Scaling-up Ecosystem-based Debt-for-Climate Swaps: From the Millions to the Billions

Background Paper #1

By Stephen Leonard, Ellycia Harrould-Kolieb, Oscar Reyes, Justine Nicole Torres, and Elizabeth Crespo.

It is widely acknowledged that the crises of biodiversity and ecosystem loss and climate change are interlinked. Healthy ecosystems can contribute significantly to climate change adaptation and mitigation, including keeping global warming to 1.5°C in the coming years. However, climate change impacts are a continuous threat to the integrity of ecosystems, compromising their ability to serve as valuable carbon sinks and provide vital services for human communities. In addition, the continuing debt crisis – exacerbated by the Covid-19 pandemic – currently being faced by developing countries is already constraining their ability to allocate funds to programmes on climate change, human rights, biodiversity, and

This paper discusses how debt-for-climate swaps can be useful «triple-win» instruments to address the climate crisis by ensuring the protection of valuable terrestrial and marine ecosystems, while also contributing to debt sustainability. The paper draws on examples of previous debt-for-nature swaps and identifies lessons for moving forward, particularly around matters concerning the participation of indigenous peoples and local communities, land tenure and rights, governance, and monitoring and evaluation. It also draws from experiences with forest-based climate interventions related to REDD+ (Reducing Emissions from Deforestation and forest Degradation) implementation, which may also prove relevant for the application of safeguards policies, forest governance, and capacity-building.

Given the geographical overlaps of high levels of debt, vulnerability to climate change, high levels of biodiversity, and potentials for climate mitigation, debt-for-climate swaps should be considered as a tool for achieving the triple goals of reducing crippling debt, protecting biodiversity and ecosystems and their services, and climate mitigation and adaptation.

Key points:

  • There are clear connections between indebtedness, climate change, and biodiversity loss, and there is an overlap between priority geographies and the solutions that are needed to address all three;
  • By supporting the protection of ecosystems on a large scale, debt-for-climate swaps could facilitate a host of social and environmental benefits for communities, including sustained ecosystems services, enhanced resilience, opportunities for climate change mitigation, and avenues to secure local rights and community participation;
  • Increased protection for forests, ecosystems, and biodiversity is projected to yield significant economic benefits – especially where indigenous peoples are fully involved in project design and implementation – for comparatively lower costs in terms of investment;
  • Developed countries continue to fall far short of taking on their fair share of global responsibility for the climate and biodiversity crises. Climate and biodiversity finance remain inadequate, and there is a need for increased public finance in terms of both direct investment and as a stimulus for the flow of private funds;
  • The Green Climate Fund (GCF) has the potential to become an important institution in the promotion of debt-for-climate swaps. Options for how this might work can already be seen in the debt-for-nature swap in the Seychelles with The Nature Conservancy (TNC) and the Caribbean Resilience Fund (CRF) proposal of the Economic Commission for Latin America and the Caribbean (ECLAC);
  • Lessons can be learnt from previous debt-for-nature swaps, and from REDD+. To secure a triple win (debt, biodiversity, and climate), debt-for-climate swaps need to:
  1. Be significantly increased in scale – from the millions to the billions, with fit-for-purpose independent and transparent governance to match;
  2. Ensure the full and effective participation of indigenous peoples and local communities in the design, implementation (including related to tenure), and monitoring of programmes and activities;
  3. Be part of an inclusive approach to debt restructuring that involves private creditors, ensuring their preparedness for a debt «haircut»;
  4. Extend beyond the North-South scope of conventional international climate and biodiversity finance and debt swaps; and
  5. Be country-driven and responsive to priorities, and increase the ambitions of Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs).

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.