– Aarav Kumar and Keshav Agarwal

Introduction

Donald Trump, after being elected as the president, ordered the withdrawal of the United States from the Paris Agreement in January 2025. However, this is not the first time the world’s biggest economy has exited from the agreement and disrupted the harmonized efforts towards mitigating climate change effects. Earlier on November 4, 2020, U.S. formally exited the agreement after the then President Trump announced the same in 2017. In 2021, Joe Biden rejoined the agreement indicating its commitment and shared responsibility towards a greener future. With the recent step, the U.S. is not bound by the promise of keeping the global temperature rise below 1.5 degrees Celsius and would find itself with Yemen, Iran and Libya, the only non-signatories to the historic agreement. 

The exit of U.S. has created a climate leadership gap, a country which can drive and synchronize the efforts around the globe and provide the requisite supervision and monetary as well as policy support. Observers believe that either India or China could be the new climate leader, essentially on account of the size of the economy and persistent efforts towards developing green energy sources and actively implementing the same. Both the countries are positioning itself as the key drivers of sustainable international climate action by showcasing multilateral efforts and upscaling the investments in renewable energy. 

Firstly, this piece analyses the economic implications and externalities of the exit of the U.S. from the Paris Agreement. Secondly, it highlights the reasons because of which, China is not as suited to take the place of U.S. as India is. Thirdly, it deals with the potential of India as the global climate leader and the underlying economics that would play a pivotal role. Lastly, it provides the recommendations which could bolster the status of India as a leader to guide the world with adequate technological and policy acumen.

Implications of the US Exit: an Economic Perspective

On January 20, 2025, soon after assuming his office, Mr. Donald Trump, the President of the United States of America, formally signed an executive order to withdraw the United States from the agreement for a second time. Ending the entire $3 billion of U.S. funding greatly affected all climate change research, substantially lowered society’s chance of fully achieving the Paris Agreement goals and completely omitted U.S. input in all future IPCC reports. With a large contribution of 14.4%, the United States is the second to only China in terms of carbon dioxide emissions and has been the single largest historical emitter. If every economic term of this scale is attained, the failure to meet each Nationally determined contribution (NDC) now detailed in the agreement could diminish worldwide GDP by more than a quarter near the end of the century. Another study estimated that exceeding, or even meeting the Paris goals through infrastructure investments in clean energy may result in major global rewards of around $19 trillion. This could happen in addition to energy efficiency investments. The policy of the United States which is “Putting America First in International Environmental Agreements” Executive Order aims to curtail the amount of money that the U.S. gives to other nations to support mitigation and adaptation efforts. As is evident by European allies’ hard lobbying against the move of the U.S., the countries are disappointed that the exit of U.S. would significantly impact and weaken the enforcement measures of other countries, and it would become difficult for the countries to make their own tough cuts. They fear that backsliding by the world’s largest economy could arrest the efforts already underway to mitigate the changes in climate that are causing expensive coastal damage. Looking ahead, a number of countries are seizing the economic opportunities of climate adaptation and resilience. Germany, for instance, is fully prepared to invest at least €1.6 billion in artificial intelligence by 2025, tailored for climate efforts; similarly, Japan has enthusiastically pledged to double its adaptation funding to  $14.8 billion by 2025; nations like Uruguay, Denmark, and Lithuania, have been recognized for having greatly scaled up the share of solar and also wind energy in their electricity mix by at least 6 percentage points annually over a five-year span.

Why China may Fall Short as a Climate Leader

Since the last few years, China, the second largest economy of the world, is trying to position itself as the best suited candidate for the global climate leadership. This is evident by the fact that the Country, with the launch of BRIGC in 2019 which aims to make the flagship BRI (Belt and Road Initiative) greener with active participation of all the stakeholders. Ahead of COP 29, the country submitted a proposal on behalf of the BASIC group (Brazil, China, India and South Africa) to add unilateral climate-related trade restrictions to the summit agenda.  In COP 29, China sent a large delegation of more than 900 people continuing the trend it had started in COP 28, with nearly 1300 delegates. Ding Xuexiang, Vice-Premier of China, himself attended the summit at Baku and stated that the country has allocated more than $24.5bn for developing countries. This was the first time China adopted the language of Climate-finance. At the summit, China also emphasized its ‘dual carbon’ policy as a positive step towards abating the effects of climate change. It is also planning to introduce its first sovereign green bond in 2025. 

