurring shortly after the climate conference, which does have the potential to reshape global economic governance and help secure effective and transformative climate finance: the adoption of the final Terms of Reference for a future UN tax convention, with overwhelming majority at the UN General Assembly.
Secured in November 2023 through the initiative of the African Group at the United Nations, the UN Framework Convention on International Tax Cooperation (UNFCITC) seeks to establish a multilateral and inclusive system of global tax governance which has for decades been controlled by an exclusive club of rich nations: the Organisation for Economic Co-Operation and Development (OECD). The newly adopted Terms of Reference will act as the basis for upcoming negotiations by September 2027.
The COP29 outcome is yet another reminder that securing transformative climate finance requires meaningful reforms in global debt and taxation governance. It also highlights the need to reframe the core demands of grant-based climate finance, debt cancellation, as well as fair and progressive taxation, as key components of climate justice. The UN tax convention offers a promising start in this process, including by serving as a potential blueprint for a UN Framework Convention on Sovereign Debt as some civil society groups are calling for.
COP29 outcome: Debt distress for developing countries, profit scheme for private creditors
There should be no illusions about the fact that protection against climate change will require vast sums of money. According to a study by the Climate Policy Initiative, global climate finance allocated to mitigation and adaptation needs to reach US$ 9 trillion by 2030 in order to keep global rise in temperatures below 1.5°C. This is a far cry from the estimated US$ 1.55 trillion of climate finance mobilised in 2023.
Such a colossal financial effort, however, is strictly necessary in view of the losses accrued by humanity if no efforts were to be made to reduce greenhouse emissions – the so-called Business-As-Usual scenario: the projected economic losses that can be avoided by 2100 by realising a 1.5°C warming scenario are estimated to be almost five times greater than the climate finance needed by 2050 to achieve it.
Source : Climate Policy Initiative
Given this urgent need to massively scale up climate finance, the UN Trade and Development organisation (UNCTAD) released new figures shortly before the Baku conference on the climate financing needs of developing countries, in accordance with the provisions of the United Nations Framework Convention on Climate Change (UNFCCC) and subsequent climate agreements. The goal was to considerably increase the US$ 100 billion annual target of climate finance allocated by developed countries to developing nations.
The report estimated that developing countries would need US$ 1.1 in climate finance – covering mitigation, adaptation and managing loss and damage – from 2025 and around US$ 1.8 trillion by 2030. According to UNCTAD, developed countries would need to fund at least three quarters of the climate investments needed by developing nations. This means that developed economies need to provide close to US$ 0.89 trillion of climate funds to their developing counterparts as of 2025, and US$ 1.46 trillion by 2030.
The outcome of COP29, however, represents a dismal failure in view of the figures mentioned above.
The final decision calls on “all actors to work together” in scaling up climate financing to reach at least US$ 1.3 trillion by 2035, from all “public and private sources”. However, only US$ 300 billion of the total amount would come from the budgets of developed countries, and loose communication means even that commitment is uncertain. The text stipulates, rather, that the US$ 300 billion pledge could be secured “from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources”.
Therefore, not only is the total allocated sum grossly insufficient as regards the actual needs of developing countries – the US$1.3 trillion target should be reached well before 2030 according to UNCTAD – but the great majority is bound to come in the form of private finance, which would add to the debt burden of developing countries and send profits abroad. According to a recent analysis by Oil Change International ahead of the climate conference in Baku, 83% of the private finance “mobilised” by developed economies towards low and middle-low income economies, between 2019 and 2023, came in the form of loans.
In other words, the COP29 decision turns the climate crisis into a profitable enterprise for private creditors and investors, while exacerbating a debt crisis that is already wreaking havoc in many developing countries.
Debt cancellation and grant-based climate finance: Reparations towards climate justice
This outcome is particularly devastating at a time when unsustainable debt has reached peak levels in developing countries, and debt servicing is taking up the lion’s share of public spending to the detriment of healthcare, education, and climate action.
