The debt and climate crises : Why climate justice must include debt justice

21 October 2022 by Tess Woolfenden , Dr Sindra Sharma Khushal

Cover image from Adobe Stock - Overview of three hurricanes Irma, Jose and Katia in the Caribbean Sea and the Atlantic Ocean - Elements of this image furnished by NASA.

The CADTM supports the following text, which shows the link between debt and climate crises and contributes some relevant ideas on this issue. However, we do not believe that radical changes such as debt cancellations will come from major international financial institutions such as the World Bank and the International Monetary Fund (IMF). The CADTM considers that these necessary changes will come from the people, from social movements, from a citizen public debt audits. Moreover, we do not consider the debt swaps system to be a solution and advocate for debt cancellations combined with reparations paid by former colonizing countries, imperialist ones and creditors for all the damages (including environmental ones) they have been causing in the Global South.

Without finance for addressing Loss and Damage, and adequate finance for adaptation, over the next 10 years we calculate that Sub-Saharan African countries will have to take on an additional $996 billion in debt - a 50% increase on current debt levels as a percentage of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.

The failure of global decision makers to adequately respond to the economic shock caused by the pandemic has plunged many global south countries further into a debt crisis that has been building for the last decade. Meanwhile, many of the same countries are on the frontline of the climate crisis, experiencing devastation from more frequent climate extreme events like tropical storms and droughts, to rising sea levels and increasing temperatures.

Countries need funds to address the climate crisis now. However, many global south countries are trapped repaying vast sums to their creditors every year, hampering their ability to respond to the mounting impacts and costs of the climate crisis. At the same time, extreme climate events and insufficient grant-based climate finance are forcing
indebted countries deeper into debt, keeping many locked in fossil fuel production, as the main source of income to guarantee debt service Debt service The sum of the interests and the amortization of the capital borrowed. payment, and creating a vicious cycle that can be impossible to escape. What’s more, climate finance itself continues
to push vulnerable countries into debt as over 70% is provided as loans. Countries which have done the least to create the climate crisis are stuck paying the most.

Global south governments, civil society and even key global institutions like the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
have been highlighting the links between debt and the climate crisis, including at COP26, but this has not translated into adequate action by decision makers such as the G7 and G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). .

To address the climate crisis, urgent action is needed on the debt crisis in the global south. This includes debt relief and new, additional and adequate grant-based climate finance, in recognition of the climate debt owed to countries in the global south by wealthy polluting nations for their role in creating the climate crisis from colonialism to the present day. This finance is absolutely necessary to support vulnerable countries as they attempt to adapt to the impacts of climate change, address the Loss and Damage arising from such impacts that have gone beyond what can be adapted to, and manage the climate transition.

The provision of climate finance from the global north to countries in the global south lies at the heart of the international cooperation framework for climate action under the UNFCCC and its Paris Agreement, and is enshrined in the principles of common but differentiated responsibility and respective capability (CBDR-RC) within the UNFCCC.

COP27 presents a vital opportunity to continue to raise the importance of the debt issue and its close and direct linkage to the climate crisis, ensuring it is factored into key decisions moving forward and to move decision makers beyond words to action.
While we recognise that the UNFCCC does not have the mandate to manage debt levels or provide debt relief, the UNFCCC does have the ability to ensure that climate finance provided (or not provided) does not force vulnerable countries deeper into debt to ensure the instruments and mechanisms deployed follow climate justice principles and are fit for purpose.

To address the climate and debt crises, wealthy governments such as the G20 and key institutions such as the International Monetary Fund and World Bank urgently need to:

  • Provide debt cancellation for all global south countries that need it across all creditors,
    including ensuring that private creditors take part, to free up resources for climate action and other national needs, and to insure that countries are not trapped in fossil fuel and other extractive sectors.
  • Cancel debt when climate extreme events strike. Suspend and cancel debt payments
    when a climate extreme event takes place, so countries have the resources they need for emergency response and reconstruction without going into more debt.
  • Provide significantly more, better-quality, new and additional climate finance so countries are not forced into more debt to pay for a crisis they did not create, including establishing and delivering on a new climate finance goal as a part of the New Collective Quantified Goal for climate finance, and a Loss and Damage Finance Facility.

You can find the full briefing here.

Source : Debt Justice



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