Debt-for-climate swaps as a tool to support the implementation of the Paris Agreement

Under the Paris Agreement, developed and developing countries have committed to do their part to ensure that the warming of the planet is capped at well below 2 °C above pre- industrial levels and are pursuing efforts to limit the temperature increase to 1.5 °C above pre- industrial levels. These commitments are reflected in their Nationally Determined Contributions (NDCs), which countries are required to submit every five years. However, with COVID-19 recovery efforts demanding a massive increase in government expenditure amid slowing economic activity, sovereign debt levels have risen sharply in 2020 and are likely to remain high in the near future. Currently, 11 Asia-Pacific countries are at high risk of debt distress, seven of which are Pacific Small Island Developing States: Afghanistan, Kiribati, Lao PDR, Maldives, Marshall Islands, Micronesia (Federated States of), Papua New Guinea, Samoa, Tajikistan, Tonga and Tuvalu. Furthermore, as countries prioritize addressing health concerns and a speedy economic recovery, relatively less attention is being paid to tackling climate change. Given this situation, there has been increasing support for debt-for-climate swaps as a solution to simultaneously reduce sovereign debt burdens and increase financing to scale up investments in climate mitigation and adaptation projects. Earlier this year, the Managing Director of the IMF announced that the IMF and the World Bank are working together to develop an “organizing framework†for connecting debt relief to countries’ plans for investing in green, resilient and inclusive development. Their joint proposal for green debt swaps will be announced during COP 26.