Pay the Global South for climate damage, but only if it prices carbon, says economist Greenstone

Environment & Climate Change · 4 October 2026 · Based on The Hindu (original report)

Must read — 2 past UPSC questions on this theme (Prelims GS-1 2025, Prelims GS-1 2021).

2-minute summary

Prominent economist Michael Greenstone (Director of the Energy Policy Institute, University of Chicago), along with Nobel laureates Abhijit Banerjee and Esther Duflo, has proposed a novel climate finance mechanism in their forthcoming book, *Just Economics*. The proposal suggests that wealthy OECD nations should directly compensate individuals in the Global South for climate damages caused by historical emissions. However, this unencumbered financial transfer would be strictly contingent on recipient nations implementing domestic carbon pricing. Greenstone argues that since 82% of future emissions are projected to come from outside the OECD, and moral appeals have failed, market-based incentives are necessary. To illustrate the efficacy of market solutions, he highlights the success of the Surat Emissions Trading Scheme (ETS) for particulate matter, which achieved 99% compliance through strict enforcement and permit trading. The model is now being expanded to sulphur dioxide trading in Maharashtra and explored by several other Indian states, though challenges like monitoring equipment tampering and setting optimal pollution caps remain.

Why it's in the news

Economist Michael Greenstone has proposed a conditional climate damage compensation model linking OECD funding to carbon pricing in the Global South. This comes ahead of major global climate talks and amidst the expansion of sub-national emissions trading schemes in Indian states like Gujarat and Maharashtra.

Facts to remember

• The Surat Emissions Trading Scheme (ETS), launched in 2019 in collaboration with the Gujarat Pollution Control Board, is India's first market-based system to regulate particulate matter emissions.
• According to projections cited by economist Michael Greenstone, 82% of future global carbon emissions are expected to originate outside the OECD countries.
• The Organisation for Economic Co-operation and Development (OECD) is an international grouping of 38 mostly high-income, industrialised countries headquartered in Paris, France.
• Maharashtra is expanding the emissions trading model to cover sulphur dioxide (SO2) emissions from large power plants.

Background and context

The global climate governance architecture is built on the principle of 'Common But Differentiated Responsibilities and Respective Capabilities' (CBDR-RC), formalised under the 1992 UNFCCC. This principle recognizes that developed nations (like OECD members) historically contributed the most to cumulative greenhouse gas emissions and should lead mitigation efforts while providing finance to the Global South. However, developed nations have consistently missed climate finance targets, such as the $100 billion annual commitment promised at COP15 in 2009. In response, economists are proposing market-based alternatives. Carbon pricing (via carbon taxes or cap-and-trade systems) internalizes the social cost of carbon. Article 6 of the Paris Agreement provides a framework for international carbon markets, but domestic implementation in developing nations has been slow due to concerns over industrial growth and poverty alleviation.

Constitutional provisions

• Article 48A — Directive Principle of State Policy directing the State to endeavour to protect and improve the environment and safeguard forests and wildlife.
• Article 51A(g) — Fundamental Duty of every citizen to protect and improve the natural environment, including forests, lakes, rivers, and wildlife.

Committees and reports

• Just Economics (Forthcoming Book) — Co-authored by Michael Greenstone, Abhijit Banerjee, and Esther Duflo, proposing direct climate damage transfers to the Global South conditional on domestic carbon pricing.

Government schemes

• Carbon Credit Trading Scheme (CCTS) — Notified by the Ministry of Power under the Energy Conservation Act, to develop a domestic carbon market in India, aligning with sub-national initiatives like the Surat ETS.
• Perform, Achieve and Trade (PAT) Scheme — A market-based mechanism under the Bureau of Energy Efficiency (BEE) to enhance energy efficiency in energy-intensive industries through tradeable Energy Saving Certificates (ESCerts).

International organisations

• UNFCCC (United Nations Framework Convention on Climate Change) — The primary international treaty body responsible for global climate negotiations, including the Paris Agreement and the Loss and Damage Fund.
• OECD (Organisation for Economic Co-operation and Development) — A forum of 38 high-income countries that historically account for the majority of accumulated global emissions.

Previous UPSC questions on this theme

• Prelims GS-1 2025 — Consider the following statements : Statement I : Article 6 of the Paris Agreement on climate change is frequently discussed in global discussions on sustainable development and climate change. Statement II : Article 6 of the Paris Agreement on climate change sets out the principles of carbon markets. Statement III : Article 6 of the Paris Agreement on climate change intends to promote inter-country non-market strategies to reach their climate targets. Which one of the following is correct in respect of the above statements? (a) Both Statement II and Statement III are correct and both of them explain Statement I (b) Both Statement II and Statement III are correct but only one of them explains Statement I (c) Only one of the Statements II and III is correct and that explains Statement I (d) Neither Statement II nor Statement III is correct
• Prelims GS-1 2021 — The 'Common Carbon Metric', supported by UNEP, has been developed for (a) assessing the carbon footprint of building operations around the world (b) enabling commercial farming entities around the world to enter carbon emission trading (c) enabling governments to assess the overall carbon footprint caused by their countries (d) assessing the overall carbon footprint caused by the use of fossil fuels by the world in a unit time

Mains practice: Assess the potential of market-based instruments, such as Emissions Trading Schemes (ETS), in balancing India's industrial growth with its environmental commitments. Draw insights from sub-national initiatives like the Surat ETS.

Emissions Trading Schemes (ETS), or cap-and-trade systems, are market-based instruments that set a regulatory limit on emissions while allowing industries to trade permits. This internalizes environmental costs, offering a flexible alternative to rigid command-and-control regulations.

