The Global South is facing a significant hurdle in its climate ambitions as a mounting debt crisis threatens to derail crucial progress. This issue is taking center stage at this year’s United Nations Climate Change Conference (COP28) in Dubai, where governments are grappling with the operationalization and financing of the Loss and Damage Fund established at COP27.
A preliminary global stocktake (GST) report released in October has fallen short of expectations, highlighting that global carbon dioxide levels have yet to peak. The International Energy Agency's recent World Energy Outlook underscores the urgent need to accelerate the clean-energy transition and dramatically reduce greenhouse gas emissions to meet climate targets.
However, bridging the substantial climate financing gap is challenging amidst widespread sovereign debt distress. The Debt Relief for a Green and Inclusive Recovery Project reveals that 69 countries require immediate debt relief, with 61 of them owed at least $812 billion that needs restructuring. An IMF working paper further indicates that only seven out of 29 low-income countries have the fiscal space to address their adaptation needs and achieve their emissions-reduction targets, known as nationally determined contributions (NDCs). With debt-service costs set to rise in 2024, many nations will prioritize interest payments over essential sectors like health and education.
As the debt crisis persists, emerging-market and developing economies struggle to invest in gender-sensitive, low-carbon development. This not only increases their vulnerability to climate shocks and fiscal instability but also endangers the global goal of limiting warming to 1.5° Celsius, as outlined in the Paris Agreement.
To tackle the intertwined debt and climate challenges at COP28 and beyond, policymakers should focus on three key objectives: establishing a more inclusive and efficient debt-restructuring process, increasing concessional finance, and expanding the role and capacity of multilateral development banks (MDBs).
Reforming the G20's Common Framework is essential to ensure that all climate-vulnerable countries, including middle-income nations, receive adequate debt treatment. While the Common Framework has begun providing relief, recent restructuring deals have been limited and entangled in prolonged negotiations, exacerbating the problem. Future agreements must offer substantial relief measures to stimulate economic growth and achieve climate objectives, rather than merely maintaining previous austerity levels or delaying impending crises.
Additionally, the demand for more concessional finance is evident. At the recent World Bank and IMF meetings in Marrakesh, IMF Managing Director Kristalina Georgieva highlighted the challenges of a \"higher-for-longer era\" of interest rates, which complicates the deployment of renewable energy projects that are highly sensitive to capital costs. Climate vulnerability further inflates debt costs and restricts access to necessary financing.
Reference(s):
cgtn.com
