Climate Change and the Debt Trap: A Growing Crisis for Vulnerable Nations

Climate change is not just about rising temperatures and extreme weather. It's also about money. Many countries that are most affected by climate change are also struggling with huge amounts of debt. These countries, which make up the Climate Vulnerable Forum's Vulnerable Twenty Group (CVF-V20), are home to 1. 7 billion of the world's poorest people. They are facing a double whammy: dealing with climate change and paying off massive debts. The total debt of these countries is a staggering $1 trillion. And they have to pay back $746 billion in debt service payments by 2031. That's a lot of money, especially when you consider that these countries are also trying to deal with the costs of climate change. In fact, the amount they owe is about four times what they need to finance their climate plans. This debt crisis is having a real impact on people's lives. In recent years, 12 CVF-V20 countries have spent more on debt interest payments than on education. And 16 countries have spent more on debt servicing than on health. It's no surprise, then, that 22 out of 45 low-income countries in the group are classified as "debt distressed" by the International Monetary Fund and the World Bank. The international response to this crisis has been disappointing. Mechanisms like the G20's Common Framework, which was designed to help countries restructure their debts, have not delivered the timely and efficient relief that was promised. At the same time, global shocks like the COVID-19 pandemic and the Ukraine war have tightened the fiscal noose. And to make matters worse, donor nations have recently made sharp cuts to their aid budgets, slashing one of the few remaining budgetary lifelines for these countries. The irony is that these climate-vulnerable developing countries have some of the most ambitious climate targets on Earth. If they could meet these targets, they would not only grow and prosper but also insulate themselves from further climate damages and slash their projected future emissions. But the global finance system makes achieving these targets all but impossible. The cost of borrowing money to make the necessary investments is often astronomical, and more debt piles up. There is a solution, and it's one that experts and ministers should consider as they prepare for the Group of 20 and U. N. climate change summits later this year. First, they need to create breathing space by extending the maturity on the loans well into the future. This would take several countries back from the brink of default and lower total debt servicing obligations by a quarter of a trillion U. S. dollars between now and 2031.This would come at no cost to creditors as it simply stretches out the repayment period and smooths out interest payments. But more needs to be done for climate-vulnerable countries. If interest rates can be reduced to the rate charged by the World Bank's concessional lending arm (1. 35 percent), on top of the maturity extension, another nearly half-trillion dollars of debt repayments could be saved between 2025 and 2031. This is money that could then deliver health and education to their people. It is also money that could be used to tackle the climate crisis at home and unlock desperately needed capital for investing in clean energy and climate-resilient infrastructure, such as flood protection and sea walls. If these countries are to leapfrog the fossil fuel age and invest in modernizing their economies through solar-powered grids, electrification of transport, and other clean tech that they need to deliver economic prosperity, they need more financing, not less, at concessional rates. Otherwise, they risk simply creating another debt problem further down the line. Comprehensive debt relief is a big ask, but not one without precedent. The Jubilee 2000 movement at the turn of the millennium secured the cancellation of $76 billion in debt for 36 of the world's poorest countries. It freed up resources and helped nations lift millions out of poverty. Twenty-five years later, we need to recreate the same sense of solidarity, only this time in the face of a planetary emergency. Debt relief is a climate justice imperative. Given that the debts of these countries are aggravated by climate impacts caused by others, it is an obligation of historical high emitters to assist in restitution for the damages they have caused elsewhere in the world. The Vatican Jubilee Commission recently laid out a clear moral and economic case for debt relief. This is a win-win: for the planet, for these peoples, and for the global economy. Time is not on our side. We have a small and closing window to redouble efforts on climate action and get the sustainable development goals back on track. These governments are committed to putting resources behind these goals. However, they cannot do so alone. The international community needs to move in lock-step to transform the debt crisis into a climate of opportunity.