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

Many developing countries are deep in financial debt. More often than not, however, they are rich in biodiversity. An increasingly popular climate agreement could enable them to minimise the debt they owe to wealthy nations – as long as the money saved is placed into environmental protection and adaptation projects.

Levels of debt in low-income and developing nations are steadily rising.

This is a result of regularly borrowing money from wealthy nations in order to keep their economies afloat, which skyrocketed throughout the pandemic and continues to increase in response to inflation.

By the end of 2020, the average debt level for developing nations stood at 42 percent of their gross national income. That’s 26 percent higher than it was only a decade before.

Many developing nations – excluding China and India – have low annual emission levels when compared to wealthy nations. They are also often rich in biodiversity, yet unfairly find themselves located in regions most vulnerable to the effects of climate change.

Making matters worse, after submitting national debt payments, most of these countries have little leftover funds to invest in environmental conservation, climate adaptation, and mitigation projects.

This creates a vicious cycle of inequality, climate injustice, and poverty.

As the world’s most powerful leaders look for innovative ways to improve economic equality and take climate action, many are considering a two-for-one deal. This entails allowing developing nations to swap their national debt payments for investments into local environmental protection projects.

The most recent deal of this kind has occurred between Portugal and Cape Verde.

Before we get into the details of Portugal and Cape Verde, it would be helpful to look at the three different kinds of ‘debt-for-climate’ agreements that can be made.

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.

Costa Rica Doubled Its Forest Cover In Just 30 Years!

Costa Rica’s reforestation

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.

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.’

What is Climate Finance? | Main Funds - Iberdrola

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.