• **Lessons from Sub-national Initiatives:**

India's pioneer initiative, the Surat ETS for particulate matter (launched in 2019 by the Gujarat Pollution Control Board), demonstrated remarkable success. A randomized evaluation showed that compliance reached 99% because industries could trade permits, finding cheaper ways to reduce emissions. Building on this, Maharashtra is implementing an ETS for sulphur dioxide (SO2) targeting large power plants, while states like Rajasthan and Haryana are exploring similar frameworks.

• **Potential in Balancing Growth and Environment:**

1. *Cost-Effective Abatement:* Market mechanisms allow high-cost abaters to buy permits from low-cost abaters, minimizing the overall economic cost of pollution reduction.

2. *Incentivizing Innovation:* Placing a price on emissions encourages industries to adopt cleaner technologies, aligning with India's Net-Zero 2070 target.

3. *Resource Mobilization:* Revenue from permit auctions can fund local environmental remediation and green infrastructure.

• **Key Implementation Challenges:**

1. *Monitoring Integrity:* The 'Achilles heel' of environmental markets is the tampering or turning off of Continuous Emissions Monitoring Systems (CEMS) by industries to avoid compliance.

2. *Cap Determination:* Setting the optimal pollution cap requires balancing public health with industrial competitiveness.

3. *Institutional Capacity:* State Pollution Control Boards (SPCBs) often lack the technical expertise to manage complex trading platforms.

**Way Forward:**

To scale these initiatives, India must strictly enforce penalties for non-compliance (similar to Surat's 10x permit value fine). Furthermore, sub-national markets should eventually be integrated into the national Carbon Credit Trading Scheme (CCTS) established under the Energy Conservation (Amendment) Act, 2022. This will ensure a robust, unified carbon market that supports both economic growth and SDG 13 (Climate Action).

Prelims practice questions

Q1. Consider the following statements regarding market-based environmental regulations in India: 1. The Surat Emissions Trading Scheme (ETS) was India's first market-based mechanism to regulate particulate matter emissions. 2. The national Carbon Credit Trading Scheme (CCTS) is governed under the Air (Prevention and Control of Pollution) Act, 1981. 3. Maharashtra has initiated a mock trading market for sulphur dioxide (SO2) emissions targeting large power plants. How many of the above statements are correct?

1. Only one
2. Only two
3. All three
4. None

Answer: B. Statement 1 is correct: The Surat ETS, launched in 2019, is India's first market-based mechanism for particulate matter. Statement 2 is incorrect: The Carbon Credit Trading Scheme (CCTS) was notified under the Energy Conservation Act, 2001 (amended in 2022), not the Air Act, 1981. Statement 3 is correct: Maharashtra is implementing an ETS for sulphur dioxide (SO2) targeting large power plants, starting with a mock trading period.

Q2. With reference to global climate finance and carbon pricing, consider the following statements: Statement I: Developed countries have proposed that climate damage compensation to the Global South should be contingent on these nations implementing domestic carbon pricing. Statement II: The principle of Common But Differentiated Responsibilities (CBDR) under the UNFCCC requires all nations, regardless of historical emissions, to implement identical carbon pricing mechanisms. Which one of the following is correct in respect of the above statements?

1. Both Statement I and Statement II are correct and Statement II explains Statement I
2. Both Statement I and Statement II are correct but Statement II does not explain Statement I
3. Statement I is correct but Statement II is incorrect
4. Statement I is incorrect but Statement II is correct

Answer: C. Statement I is correct as it reflects the proposal by economists like Michael Greenstone to link climate compensation to carbon pricing in the Global South. Statement II is incorrect because the principle of CBDR explicitly differentiates responsibilities based on historical contributions and capabilities, meaning developing nations are not obligated to meet the same mitigation timelines or mechanisms as developed nations.

Q3. Which of the following best describes the primary difference between a Carbon Tax and a Cap-and-Trade (Emissions Trading) system?

1. A carbon tax is implemented exclusively by international bodies like the UNFCCC, while cap-and-trade systems are only managed by local municipal corporations.
2. A carbon tax guarantees a specific quantity of emission reductions, whereas a cap-and-trade system guarantees a stable price for carbon certificates.
3. A carbon tax provides price certainty for carbon emissions but leaves the emission reduction quantity uncertain, whereas a cap-and-trade system guarantees a specific emission limit but leaves the carbon price to be determined by the market.
4. A carbon tax sets a strict limit on the total volume of emissions allowed, whereas a cap-and-trade system allows unlimited emissions as long as a flat fee is paid per ton of carbon.

Answer: C. A carbon tax fixes the price of carbon (providing price certainty) but does not guarantee a specific reduction in emissions. Conversely, a cap-and-trade system sets a firm limit on emissions (providing quantity certainty) but allows the market to determine the price of permits, leading to price volatility.

Revision flashcards

• What is the fundamental difference between a Carbon Tax and an Emissions Trading Scheme (ETS) regarding market certainty? A Carbon Tax provides price certainty but emission quantity uncertainty. An ETS provides emission quantity certainty (via the cap) but price uncertainty.
• Which Indian statutory body is responsible for implementing sub-national emissions trading schemes like the Surat PM market? State Pollution Control Boards (SPCBs), operating under the Air (Prevention and Control of Pollution) Act, 1981.
• According to the proposal by economist Michael Greenstone in October 2026, what condition must the Global South meet to receive climate damage compensation from OECD nations? The Global South must adopt domestic carbon pricing mechanisms.
• In which Indian state was a mock trading market for sulphur dioxide (SO2) emissions from large power plants underway as of October 2026? Maharashtra.
• Why is continuous emissions monitoring equipment considered the 'Achilles heel' of environmental market regulations? Industries often turn off monitoring equipment to gain a competitive advantage, making real-time enforcement and accurate permit compliance difficult for regulators.