Earlier this month, the Intergovernmental Panel on Climate Change published its latest report on progress towards mitigating the impacts of climate change. The report was written by nearly 300 expert scientists in climate change and drew on information from over 18,000 other documents.
Like the previous report on adaptation released in February (see our blog on this here), the IPCC recognised debt to be a key issue impacting on countries’ ability to act on the climate crisis. This means that some of the world’s leading climate scientists are now calling for action on debt so that countries are better able to respond to climate change.
Covid-19 and debt
The report outlines our stark reality – it’s “now or never” if we want to prevent complete climate breakdown. While current emissions have set us on a path of irreversible climate catastrophe, limiting global heating to 1.5 degrees is possible if we act now.
This is going to require significant emissions cuts across all sectors – governments, businesses and individuals. However, lower income countries are being blocked from acting by vast debt levels, made worse by the Covid-19 pandemic.
The IPCC report describes how lower income countries have had to rapidly increase short-term spending in response to the pandemic, taking on more debt to finance it, pushing many into debt crisis. This has “reduced the space and maneuverability for developing countries to innovate and use surplus funds to procure new and clean technologies.” The impacts of this “may prevail much longer than the crisis itself” which is likely to impact countries’ ability to invest in preventing further climate change “for many years to come” meaning for many, the devastation caused by the climate crisis will continue to get worse.
Furthermore, while Covid-19 has lowered interest rates for wealthy countries, these cheaper rates are not available to many lower income countries because of their unsustainable debt levels. In fact, the costs of finance have been increasing for many climate vulnerable countries because of the vulnerability they experience.
It is not just Covid-19 that has exacerbated debt levels. The IPCC report highlights how rising costs of limiting and adapting to climate change are also increasing debt levels, at a time when public finance is already under significant stress.
Fossil fuels
The IPCC highlights how high debt levels undermine lower income countries’ ability to move away from fossil fuel production as these industries provide an important source of income.
Furthermore, while wealthy countries talk the talk on reducing emissions and supporting lower income countries to do the same, many continue to fund fossil fuel-based projects in lower income countries that are at odds with their climate commitments. This means public money is being used to fund non-renewable, climate harmful projects in lower income countries adding a further barrier for those countries to move away from fossil fuel extraction.
Solutions
The IPCC recognises that existing efforts by the G20, World Bank and IMF to address unsustainable debt levels are failing to adequately respond to the long-term needs of lower income countries. The report suggests a combination of debt relief and sustainable lending practices so that countries can free up resources to respond to the climate crisis.
Furthermore, the report recognises that delaying action on mitigating and adapting to climate change may increase debt levels in the long run, highlighting the urgent need to act now.
Some of the specific proposals made in the report include:
Improving debt sustainability
Currently, climate change impacts are not sufficiently incorporated into debt sustainability assessments completed by the World Bank and IMF. This can lead to “continued overestimation of future GDP as happened in the past", meaning countries may not receive the levels of debt relief needed in restructurings, or may find they have limited access to cheap finance as their vulnerability is not sufficiently accounted for. The IPCC suggest that debt sustainability frameworks should rely more on a holistic view of vulnerability rather than just GDP or income status, as many in the global debt movement have been demanding.
Debt-for-climate swaps
Debt-for-climate swaps can take various forms, but generally refer to when a borrowing government has a part of their external debt cancelled in exchange for them committing to use an agreed amount of the savings for climate action. The IPCC report suggests that this mechanism “offers potential if used correctly” (2581), but also flags some potential challenges such as taking a lot of time and resources to set up, the risk of freed up resources being counted toward aid despite being the country’s own money, and that cancelling some debt may not give a government new money to spend on climate goals (especially if they were unable to repay the original loan in the first place).
We would also add to this that climate-for-debt swaps may not actually assist with reducing debt levels if they do not include a degree of debt cancellation, and if a significant amount of the existing debt is not included. You can read more about climate-for-debt swaps and how they can best be shaped to contribute to debt relief here.
“Hurricane Clauses”
Hurricane clauses refer to terms included in debt contracts that allow the borrowing country to suspend debt payments (interest and/or principal depending on the contract) when an event takes place that causes significant economic shock (this could be a hurricane but could be something else too). Currently, these clauses are only included in a few loan contracts, but not the vast majority. The report suggests that this could be a useful mechanism to include in all loan contracts to help reduce short-term debt stress in the event of a climate-extreme event.
Climate finance
The report also calls on wealthy countries to provide climate finance to lower income countries, highlighting that this is vital to “reduc[e] the asymmetries between rich and poor countries”.
There is also a nod to at least some of this finance coming in the form of grants, not loans (so as to not add to already unharmful debt levels) - “Scaled-up public grants for mitigation and adaptation funding for vulnerable regions, especially in Sub-Saharan Africa, would be cost-effective and have high social returns in terms of access to basic energy”.
As the report notes, increasing grant-based climate finance will mean countries are not forced into more debt to pay for a crisis they did not create - “climate financing over the next decade (2021–2030) can help address macroeconomic uncertainty and alleviate developing countries’ debt burden post-COVID-19" (2520). It will also mean countries are less likely to need to rely on revenues from fossil fuels, as highlighted recently by Mia Mottley, Prime Minister of Barbados.
Wealthy countries and corporations should provide grant-based climate finance in line with need (trillions, not billions) as a form of compensation for their role in creating the climate crisis, as highlighted in the IPCC’s previous report.
Special Drawing Rights
The report suggests that one way for wealthy countries to provide more finance for climate action to lower income would be by reallocating their Special Drawing Rights (SDRs) to climate vulnerable countries. Special Drawing Rights are a unit created by the IMF which increases a country’s foreign currency reserves. In 2021, the IMF allocated $650 billion worth of SDRs to countries around the world based on their voting quotas within the IMF. This means that wealthy countries received the lion's share of SDRs, while lower income countries who need them the most, received the least – lower income countries only received about 1% collectively. This has promoted global calls for wealthy countries to reallocate some of their SDRs to lower-income countries.
Just a few weeks ago, the IMF announced the creation of a new fund called the ‘Resilience and Sustainability Fund’ (RST) which aims to use wealthy countries SDRs to lend to lower-income countries for climate action. This will provide cheaper finance to lower-income countries than they could get from other lenders. However, it will still add to debt levels, once again forcing lower income countries to pay for a crisis they did not create. Furthermore, the IMF typically only lend to lower-income countries if they agree to put in place economic reforms that will supposedly better enable them to repay the debt, but which often increase poverty rates and inequality in the borrowing nation, especially affecting already marginalised groups, and which can encourage climate harmful practises such as fossil fuel extraction. There are legitimate fears from civil society that the IMF will impose “green conditionality” as a part of the loans provided by the RST which should be avoided, else the RST will become yet another neo-colonial opportunity for wealthy powers to impose harmful reforms onto lower income countries for their own interest.
Thanks to the work of CAFOD, we know that the UK government is technically and legally able to reallocate their SDRs to lower income countries as grants, not loans. This is likely to be the case for other countries too, and should be prioritised as an option to avoid adding to already burdened debt levels.
It is encouraging that the IPCC is consistently raising awareness of the importance of addressing debt for climate change, in its work – as the report shows, we cannot address the climate crisis without also addressing the debt crisis in lower income countries.
However, some of the solutions proposed may be inadequate to reduce debt levels. We need to prioritise comprehensive debt relief and the significant scaling up of grant-based climate finance to ensure countries have the resources they need to address climate change. Other initiatives presented by the IPCC may helpfully contribute but are unlikely to provide the scale of action we need.