Cancel developing countries' debt in exchange for climate change action

As the effects of climate change worsen and developing countries bear the brunt, could debt relief be a way to finance climate action?

One of the main objectives of this week’s New York climate summit was to mobilise finance to tackle climate change. Slow progress in scaling up finance has been a key bottleneck in negotiating a global climate treaty.

The World Bank estimates that adapting to a warmer climate could cost $70bn to $100bn per year by 2050, assuming warming is kept to the target of 2C. However, the real costs could be far higher, as recent analysis shows the world is currently on course for 4C of warming, a level unprecedented for humanity. Current levels of CO2 in the atmosphere have not been this high for about 3m years.

The New Climate Economy Report, released last week, concluded that the economic cost of inaction is greater than the cost of action, and that investing in reducing emissions has economic benefits, including health benefits.

However, many countries have failed to make new pledges of public finance to tackle climate change. Could debt relief be a way to generate finance for climate change?

Mobilising money for the Green Climate Fund

The UN secretary-general Ban Ki-moon encouraged countries at the summit to capitalise the Green Climate Fund. The UN fund, established in 2010, is charged with mobilising $100bn of finance annually by 2020 for climate action in developing countries.

Several countries made pledges to the fund, including most substantially, a pledge of $1bn from France. There is now $2.3bn in the fund, but this still falls short of the $10bn that was requested to get it started.

The summit was more successful in scaling up private finance, with an announcement that a new coalition of governments, investors and financial institutions will mobilise $200bn by the end of next year to support climate action. However, pledges on public finance were more limited.

Debt relief as an alternative solution

One innovative way to generate finance might be through debt for climate swaps. National debt owed by developing countries could be cancelled in exchange for financing actions on climate change.

Many developing countries are highly indebted and also vulnerable to the impacts of climate change. Debt also restricts the capacity of developing countries to respond, for instance by building cyclone shelters.

The idea could build on the Jubilee 2000 campaign, which attempted to get large amounts of debt forgiven by the millennium.

Tim Jones, policy officer at the Jubilee Debt Campaign, says, “It is the rich world who are indebted to impoverished countries because of their excessive greenhouse gas emissions. Unjust financial debts of developing countries should be cancelled, and the rich world should pay reparations to help countries deal with the damage they have caused.”

Debt relief could also make it easier to scale-up public finance for climate change at a time when developed countries are implementing austerity cuts.

Increasing climate vulnerability and debt

Many developing countries that are highly vulnerable to climate change have already been taking out loans in order to adapt. In Bangladesh, the government has used loans from the World Bank to build cyclone shelters to cope with increasing cyclones. However, civil society groups have raised concerns about the ethics of providing ‘climate loans’ which increase the country’s debt burden.

The government of Bangladesh is already indebted. In fact, for every $1 that Bangladesh received in climate finance over the period 2010-12, it paid back over $3 to service long-term bilateral debt.

Climate impacts are projected to get much worse, particularly in developing countries that did not create the problem. The victims of climate change, including future generations, risk being saddled with huge debts as a result.

Re-directly finance flows to climate action

Already many leaders from the private sector have expressed at the summit that they are willing and ready to act. A group of institutional investors committed to decarbonise $100bn of institutional investments by December 2015.

In the meantime, the UK government is still spending $1.2bn per year on fossil fuel subsidies, including loan guarantees. However, most of these fossil-fuel resources are unburnable if we are to have a chance of keeping global warming within limits. Investing in fossil fuels is fundamentally a waste of money, unless the world is banking on destruction.

Bold leadership is still needed from governments in the run-up to the Paris Conference next year, including pledges to the Green Climate Fund to support developing countries. The progress on climate action amongst the private sector will not substitute for this.

The climate crisis demonstrates the need for urgent action and leadership by both the private and public sector. If not, future generations will face both a climate change crisis and a financial crisis.

Helena Wright and Adrian Fenton, Guardian Professional.

Published on Friday 26 September 2014 15.11 BST

Helena Wright is a PhD researcher at Imperial College London. Adrian Fenton is a visiting researcher at the International Centre for Climate Change and Development and a PhD researcher at Leeds University

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