New figures released by the World Bank show that developing countries spent a record US$ 1.4 trillion in 2023 alone in debt servicing, with interest costs surging to $406 billion as a result of global inflation. The financial strain was most severe for the “poorest and most vulnerable countries”, according to the World Bank, who spent a record US$ 96.2 billion to service their debt in 2023. The interest payments for these countries reached an all-time high of US$34.6 billion in 2023, quadrupling since a decade ago.
The main beneficiaries of these record debt repayments have been private creditors. According to the World Bank, foreign private creditors have received nearly US$ 13 billion more in debt-service payments from public borrowers in the poorest countries than they disbursed in new financing.
Not surprisingly, the pressure on public services and environmental protection as a result of the vast sums spent on debt servicing is immense. According to UNCTAD’s latest figures, 48 developing countries – totalling 3.3 billion people – spend more on interest payments arising from public debt, than on either health or education. Another study by Development Finance International found that 42 countries of the Global South spent 12.5 times more on debt services than on climate adaptation and mitigation in 2023.
In the context of vulnerability to climate change, high levels of debt distress is all the more alarming as it can lead into a vicious circle of debt and climate crises: faced with climate-related disasters, indebted developing nations have little choice but to borrow externally, often with higher interest rates, which not only exacerbates their debt burden but also their climate vulnerability, since the necessary investments for climate mitigation and adaptation will have to be delayed for debt service payments. The devastating floods in Pakistan illustrate a case in point of this vicious cycle of climate vulnerability and debt distress in action.
Source : Eurodad
Alarmingly, public climate finance by developing countries to developing nations, has in fact contributed to this mounting debt burden for developing . According to the most recent OECD report which tracks the annual climate finance provided by developing countries to their developing nations, only 26% of public climate finance provided by developed economies has come in the form of grants, with the vast majority of the remaining sum provided as loans.
Changing this dysfunctional system requires reformulating demands for climate finance and debt reform as necessary reparations in service of climate justice.
It is well established that climate change is primarily the historical responsibility of countries in the Global North due to their highly disproportionate cumulative CO2 emissions, resulting from a system of extractive capitalism and colonial exploitation. Studies have shown that countries in the Global North are responsible for 92% of cumulative excess CO2 emissions, while low and middle-income countries located in the Global South are bearing the brunt of the consequences.
This disproportionate responsibility of Global North Countries with respect to climate change has been explicitly acknowledged through the principle of Common But Differentiated Responsibilities (CBDR), enshrined in the 1992 United Nations Framework Convention on Climate Change (UNFCCC). But beyond this institutional commitment outlined in subsequent climate change agreements from Rio to Kyoto and to Paris, climate finance is a way of restituting the climate debt that the Global North owes to the Global South; the historical debt that industrialised countries have accumulated vis-a-vis developing countries due to their disproportionate role in cumulative greenhouse gas emissions and climate degradation.
It is in this context, that the demand for grant-based climate finance coupled with debt restructuring or cancellation, needs to be reframed as prerequisites for climate justice; just as the call for fixing and repurposing the global tax model in order to address the basic inequalities at the core of climate change.
The need to realign tax and climate justice
When confronted with criticism about the low level of finances committed by developed countries at COP29, the UK’s energy secretary claimed that the deal was the best on offer given the financial strain currently experienced by many developed countries.
“Developed countries have gone quite a long way to try and find a way through this, and at a time when public finances really are stretched” said David Miliband.
However, faced with the existential dangers and financial costs of climate inaction, the question is not whether there is currently enough money in the coffers to address the situation, but rather how we can raise the necessary resources to deal with the climate emergency. Once the question is formulated in this light, then there is an obvious candidate for securing the urgently needed funds: tax.
Whether the necessary funds for climate action are secured through domestic resource mobilisation by developing countries or through external climate finance, nearly all the funds need to be raised through taxation. A functioning tax system is, therefore, essential for generating the vast sums of money needed to address climate change.
Moreover, beyond the provision of public goods, tax is also a powerful instrument that can be used for correcting societal wrongs and injustices. In other words, it is not only a tool used for the purpose of generating and redistributing revenue, but can also be deployed to provide reparations and remedies for past injustices and ongoing inequalities, including in the case of climate change.
