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Debt-Fossil Fuel Trap Report

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August 28, 2023

Why in news?

Debit-Fossil Fuel Trap report shows that Global North-imposed debt is locking the Global South into fossil fuels.

What is the report findings?

  • Debt-Fossil Fuel Trap report has been released by the anti-debt campaigner’s Debt Justice and partners.
  • Global South- Global South is a term used for developing, less developing and underdeveloped countries, located in Africa, Latin America, and Asia.
  • Global south countries are currently spending 5 times more on repaying debt than they are on addressing the impacts of the climate crisis.
  • Increase debt- The revenue from fossil fuel projects are often overinflated and require huge investments to reach expected returns, leading to further debt Revenues from such projects.
  • External debt payments- The money borrowed from richer countries, or multilateral creditors like the World Bank and IMF, or private lenders such as banks has risen by 150%.
  • Cut on public expenditure- Around 54 countries are in a debt crisis, they had to cut public spending during the pandemic to repay loans.
  • Climate change-Extreme weather events force countries to borrow more money for adaptation and mitigation efforts.
  • For example Dominica’s debt as a percentage of GDP rose from 68% to 78% after Hurricane Maria hit the island in 2017.

debt trap report of global south 1

  • Extract fossil fuel - It is seen as a means to generate revenue and to reduce debt for countries in the global south
  • Argentina- It supports fracking in Vaca Muerta oil and gas field in Northern Patagonia to ease the debt crisis.
  • This project is also backed by International Monetary Fund.

Debt trap report of global south 2

  • Saviour of foreign currency- Through this foreign currency could be saved by supplying oil and gas domestically while additional foreign currency can also be generated.
  • Environmental catastrophe- Fracking is a drilling method used to extract oil or natural gas from deep in the Earth’s surface.
  • It leads to greenhouse gas leak like methane, air pollution etc.,
  • Huge investment- It requires large-scale investment of investment for Argentina.
  • The country’s strategy to reduce debt may end up adding to debt levels without generating adequate revenue to repay.
  • External support- Despite many assurances, to stop investing in fossil fuels in global south countries, richer countries have financed fossil fuel projects.
  • The financing is done through loans, adding to debt burdens and keeping countries locked in fossil fuel production.
  • Resource backed loan-It is a loan contract in which the repayment is made
    1. Directly in natural resources such as oil and minerals.
    2. Resource-related future income stream.
    3. It is guaranteed by a resource-related income stream.
    4. Collateral natural resource asset.
  • Example- In Surinam, creditors are entitled to 30% of oil revenue until 2050, incentivizing continued oil exploitation.

What are the key recommendations of the report?

  • Ambitious debt cancellation- Implement comprehensive debt cancellation for countries in need, across all creditors, free from economic conditions.
  • Transition to clean energy-      Encourage the adoption of clean and renewable energy sources to reduce dependency on fossil fuels.
  • Government support-      Wealthy governments and institutions should play a role in supporting countries to exit the debt-fossil fuel trap.
  • Sustainable Development- Promote sustainable development strategies that prioritize environmental protection and economic stability.
  • SDG 7- Ensure access to affordable, reliable, sustainable and modern energy for all.
  • Curb external support- Bilateral and multilateral finance should be aligned with a 1.5-degree warming scenario and fair shares calculations, and not be used to finance fossil fuels.
  • Climate finance- There is a need to scale up grant-based, new and additional public climate finance that fosters environment and social sustainability.

References

  1. Indian Express- Fossil fuel reliance by poor countries
  2. Debt Justice- Debt Fossil Fuel Trap Report
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