Thus, China has made substantial efforts in the development of renewable energy infrastructure. Leading the world as the top energy investor, China forms 33% share of the global clean energy. The seriousness of China against global warming is further buttressed by the fact that it dominates clean technology manufacturing and its export of clean-tech rising from 24% to 43% over the period of 2022-24. However, despite its rapid development in the adoption of green energy and the efforts towards climate diplomacy, China is not the best-suited option for global climate leadership. Firstly, it accounts for 28% of the global emissions currently. Therefore, China would not be able to lead the world by example and would be unable to practice climate diplomacy effectively by persuading other countries to cut down on emissions. Secondly, despite the ambitious targets, China has consistently failed to materialize the same. In 2020, Xi Jinping announced the ‘30-60’ policy, with the aim of achieving peak emissions by 2030, and carbon neutrality by 2060. However, the Climate Change Performance Index ranked China 55 out of 66 countries and highlighted the country’s overreliance on coal despite it being the largest producer of renewable energy in the world. .  The statement of China’s representative at COP 29 that they would only continue to make voluntary commitments, and not the binding ones to climate finance further weakens its credibility. From the perspective of economics, by abstaining from binding agreements and concrete promises, China reduced the transaction costs, here the costs associated with entering and enforcing binding agreements domestically in the short run and thus, undermined the global climate negotiations. This would lead to a lack of cooperation and necessary motivation for the other countries to follow.  in 2024 China approved new coal-fired power capacity of 66.7 gigawatts (GW) with similar coal projects on the still in the phases of construction. The growth of renewable energy along with parallel investments in coal energy undermines the credibility of China as a dependable leader in the climate arena. The statement of China’s representative at COP 29 that they would only continue to make voluntary commitments, and not the binding ones to climate finance further weakens its trustworthiness. 

The Economic Principles Involved

Transaction Costs

Transaction costs are such costs which are incurred during transaction or trade. They include search and information costs, bargaining costs, and policing and enforcement costs broadly.

By abstaining from binding agreements and concrete promises, China reduced the transaction costs, here the costs associated with entering and enforcing binding agreements domestically in the short run and thus, undermined the global climate negotiations. This would lead to a lack of cooperation and necessary motivation for the other countries to follow. 

Information Asymmetry

Besides, there is rampant information asymmetry, such as exaggerated green claims and information irregularities acts as hurdles in objectively assessing the green transition of the country. In September 2024, German authorities refused to grant $20 million worth of carbon credits after finding irregularities in green projects in China . Remote assessment using satellite imagery and similar techniques is insufficient. Besides, on-site inspection by neutral authorities is not followed in practice. on Costs

The Economic Principles Involved

Transaction Costs

Transaction costs are such costs which are incurred during transaction or trade. They include search and information costs, bargaining costs, and policing and enforcement costs broadly.

By abstaining from binding agreements and concrete promises, China reduced the transaction costs, here the costs associated with entering and enforcing binding agreements domestically in the short run and thus, undermined the global climate negotiations. This would lead to a lack of cooperation and necessary motivation for the other countries to follow. 

Information Asymmetry

Besides, there is rampant information asymmetry, such as exaggerated green claims and information irregularities acts as hurdles in objectively assessing the green transition of the country. In September 2024, German authorities refused to grant $20 million worth of carbon credits after finding irregularities in green projects in China . Remote assessment using satellite imagery and similar techniques is insufficient. Besides, on-site inspection by neutral authorities is not followed in practice. 

The Case for India: a well-deserving alternative

Over the recent years, India has been setting an example of consistency and resilience for the world, especially the developing countries in terms of renewable energy production and implementation. Total renewable energy capacity of India reached the milestone of 200 gigawatts (GWs) in October, highlighting that the implementation is in sync with the target of 500 gigawatts by 2030. Solar power has the majority share in the renewable energy capacity of the country which has grown at an exceptional rate of 3450% over the past decade. However, it is also trying to diversify and increase the share of other renewable sources of energy. The best example is the National Green Hydrogen Mission which provides a greener alternative to fossil fuels. With the subsidies being provided by the government, people are incentivized to transition to greener alternatives like domestic solar energy setup and Electric Vehicles (EVs). The concept of incentive in economics refers to the idea that people are motivated to take certain actions based on the associated benefits or rewards. In 2024, EV sales crossed historic 2 million units. 

