Debt-for-Nature Swaps: A Win-Win for the Economy and Environment?

By Lillian Caldwell, Beyond Bretton Woods Summer Fellow

July 19, 2024

How can leaders in global finance address the climate crisis as they take on the urgent sovereign debt crisis? Debt-for-nature swaps, agreements exchanging debt repayments for environmental conservation efforts, are emerging as a proven and promising solution. 

Currently, climate-related risks make up four of the top five most severe global risks over the next decade. Many climate vulnerable countries, such as those in the Caribbean, are also threatened by debt distress and a sovereign debt crisis. Small island developing states are frequently subject to climate-related disasters while also spending 30-70% of their public revenues on debt repayment. This financial strain diverts resources and funds away from essential conservation and sustainable development initiatives. 

In a debt-for-nature swap, bilateral or multilateral banks, private investors, or NGOs agree to forgive or cancel a portion of a country’s outstanding debt at a discount, in return for commitments to fund conservation-related projects. The size of the discount can be determined by macroeconomic factors, balance of payment dynamics, and the value of nature. This arrangement allows debtor countries to redirect funds away from debt repayment and toward environmental and sustainable development efforts. The first such agreement was launched in 1987 between Bolivia and Conservation International: the U.S.-based non-profit purchased $650,000 worth of Bolivia’s external debt in exchange for the conservation of 3.7 million acres of Bolivia’s Amazon Basin. Through this deal, Bolivia was able to reconstruct a portion of its debt in exchange for environmental protection. 

Since 1987, debt-for-nature swaps have become increasingly popular, with around 140 agreements having occurred globally (Whiting 2024). In 2023, Ecuador announced plans for the world’s largest debt-for-nature swap, converting $1.6 billion in debt into $12 million per year for conservation of the Galapagos Islands. In 2023, Barbados successfully executed a $300 million debt-for-nature swap to upgrade the nation’s water infrastructure. 

The Bahamas is currently readying the world’s next debt-for-nature swap, set to launch between August and October 2024. Using an Inter-American Development Bank (IDB) credit guarantee, the deal will involve less than $500 million of the Bahamas’ debt and is earmarked for improving the management of the country’s many marine protected areas. Given the Bahamas’ climate vulnerability, this initiative is important to building the country’s climate resilience. The initiative sets a strong example for other nations to follow. 

Debt-for-nature swaps offer substantial benefits. According to the International Institute for Environment and Development, these swaps could free up more than $103.4 billion in debt for developing countries, allowing for more restoration, conservation, and adaptation spending. It will cost between $3-6 trillion a year until 2050 to achieve the Paris Agreement’s temperature and adaptation goals, and many developing countries lack the funds to invest in sustainable development and climate adaptation without accruing more debt. Allowing countries to prioritize environmental conservation without increasing their debt burden, debt-for-nature swaps offer an enticing opportunity to many developing countries. 

The success of these swaps is contingent upon the transparency and cooperation of the participating countries. Debtor countries are in charge of effective enforcement of the swap’s conditions, which should be tailored to their specific financial and environmental needs. The swap should be designed to provide additional resources to the debtor country and enhance its fiscal space. If a swap only reduces a small portion of the debt burden, it may have insignificant indirect effects on the economy and environment. The swap’s terms must align with the debtor country’s current environmental and developmental policy goals and respect the country’s governing capabilities. The debtor country must have the policy and institutional infrastructure to execute the goals of debt-for-nature swap. 

Enforced and executed correctly, debt-for-nature swaps are viable solutions to address the climate and debt crisis. Debt-for-nature swaps need to be scaled in both size and number to achieve meaningful, lasting impact. 

Citations

Briceno, John Antonio, and Jennifer Morris. 2023. “The Debt-for-Nature Lifeline.” The Nature Conservancy. June 22, 2023. https://www.nature.org/en-us/what-we-do/our-insights/perspectives/debt-for-nature-lifeline/.

Cassimon, Danny, Martin Prowse, and Dennis Essers. 2011. “The Pitfalls and Potential of Debt-for-Nature Swaps: A US-Indonesian Case Study.” Global Environmental Change 21 (1): 93–102. https://doi.org/10.1016/j.gloenvcha.2010.10.001.

“Debt Swaps Could Release $100 Billion for Climate Action.” n.d. Accessed June 30, 2024. https://www.iied.org/debt-swaps-could-release-100-billion-for-climate-action.

“Global Risks Report 2024.” n.d. World Economic Forum. Accessed July 1, 2024. https://www.weforum.org/publications/global-risks-report-2024/in-full/.

Hebbale, Chetan, and Johannes Urpelainen. 2023. “Debt-for-Adaptation Swaps: A Financial Tool to Help Climate Vulnerable Nations.” Brookings. March 21, 2023. https://www.brookings.edu/articles/debt-for-adaptation-swaps-a-financial-tool-to-help-climate-vulnerable-nations/.

McCoy, Mary Kate. 2023. “How One South American Country Became a Lab for Conservation.” October 26, 2023. https://www.conservation.org/blog/how-one-south-american-country-became-a-lab-for-conservation.

Robards, Chester. 2024. “Bahamas’ First Debt-for-Nature Swap Could Be Finalized This Fall.” The Nassau Guardian. July 1, 2024. https://www.thenassauguardian.com/business/bahamas-first-debt-for-nature-swap-could-be-finalized-this-fall/article_096f6ac2-3714-11ef-beb8-cfbc3e3f12e0.html.

Whiting, Kate. 2024. “Climate Finance: What Are Debt-for-Nature Swaps and How Can They Help Countries?” World Economic Forum. April 26, 2024. https://www.weforum.org/agenda/2024/04/climate-finance-debt-nature-swap/.