Kristin Hoel, Unsplash
Debt-For-Carbon: Using Carbon Credits For Debt Relief
Igor Shi shlov, et al., Environmental Defense Fund Fisheries & Aquaculture
The convergence of climate vulnerability and sovereign debt distress has emerged as one of the defining macroeconomic challenges of this decade. Across developing economies, rising climate change impacts are constraining fiscal space and raising borrowing costs, while limited access to concessional finance hampers investment in resilience and low-carbon growth. To bridge this gap, governments and creditors are increasingly exploring debt-for-climate swaps—transactions that reduce or restructure debt in exchange for commitments to fund adaptation and mitigation. Yet despite renewed interest, most debt swaps remain small, complex, and opaque, offering limited macroeconomic impact.
This discussion paper proposes an evolution of the instrument: integrating carbon credits— particularly those generated under Article 6 of the Paris Agreement or high-integrity voluntary carbon market programs—into sovereign debt operations. Carbon credits offer measurable, verifiable, and tradable metrics of mitigation performance that can strengthen the financial attractiveness and environmental integrity of debt-for-climate swaps. Embedding them in debt transactions can help streamline negotiations, improve transparency, and align fiscal relief directly with mitigation targets of nationally determined contributions (NDCs) under the Paris Agreement.
Read the full discussion paper here.
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