Make the Global South pay for climate damage, but only if it makes carbon more expensive, Greenstone economist says

Michael Greenstone | Photo credit: michaelgreenstone.com

Rich countries should pay people in developing countries for the climate damage caused by their emissions, provided those countries put a price on carbon. That’s the central proposition of a forthcoming book, Just Economics, by University of Chicago economist Michael Greenstone with Nobel laureates Abhijit Banerjee and Esther Duflo.

“We’re proposing to the Indians that they get the money without the burden,” Mr. Greenstone, who is director of the Energy Policy Institute at the University of Chicago, said in an interview. “Spend what you want. This is based on the amount of damage caused by emissions from OECD countries.” According to him, the payment “will go directly to the people, not to the government.”

The Organization for Economic Co-operation and Development (OECD) is a grouping of mostly rich, industrialized countries that have contributed most of the accumulated carbon in the atmosphere that causes global warming. This is in contrast to the “Global South”, which means low- and middle-income countries, but whose emissions are growing rapidly.

“82% of future emissions are expected to be outside the OECD and moral appeals have failed,” he reckoned, “the better angel argument doesn’t work.” However, the transfer would be “dependent on the Global South accepting carbon pricing. It’s not free. It’s a deal. You have to give something to get something.”

Mr Greenstone said it was possible to calculate the carbon emissions damage to India. “However, the exact parameters of this will have to be negotiated. Such an agreement did not require the whole world and could be concluded, for example, between the European Union and India,” he argued.

He pointed to the “more or less complete failure of climate finance in the Global South” and said “it’s time to think about a new approach”. The countries are expected to meet in Turkey next month for an annual climate meeting.

Market solution

Much of Mr. Greenstone’s work involves designing market-based solutions to tackle pollution. The most significant is the Surat Emissions Trading Scheme to control particulate matter, which was first mooted by the Gujarat Pollution Control Board in 2010. In a randomized trial, 150 textile mills were allocated to the market and 150 remained under conventional regulation. Market compliance was “99%” versus around a third of industries not being compliant at any time as it currently stands. This was because the researchers could see what firms were bidding to buy and sell pollution allowances: “The price I want for it has to be at least what it cost me. From those bids, we were able to deduce how expensive it was to achieve different levels of total emissions. Reducing emissions turned out to be cheap because the guys had all the equipment and had to start operating it or maintain it,” he explained. Enforcement mattered. When firms did not have a permit, the regulator imposed a fine of ten times the value of the permit. “Once the industry saw that the rules were going to be enforced, everything changed,” he said.

While the Surat system was designed to reduce particulate matter from textile factories, the next stop is Maharashtra, where the market will cover sulfur dioxide — a gaseous pollutant — and include large power plants. He said “there is a mock trading period involving the real market without real money to get firms used to trading allowances before the real market opens.

Similar talks are underway with Rajasthan, Uttar Pradesh, Madhya Pradesh, Bihar and Haryana. The Gujarat Pollution Control Board itself has sought help in designing a water market and a nationwide sulfur dioxide market. If states start to operate their own markets, he said, “one can imagine the interconnection of these markets.”

The challenge that law enforcement has faced is the inability to monitor plant emissions second by second. Industries have often resorted to switching off pollution monitoring equipment for competitive advantage. “This is the Achilles heel of environmental regulation around the world.” Another big challenge is finding the upper limit of pollutants that industries could emit. “It’s a judgment about the right trade-off between economic cost and environmental quality.”

Published – 02 Oct 2026 22:46 IST