Hundreds of miles off the coast of South America are the rocky, volcanic islands of the Galapagos. Teeming with creatures from blue-footed birds to dragon-like iguanas, these bountiful islands have long fostered cutting-edge thinking.
A 19th-century naturalist, Charles Darwin, gave birth to his famous theory of evolution, according to which species that are more adapted to their environment are more likely to survive. And now, the islands are hosting a very novel adaptation experiment: debt relief. in exchange for spending on climate and nature.
Earlier this year, Ecuador, which has sovereignty over the Galapagos, announced an unprecedented agreement. With the collaboration of personal investment bank Credit Suisse and U. S. progression bank, it refinanced $1. 6 billion (£1. 3 billion) in government bonds at a reduced rate. and issued a new “blue bond. ” In return, at least £12 million (£10 million) a year of the cash stored from the less expensive loan will now be spent on conservation efforts in the remote archipelago.
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Known as debt-for-nature or debt-for-climate swaps, these new monetary instruments are gaining traction among highly indebted countries, from Barbados to Belize. Moreover, by freeing up cash to repair ecosystems and build resilience, some of them are helping to respond. A bigger question: how do we finance the global response to climate change?
Bridging the funding gap
According to the Organisation for Economic Co-operation and Development (OECD), emerging economies will need $2. 4 trillion (£1. 9 trillion) in annual investments in climate action in the coming years. But so far richer countries have been slow to meet their targets. monetary pledges to help poorer countries adapt to a warmer world. The new loss and damage fund announced at COP28 this year was introduced with $400 million (£318 million) from rich countries. But emerging countries stand to lose 1,000 times more each year to climate change, according to one estimate.
The Galapagos giant tortoise is one of many species endemic to the archipelago, which is now benefitting from the world’s largest debt-for-nature swap (Getty Images)
This money could fund projects that bolster natural defences, such as restoring mangroves to help protect against floods, or reforming agriculture to improve food system resilience.
However, many countries are also unable to finance the adjustments discussed above. Loans can help (and in 2020, 71% of public climate finance was provided this way), but last year more than 50 emerging countries were already heavily indebted. Lately, some countries are paying their creditors more than 12 times what they spend on climate measures.
Much of today’s economic vulnerability is also due to exogenous shocks, not macroeconomic mismanagement, says Vera Songwe, co-chair of the UN’s independent high-level panel on climate finance. From Covid-19 to the war in Ukraine to climate disasters, recent global events have occasionally slowed economic expansion and raised interest rates. The result is that the debt burden of many of the poorest countries is skyrocketing, through no fault of their own. “We cannot solve the climate challenge without solving the debt challenge,” as Kenya’s president recently summed it up.
Simply put, being in debt can cost the indebted country dearly. In addition, it can also be dangerous for creditors, because if a country cannot pay its debt, it will default.
In the case of some highly indebted countries, agreements have been negotiated whereby creditors sell their share of the debt at a reduced rate and thus offload the risk.
New, less expensive loans are then issued in exchange for a commitment that some of the stored cash will go to nature- or climate-related actions.
One way for indebted countries to respond to debt crises is to increase exports of key resources such as fuel, forests, or fish; However, keeping those assets intact now involves sequestering carbon and maintaining biodiversity. Similarly, debt cannot be solved without climate action, because when climate-related mistakes occur, economies are put under even greater pressure. Twenty-eight of the most indebted countries are already among the most vulnerable to climate.
Urgent debt relief is needed “to avoid a worsening of the escalation crisis,” the United Nations Development Programme (UNDP) warned.
Connection with nature
In the midst of these combined crises of nature, climate and cost of living, is a debt swap for the poorest countries the solution?
In 2015, Seychelles cancelled nearly $22 million (£16. 8 million) of its debt in exchange for the creation of thirteen new marine spaces where fishing, oil exploration and other progression activities are prohibited or severely restricted. It was on the verge of defaulting on a billion dollar portion, but it also reduced its debt by creating a blue bond to direct savings to a conservation fund. And in Portugal this year, the government pledged to reinvest the £650 million (£524 million) Cape Verde owes (read more about the deal that saved the troubled waters of the Seychelles).
In 2021, Belize reduced its debt by creating a blue bond that directed savings to a conservation fund (Credit: Getty Images).
One of the benefits of such swaps is that they do not hurt a country’s credit rating, which would make it more expensive to borrow in the long term. That might be fair if the debt is forgiven entirely, says Andrew Deutz, managing director of global policy and conservation funding at The Nature Conservancy, a foreign conservation organization that has helped implement a number of systems in Belize, Gabon and Barbados.
Deutz explains that by partially granting new, less expensive loans, the countries’ most expensive creditors can be reimbursed and the savings can be spent on protecting the sea. This can be “a big deal for an NGO,” he admits, because it’s not a bank. And it has a limited balance sheet, but hopes to form a coalition that can “accelerate” and leverage its evidence of concepts.
In addition, some recommend that the idea contribute to conservation. Belize’s agreement has already resulted in an expansion of its ocean cover area and the designation of public lands as mangrove reserves, according to an inaugural study report. Meanwhile, in the Seychelles, where the new conservation effort has been underway the longest, 400,000 km² (154,000 square miles) of sea is now protected and blue whales have returned.
