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Barbados Prime Minister Mia Amor Mottley spoke passionately to the United Nations General Assembly in September many developing countries are shouldering and its increasing impact on their ability to thrive.

The average debt for low- and middle-income countries, excluding China, reached in 2020, up from 26% in 2011. For countries in Latin America and the Caribbean, the annual payments just to service that debt .

At the same time, these countries are facing a " of climate change, of pandemic and indeed now the conflict that is leading to the inflationary pressures that lead regrettably to people ," Mottley said.

Rising borrowing costs coupled with high inflation and slow economic growth have left developing countries like hers in when it comes to climate change. High debt payments mean countries have fewer resources for mitigating and adapting to climate change. Yet climate change is increasing their vulnerability, and that can , increasing the cost of borrowing. can lead to higher debt risks. It's a vicious cycle.

As one solution, countries and international organizations are talking about "debt-for-climate swaps" to help tackle both problems at the same time. U.N. Deputy Secretary-General Amina Mohammed ahead of the 2022 , Nov. 6-18, as one option for refinancing countries' "crippling" debt.

How debt swaps work

allow countries to reduce their debt obligations in exchange for a commitment to finance domestic climate projects with the freed-up financial resources.

They have been to preserve the environment and address the liquidity crisis in developing countries, including Bolivia, Costa Rica and Belize. These are commonly known as "debt-for-nature swaps."

Belize, for example, was able to lower its debt in exchange for committing to designate 30% of its marine areas as protected areas and to spend $US4 million a year for the next two decades on marine conservation .

The swap, organized in 2021 by , involves the U.S.-based environmental group lending funds at a low-interest rate to Belize to buy back $553 million in commercial debt at a deep discount of 45%. The Nature Conservancy raised funds from the investment bank Credit Swisse via the issuance of "blue bonds" backed by the U.S. government, which gave the bonds a strong investment-grade credit rating.

Similarly, Costa Rica has carried out two debt-for-nature swaps with the United States. Under the swaps, Costa Rica agreed to allocate for conservation projects. It has already planted more than 60,000 trees and .

While debt-for-nature swaps have been used mostly for conservation, the same concept could be activities, such as building solar farms or sea walls. Some finance experts have that debt-for-climate swaps could be structured in a way that could also encourage private-sector bond holders to exchange the national debt they hold for carbon offsets.

Three keys to successful debt-for-climate swaps

I work with the at the Fletcher School at Tufts University. Our experience with debt swaps offers lessons for the design and implementation of debt-for-climate swaps.

First, the complex governance structures of debt swaps have limited their use. In the past, transactions were generally small, in funding for the environment from 1987 to 2003. A for future debt-for-climate swaps could reduce the complexity and lower the time and costs involved.

Second, debt-for-climate swaps would need to relieve enough of the debt burden to allow debtor countries to invest in climate adaptation and mitigation projects. For instance, the U.S. created debt-for-nature swaps with Indonesia in 2009 that were criticized for to help the Indonesian government achieve its conservation goals.

Another concern is known as "additionality"—ensuring that the swaps lead to additional climate efforts, as opposed to or with international climate finance.

With between the amount of adaptation assistance reaching countries and the amount they need, debt-for-climate swaps can be a meaningful source of funding. Climate Policy Initiative, a nonprofit research group, recently of the adaptation needs countries listed in their Nationally Determined Contributions—the climate change plans they submit to the U.N.—can be only met with help from development banks or other countries.

Regions experimenting with debt swaps

A few regions are testing debt-for-climate swaps.

The Economic and Social Commission for Western Africa has developed a , in which it functions as a liaison between creditors and . The initiative focuses on advancing sustainable development and climate goals, such as developing more resilient agriculture.

Similarly, as part of the Caribbean Resilience Fund, the Economic Commission for Latin America and the Caribbean a Debt for Climate Adaptation Swap. It aims to reduce the $527 million of debt in three pilot countries by issuing green bonds, similar to Belize's debt swap. Development banks would by guaranteeing new bonds and reducing the credit risk.

With carefully designed debt-for-climate swaps and support from international institutions, developing countries could expand their finance for desperately needed climate mitigation and adaptation actions and remove some of their heavy debt burden.

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