Debt Diverts Resources from Fighting the Climate Crisis

Fighting the climate crisis requires funds to build climate resilience and transition to a low-carbon economy, but countries saddled with mountains of unsustainable debt are locked into paying vast sums to their creditors. Last year, $372 billion flowed out of lower-income countries in debt repayments: these are vital resources that could have been directed to tackling the climate emergency and the pandemic. Instead, lower income countries are now paying five times more in debt than they are spending on fighting the climate crisis.

At the same time, extreme climate events are forcing countries deeper into debt to pay for rebuilding and reconstruction, creating a vicious cycle of further indebtedness. In 2017, the Caribbean island nation of Dominica was struck by Hurricane Maria, which destroyed over 90% of its structures and caused $2 billion worth of damage—a staggering 330% of the country’s GDP. Dominica was already in debt crisis before the hurricane but had no choice but to plunge itself deeper into debt in the face of this climate disaster. Caribbean and other Small Island Developing States are responsible for just 0.2% of global emissions, yet are being repeatedly affected by devastating hurricanes.

The UN estimates that climate-extreme events are now happening at a rate of one per week, with the impacts of the climate crisis set to cost vulnerable countries up to $300 billion per year. There is no let-up for countries on the frontline of the climate crisis. There is also no internationally agreed way to suspend debt payments for a country following a climate-related disaster—and so even though emergency response and post-disaster reconstruction are crucial priorities following climate destruction, countries are forced to continue to divert resources to make debt repayments.

Climate Finance Is Creating New Debts

The climate crisis was created by the rich polluting countries and corporations through centuries of industrialisation and extraction, facilitated by colonialism. Yet the impacts of the crisis are falling hardest on the Global South. In fact, the real debt that needs settling is the debt that the Global North owes to the Global South.

There is some recognition of this enshrined in the United Nations Framework Convention on Climate Change through the principle of common but differentiated responsibilities, whereby those countries that have historically contributed the most to climate change are held most responsible for dealing with its impacts. In line with this, rich governments pledged to give $100 billion in climate finance every year by 2020 to the Global South. But this target is hugely insufficient to meet the scale of the crisis—the amount needed is not counted in billions but in trillions.

The $100 billion pledge has never been met in full, and to make matters worse, three quarters of the finance that has been delivered is in loans, not grants. This is creating even more indebtedness for Global South countries while generating income for rich governments from the interest.

Giving out climate finance in the form of loans makes a mockery of the idea that rich countries should take responsibility for the climate crisis they created and compensate for denying the Global South the opportunity to burn coal and gas to develop as they did. Another way of thinking about it is to imagine a rich person setting fire to your house, making money from the arson, and then, instead of giving you compensation, offering you a loan to rebuild your home. You are left with nothing—and become even more indebted to the rich person who burned down your house in the first place.

Breaking the Vicious Cycle

There can be no climate justice without debt justice. In order to break the vicious cycle of debt and climate crisis, three things need to happen.

First, governments and international institutions should cancel the debt of any country that needs it. Sheikh Hasina, Prime Minister of Bangladesh and chair of a group of countries most affected by the climate crisis, has called for debt restructuring for all countries in this group. In the short term, existing G20 debt relief initiatives need significant reform. In the longer term, an independent debt cancellation process needs to be set up to cancel debts for any country necessary through a process that is fair, transparent, and ensures countries and creditors can negotiate on equal footing.

Second, in the event of a climate disaster, repayments should be suspended immediately and a new grant-based fund for loss and damage should be set up to help with the costs of reconstruction following an extreme climate event. This should be funded by polluting governments and corporations.

Third, rich governments should set and deliver climate finance goals of at least $400 billion per year and in line with need and the demands from groups in the Global South. Climate finance must come in the form of grants, not loans, so it actually compensates the Global South for a crisis it did not create, and does not exacerbate existing indebtedness.

These steps can help to break the downward spiral of continued and worsening indebtedness as well as move us closer to climate justice. Ignoring the interconnectedness of the debt and climate crises exacerbates both crises and leaves lower income countries bearing the brunt of further injustice while worsening the breakdown of trust between rich countries and the Global South in the COP26 process. If there is to be any progress at COP26, Global South demands must be heard—the issue of debt needs to be on the table.