How Can Debt-for-Climate Swaps Engage African Countries More Fully in the Fight Against Climate Change?

The COP29 summit in Baku, Azerbaijan, concluded with a new climate finance agreement that has left developing nations deeply dissatisfied. The deal established the New Collective Quantified Goal (NCQG), committing developed countries to channel "at least" $300 billion annually into a mix of grants and loans by 2035 to support climate action in poorer countries. While this represents an increase from the unfulfilled $100 billion annual pledge made at COP15, the amount is far below the $500 billion demanded by a coalition of 134 developing nations. An additional aspirational target of $1.3 trillion annually, reliant on private finance, further stoked concerns due to its lack of a clear framework. Developing countries fear that, like the previous pledge, these promises may remain unmet, particularly given the agreement's absence of specific allocations for vulnerable regions or disaster relief. This has intensified frustrations and scepticism, with many viewing the arrangement as insufficient to address the escalating climate crisis and its disproportionate impacts on the Global South.

This underscores the urgent need for a definitive, efficient, and reliable approach to financing climate action in Africa. One promising solution is debt-for-climate swaps, also referred to as debt-for-nature swaps, where creditors provide debt relief in exchange for sovereign commitments to conservation and climate-related efforts. These arrangements aim to free up fiscal space in emerging markets and developing economies (EMDEs), enabling countries to address critical environmental challenges while managing limited financial resources.

This mechanism presents a lifeline for African states grappling with climate vulnerabilities by unlocking new and additional funding for climate adaptation projects—often unappealing to traditional investors due to low financial returns. With low-income and heavily indebted countries being particularly vulnerable to climate impacts, debt-for-climate swaps offer a pathway to development, debt relief, and enhanced climate adaptation.

Africa’s climate finance landscape reflects a mix of progress and persistent challenges, with significant disparities in funding sources, instruments, and allocation. Firstly, it is important but unfortunate to note that Africa receives only 2% of global finance flows. According to the Landscape of Climate Finance in Africa 2024 by the Climate Policy Initiative (CPI), climate finance flows to the continent increased to an annual average of $43.7 billion between 2021 and 2022, a 48% rise from prior years. This growth was led primarily by public finance, which constituted 82% of total flows, sourced mainly from multilateral development finance institutions (DFIs) and bilateral donors. However, this amount remains inadequate, meeting only 23% of the $190 billion Africa requires annually to fulfil its climate commitments under Nationally Determined Contributions (NDCs).

Public funding, driven by grants and concessional loans from institutions like multilateral DFIs, targeted critical areas, with 39% allocated to mitigation efforts, 37% to adaptation projects, and 24% to dual-benefit initiatives addressing both. Yet, adaptation funding remains insufficient despite Africa’s acute vulnerability to climate impacts. Data from the Climate Finance in Africa Report by UNDP on the other hand also reveals that between 2011 to 2021 adaptation accounted for 41.7% of the total flows. This is overshadowed by the 43.8% directed toward mitigation, often due to mitigation projects being more attractive and profitable to investors with a clear view of “direct financial benefits”. Priority sectors for adaptation funding include agriculture, forestry, and other land uses (AFOLU), as well as water management, reflecting the urgency of safeguarding food and water security in a region heavily reliant on natural resources.

Debt financing is a predominant feature of Africa’s climate finance, with concessional and market-rate loans comprising over half of the total flows, according to CPI’s report. This reliance on debt, particularly in a region already grappling with high levels of debt distress, raises concerns about long-term sustainability.

Access to climate finance also highlights stark inequalities across countries and regions. The Landscape of Climate Finance in Africa 2024 reports that ten nations, including Egypt, South Africa, and Nigeria, received half of all climate finance, while the ten most climate-vulnerable countries captured a mere 10%. These imbalances reveal systemic barriers such as limited institutional capacity, weak project pipelines, and perceptions of high risk, which deter investment in the continent's neediest regions. Furthermore, smaller, localized projects dominate Africa’s climate portfolio, with average project sizes of less than $2 million—significantly smaller than those in other regions—indicating challenges in scaling large-scale initiatives.

The structure of debt-for-climate swaps can take one of two forms. The first is a bilateral model, where a direct agreement is made between the debtor country and one or more creditor governments. Under this arrangement, the creditor forgives or reduces a portion of the debt, often with a negotiated discount rate ranging from 0% to 50%. In return, the debtor commits to using the equivalent amount to fund specific climate or conservation initiatives. These arrangements are particularly advantageous for debtor nations, as investments are typically made in local currency, reducing reliance on scarce hard currency reserves. For example, in 2022, Germany and Egypt signed a bilateral debt swap agreement worth €54 million. This agreement aimed to support Egypt’s renewable energy goals by financing new transmission lines that connect wind farms to the national grid, enhancing the country's power infrastructure and integrating sustainable energy sources. These bilateral arrangements are particularly advantageous for debtor nations, as investments are typically made in local currency, reducing reliance on scarce hard currency reserves.

The second model involves a tripartite arrangement, where an NGO or third-party intermediary facilitates the swap. In this case, the NGO purchases the debt on the secondary market at a discounted price—determined by factors such as the debtor’s credit rating, economic performance, and the likelihood of full repayment. The NGO then redeems the debt with the debtor country in exchange for a commitment to fund designated environmental projects. This model can attract additional financing from philanthropic organizations or private entities, amplifying its impact. A notable example is the 1987 agreement between Bolivia and Conservation International. The NGO purchased $650,000 worth of Bolivia's commercial debt on the secondary market for just $100,000 and then negotiated with Bolivia to allocate the forgiven debt toward creating protected areas for biodiversity conservation. This model can attract additional financing from philanthropic organizations or private entities, amplifying its impact.

Not all countries are equally suited to benefit from debt-for-climate swaps. Several factors must be considered to identify eligible candidates. Below are the basic criteria we propose for qualification into debt for climate swaps:

• Debt Vulnerability: Countries experiencing high debt distress or limited fiscal space are primary candidates. For instance, nations classified as "high risk of debt distress" by the IMF are often prioritized.
• Climate Vulnerability: Nations with acute exposure to climate impacts—such as small island developing states (SIDS) and countries in arid or flood-prone regions—are ideal recipients, as the swaps can enhance their climate resilience.
• Alignment with NDC: The selected projects should align with the country's NDCs to ensure coherence with global climate goals.
• Commitment to Reform: Nations that show the political will to implement structural reforms, including improved debt management and environmental governance, are strong candidates.

Debt-for-climate swaps, despite their promise, remain contentious due to perceived inefficiencies and risks. Dialogue for Earth reports that a 2017 UN study acknowledged their potential to improve a country's credit standing and unlock financial services for development but cautioned against the pitfalls of poorly implemented deals. The complexity of negotiations, particularly over the scope of climate or conservation measures, often results in protracted discussions that inflate costs and delay action. Inefficiencies, coupled with high operational costs, have prevented debt-for-climate swaps from achieving widespread acceptance as a reliable financial instrument.

Yet, for low-income nations grappling with climate vulnerability and crushing debt, these swaps remain a vital mechanism to break free from the climate debt trap. With equitable terms, transparent frameworks, and well-defined conservation goals, debt-for-climate swaps can provide much-needed fiscal space while advancing sustainable development. For nations on the frontlines of the climate crisis, debt-for-climate swaps offer a chance to transform financial burdens into investments in resilience and environmental preservation. The global community must act with urgency, ensuring that these tools are not only refined but scaled to support those who need them most.