Debt-Fossil Fuel Trap

August 23, 2023

GS Paper III Environment and Ecology

Context:

Recently, a new report ‘The Debt-Fossil Fuel Trap’, was published by the anti-debt campaigners Debt Justice and partners.

The “Debt-Fossil Fuel Trap”:

It refers to a situation where countries, particularly those in the Global South, are caught in a cycle of heavy debt burdens and continued reliance on fossil fuel industries for revenue generation.

Key Takeaways from ‘The Debt-Fossil Fuel Trap’ report:

Global South:

The term “Global South” refers to a group of countries described as ‘developing’, ‘less developed’, or ‘underdeveloped’.
It refers to countries in Asia, Africa and South America.

Debt-Reliant Economies and Fossil Fuel Dependence:Poor countries burdened with heavy debts are compelled to rely on fossil fuel revenue to repay loans borrowed from wealthier nations, multilateral creditors like the World Bank and IMF, or private lenders.
- For Example: Argentina has been supporting fracking projects in the Vaca Muerta oil and gas field in Northern Patagonia to generate revenues to ease the country’s debt crisis. Notably, the IMF has also backed these projects.
Surging External Debt Payments in Global South:The external debt payments of Global South countries have surged by 150% between 2011 and 2023, reaching the highest levels in 25 years.
Debt Crisis and Constrained Public Spending:Around 54 countries are facing a debt crisis, resulting in reduced public spending during the pandemic to meet loan repayment obligations.
Climate Challenges Amplify Borrowing in Global South:Many of these indebted countries lack adequate resources for climate adaptation, mitigation, and addressing loss and damage, forcing them to borrow more money.
Natural Disasters Escalate Debt-to-GDP Ratio:After events like natural disasters, countries can see their debt as a percentage of GDP rise significantly, such as Dominica’s experience after Hurricane Maria in 2017.
Unfulfilled Pledges: Despite promises to discontinue investing in fossil fuels in Global South countries, richer nations and lenders continue to finance fossil fuel projects through loans, perpetuating fossil fuel production.
Resource Backed Loans (RBLs):Resource backed loans (RBLs) are a mechanism through which repayment is tied to natural resources or future income streams derived from those resources.

Recommendations for a Sustainable Path Forward:

Implementing ambitious debt cancellation for countries in need without economic conditions
Rejecting repayments from fossil fuel projects.
Aligning bilateral and multilateral finance with a 1.5-degree warming scenario while avoiding fossil fuel financing.

News Source: The Indian Express