Addressing the Twin Crises of Debt and Environmental Sustainability: Lessons from COP28

by Zoraiz Zafar, ’24

In the backdrop of the COP28 conference, a pressing issue that emerged was the twin crises of debt and environmental sustainability, particularly in developing countries like Pakistan and Sri Lanka. This essay explores the intricate relationship between these crises and proposes a nuanced approach to addressing them, drawing from the rich tapestry of discussions and experiences at COP28.

Developing countries are increasingly grappling with the dual challenge of environmental degradation and burgeoning debt. Pakistan, for instance, has been hit hard by climate-induced disasters, exacerbating its already precarious economic situation. The devastating floods and heatwaves 2022 have not only caused immense human suffering but also strained the country’s financial resources. Similarly, Sri Lanka’s recent economic turmoil and its vulnerability to torrential storm damage underscores the fragile balance between environmental and fiscal stability.

The first step in addressing these crises is acknowledging that they cannot be resolved solely through increased spending. While financial resources are crucial, the focus must also be on revenue generation and innovation. This was a recurring theme at COP28, where discussions often centered around sustainable economic models and pioneering ideas that do not compromise environmental integrity.

A key aspect of this approach is ensuring that climate-related projects are ‘bankable.’ However, the traditional definition of bankability, often centered around private financial returns, needs reevaluation. At the Asian Infrastructure Investment Bank session on ‘Pathway to Net Zero Incentives and Carbon Markets,’ the concept of bankability was discussed in the context of carbon markets and climate finance. It became clear that cost-benefit analyses in these projects often overlook the social benefits, an aspect crucial for developing countries.

To address this, developing countries should seek partnerships with Multilateral Development Banks (MDBs) and local private companies and innovators. This approach was exemplified in discussions at the World Bank and AIIB (Asian Infrastructure Investment Bank) pavilions, where the focus was on collaborative models that distribute risks and rewards more equitably. Such partnerships can lead to ‘socially bankable’ projects that not only yield financial returns but also deliver substantial social and environmental benefits.

The Finnish pavilion provided a compelling example with their advocacy for using the Baltic region’s hydrogen power generation capabilities. This initiative, while environmentally beneficial, also faces demand-side constraints, as was highlighted by a McKinsey consultant. This scenario underscores the need for projects that balance environmental sustainability with economic viability, with the combined influence and will of government entities and private collaborators to enact real change.

Moreover, the concept of ‘socially bankable’ projects was further reinforced during discussions on Public-Private Partnerships (PPPs) at the World Bank event on ‘Private Sector Mobilization for Climate.’ The Jamaican Minister of Finance emphasized the importance of resilient infrastructure in the face of increasing natural disasters, a concern particularly relevant for small island nations with limited global visibility.

The experience at COP28 also highlighted the importance of innovative solutions in addressing these crises. For instance, the session on ‘The Future of Financing Partnerships for Energy Transfers’ by the AIIB underscored the need for realistic pathways to net zero, emphasizing the role of the private sector in forgoing some private profits for greater environmental good.

In conclusion, the twin crises of debt and environmental sustainability in developing countries demand a multifaceted approach. The lessons from COP28 suggest that a combination of fiscal prudence, innovative financing models, and socially responsible investment can pave the way forward. Developing countries must leverage partnerships with MDBs and local innovators to embark on projects that are not just financially bankable but also socially and environmentally beneficial. This approach not only addresses the immediate challenges but also lays the foundation for a sustainable and resilient future. As we move forward, new questions arise: How can we further refine the concept of ‘social bankability’ to include and quantify broader societal benefits? And through what mechanism can we ensure that these innovative financing models are accessible and equitable for all developing countries? These are the questions that will shape our path in the ongoing fight against the twin crises of debt and environmental sustainability.

References Cited:
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in Developing Countries

2. UNFCCC. 2023. SB008-SD Tool input from Sustainable Development Initiative

3. Marrakech Partnership for Global Climate Action. 2023. Roundtable Discussion on the Objectives of the Sustainable Debt Coalition and a Task Force on Sustainability-Linked Sovereign Financing for Nature and Climate

4. Tibulca, Ioana-Laura. 2021. Debt Sustainability: Can EU Member States Use Environmental

Taxes to Regain Fiscal Space?

5. Wall Street Journal Editorial Board. 2023. The Truth About Net Zero, at Last.