Debt-for-Climate Swaps: A Smarter Way to Tackle Debt and the Climate Crisis

By Keisha N. Blades

Many developing countries are being stretched thin. On the one hand, they urgently need to invest in climate resilience. On the other hand, they are juggling rising debt and tight budgets. A recent report from the Independent High-Level Expert Group on Climate Finance estimates that emerging markets and developing countries (excluding China) need around $2.3 to $2.5 trillion each year by 2030 to fund meaningful climate action (Bhattacharya , Songwe , Soubeyran , & Stern , 2024).

At the same time, these countries are on the frontlines of the climate crisis. In the Caribbean, one hurricane can wipe out years of progress and leave governments scrambling for recovery funds. For example, Hurricane Beryl, which struck on July 01, 2024, devastated approximately 98 percent of the housing stock on the islands of Carriacou and Petite Martinique in just a few hours (New York Times, 2024). With limited buffers and access to affordable financing, borrowing becomes the only option, deepening already heavy debt loads.

This is where debt-for-climate swaps come into the conversation.

A Win-Win in Theory

In simple terms, these swaps allow a portion of a country’s debt to be forgiven or restructured in exchange for investments in climate-related projects. Instead of sending money back to creditors, governments can channel those funds into things like clean energy, forest protection, or climate-resilient infrastructure (Green Climate Fund, 2024).

This is not a brand-new idea. These kinds of deals first popped up in the 1980s to support environmental conservation, but they have been evolving as the global climate and debt situations become more urgent.

Some countries are already showing how it can work. Barbados used this approach to finance upgrades to water and sewage systems, which is critical for climate resilience (EIB, 2024). Indonesia used similar swaps to invest in hydrogen energy and protect large areas of rainforest in Borneo (Marusiak, 2011). In both cases, the debt relief made space for important long-term investments that benefit both people and the environment.

Why It Matters Right Now

Global debt is climbing fast. According to the IMF, it’s expected to exceed $100 trillion this year, nearly 93 percent of global GDP, and it is on track to reach 100 percent by 2030 (IMF, 2024). Developing countries are especially vulnerable. The impacts of COVID-19, rising interest rates, geo-political conflicts and the growing costs of climate adaptation have left many struggling to stay afloat.

Debt-for-climate swaps offer some breathing room. They free up resources that can go toward climate action without pushing countries deeper into debt. And beyond the finances, these projects can help countries build cleaner, stronger, and more resilient futures.

Real Impact on the Ground

What I find encouraging is that these swaps aren’t just about numbers on a spreadsheet, they are driving real results. In Indonesia, for example, reforestation programs supported through debt swaps are not only helping the environment, but also involving local communities in conservation efforts. These kinds of initiatives strengthen environmental governance, create jobs, and support sustainable livelihoods.

They also send a signal: it’s possible to design solutions that work for both the economy and the environment.

But Let’s Be Real

As promising as this all sounds, debt-for-climate swaps are not a magic fix. One of the main criticisms is that the debt relief offered is often small in the grand scheme of what countries owe. So, while helpful, it is rarely game-changing.

Then there’s the issue of transparency. These deals require strong systems to monitor where the money goes and how it’s used and not every country has the tools to do that effectively. Some also worry about donors pushing their own climate agendas, instead of supporting what local communities actually need. And without buy-in from a broader group of creditors, these swaps risk being one-off deals rather than part of a bigger, coordinated solution.

Still Worth Pursuing

Even with those challenges, I believe this approach holds real potential. If done right, fairly, transparently, and with countries leading the way, debt-for-climate swaps can be more than a temporary fix. They can be part of a broader strategy to support both debt sustainability and climate resilience.

At a time when we need bold, practical solutions, this is one worth paying attention to. Could this be the start of a smarter way to manage debt and protect our planet at the same time?

References

Bhattacharya , A., Songwe , V., Soubeyran , E., & Stern , N. (2024, November 14). Raising Ambition and Accelerating. Retrieved from London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.: https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2024/11/Raising-ambition-and-accelerating-delivery-of-climate-finance_Third-IHLEG-report.pdf

EIB. (2024, December 02). Barbados launched the world's first debt-for-climate-resilience operation. Retrieved from European Investment Bank: https://www.eib.org/en/press/all/2024-482-barbados-launched-the-world-s-first-debt-for-climate-resilience-operation

Green Climate Fund. (2024, September). Debt for climate swaps: exploring avenues and opportunities. Retrieved from Green Climate Fund: https://www.greenclimate.fund/document/debt-climate-swaps-exploring-avenues-and-opportunities

IMF. (2024, October 15). Global Public Debt Is Probably Worse Than it Looks; Elevated risks to public debt call for enduring and carefully designed fiscal adjustments. Retrieved from IMF Blog: https://www.imf.org/en/Blogs/Articles/2024/10/15/global-public-debt-is-probably-worse-than-it-looks

Marusiak, J. (2011, October 04). Borneo rainforest conservation banking on Indonesian debt. Retrieved from Eco Business: https://www.eco-business.com/news/borneo-rainforest-conservation-banking-on-indonesian-debt/

New York Times. (2024, July 03). Destruction on Carriacou and Petite Martinique Islands Captured in Satellite Images. Retrieved from New York Times: https://www.nytimes.com/2024/07/03/weather/beryl-carriacou-petite-martinique-images.html