· 6 min read
Amid the push to decarbonize, one critical issue has been largely overlooked: the nexus between debt and decarbonization. Many countries in the Global South, already weighed down by existing debt, now face the daunting challenge of financing an energy shift they cannot afford to pay for – or ignore. In advance of the upcoming UN Financing for Development (FfD) Forum, attention is already turning to a broader systemic financing gap - estimated at $4 trillion annually - that threatens progress toward both climate and development goals. While technological advancements have made renewable energy more affordable than ever, costs remain prohibitive for many nations, with less than 15% of global clean energy investment reaching the Global South, resulting in missed opportunities to benefit from sustainable energy.
Public debt could be a powerful tool to finance this transition. Yet excessive or poorly managed debt undermines development goals. For instance, the African continent requires over $200 billion annually to achieve its sustainable energy targets by 2030 but receives just 2% of global clean energy investments. Meanwhile, public debt in the region has already exceeded $1.1 trillion; many countries have debt levels greater than 60% of their GDP. Alarmingly, the number of African nations with interest payments that exceed 10% of public revenue has more than doubled since 2010. By 2023, 54 developing nations, nearly half in Africa, dedicated at least 10% of government spending to debt servicing. These figures tell a disturbing story about the diversion of resources from essential sectors like health, education, and development, putting the future at risk.
If countries continue to rely purely on spending to reach their climate goals, the consequences could be significant. Debt could potentially soar by an additional 45–50% of GDP by 2050. Clearly, traditional financing models are no longer sufficient.
While the challenges are significant, a well-managed energy transition could become a pathway out of debt burdens, helping to build financial systems that can withstand volatility. Sustainable energy investments, when thoughtfully structured, can deliver economic returns that generate broader development gains. These pathways offer the potential to ease debt burdens, bolster fiscal stability, improve the balance of payments, and lay the groundwork for more resilient financial systems capable of withstanding future volatility. Much depends, however, on a comprehensive, forward-looking policy framework. What would this look like?
First, reforming fossil fuel subsidies is critical for a successful energy transition. In 2023, subsidies for fossil fuel consumption alone globally amounted to $1 trillion. Many measures from 2021 and 2022, introduced to offset high fuel costs, are still in place. It can be challenging to eliminate subsidies when people in the Global South rely on them for basic energy access or transport. Yet when subsidies are untargeted, they tend to disproportionately benefit wealthier individuals, who consume more energy, while offering limited support to those who need it most. Reforming these subsidies would free significant fiscal resources that could be redirected to clean energy investments.
This is especially important in a time of strained public budgets, where funding for worker retraining, education, health and social services is vital to securing public support for a just energy transition. Without such investments, the political and social backing needed to achieve climate goals may falter. UNDP's interactive simulator allows users to explore different scenarios for fossil fuel subsidy reforms. This tool helps visualize how reallocating a percentage of a country’s fossil fuel subsidies towards areas such as education, health and renewable energy can positively affect vulnerable populations and overall welfare.
Second, driving the energy transition while addressing debt challenges requires a well-designed public financing framework. It should integrate blended finance, innovative financial instruments and aim at strengthening economic resilience.
This requires moving beyond traditional lending institutions to explore innovative financing mechanisms. Public financing- for instance through national development banks or sovereign wealth funds - plays a pivotal role in reducing risks associated with energy transition projects, especially in the Global South where investment gaps remain substantial. By creating a favorable investment environment, public funds can also attract private capital to renewable energy initiatives. Blended finance structures are particularly effective in mobilizing private investments by combining public and private capital to mitigate risks and enhance project viability. These models can pool resources, offer concessional capital and scale up investments in renewable energy, particularly in underserved areas. Bond markets provide another avenue to raise capital for renewable energy projects. By enabling banks to recycle capital, bond markets can help finance new initiatives, expanding the reach and impact of sustainable energy investments.
Third, international cooperation needs to go beyond financial aid; it must help create equitable financing frameworks that reflect the needs of countries in the Global South. This includes advocating for debt relief that is directly connected to climate action, with international assistance contingent on measurable results. Partnerships with bilateral and multilateral donors should serve as catalytic platforms to help countries in the Global South attract investment in affordable, reliable, sustainable and modern energy for all. This includes addressing barriers to clean technology deployment, such as zero- and low-emission solutions and renewable energy; enhancing the role of multilateral development banks and international financial institutions through financing, policy engagement, technical advice; and knowledge sharing. For instance, the Clean Energy Solutions Center has supported over 90 countries with expert advice, capacity-building and resources to develop tailored renewable energy policies. Such collaborative initiatives highlight the vast potential for scaling up renewable energy by sharing knowledge and leveraging partnerships.
Innovative financing mechanisms, such as donor-backed guarantees and insurance, can make instruments like thematic bonds more attractive while reducing financial risks - particularly green, sustainability-linked or climate resilience bonds. Even more critical is to ensure that financial de-risking is undertaken by derisking platforms that can actually absorb the real and perceived risks in high risk markets. Through improving the risk-return profile, these mechanisms help attract private investors by covering potential losses or shielding against political and currency risks, channeling more private capital into renewable energy and climate-resilient projects in high-risk or underserved markets. Additionally, concepts such as debt-for-energy swaps offer a practical pathway where creditors agree to reduce debt in exchange for commitments to invest in renewable energy. Egypt’s €54 million debt swap with Germany funded renewable energy projects and offers a compelling example of how these mechanisms can align financial relief with climate goals.
It is time to recognize that debt is not just an economic issue. It is a climate issue, a justice issue, a development issue and ultimately, a survival issue. Without rethinking how we manage debt, any talk of a global green transition is at best incomplete and at worst, dangerously misguided.
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