Opinion: Why debt swaps are failing the renewable energy transition

Debt swaps related to nature or climate goals have been on the rise in recent years, touted as a solution to the growing debt crisis and the severe lack of climate finance for vulnerable nations. However, while they seem attractive, these swaps often fall short of their promises, creating more problems than they solve. While the focus on debt swaps has primarily been on nature and conservation, there is also a growing trend toward debt swaps that free up some resources for renewable energy. The world needs an estimated $4.5 trillion annually by 2030 to transition to renewable energy at the scale needed to meet global climate goals. Yet the amount of climate finance actually delivered remains significantly lower, with rich countries providing around $116 billion to lower-income countries in 2022, meeting their deeply inadequate and arbitrary $100 billion per year promise for the first time, two years late and mostly via loans. Meanwhile, low-income countries, many of which are on the front line of the climate crisis, are experiencing the worst debt crisis in 30 years and spending much more on debt payments than addressing the climate emergency. “The international community must not be distracted by debt swaps, which fail to deliver systemic change. Instead, it must focus on real solutions that allow lower-income countries to lead their own renewable energy transitions.” --— Debt swaps that focus on or include renewable energy components claim to address both issues at once — this creates a false hope that debt swaps can address both nature conservation and energy needs. In fact, they often fall short of promises and create significant risks. The risks of renewable energy debt swaps A number of debt swaps related to renewable energy have taken place in recent years. For example, Egypt entered into a debt swap with Germany under its Nexus of Water, Food, and Energy program, which funds renewable energy projects. One of the biggest concerns surrounding debt-for-renewable-energy swaps is conditionality. These agreements are often tied to strict conditions that limit how freed-up resources can be used, reducing flexibility for governments to direct funds to the most urgent energy needs. This can lead to projects that favor private-sector interests over community-led renewable energy solutions. This reinforces power imbalances — placing decision-making in the hands of financial institutions and donor countries rather than the affected communities or governments. Another major issue is the lack of transparency and accountability. There is very little publicly accessible information on the impacts of such agreements related to renewable energy, making the impacts challenging to scrutinize and follow. Debt swaps may not always lead to long-term sustainable development if the projects are not carefully monitored and integrated into broader national strategies, yet monitoring this is incredibly challenging if information is not accessible and transparent. The same issues occur with regards to debt-for-nature swaps. For example, in an initial assessment of Ecuador’s 2023 debt-for-nature swap, communities, organizations, and conservation experts were not able to find any evidence of investments made toward protection, monitoring, and surveillance of marine conservation over a year after the deal was finalized. Debt swaps have a history of failing to engage meaningfully with relevant stakeholders. In Belize for example, the conservation impacts of the 2022 debt swap are being criticized by local communities and fishing communities due to a lack of transparency and meaningful community engagement. In Ecuador, Indigenous leaders have also said they have not been adequately consulted with regard to the country’s 2024 debt swap, despite financial organizations involved in the transaction claiming they have. While the main focus of these agreements is on freeing up resources for conservation goals rather than renewable energy, they highlight the problematic nature of debt swaps that do not engage in or meet local needs. Furthermore, there is a risk that these initiatives could prioritize large-scale, capital-intensive projects over smaller, decentralized renewable energy solutions, which may be more suitable for local contexts but often struggle to attract financing. The debt sustainability trap From the perspective of debt sustainability, debt swaps also raise concerns. Many countries are already facing a debt crisis, and need rapid and comprehensive debt cancellation to restore debt sustainability and fiscal capacity to respond to their populations’ needs. Yet debt swaps can be complex, long, and burdensome to negotiate, and sometimes come with high transaction costs for the participating government. Of Belize’s $553 million debt-for-nature swap, $86 million, or more than 15%, went on fees and intermediaries. Furthermore, debt swaps typically do not meaningfully reduce debt levels. In Seychelles’ 2016 debt-for-nature swap, for example, the country’s debt levels were reduced by $8 million — just 2% of the country’s total debt stock at the time. All of the resources freed up by the debt swap had to be used for conservation efforts, meaning there were no resources left over for other country-level needs, including other development priorities. For these reasons, debt swaps cannot be seen as a viable alternative to debt cancellation, and yet they continue to gain in popularity as more and more are implemented. The real solution: Climate finance and debt justice Instead of pursuing debt swaps, which are inefficient and often counterproductive, what is urgently needed is scaled-up, grant-based climate finance for renewable energy. Governments in the global south require unrestricted, direct financing that enables them to invest in energy infrastructure without adding to their debt burden. This means not only meeting but exceeding the overdue $1.7 trillion estimation needed by global south countries annually to meet clean energy needs and ensuring that financing mechanisms are just, accessible, and community-led. For many climate-vulnerable countries, debt cancellation is also critical. The upcoming Fourth International Financing for Development Conference in Seville, Spain, presents an opportunity for global leaders to deliver meaningful debt justice — including cancellation of unsustainable debt, allowing countries to prioritize climate resilience and the energy transition. The international community must not be distracted by debt swaps, which fail to deliver systemic change. Instead, it must focus on real solutions that allow lower-income countries to lead their own renewable energy transitions. The message is clear: Climate-vulnerable countries don't need more financial gimmicks. They need debt justice and real climate finance.