From Debt to Decarbonization: How Climate Swaps Are Helping Developing Nations Fund Climate Action

Meeting current climate commitments will require $8.6 trillion annually between now and 2030, and more than $10 trillion a year throughout the 2030s, according to the University of Cambridge’s Judge Business School. In 2024, global investment in the energy transformation reached a record $2 trillion, according to BloombergNEF. Yet this remains far short of what is needed, with only a fraction flowing to developing economies. 

These nations face a harsh paradox. They are among the most vulnerable to the effects of climate change, yet often least able to pay for adaptation or mitigation. Punishing debt burdens and shrinking fiscal headroom leave many unable to invest in flood defenses, clean energy, or nature restoration. Development aid is also in decline. In response, some governments are turning to debt-for-climate swaps, a mechanism that leverages financial restructuring to unlock investment in environmental resilience. 

A new global hub
In July, Spain and the World Bank unveiled the Global Hub for Debt Swaps for Development at the United Nations' Finance for Development summit in Seville. The initiative aims to help developing countries tackle debt burdens and climate vulnerability in tandem. The hub offers technical and financial assistance to governments pursuing debt-for-climate and debt-for-food-security swaps. Spain has committed €3 million ($3.54 million), while the World Bank has announced a multi-partner trust fund to finance advisory support and implementation.



 
How debt-for-climate swaps help
Conventional climate finance suffers three persistent flaws: it is slow to deploy, narrowly project-based, and skewed towards mitigation efforts in middle-income economies. Debt-for-climate swaps offer a different approach. A country refinances high-cost debt on better terms, often with support from development banks or conservation organizations. The resulting fiscal savings are committed to long-term investments in climate adaptation or environmental protection.

The concept is not new. Thomas Lovejoy of the World Wildlife Fund first proposed debt-for-nature swaps in 1984. But recent years have seen their evolution into more sophisticated instruments. As International Monetary Fund (IMF) Managing Director Kristalina Georgieva explains, “Creditors provide debt relief in return for a government commitment to, say, decarbonize the economy, invest in climate-resilient infrastructure, or protect biodiverse forests or reefs.”

The benefits are multi-layered: debtor nations reduce financial pressure, creditors recover value, and environmental groups secure measurable conservation outcomes. Around $6 billion in such swaps have been executed to date.

Belize: swapping bonds for blue conservation
In 2021, Belize completed a $364 million debt-for-nature swap with The Nature Conservancy (TNC), cutting its debt by 12% of GDP. The deal involved repurchasing $553 million in bonds at a 45% discount, with savings committed to marine conservation. Belize pledged to protect 30% of its ocean territory by 2026, doubling the size of its protected marine areas. A $23.5 million endowment will support funding beyond 2040. The transaction builds on a precedent set by the Seychelles and remains the largest marine-focused swap to date.

Barbados: resilience through water security

In 2023, Barbados completed the world’s first debt-for-climate resilience swap. Backed by $300 million in guarantees from the European Investment Bank and the Inter-American Development Bank (IDB), the deal refinanced $293 million in domestic bonds. It freed up $125 million for adaptation, focused on water infrastructure and pollution control. The loan includes sustainability targets, with penalties for underperformance. Prime Minister Mia Mottley called it “a model for vulnerable states.”

Ecuador: protecting the Galápagos

 
Ecuador executed a landmark $1.6 billion debt-for-nature swap in 2023, buying back debt for $644 million. Backed by the IDB and the U.S. International Development Finance Corporation (DFC), the deal created a $656 million “Galápagos Bond.” It will channel $323 million into marine conservation, including the Galápagos Marine Reserve and the Reserva Marina Hermandad. The Galápagos Life Fund will support biodiversity across areas home to 3,500 species, 25% of which are found nowhere else. Ecuador is now exploring similar deals for the Amazon.

A scalable model for climate finance?
Belize, Barbados, and Ecuador have shown that debt-for-climate swaps can align fiscal relief with environmental gains. According to the International Institute for Environment and Development (IIED), up to $100 billion in emerging-economy debt could be restructured for climate action. But scaling up requires more than isolated success. It demands stronger technical capacity, improved financial terms, and greater willingness among creditors. As Kristalina Georgieva notes, “The number and size of transactions must be scaled up significantly.”

The new Global Hub for Debt Swaps is a promising step. But as climate risks intensify, innovation must keep pace. By no means a panacea, debt-for-climate swaps can form part of the solution, offering a credible pathway for countries caught between fiscal constraints and a future climate catastrophe.