As the Tax Justice Network has highlighted, this transformative and progressive vision of tax in promoting human, social and environmental welfare is conspicuously absent when it comes to discussions on climate change. Hence, there is a pressing need to realign the goals of climate justice with those of tax justice.
As noted above, industrialised countries of the Global North bear the lion’s share of historical responsibility in driving climate change, while the impacts in terms of losses in GDP, agricultural productivity, biodiversity and human life, are disproportionately felt by developing countries.
But climate change is also marked by extreme inequalities, in terms of both responsibility and impact, as regards wealth disparities between individuals. An Oxfam study has found that for the year 2019, the carbon emissions of the richest 1% equaled those of the poorest 66% of the planet. Since the 1990s, the same 1% has burned through twice as much of the carbon budget as the poorest half of humanity combined. At the same time, poorer communities in vulnerable countries of the Global South are those hit hardest by climate change. For instance, the Climate Inequality Report found that in low-and middle-income countries, income losses due to climate change of the bottom 40% are estimated to be 70% larger than the average.
Redressing these basic inequalities at the heart of climate change requires fixing the dysfunctional global tax system, as well as the adoption of ambitious and progressive tax policies targeting multinational corporations and wealthy individuals with disproportionate responsibility in global CO2 emissions.
According to the latest estimates by the Tax Justice Network, the world loses US$492 billion a year to tax abuse by multinational corporations and wealthy individuals using tax havens and secrecy jurisdictions to underpay tax. This includes $US 348 billion of losses in tax revenue as a result of corporate profit-shifting, and US$145 billion of losses due to undeclared private wealth hidden in offshore tax havens.
These losses reflect the direct costs of tax abuse resulting from the artificial profit shifting of corporations and the offshore assets of wealthy individuals, which would have been taxed at existing rates were it not for the network of loopholes and tax havens that enable global tax abuse. However, this system has considerable indirect costs for countries, in particular by fostering a race to the bottom on corporate taxation rates where governments feel compelled (wrongly) to continuously reduce corporate taxation in order to attract foreign “investments”. If this race to the bottom were to be eliminated through the dismantling of tax havens, countries could earn considerably more in tax revenue since the pressure to reduce taxes would disappear and effective fiscal autonomy would be restored.
According to the IMF, these indirect costs are three to six times higher than the direct costs. The potential gain from fixing the broken system of international taxation is therefore more likely to be in the order of trillions of additional fiscal revenue every year.
A small increase in corporate tax rates of the most polluting corporations active in the fossil fuel, shipping or aviation industries who currently enjoy generous subsidies and tax incentives, could alone result in hundreds of billions of additional tax revenue.
Other research by the Tax Justice Network has shown that the imposition of a “featherlight” wealth tax of 1.7% to 3.5% targeting the 0.5% richest households of every country, would generate $2.1 trillion of additional tax revenue a year globally. This sum easily covers the total amount of climate finance developing countries would need between now and 2030 (US$ 1.1 trillion in 2025, and up to US$ 1.8 trillion in 2030) based on the UNCTAD figures highlighted above.
The UN tax convention: a historic opportunity to reshape global economic governance
These transformative tax policies, based on the “polluter pays priciple”, could be implemented if the network of tax havens and secrecy jurisdictions which enable global tax abuse were to be dismantled. Their full potential would be further facilitated by realigning the agendas of climate and tax justice. The UN Tax Convention offers an unprecedented opportunity to achieve precisely these outcomes.
The OECD’s stewardship of international taxation has been marked by a long list of failures in delivering inclusive and effective outcomes. It has a solid track record of zealously protecting the interests of the world’s richest economies, while sidelining the needs of developing countries. The so-called “Two Pillar” solution to the problem of corporate tax abuse is a case in point of this flawed and ineffective model of tax governance.
This complex labyrinth of regulations does little to curb profit-shifting practices by multinational corporations due to its numerous loopholes, but has still ended up gridlocked due to US opposition to a proposed distribution of taxation rights of excess profits.
