A U.S. policy think tank is advocating a transformative approach to climate finance for vulnerable countries: cancel national debts and redirect the repayment funds to climate adaptation and resilience projects.
Developing countries need four to eight times current climate finance commitments, but delivery mechanisms meant to address this shortfall—like the Global Shield fund for climate risk and the historic loss and damage fund agreed to at last year’s COP 27 summit—are still a long way from launch. “Given this context, a new tool, debt-for-adaptations swaps, could be a game-changing way to accelerate the lethargic pace at which climate finance is made accessible to countries desperately in need,” write Brookings Institution researchers Chetan Hebbale and Johannes Urpelainen.
Under this plan, big lenders like governments, the International Monetary Fund, or the World Bank would forgive large sums of national debt if outstanding dues were redirected through a verifiable paper trail to adaptation projects within the debtor country.
Debt-for-nature swaps have been around since the late 1980s, the two researchers note. The first was a 1987 swap between Bolivia and Conservation International, where the U.S. non-profit used philanthropic funds to buy some of Bolivia’s debt at a discount. In exchange, the Bolivian government set aside 3.7 million acres in the Amazon Basin for conservation.
Hebbale and Urpelainen propose a similar mechanism, with a twist: “Rather than exclusively focusing on conservation, recipient countries who have debt forgiven should direct those funds towards climate adaptation activities, with a focus on building resilience against sea level rise, flooding, droughts, and extreme heat.”
The double benefit of debt-for-adaptation swapping is that it would enable developing countries to climate-proof their economies and their public finances. It would not only alleviate debt distress, but also abate the “monumental” gap in adaptation funding, the Brookings researchers say.
So far, the lion’s share of climate finance has been granted with the expectation that it will generate revenue, so 90% of it goes to activities that mitigate emissions, like renewable power projects. “This makes sense from an investor perspective because electricity can be bought and sold, generating predictable cash flows to yield returns.”
But the result is that climate adaptation is “almost entirely neglected in climate finance flows”, with only around US$50 billion allotted to it between 2019 and 2020, compared to $571 billion for mitigation.
“Suffice it to say, as long as profit-motive drives the majority of climate finance flows, adaptation finance will lag behind,” the researchers warn. “The United Nations estimates that developing countries already need $70 billion per year to cover adaptation costs now and will need $140 to $300 billion in 2030, rising to $280 to $500 billion by 2050.”
Debt-for-adaptation swaps would be revolutionary in these circumstances, accruing all the immediate benefits to impoverished debtor nations, none to the usually better-off lenders. And they are an ethical imperative, given that the debt burden of developing countries “is largely a historical product of colonialism.”
But adaptation swaps could also be viewed as preserving the best interests of the developed world, the researchers add. Countries like the U.S., specifically, stand to make a strategic gain: “As developing nations look to see who will help them out of the climate catastrophe, the U.S. has a chance to pioneer an alternate model to China’s Belt and Road Initiative (BRI), which is entrapping developing countries into loans and debt distress.” (BRI offers vital infrastructure funding for developing nations, but China disburses the funding as loans, often at high interest rates.)
In contrast, debt-for-adaptation swaps could be a way for the U.S. to step up in a time of need by investing in green infrastructure and disaster recovery abroad. The geopolitical goal would be encourage developing countries to align themselves with the U.S. rather than relying on China, the writers suggest.
Many developing countries are desperate for an intervention: high debt and low income paired with climate vulnerability “will exacerbate each other going forward in a vicious spiral.” Some, with sovereign debt levels at or above 100% of their GDP, end up “spending five times more repaying their debts than fighting climate change.”
Meanwhile, damages from extreme weather events, which erode tax revenues even as they destroy expensive infrastructure, continue to eat away at whatever stability remains.
A debt-for-adaptation swap for such places would also “sweeten the pot for private investors” who might want to finance climate projects in recipient countries, since those countries would “have more fiscal space to secure debt financing and can absorb more risk going forward.”
Priority must be given to countries that face high climate vulnerability and a high risk of debt distress, but remain underfunded, the researchers say. Their list includes Chad, Sudan, Zimbabwe, Guinea-Bissau, Liberia, Tonga, Mauritania, Sierra Leone, Burundi, Ethiopia, and Afghanistan.
Over the longer haul, “adaptation finance can help avoid the costs of infrastructure collapse, climate refugees, and potential failed states,” the researchers say, pointing out that “what adaptation lacks in revenue generation opportunities, it makes up for in avoided damages.”
They conclude with a call to action for wealthy, developed countries that “achieved their high standards of living through centuries of pollution and wealth extraction from the developing world,” to help fill the funding hole.
“If action is not taken, the risks of instability, climate refugees, and conflicts will continue to grow, eventually threatening the security of developed nations.”