Why ‘debt-for-nature’ swaps are the future of climate finance

What are the different types of ‘debt-for-climate’ agreements?

According to the Climate Policy Initiative, these are typically chosen on a case-by-case basis. The three options include debt suspension, debt forgiveness, or most commonly, the reorientation of debts in order for payments to be utilised for green recovery.

Wealthy countries agreeing to swap another’s national debt for investment into its natural environments is not new. Bolivia, Costa Rica, and Belize managed to organise debt-for-nature swaps in the early 1980s.

Belize lowered its national debt by committing to place 30 percent of its marine areas under legal protection. It also spent $4 million annually, which was previously spent on paying off debts, over the course of 20 years to advance its marine conservation efforts.

Meanwhile, Costa Rica landed two debt-for-nature swaps with the US. With the money freed up from its usual debt payments, Costa Rica was able to allocate $53 million to conservation projects and has completely reversed its deforestation levels by planting over 60,000 trees.

Though these past agreements have involved swaps based on investments into nature conservation and reforestation projects, future agreements will likely involve climate mitigation and adaptation.

This is where Portugal and Cape Verde come in.

As a former Portuguese colony, Cape Verde has relied heavily on economic aid from its sovereign nation. It reportedly owes Portuguese banks and other financial entities over €400 million, plus an additional €140 million to the Portuguese state itself.

🇨🇻🇵🇹 Cape Verde owes Portugal 140 million euros, but it signed an agreement to swap what it owes for environmental and climate investment. The deal is a win-win for both parties.

An @EyeOnAfricaF24 report ⤵️ pic.twitter.com/7RrKiZLCDn

— Eye on Africa – France 24 (@EyeOnAfricaF24) January 25, 2023

What is the Cape Verde deal?

In a recent development, Portuguese Prime Minister Antonio Costa has agreed to allow €12 million of Cape Verde’s usual debt repayments to be invested into green energy transition and climate adaptation on the island.

The archipelago nation, located off Africa, is experiencing drastic effects of climate change – including rising sea levels and marine biodiversity loss due to ocean acidity.

Without this debt-for-climate swap, Cape Verde would not be able to build the necessary infrastructures that prevent coastal erosion and protect its food and water resources. Nor would it be able to transition to renewable energy such as hydropower.

Speaking of the deal, the head of the International Institute for Environment and Development Tom Mitchell said:

‘This agreement should serve as inspiration for other creditors and debtor nations to harness sovereign debt as part of the solution to the challenges of climate change and biodiversity loss.’

I don’t see why not as fantastic models for this kind of deal already exist. Seychelles became the first nation to agree on a ‘debt for nature’ swap to protect and fund the world’s first Blue Economy.

It converted $21.6 million of its national debt through the world’s first ‘blue bond,’ which specifically protects 30 percent of Seychelles’ marine environment.

It also raised an additional $15 million from international investors looking to finance sustainable marine projects and boost their own green credibility.

Seychelles’ success gaining support from both public and private investors proved that countries can attract additional capital through environmental protection plans.

Even better, these initiatives help to empower local communities, improve sustainability in fisheries, and serve to nurture the well-being of oceans.

By allowing debt sums to be redirected into climate adaptation and mitigation, jobs in developing nations will be created, local infrastructures will be safeguarded, and the livelihoods of thousands will be protected.