The Architecture for a Debt-for-Climate Initiative

The Debt-for-Climate Initiative (DCI) is an effort to provide comprehensive debt relief for eligible countries to generate fiscal space for climate action. The DCI aims at achieving maximum creditor and debtor participation. The DCI consists of three pillars. The first pillar involves debt-stock relief for countries with an unsustainable level of debt and high climate vulnerability and risk of biodiversity loss. The second pillar provides debt flow relief by rescheduling debt maturities with or without coupon reductions for countries facing liquidity problems. The third pillar engages those countries not eligible under the first two pillars that have high climate vulnerability and risk of biodiversity loss through debt standstill agreements. All pillars include debt-for-climate swaps as well. To operation- alise the DCI, we propose a multi-level structure to involve relevant debtors and creditors. First, a Climate Investment Trust Fund will support debt swap operations, manage pro- ceeds from debt swaps, and provide financing for climate change projects. Second, swaps can also be managed directly at the regional and national levels through national climate funds or direct budgetary support. For debt relief, we propose two Climate Trust Funds be set up – one at the World Bank and one housed at the IMF – to cover the cost of forgiving debt owed by eligible countries to these organisations. Finally, we also call for a renewal and enhancement of the IDA Debt Reduction Facility to purchase debt owed by eligible countries to private creditors.