The decision to move the governance of international taxation to a multilateral body through the establishment of a UN Framework Convention on International Tax Cooperation (UNFITC), marks a historic opportunity to set up an inclusive and equitable system that can deliver genuine progress for developing countries. The newly adopted Terms of Reference (ToR) which will serve as the basis for the upcoming negotiations and establish the parameters of the future Framework agreement, offer a promising prospect in this regard.
The ToR document lists the establishment of a “fully inclusive and effective international tax cooperation in terms of substance and process” as a core objective, while highlighting alignment with “international human rights law” and the achievement of “sustainable development” among the guiding principles. It also emphasizes the adoption of “a holistic, sustainable development perspective”, which covers economic, social and environmental policy aspects “in a balanced and integrated manner”.
Moreover, it sets out ambitious outcomes in terms of tax cooperation, namely “fair allocation of taxing rights, including equitable taxation of multinational enterprises”, “addressing tax evasion and avoidance of high-net worth individuals”, as well as a commitment to international tax solutions that contribute to “sustainable development in its three dimensions, economic, social and environmental, in a balanced and integrated manner”.
Therefore, not only does the ToR establish the basis for a multilateral system of tax governance that is committed to equitable and inclusive processes and outcomes based on respect for human rights, it also adopts an “integrated” and “holistic” approach to sustainable development that incorporates economic, social and environmental aspects. This is precisely the approach needed to mobilise the potential of tax justice solutions in addressing the climate emergency. Indeed, the issue of “tax cooperation on environmental challenges” is listed as a potential additional protocol to the future framework agreement.
Crucially, the UN tax convention could serve as a potential blueprint for a Framework Convention on Sovereign Debt, as some countries and civil society groups are calling for.
Just as the global tax architecture has for long been dominated by a small group of rich nations, so has the governance of international debt been the exclusive domain of groups led by public and private creditors, including the G20, the Paris Club, multilateral banks such as the World Bank and the IMF, and even asset management companies.
A multilateral debt convention would, instead, provide an inclusive framework for debt governance where the interests of developing nations, premised on respect for human rights and sustainable development, are protected.
As the European Network on Debt and Development (Eurodad) has outlined, such a convention should include a debt resolution mechanism which prevents the accumulation of unsustainable and illegitimate debt, new binding principles for responsible lending and borrowing principles, and the creation of a global debt transparency.
The Eurodad proposal also advocates for an approach to debt governance that fully integrates factors related to climate change by, for instance, calling for new assessments of debt sustainability that put the imperative of addressing climate change before debt servicing.
The call for such a multilateral debt convention, following the example of the UN tax convention, is gaining momentum ahead of the Fourth Financing for Development Conference in Seville in 2025.
Of course, there should be no illusions about the fact that securing changes in global tax and debt governance along the lines described above would be nothing short of a colossal task. The UN tax convention has already met opposition by a small but powerful group of countries led by the US and the UK, who will seek to prevent any change that threatens their economic and political interests in the upcoming negotiations. Multinational corporations, deploying their army of professional lobbyists, will no doubt follow suit. The pursuit of a sovereign debt convention will also be met with numerous obstacles and outright opposition from stakeholders who profit from the current system.
But the momentum for greater multilateralism and inclusive economic governance introduced by the UN tax convention will be difficult to contain or reverse, even by an upcoming US administration deeply resentful of multilateral institutions and hell bent on unilateral coercion. Indeed, the Trump presidency may prove to be a decisive moment of clarity for other countries, particularly EU nations, who could come to realise that multilateralism is the only viable and reliable path for securing economic progress and cooperation in the face of US unilateralism.
A more inclusive approach to global economic governance which protects the interests of developing countries, is also far more likely to view global debt and tax reform as prerequisites for achieving climate justice, and pave the way for transformative climate policies, including on the critical issue of climate finance.
Indeed, humanity’s best chance of survival against the most severe risks of climate change lies in solutions which advance precisely this harmonious approach to economic and climate justice.
International Political Economy Watch 
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