Recent research by the global affairs think tank Overseas Development Institute (ODI) has revealed that the global energy transition faces a significant challenge due to the debt spirals associated with the extraction of fossil fuels in low- and middle-income countries.
Fossil fuel debt hampers transition
These debt-ridden countries are forced to promote oil and gas production to generate revenue for debt service. Unfortunately, this approach not only undermines efforts to combat climate change, but also fails to align with the growing demand for renewable energy.
The ODI study focused on the debt levels of 21 low- and middle-income countries over an 11-year period. The findings show that when oil and gas prices are high, these countries tend to increase their indebtedness as their creditworthiness improves. Conversely, they also borrow more when prices are low to ease the burden of declining income for their citizens.
During the study period, the debt levels of most oil and gas producing countries skyrocketed. Angola, Gabon, Mozambique, Venezuela, and the Democratic Republic of the Congo, for example, saw their debt as a percentage of GDP increase by more than 50 percentage points. Concessional lending declined while private lenders increased their lending, as seen in the case of Chad and Bolivia, experiencing a 75-fold increase.
The implications of climate change make the risks associated with oil and gas production even more pronounced. Higher average temperatures and the possible disappearance of export markets pose significant challenges. As global demand for fossil fuels declines and the cost of renewable energy continues to decline, the value of fossil fuel-related assets will decline as well. It is crucial that countries recognize these dynamics and adapt their strategies accordingly to ensure a sustainable and resilient energy transition.
Practical solutions to break fossil fuel debt cycle
According to the study, practical solutions are proposed to break the cycle of debt related to fossil fuels. These measures include actions by wealthier nations, such as debt relief or forgiveness, the establishment of international financial mechanisms that promote the transition away from oil and gas, and the offering of targeted concessional financing.
Reliance on fossil fuels as a means to borrow and manage debt poses a significant barrier to achieving the global phase-out of oil and gas. Tackling the problem of fossil fuel debt should be a top priority during the next Paris Committee, led by Emmanuel Macron and Mia Motley. This summit will discuss climate change and sustainability goals, highlighting the historical responsibility of higher-income countries and their governments and financial institutions in managing the public debt of many low- and middle-income nations.
“This study clearly underscores the need for rich countries to implement such development measures,” said Carlos López, visiting senior fellow at ODI and professor at the University of Cape Town’s Nelson Mandela School of Governance and chair of the Board of the African Climate Foundation.
Carlos added, “It is imperative to take these measures forward to help other countries to break free from the oil and gas trap. The equity aspect of the energy transition should not be seen as a mere feature, but rather as a foundation. Fair energy and equitable transition require provisions for debt relief or forgiveness for oil and gas-dependent countries, as well as financial arrangements that facilitate a phase-out rather than an increase in production. Stimulus in this direction is crucial.”
Breaking the vicious cycle
“Relying on earnings from oil and gas exports to bridge external debt risks driving countries into a vicious cycle of indebtedness and fossil fuel dependence,” said Ipek Gengsu, Acting Director of Climate and Sustainability at ODI. It also presents a challenge in ensuring an equitable energy transition.”We must employ new and innovative solutions to accelerate a fair and clean energy transition, and policymakers must quickly use these options, as this study demonstrates.”
Chantelly Stedman, Senior Research Officer at ODI, said: “As the urgency for action to stop climate change continues to grow, our study shows that the impact of oil and gas revenues on the countries covered in this research Gradual phasing out of over-dependent fossil fuel production is financially difficult. If the international community is serious about tackling climate change and development challenges together, it is essential that this month’s summit in Paris include this as a major issue.”
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