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With a little help from my friends: Debt Renegotiation and Climate Change

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  • Cardenas, J. C.
  • Jaramillo, F
  • León, D
  • López, M.
  • Rodríguez, M
  • Zuleta, H

Abstract

The economic crisis from the Covid-19 pandemic has generated a fall in tax revenues and an increase in the need for public spending in most economies throughout the world. This situation has led to a substantial increase in the sovereign debt levels and has dramatically reduced the fiscal space of governments. For upper- middle-income countries (UMICs), current access to financing is limited and this can potentially limit the space for climate action in the short and medium run. However, delaying climate action can generate a negative signal on fiscal sustainability due to the physical and transition risks of climate change. Unsustainable production practices will result in a deterioration of the productive capacity of natural assets reducing potential tax income. Simultaneously there will be a stronger need for public spending to face the future damages associated to greenhouse gases emissions. Therefore, in order to address the current crisis, we need an integral approach that considers the climate crisis as a challenge with a high degree of urgency. For this approach to be feasible, sufficient international climate finance needs to be available, and it should help to steer relief and recovery efforts into a direction in which these are also compatible with climate targets. In this document, we propose a sovereign debt negotiation scheme in which the conditions of the debt depend on the climate policies undertaken by the debtor countries. Likewise, we point out that the feasibility of beneficial agreements for debtors and the implementation of good climate policies depend positively on the size of the debt and each country's potential to affect the current trend of climate change. For these reasons, the formation of coalitions of debtor countries can be a key factor for debt relief and the implementation of climate policies.

Suggested Citation

  • Cardenas, J. C. & Jaramillo, F & León, D & López, M. & Rodríguez, M & Zuleta, H, 2021. "With a little help from my friends: Debt Renegotiation and Climate Change," Documentos de Trabajo 19732, Universidad del Rosario.
  • Handle: RePEc:col:000092:019732
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    More about this item

    Keywords

    Covid 19; Climate Change; Sovereign Debt; Coalitions; Climate Policy;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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