What is a debt for climate swap?

• A debt-for-climate swap is an agreement between the creditor and a debtor by which the former forgoes a portion of the latter’s foreign debt, or provides it debt relief, in return for a commitment by the government to invest in a specific environmental project. 
• This could be developing climate-resilient infrastructure, protecting biodiversity, etc.
• In the past decade, debt-for-climate swaps have grown relatively popular among low- and middle-income countries.

Background

• Debt-for-nature swap first used in the 1980s in Latin America, where the countries aimed to reduce unsustainable external debts and address worsening environmental conditions.
• Debt-for-climate swaps emerged as a broader concept in the 2000s for not only conservation but also climate mitigation and adaptation.

Significance

• Debt for climate swap was introduced as a debt restructuring device that aims to combat climate change by ensuring that debt-ridden countries do not incur additional debt while addressing climate change locally.
• They possess dual objectives: to promote specific investment and policy action on one hand and promote debt relief on the other.

• The small island developing states (SIDS) can make use of debt-for-climate swaps, to address challenges such as: adapting to increasing climate risk and recovering from financial distress.
• For instance: In 2021, Belize, a country on the northeastern coast of Central America, reduced its debt by 10 per cent of its GDP and acquired funds to protect the world’s second-largest coral reef by striking a $553-million swap deal with The Nature Conservancy (TNC), a US-based environmental organisation.