Government policy support with schemes like PM KUSUM, PM Surya Ghar further provides the necessary push in public as well as private sector. As a developing country, India is successfully integrating climate goals with development, prioritizing long term benefits and short-term costs over short-term benefits and long-term costs. 

India has been participating in global climate discourses actively since last few years. International Solar Alliance (ISA), co-founded by India and France, promotes hassle-free deployment of solar energy, especially in developing countries. At COP 29, India proposed New Collective Quantified Goal (NCQG), which aims $1.3 trillion annually to support green energy transition. India also organized various side events with other countries to foster greater cooperation and inputs from different stakeholders. 

In 2024 when India hosted G20 Summit, the country made sure climate change is one of the central themes to be discussed, with outcomes such as ‘Travel for LiFE’, the urgent need for mobilizing almost $6 trillion annually for developing countries. African Union, a group of 55 countries was also admitted as a member of G20, and thus, gave equitable representation to 17% population of the world in climate discourse among other themes. 

The Economics of India as a Leading Figure

A counter to free ridership and promotion full information

Free Ridership is an economic concept which refers to people consuming shared goods, services and resources which they did not pay for. In the global arena, the developed countries have been the drivers of arbitrary sanctions, policies and schemes, due to which the developing countries face the burden of enforcement inequitably. Therefore, the countries that are not actively rolling out green energy or the ones without serious commitments free ride on commitment, compliance and investments of the compliant countries. 

India becoming the leader, could address this issue suitably as it has shown time and again that economic development and sustainable practices can go hand in hand. India has been leading the world in innovations in green energy like solar power, and EVs. The leadership status of India would bring to the world, the unique problems faced by developing countries, or more precisely, the ‘Global South’. This would promote full information and therefore, would encourage the more equitable laws and mechanisms, and compliance measures. 

Pareto Efficiency and Climate Finance

Pareto efficiency is a concept used in welfare economics which ensures the most efficient allocation of resources, such that the resources cannot be reallocated to make one individual better off without making at least one individual worse off. This is supposed to be the ideal goal in economics, and each step towards total pareto efficiency brings one closer to highest level of efficiency. 

India, as a developing country and the mediator between developing and developed countries like UK, can advocate for most equitable solutions which can benefit both developing as well as developed countries at the same time. This would be pertinent in the case of climate financing mechanisms. India, with the global leadership could advocate with authority, for a climate fund promoting sufficient resources for the countries for mitigation and adaptation. Developing countries would find it easier to develop and deploy new technologies with lower costs and the developed countries would create new markets for green energy and clean technologies, ultimately benefitting themselves. Moreover, this would also make the developed countries accountable for emissions, contributed by them throughout the history. 

Increasing marginal utility

Becoming the leader, India would also attract more investments in clean energy, making green technologies cheaper and more accessible. With abundant domestic production, export would also be encouraged, and the marginal utility of renewable energy would increase accordingly on account of it being cost effective in the long run, with health improvement.

This would push the people globally to adopt renewable energy more readily upon recognizing the positive externalities. 

Way Ahead

Despite the possibilities and potential of India as the global climate leader, there are certain key concerns which needs to be addressed prudently. 

India as a potential leader of global climate movement would face immense international scrutiny regarding climate policies and their impact. If India fails to meet its climate commitments, it would be a blow to its credibility. Therefore, realistic targets and prudent enforcement mechanisms would be crucial. Enhanced cooperation with countries around the world would foster overall development and accountability. 

Besides, the government needs to scale up investments in research and developments of better energy solutions. It needs to take into consideration, opinions of experts from around the world to some up with the best possible solutions and address issues arising thereof promptly. 

Conclusion

The leadership void created with the exit of U.S. creates unprecedented opportunities for developing countries, particularly, China and India to lead the global climate movements. While China is an apt substitute for the U.S., the inconsistencies and irregularities weaken its credibility. 

In contrast, India has been the promoter of sustainable growth, both domestically and internationally and best suited for global climate leadership. The leadership of India would potentially provide solution to glaring issues in the international fora. However, India needs to have greater transparency, accountability and international cooperation if it wants to do justice to the role of the potential leader.