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Climate finance has taken centre stage at this year’s UN climate summit.��

Going into COP28, the issue of who was to pay for the escalating climate crisis was top of the agenda. The conference started on a high note, with a landmark agreement to operationalise a Loss and Damage fund signed on day one.��

The central tenet of Loss and Damage is that not everyone is equally responsible for or impacted by the climate crisis. Wealthy nations, who are historic polluters, should be required to provide financing for poorer, climate-vulnerable nations on the frontlines of environmental breakdown.��

But despite this early win, COP28 has only secured a fraction of the estimated $387 billion per year needed to finance interventions to mitigate climate change.

Is there a better way to mobilise funds for climate adaptation?

Increasingly, climate experts and activists have pointed to the interconnectedness of climate vulnerability and debt in developing countries.

In 2023, global debt is projected to hit $97 trillion, and an unprecedented debt crisis is sweeping the developing world. A found that 54 countries are currently facing a debt crisis, and external debt payments by the Global South have increased by 150% since 2011.

For decades, developing nations have grappled with the dual burden of a crippling debt crisis and an accelerating climate crisis. According to , a staggering 93% of the most climate-vulnerable nations are “drowning in debt”.

"To be ethical and efficient, debt cancellations must be unconditional"

The debt-fossil fuel trap

Instead of allocating money towards climate adaptation and mitigation measures, developing countries that face hefty external debts are forced to spend on repayments to creditors, usually wealthier governments, private lenders, or international institutions such as the International Monetary Fund (IMF) or World Bank.

These countries are currently spending 12.5 times as much on debt repayments as they are on climate resilience initiatives.

This, in turn, leaves already vulnerable nations even more ill-prepared to deal with the impacts of climate change. When extreme weather events do occur, the consequences are often devastating and require countries to take on more debt to pay for recovery.

“That’s why we talk about the debt and climate change vicious cycle,” said Iolanda Fresnillo, the policy and advocacy manager on debt justice at the European Network on Debt and Development (Eurodad).

In Pakistan, a country on the frontlines of climate disaster, devastating floods last year caused an estimated $40 billion worth of damage. Yet almost all of the financial assistance offered is in the form of loans, adding to its already high levels of debt.

“The main option is borrowing. 70% of climate finance over the last six years has been by lending,” Fresnillo told ������, adding that climate-vulnerable nations often pay higher interest rates because financial markets see climate change as a risk.��

In order to repay debts, developing countries must continue to rely on the revenues from extracting and exporting fossil fuels. This paradox, whereby a country’s economic stability is dependent on environmentally damaging and unsustainable practices, is known as the debt-fossil fuel trap.��

“Countries normally go to the IMF for support. And the IMF as a recommendation normally tells them, ‘Well, you should increase your fossil fuel exports’, as is happening in Argentina, for instance,” said Fresnillo.��

Between 2015 and 2021, the IMF 55% of its member states to expand fossil fuels, which are the overwhelming drivers of the climate crisis.

“It's a spiral that we need to break,” said Fresnillo.��

The trouble with debt swaps

So far, the vast majority of conversations about debt within climate negotiations have focused on debt swaps, which involve exchanging a portion of a country's debt obligations for investments or initiatives focused on climate action.

This practice has become increasingly common in recent years, with notable examples of debt swaps in Barbados, Belize, Ecuador and Cape Verde.

Last week at COP28, a new global task force was established to facilitate debt-for-nature swaps as a form of climate action.

Swaps that are well-designed can help to mobilise funds and resources for climate adaptation and environmental conservation projects in developing countries. But despite the hype, debt justice campaigners have also that they are not a silver bullet for the global debt crisis.

At their current scale, these deals very rarely have any significant impact on a country’s total debt. They are lengthy processes with high transaction costs, which often go to private organisations brought in to implement and oversee the swap.

But the biggest concern with debt swaps is their conditionality and the power they give creditors to determine how funds are used. Often, the terms of the agreement are not clear.

“What we are seeing, particularly in these debt-for-nature swaps that are happening recently, is a lack of transparency, which is very worrying because we don't know exactly what's going on. And, for instance, they say, ‘Yes, we will consider local communities and civil society participation.’ But we don't really know the details,” Fresnillo explained.

“If those conditions are not aligned with the country's priorities, it is a breach of the sovereignty in the country,” she said, adding that this entrenches existing unequal power dynamics between the Global North and South.

Towards debt justice

Instead, activists have called for wealthier nations, international institutions and private lenders to cancel the debt of developing nations struggling with the impacts of climate change, arguing that this is a form of climate justice.

To be ethical and efficient, debt cancellations must be unconditional, noted Fresnillo.

“You cancel the debt, and the country that doesn't have the resources to repay those debts in the first place, doesn't have to invest that money in anything in particular but its own needs.”

Fresnillo points to the (HIPC) Initiative launched by the IMF and World Bank in 1996 to illustrate the benefits of debt cancellation.

“That experience demonstrated that countries invested that money in education and health and social spending,” she said.��

In an , more than 550 economists, climate experts and activists have called for debt cancellation to be on the agenda at COP28, as did protesters at the summit, emphasising that climate finance in the form of Loss and Damage was not enough.

“The [Global] North cannot deceive us by saying ‘we are sending capital and assistance’ when there is a of financial outflows from the South to the North,” said Lidy Nacpil of the Asian Peoples’ Movement on Debt and Development, in response to a question from ������ at a press conference.

“Whatever finance we are going to pour in for climate action, an even greater amount will flow out as debt service.”

“This needs to be complementary to loss and damage,” asserted Fresnillo, dismissing claims that debt cancellation is not economically viable for wealthier countries.

“The truth is that when they need the money for their own interests, like supporting Ukraine in the war against Russia, investing in military spending, or bailing out the banks, they find the money,” she said.

“It's just about priorities."

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Nadine Talaat is a London-based journalist writing about Middle East politics, borders and migration, environment, and media representation. She is a Deputy Editor with ������'s��editorial team

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