By prioritising debt repayment over fulfilling their climate goals, many low- and middle-income countries are delaying the transition to green economies
According to a new analysis, many low-and middle-income nations are postponing the transition to green economies by spending more on debt repayments than on achieving their climate targets. The research comes at a time when world leaders are meeting in Paris for a two-day summit to discuss changes to the international financial system that will help combat poverty and climate change. According to the paper "Beyond climate finance," past injustices have left developing nations reliant on imported goods, energy, and food. Their ability to invest in development and the environment has been hampered by high debt levels.
The economies of poor and emerging nations are also the ones that suffer the most from climate disasters. For instance, the Caribbean island of Dominica suffered damage from Hurricane Maria in 2017 that was equal to 226% of the island's GDP. Floods in Pakistan in 2022 and Cyclone Pam in Vanuatu in 2015 both resulted in losses equal to 9% and 64% of the respective countries' GDPs. Developing countries frequently lack the resources to complete social and environmental projects, thus they must borrow money from other countries to pay for their basic needs.
According to the paper, foreign debt service payments for low-income countries will account for an average of 16.3% of total government revenues by 2023, which is the highest level since 1998.
"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.
Losses and damage brought on by climate change are primarily concentrated in underdeveloped nations, according to Avantika Goswami, programme manager for climate change at CSE. These are also the nations that require financial assistance for climate change so that they can advance without significantly increasing the stock of greenhouse gases. Sunita Narain, director general of CSE, stated that the majority of aid is not free or inexpensive; rather, it is provided in the form of loans or investments, which require repayment by the recipient nations. The fact that the nations that require the money the most are unable to pay it back creates a difficulty.
"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.
In the decade from 2011 to 2020, 75% of all climate funding was concentrated in North America, western Europe, East Asia, and the Pacific, predominantly under the leadership of China. Less than 25% of climate finance flows went to regions that are home to the majority of low- and middle-income countries, according to CSE research that uses data from the independent climate policy organisation Climate Policy Initiative (CPI) in San Francisco. The capacity of emerging nations for domestic spending has been strained by shocks like the Covid-19 outbreak.
According to CPI, only 16 per cent of the total climate finance that flowed in the 2011-2020 period can be termed concessional—money given on favourable terms such as grants or low-interest loans.
This indicates that the other 84% of climate money was offered in the form of loans at market rates, which certainly cannot be paid for by underdeveloped and impoverished countries. According to the CSE research, securing funds for climate initiatives is more expensive for developing nations since those nations are thought to have a higher "high-risk environment" because of their socioeconomic problems and scarce resources. This entails higher expected returns on equity and higher interest rates on loans. As a result, deploying green technologies—which are more recent and demand greater up-front capital investment—can be up to seven times more expensive in emerging and developing nations than in Europe and the US, decreasing their economic appeal.
Goswami claimed that multilateral development banks (MDBs), a significant source of concessional financing, are risk adverse and give out loans for 80% of climate funds, worsening the debt situation. Additionally, she noted, the role of MDBs is being broadened to make financial flows "Paris-aligned," which may be paternalistic and may restrict funding sources for impoverished nations.
"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 while operating in a financial system that is inequitable by design," Narain said.
The report makes various recommendations. One is that it should be simpler to obtain the additional funding that developing nations require but do not have to repay. Furthermore, they contend that middle-income nations should be treated more fairly under the loan regulations. The CSE stated that it is vital to cease accumulating new debt and to find solutions to the existing debt issues, and that decisions regarding who receives the money should be determined collectively rather than by a small number of wealthy countries.