Climate finance took centre stage at last 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 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 recent report 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 research by ActionAid International, a staggering 93% of the most climate-vulnerable nations are “drowning in debt”.
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 The New Arab, 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 advised 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.