AEIR 2019/2020


29
Oct
2020

Can swapping debt for climate action help with pandemic recovery?

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COVID-19 has triggered interest in swapping national debt for action on climate change adaptation.

The year 2020 has reinforced the need to build resilience to future shocks, including pandemics. It has also brought to light the vulnerability of our current economic systems to risks related to the “tragedy of the horizon”, a term coined by Mark Carney the former Governor of the Bank of England, meaning the catastrophic impact of climate change imposed on future generations that the current generation has no incentive to address.

COVID-19 is putting public budgets across the world under strain and pushing countries – many of which are highly climate vulnerable - further into debt. Investment in climate resilience measures may be neglected as short-term needs are prioritized. This may have led to the resurgence of interest in an old idea: debt for nature swaps, this time as an instrument for ensuring continued climate action.

Typically, such a swap has involved the purchase of a country’s debt at a discounted value by a third party and transferring the title to the debtor country thereby providing relief. In return for this, the country would commit to environmental conservation goals.

In the mid 1980s and 1990s, debt for nature swaps were championed by international non-government organizations, such as the World Wildlife Foundation, The Nature Conservancy and Conservation International, particularly in Latin America. This principle of debt relief for protecting nature was also applicable to bilateral organizations, such as development banks, or multiple country arrangements.

Such financing mechanisms are particularly relevant when adaptation to climate change is underfinanced compared to mitigation actions. Indeed, estimates by the Climate Policy Initiative reveal that of the average climate finance flows in 2017/18 of $579 billion, a mere $30 billion was used for adaptation.

In 2018, the Seychelles government, with support from The Nature Conservancy, the Global Environment Facility, the United Nations Development Program, and private investors, championed a debt for climate swap for $27 million of official debt at a 5% discount on face value. The debt bought back through the consortium will be partly repaid in local currency.

As part of the deal, the Seychelles Conservation and Climate Adaptation Trust was established to maintain protected marine parks, help manage fisheries, conserve biodiversity, promote ecotourism and help build climate resilience. This and other such examples have led to a revival of discussions on this innovative financing mechanism.

Whether it be climate action swaps or more traditional financing,
urgent action is needed.

However, much needs to be done and clarified on how and whether such schemes are adding real and additional financing. Also, the scale at which they have been tried thus far has been relatively small.

What would it take to transition these to large programs and scale of financing? Given their complex governance, do the transaction costs of setting up such schemes justify the ends? Related to this is an additional issue of the conditionalities attached to such swaps and how these would align with those in the other debt relief initiatives or with policy-based lending.

Finally, there is also a need to assess whether such a financing option should be tailored only for certain types of situations, economic characteristics, type and level of indebtedness, and other circumstances.

Various other innovative instruments have been suggested in the past, such as a levy on international air travel and an adaptation benefit mechanism akin to the Clean Development Mechanism for mitigation. The former may not be a viable source any more, given the crisis facing the airline industry. On the latter, the jury is still out due to the complexity involved in the certification of adaptation benefits for potential investors and lenders, including the vast institutional arrangements required.

That said, the enthusiasm in some quarters on debt for climate action swaps needs to be tempered and calibrated better for it to gain further currency.

Meanwhile even if we succeed in putting the world on a trajectory that keeps the rise in global temperatures to 1.5°C, there will still be significant impacts on livelihoods, food insecurity, population displacement, and public health. And, just as we’ve seen with COVID-19, that brunt will again be borne by the poor and vulnerable.

This is a wake-up call to invest in resilience to future shocks and build adaptive capacity at different levels, across geographies and across time frames. Whether it be climate action swaps or more traditional financing, urgent action is needed.

Original article was published at the ADB Blog and duplicated here with permission from the author.
*Preety Bhandari is the Chief of the Climate Change and Disaster Risk Management Thematic Group concurrently Director, SDCD
The views expressed in this blog post are the views of the author and do not necessarily reflect the views or policies of ARIC, the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ARIC does not guarantee the accuracy of the information and data included in this blog post and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with official ADB terms.