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Among the first beneficiaries of Belize’s new fund is MarAlliance, a nonprofit organization founded by marine conservation specialist Rachel Graham. The $327,000 (£260,000) awarded over three years will help repair Gladden Spit and the Silk Cayes Marine Reserve. These stretches of ocean are home to unusually gigantic populations of spawning fish and were once a feeding point for visiting whale sharks. More than 20 years ago, Graham’s studies helped turn the area into a special reserve, helping to upgrade unsustainable local fishing jobs with tourism opportunities. Since then, however, control has ceased and poaching has increased, to the point that sharks are barely seen.
“We’re going to assess the prestige of spawning concentrations and examine why sharks aren’t coming,” Graham says. “Should we expand the protected domain to help achieve local and national conservation goals?Can we help local authorities, NGOs in engaging networks, managing sites and enforcing protections?And what is the effect of climate change on fish habitats and populations?Here are some of the questions we addressed.
The new investment aid finds answers to these challenges. But the mechanism in its current form also has drawbacks, Graham points out. Overly onerous reporting requirements delay work and restrict the type of organizations that can apply for grants, and smaller nonprofits cannot. bear the additional administrative costs. ” We’re running out of time: we want to apply the answers now. “
Undoing injustice
Not everyone thinks such debt-swaps are a good approach, however. Administrative concerns aside, wider questions still remain about their impact.
Such deals can lead to high transaction prices and are not enough on their own to address a country’s debt problems, warns Jayati Ghosh, a professor of economics at the University of Massachusetts Amherst in the United States. The amount of debt relief the country receives is marginal, there is not a good enough track of the herbal benefits that will be gained, and the cash is not enough to allow a country to cover the prices of loss and damage, or even good enough climate mitigation.
But Deutz points out that they can do some things that other interventions have not allowed so far. “As a conservation or climate finance mechanism, those debt-for-nature swaps are extremely effective delivery mechanisms compared to existing opportunities in the market. “
Alternatively, another option is to cancel a significant part of the debts outright. In 1950s Germany, Ghosh notes, creditors hoped to avoid a return to Nazism by wiping out half the nation’s debt and transformed the other half into soft loans – which have low interest rates and no debt payment required if the country had a trade deficit.
A debt-for-nature deal in Belize has already led to an expansion of the country’s ocean protection zone. (Credit: Getty Images)
And today, some activists are arguing for debts to be cancelled in countries that want them, with aid provided in the form of grants, not loans. More than 500 economists, climate experts and activists recently signed an open letter calling for action in this direction.
“Eliminating climate debt is key to recognising the unequal burden of climate substitution on overexploited countries, which contribute the least to global emissions,” says Anuna De Wever, a climate activist who played a vital role in school changes in Belgium over the past few years. “If we don’t address the stark inequalities that continue to exist through the colonial legacy, we probably won’t stand a chance of fighting the climate crisis. “
But the total cancellation of a country’s debt is confusing because of the diversity of creditors that currently exist. Moreover, for those who can avoid it, defaulting or canceling debt is not the preferred option, Songwe warns. “Many African countries have worked hard to achieve their goals. “macroeconomic functionality and gain market access; they don’t need to lose it,” he says. The cancellation would possibly be “useful and important” for some countries that are really struggling, but not for all.
Cooperation not competition
Instead, a broader range of reforms could make debt more affordable while increasing climate finance.
The Bridgetown Initiative, co-launched by Barbados Prime Minister Mia Mottley in 2022, has recently been the touchstone of calls to modernize the existing global monetary system. The proposed reforms come with automatic pauses in debt repayment in the event of a climate disaster, extending the duration of loans, reducing their costs, and establishing an assistance mechanism in case of exchange rate variations.
Multilateral organizations such as the World Bank and the International Monetary Fund (IMF) can lend at lower rates than capital markets. And as Mottley reminded world leaders at this year’s World Financial Summit in Paris, they were created “for the global in the post-World War II reconstruction effort. We are in a moment equivalent to World War II in terms of that the climate refers. “
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The Paris summit did not result in any primary reform, but the presidents of Kenya and France, along with many philanthropic foundations and top-tier NGOs, expressed support for the Bridgetown Initiative. Many coalitions and institutions, as well as a UN advisory council, are taking similar steps. Proposals.
One such proposal considers short-term liquidity buffers, for example through a debt-servicing mechanism that reprofiles their debt, Songwe says, so that indebted countries can reinvest their expanding savings and debt-to-GDP ratios, making it less difficult to take on debt to be repaid. Another solution is to speed up the time it takes countries to repay their debts, said David McNair, executive director of The One Campaign, an anti-poverty group.
Another suggestion would be to inspire the United Nations International Monetary Fund to reform the way it issues Special Drawing Rights. These reserve assets are released in the form of quotas and can be exchanged for hard currency at the IMF’s low interest rate. If they were distributed and selectively targeted to countries facing climate threats or suffering disasters, they could be much more effective, Ghosh says.
Barbados Prime Minister Mia Mottley proposes automatic pauses in debt payments in the event of a climate disaster and longer loan terms (Getty Images)
So where does all this leave debt-for-nature swaps?
“To the extent that they waste resources on historically underfunded spaces like conservation, they can be a tool,” says Rishikesh Bhandary, deputy director of the Global Economic Governance Initiative at Boston University. “But they are just one tool among a series of tools that will need to be deployed to combat sovereign debt. “
At this year’s COP28, Colombia, Kenya and France announced an expert opinion on debt, climate and nature. And while there is obviously still a long way to go to meet all the proposed proposals, all calls for reform recommend that the debt and climate crises are more likely to be resolved in combination than separately.
In Darwin’s own words: “In the long history of mankind (and also of animal species), those who have learned to collaborate and improvise to the maximum have prevailed. “
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