Debt Crises In Global South Debilitating Fight Against Climate Change: Report

Many low and middle-income countries are spending more money on debt payments than on meeting their climate goals, delaying their transition to green economies, a new report says.  

The report by environmental think tank Centre for Science and Environment (CSE) comes as world leaders gather in Paris for a two-day summit to discuss reforms of the international financial system to better tackle poverty and climate change.  

The report titled 'Beyond climate finance' argues that historical inequalities have made developing countries dependent on imports of food, energy, and goods. High debts have limited their capabilities to spend on development and climate.

Poor and developing countries are also the hardest hit economically by climate disasters. For example: hurricane Maria that hit the Carribean island of Dominica in 2017 caused damage equivalent to 226 per cent of its gross domestic product (GDP).

Floods in Pakistan in 2022 and cyclone Pam in Vanuatu in 2015 caused damages worth 9 per cent and 64 per cent of their respective GDPs.

Developing nations often lack sufficient funds for social and environmental projects, and rely on foreign debt to support essential activities.  

The report said debt payments for low-income countries are at their highest since 1998, with an average external debt service payment of 16.3 per cent of government revenue in 2023.

"Debt burden exceeds the annual cost of achieving the NDC for many low and middle-income countries; it is plausible that their climate ambition is being hindered by debt obligations," it said.  

Avantika Goswami, programme manager, climate change, CSE, said losses and damage due to climate change are mostly concentrated in developing countries. "These are also the countries that need finance for the climate transition to help them develop, without adding significantly to the stock of greenhouse emissions."

Sunita Narain, director general, CSE said most of the money given is not free or cheap - it's given as loans or investments instead of grants, which means countries have to pay it back. This is a problem because the countries that need the money the most can't afford to pay it back.  

In the 2011-20 period, only about 5 per cent was given as grants and the rest were loans or equity. It is then no surprise that what is termed as climate finance is not going to the countries where it is needed the most," she said.  

Seventy-five per cent of all the climate finance in the decade 2011–2020 was concentrated in North America, western Europe, East Asia and the Pacific, primarily led by China.

Regions where the majority of low and middle-income countries are located received less than 25 per cent of climate finance flows, the CSE report says, citing data from Climate Policy Initiative (CPI), a San Francisco-based independent climate policy organisation.

Shocks like the Covid-19 pandemic have stretched domestic spending capabilities of developing countries. For gas-dependent developing countries like Pakistan and Sri Lanka, the energy crisis driven by the Russian war on Ukraine left them unable to afford the LNG supplies needed to keep the power running, and hindered the industry's aspiration to switch from coal to gas in countries like India, the CSE said.

According to CPI, only 16 per cent of the total climate finance that flowed in the 2011-2020 period can be termed as concessional – money given on favourable terms such as grants or low-interest loans.

This means the rest 84 per cent of climate finance was provided as loans on market rates which poor and developing countries clearly cannot afford.

The CSE report said accessing money for climate investments is costlier for developing countries because they are perceived to have a more "high-risk environment" due to socio-economic challenges and limited resources. This means higher interest rates on loans and higher expected returns on equity.  

This makes deployment of green technologies -- which are newer and require more upfront capital investment -- up to seven times costlier in emerging and developing countries than in Europe and the United States, reducing its economic attractiveness.  

Goswami said multilateral development banks (MDBs), an important source of concessional finance, are risk-averse and provide 80 per cent of the climate finance as loans, which worsens the debt crisis.

Also, MDBs' mandate is being expanded to make financial flows "Paris-aligned", which could be paternalistic and may narrow funding streams to developing countries, she said.  

"Now, when we view the pressure to decarbonise within the context of larger systemic financial barriers, it looks like the walls are closing in from all sides for the Global South. It is unacceptable that it is being said at UNFCCC forums that developing countries do not want to take on climate ambition.

"The reality is that most of them simply cannot afford it. This system is broken and needs urgent reform. Climate ambition cannot be unlocked whilst operating in a financial system that is inequitable by design," Narain said.  

The report suggests some solutions. One is that developing countries need more money that they don't have to pay back, and that this money should be easier to get. They also say that the rules for lending money should be fairer to middle-income countries.

The CSE said that decisions about who gets the money should be made together, instead of being decided by a few powerful countries and that it's important to stop creating more debt and to find ways to solve the existing debt problems.