Portugal to use Cabo Verdean debt to fund climate and energy transition

Politics and Society

Portugal to use Cabo Verdean debt to fund climate and energy transition

In a “debt-for-nature” swap agreement between Portugal and Cabo Verde, the former has agreed to reinvest every paid instalment of the 600 million euros owed back into the African country. The funds will be channeled towards Cabo Verdean efforts for climate and energy transitions.

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Wind turbine, solution. Original public domain image from Flickr/CC0 1.0 Universal (CC0 1.0) Public Domain Dedication

According to the Climate Change Knowledge Portal, climatic models ran during the National Adaptation Programme of Action (NAPA) assessment show that Cabo Verde´s natural vulnerabilities, along with their social and economic implications, are very likely to be exacerbated by climate-related disruptions in the coming decades. These include more frequent extreme events like storms, floods, and droughts, as well as shorter rainy seasons, with immediate impacts on livelihoods, infrastructure, sanitary conditions, recharge of reservoirs, and crop productivity.

Further climate research by the IMF adds that countries such as Cabo Verde that are the most vulnerable to climate change—and the associated loss of natural biodiversity—are often those least able to afford the investment to strengthen resilience. This is because their budgets are burdened by debt, leaving them at a high risk of fiscal crisis.

As it stands, the archipelago of islands, off Africa’s west coast, owes Portugal over $600m, $13m of which is due for repayment by 2025. It also stands to lose 0.1% and 0.27% of per capita GDP by 2030 and 2050 if the Paris Agreement is not met. Because of this and its increasing climate vulnerability, the government has been working to build resilience through investments in the blue economy, reforestation, and restoration of environmental ecosystems. It is also promoting a ‘just energy transition’ through renewable energy investments. However, the country’s climate financing requires a staggering approx. €2 billion for projects to actualize.

Debt for Nature or Climate swaps

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Debt-for-climate swaps and debt-for-nature swaps are meant to help free up fiscal resources so that governments can improve resilience without triggering a fiscal crisis or sacrificing spending on other development priorities. The mechanics are that large creditors provide debt relief in exchange for the relevant government’s commitment to climate and energy transitions e.g., decarbonizing the economy, investing in climate-resilient infrastructure, or protecting biodiverse forests or reefs.

Photo: Renewables Hub Africa

These finance instruments have existed in various forms for decades, and more countries are considering them following recent agreements in Barbados, Belize, and Seychelles. They offer a solution to an issue that plagued leaders at the COP27 summit- who is responsible for funding the global fight against biodiversity loss and climate change?

Nature-rich countries are ideal candidates for debt swaps or blue bonds, at a time when a growing number of investors are clamouring to meet Environmental, Social, and Governance (ESG) and net-zero goals, and a push to get nature into sovereign debt markets are underway.

Portugal backs climate efforts in Cabo Verde

Portugal has signed an agreement to swap Cabo Verde’s debt for investments in an environmental and climate fund that is being established. Portuguese Prime Minister Antonio Costa said in a press statement that initially, €12 million of debt repayments to the state scheduled until 2025 will be put in the fund, and ultimately “the entire amount of debt repayments” will end up there, allowing Cabo Verde to invest in energy transition and the fight against climate change.

“This is a new seed that we sow in our future cooperation. Climate change is a challenge that takes place on a global scale and no country will be (environmentally) sustainable if all countries are not sustainable,” Costa said during a state visit to Cabo Verde in remarks broadcast by RTP television.

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Although he did not specify if debt to Portuguese companies was part of the deal, he did express hope that companies “will also be involved in the various areas from energy efficiency to the production of renewable energy” or storage of green hydrogen.

Cabo Verde Prime Minister Ulisses Correia e Silva also iterated that his country needed to urgently enable mechanisms and financing instruments to support such solutions and deal with natural emergencies.

By 2030, the country aims to have more than 54% of the energy produced from renewable energies.

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