Here is all you need to know about debt-for-climate swaps

Source: The post is based on the article “Here is all you need to know about debt-for-climate swaps” published in Down To Earth on 6th May 2023

What is the News?

In the past decade, Debt-for-climate swaps have grown relatively popular among low- and middle-income countries.

Multilateral development banks and multilateral organizations such as the United Nations Development Programme (UNDP) have been advocating this instrument as a debt-relief measure.

What is Debt-for-climate Swap? 

The debt-for-climate swap was introduced as a debt restructuring device that aims to combat climate change by ensuring that debt-ridden countries do not incur additional debt while addressing climate change locally.

In these cases, a new agreement would be worked out with a multilateral or bilateral partner to replace the terms of the initial loan agreement which would direct the remaining debt on mutually agreed terms towards “green or blue” domestic investments—while green investments focus on projects or areas committed to preserving the environment, blue investments focus on sustainable use of ocean resources.

Objective: It possesses dual objectives: 1) to promote specific investment and policy action on the one hand and 2) some debt relief on the other. 

Historical Background: Debt-for-climate swaps are a variation of debt-for-nature swaps, which were first proposed in the 1980s as a way to conserve biodiversity and protect tropical forests in exchange for debt relief.

– Debt-for-nature swap first appears to have been used in the 1980s in Latin America, where the countries aimed to reduce unsustainable external debts and address worsening environmental conditions.

– Debt-for-climate swaps emerged in the 2000s as a broader concept that encompasses not only nature conservation but also climate mitigation and adaptation.

What are the advantages of Debt-for-climate Swaps?

Debtors: Debt swaps can help the world’s low-income countries avoid default and enable them to redeploy part of their debt repayments to invest in measures to tackle climate change or nature protection.

For creditors: Debt swaps can reduce their risk through additional guarantees and ensure that at least part of a loan is eventually repaid.

– It will also enhance their development cooperation and climate finance objectives and strengthen their diplomatic relations with debtor countries.

How can debt for climate swaps be encouraged?

A global framework or standard that sets the rules for green debt swaps would enable more creditors to join such initiatives and help increase the size of deals.

A public campaign, similar to the huge push to cut debt and poverty in the 1990s and 2000s, could also help.