India, China proposes roadmap for carbon transition instead of deadline (GS Paper 3, Environment)
Why in news?
- India, backed by China, is trying to build a consensus within the G20 group to let countries choose a roadmap to cut carbon emissions instead of setting a deadline to end the use of fossil fuels.
Multiple pathways:
- India is keen on introducing the phrase 'multiple energy pathways' in a communique to be released at a group summit in September and has been supported by countries including China and South Africa.
- Multiple pathways for energy transition would enable countries to choose resources, even coal, while working towards plans on net zero emissions.
- The phrase is in conformity with the 2015 Paris Agreement on combating climate change that favours "common but differentiated responsibilities, under different national circumstances".
Phasing coal use:
- At a meeting of the G20 Energy Transitions Working Group (ETWG) in Gujarat, India opposed a deadline proposed by rich nations to end the use of coal.
- Coal accounts for nearly three-fourths of India's annual electricity generation and India has long defended its use of the fuel, citing lower emissions per capita, compared to other countries.
- China supported India during the meeting, saying it cannot put a timeline on ending fossil fuel dependence and would want to put 'all' its available resources to optimum use.The two countries are the top two consumers of coal in the world.
- Climate ministers from the Group of Seven (G7) wealthy nations agreed recently to accelerate the phase-out of unabated fossil fuels so as to achieve net zero in energy systems by 2050 at the latest.
Background:
- Faced with calls to phase down the use of coal at the last climate change deliberations in Egypt in November 2022, India said all fossil fuels should be phased out including natural gas. At the recent G20 meeting, India kept the focus on fossil fuels, rather than singling out coal.
- India and China, the world's two most populous countries, have often taken common positions at international climate change negotiations, despite long-standing border disputes.
- In March, the European Union agreed to promote a global fossil fuel phase out ahead of the COP28 summit in Dubai in November.
What’s next?
- India will host a summit of G20 leaders, including U.S. President Joe Biden and Chinese President Xi Jinping, in September.
- The G20 includes the G7 countries as well as Russia, China, India, Brazil, Australia and Saudi Arabia, among other nations.
De-dollarisation, the race to attain the status of global reserve currency
(GS Paper 3, Economy)
Context:
- Countries have tried to dethrone the dollar as the global reserve currency for many decades now for various reasons. But of late, attempts to de-dollarise have picked up pace in the aftermath of Russia’s invasion of Ukraine in 2022.
- Currently, the Chinese yuan is seen as the primary alternative to the U.S. dollar owing to China’s rising economic power.
What is De-dollarisation?
- De-dollarisation refers to the replacement of the U.S. dollar by other currencies as the global reserve currency.
- A reserve currency refers to any currency that is widely used in cross-border transactions and is commonly held as reserves by central banks.
Background:
- Other currencies such as the British pound and the French franc have served as international reserve currencies in the past.
- It is the currencies of economic superpowers that have usually ended up being used as the global reserve currency. As the economic clout of these countries waned, their currencies faced a similar downfall.
- This was the case, for example, with the British pound which was gradually replaced by the U.S. dollar as Britain lost its status as a global economic superpower in the first half of the 20th century.
Advantages of reserve currency:
- When a country’s fiat currency enjoys reserve currency status, it gives the country the power to purchase goods and other assets from the rest of the world by simply creating fresh currency out of thin air. However, such irresponsible expansion of the money supply can cause the debasement of the currency and eventually threaten its status as a reserve currency.
- But the U.S. Federal Reserve is not the only central bank in the world that has been debasing its currency by engaging in expansionary monetary policy over several decades.
- Other countries have also been expanding their respective money supplies to address their domestic economic problems.
- As long as the U.S. does not debase its currency at a faster pace than other countries, the dollar may manage to hold its value against other currencies and hence its reserve currency status may not come under serious threat.
The popularity of the U.S. dollar:
- The U.S. dollar is widely used in international transactions because people actually prefer to use the American currency over others for various economic reasons. Other currencies that have tried to compete against the U.S. dollar are not as popular as the greenback for carrying out international transactions.
- For example, a recent attempt by India and Russia to carry out trade between the two countries in Indian rupees rather than in U.S. dollars has hit a roadblock because the value of India’s imports from Russia far outweighs its exports to the country.
- This left Russia with excess rupees in hand which it was unwilling to spend on Indian goods or assets, and led to Russian demands for the settlement of bilateral trade in U.S. dollars.
Global acceptability of the U.S. dollar:
- The global acceptability of the U.S. dollar has primarily been attributed to the popularity of U.S. assets among investors.
- The U.S. has been running a persistent trade deficit for decades now (in fact the last time the U.S. ran a trade surplus was way back in 1975). That is, the value of its imports has for a long time exceeded the value of its exports to the rest of the world.
- The excess dollars that the rest of the world accumulates due to the U.S.’s trade deficit has been invested in U.S. assets such as in debt securities issued by the US government.
- The high level of trust that global investors have in the U.S. financial markets, perhaps owing to the ‘rule of law’ in the U.S., is considered to be a major reason why investors prefer to invest in U.S. assets.
Case of Yuan:
- It is not necessary that a country must run a trade deficit for its currency to be accepted as a reserve currency.
- China which supplies the world with huge volumes of goods and runs a trade surplus, has been trying to make the yuan a reserve currency.
- However, restrictions placed by the Chinese government on foreign access to China’s financial markets and doubts over ‘rule of law’ in China have adversely affected global demand for the yuan.
