Numerous low-and middle-income nations are trapped in a vicious cycle due to an over-reliance on the exploitation of fossil fuels to pay debt
According to recent analysis by the global affairs think tank ODI, the global energy transition is in danger due to a debt cycle linked to the extraction of fossil fuels in low- and middle-income nations. Countries are encouraged to increase oil and gas output as debt payments rise in order to raise money to pay off their debt. This imperils efforts to reduce global warming and conflicts with the requirement to store newly discovered oil and gas underground.
As per ODI's study, which looked at the debt levels of 21 low- and middle-income countries over an 11-year period, countries increased borrowing both when oil and petrol prices were high because it improves creditworthiness and when prices were low because it helps avoid taxing citizens with the burden of declining revenues.
The analysis is released just one week before the Paris Summit on a new global financing agreement, which will address debt relief and climate finance.
Most nations that produce oil and gas had an increase in debt over the study's time period. Debt as a proportion of GDP increased by more than 50 percentage points in Angola, Gabon, Mozambique, Venezuela, and the Democratic Republic of Congo (DRC) during the analysed period. The amount of debt offered at favourable terms has decreased, and debt owed to private creditors has increased—by 75 times or more in Bolivia and Chad, for instance.
The hazards of producing oil and gas are obvious as a result of climate change, including both the potential for diminishing export markets and the catastrophic effects of rising average temperatures. There is a serious risk that stranded assets will cause significant losses to a nation. The value of fossil fuel assets will decrease as the world's demand for fossil fuels declines and the cost of renewable energy keeps falling.
This report does propose some doable strategies that could stop this deadly cycle, including international funding, debt relief, or forgiveness from wealthy nations, among other things.
Carlos Lopes, ODI Visiting Senior Fellow, Professor at the Nelson Mandela School of Governance, University of Cape Town and Chair of the African Climate Foundation Board opines, “This research clearly highlights the need for wealthy nations to foster development pathways that allow countries to wean themselves off oil and gas; to free themselves. Fairness isn’t a feature of the energy transition, it’s the foundation. Debt relief or forgiveness of countries beholden to oil and gas, and provision of financing arrangements that incentivise oil and gas-rich countries to phase out rather than expand production, are critically important for a just and equitable energy transition.”
The dependence on fossil fuels for borrowing and debt servicing is a significant obstacle to the global phase-out of oil and gas. At the next Paris Summit, which will be hosted by Emmanuel Macron and Mia Mottley and where international cooperation on financing to support climate and other sustainability goals is scheduled to be discussed, fossil fuel debt should be at the top of the agenda. This is crucial since historically, high- and upper-middle income countries—whose governments and financial institutions control the majority of the public debt of low- and middle-income countries—have been responsible for climate change.