The Architecture for a Debt-for-Climate Initiative

Background Paper #4

By Annamaria Viterbo, Rishikesh Ram Bhandary and Kevin P. Gallagher

This paper offers a menu of options to create an architecture for a Debt-for-Climate Initiative (DCI). The DCI recognises that a core challenge which developing countries have in implementing and enhancing their commitments on climate change is limited fiscal space.

The Covid-19 pandemic has put tremendous fiscal strain on developing-country budgets as governments put together responses and recovery packages. However, without an explicit effort to alleviate the debt burdens of many of these countries, it is likely that the scale of the response will not be commensurate with the challenges.

Furthermore, the need to recover from the pandemic also offers a rare opportunity for governments to direct their investments into specific areas to pursue of climate objectives together with an inclusive recovery. Therefore, the DCI aims to bring together all types of creditors to achieve debt sustainability, create fiscal space, and be more climate-effective.

The three core principles of this initiative are:

1. Real debt relief (some debtors just will not be able to pay)

2. Real climate action with enduring impact

3. No one left behind

The DCI is aimed at debtor countries with unsustainable levels of debt, with liquidity problems and at high risk of climate vulnerability and biodiversity loss.

Published by Heinrich Böll Foundation, Center for Sustainable Finance (SOAS, University of London), and Boston University Global Development Policy Center as Background Paper to the Debt Relief for Green and Inclusive Recovery Project.