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Answering the Call for a New Climate Finance Architecture in SIDS

Key Takeaways:

  • Climate finance instruments and mechanisms for SIDS require a tailored approach to reflect the unique challenges SIDS face, given the need to preserve the social, economic and natural systems that these nations depend on.

  • The multi-layered benefits of these financial mechanisms help SIDS beyond developing more sustainable economies. Debt-for-nature swaps, for one, also enable SIDS to reduce external debt while deploying finance toward national adaptation and mitigation programs.

  • The Bridgetown Initiative exemplifies how climate finance instruments can foster international cooperation and collaboration. By channeling financial resources and expertise, these collaborative efforts underscore a global commitment to supporting the sustainable development of SIDS and enhancing their climate resilience.


Climate Finance in SIDS

Building on the momentum from COP27 and looking forward to COP28 in 2023, the establishment of the Loss and Damage Fund marked a turning point for high-level international dialogue and negotiations for government leaders and key stakeholders.

Both the Alliance of Small Islands States (AOSIS) and Prime Minister of Barbados, Mia Mottley, made resounding cases for the loss and damage financing facility, emphasizing a new transformative outlook for climate finance as a whole in Small Island Developing States (SIDS).


The outcome of these annual meetings and discussions have indicated the reforms and policy adjustments needed for Parties to the UNFCCC to begin the implementation phase of climate action.


Finance Instruments and Mechanisms in SIDS


As previously discussed in the first blog of this series: Small Islands, Big Ambitions: Understanding Climate Finance in SIDS, many of these countries are prone to external shocks, given their unique geographic and economic circumstances. The state of emerging markets and developing economies across SIDS is evident to the access in which external sources of financial aid is needed to preserve the social, economic and natural systems that these nations so heavily depend on.


SIDS’ small and isolated economies often pose a range of challenges. The lack of any kind of economies of scale poses threats such as inflated costs of infrastructure and a lower volume of public services in the long-term development pathway. The absence of human capital for technical expertise and capacity due to smaller populations coupled with low financial resources makes mobilizing climate finance and delivering projects in a timely manner extremely challenging. Enhancing access, modalities and partnerships for climate finance is essential for exploring debt relief opportunities and building local capacity in-country through technical assistance and technology transfer.


An additional constraint on economic growth and sustainability stems from SIDS being classified as middle to high-income countries, thereby reducing or removing eligibility for concessional financing, which is only for countries that qualify for Overseas Development Assistance (ODA).


Grants and Concessional Loans


Both grants and concessional loans are among the primary climate finance instruments deployed in SIDS and are usually distributed through development banks, agencies, climate funds or bilateral partnerships. Concessional loans provide essential financial support without burdening these already economically constrained nations with high repayment obligations, while grants and technical assistance offer direct funding for climate-related projects, facilitating initiatives and project proposals.


Historically, concessional loans aim to offer favorable interest rates and longer repayment periods, making them more attractive and accessible for SIDS to finance projects that might have otherwise been financially prohibitive. However, a higher frequency of natural disasters and pressing issues about overcoming external and public debt still make concessional loans a less desirable financial instrument for SIDS. For example, several Caribbean SIDS are currently unable to access debt relief opportunities to spur recovery efforts. The Caribbean region has increasingly been marked by low economic growth and high external debt-to-GDP ratios and will require mechanisms such as the debt-for-climate or debt-for-nature swaps to reduce debt before planning to take on additional concessional loans. Another issue is that because many Caribbean SIDS hold relatively high GDPs from tourism and other flourishing industries, it disqualifies them from ongoing debt-relief opportunities and initiatives.


A country’s GDP is usually used as an indicator for climate finance needs, but in the context of SIDS, this metric lacks consideration of vulnerability and exposure to climate disasters. As a result, AOSIS recently proposed a multi-dimensional vulnerability index that covers the unique profiles of SIDS in order to requalify them for existing debt instruments. Over time, strong transparency and accountability through debt monitoring will be key for addressing constraints on domestic resources.


Additional Financing through Carbon Markets and Offset Projects


The carbon markets offer a unique way for SIDS to interact with the private sector and attract direct investments toward climate-related initiatives. Through carbon pricing mechanisms, SIDS can monetize their emission reductions by selling carbon credits to businesses, providing an additional revenue stream for SIDS.


For countries with significant forest cover, such as Guyana, the carbon markets can be extremely beneficial. Guyana has used carbon markets as a climate finance mechanism to fund its sustainable development and conservation efforts. By valuing its vast forest resources as carbon sinks, Guyana has been able to receive financial incentives for preventing deforestation and conserving its forests.


Another example of integrating carbon markets is Fiji’s REDD+ program in partnership with the Forest Carbon Partnership Facility (FCPF) where, by the Emission Reduction Payment Agreement, the Carbon Fund of the World Bank will pay Fiji carbon result-based payments of USD $5/tonCO2 totaling USD $12.5 million until 2024.


Multilateral and Bilateral Partnerships


Collaboration is a key driver for facilitating climate finance in SIDS. Multilateral and bilateral partnerships usually involve cooperation between governments, organizations and financial institutions to mobilize resources and technical expertise where necessary.


In particular, multilateral development banks can issue concessional loans and grants to leverage and attract additional private funding through blended finance mechanisms, further decreasing financial risks and improving risk appetite for private sector participation. Although the catalytic role of international cooperation and multilateralism has been central to underpin climate action, the private financial sector is essential in closing the investment gap, accelerating climate finance flows and transitioning to a low-carbon, climate-resilient economy.


These actors aim to ensure that SIDS receive support that aligns with their specific needs and priorities, enhancing their capacity access and managing climate finance effectively.


Initiatives for Empowering Resilience


Bridgetown Initiative


As one of the more recent climate finance announcements, the Bridgetown Initiative was made to be a collaborative effort aimed at addressing the unique challenges faced by SIDS in the Caribbean region. It focuses on various areas of critical importance for SIDS, including climate change adaptation, debt sustainability, disaster risk reduction and access to climate finance. By pooling resources, knowledge and expertise, the initiative aims to amplify the collective impact of these countries in addressing medium to long-term challenges.


The core focus of the Bridgetown Initiative is that existing global financing structure is no longer viable for SIDS nations. With ongoing debt spirals and increased susceptibility to climate change, the call for immediate reform was made to improve liquidity and fiscal space for low-income countries, including SIDS. In parallel, the reform also entailed an increase in multilateral development bank lending capacity and the potential suspension of debt with countries.


Debt-for-Nature Swaps


The developing economies of SIDS are not able to provide enough investment towards strengthening resilience, usually resulting in an inefficient budget for resilience, thus leading to the possibility of accruing debt. To address this, debt-for-nature swaps were created to help free up fiscal resources to reduce and prevent risks of a fiscal crisis. Creditors who participate in debt-for-nature swaps provide debt relief in return for a government to invest in climate-related projects. Barbados, Belize and Seychelles have already started using this resource.


IMF Resilience and Sustainability Trust


The International Monetary Fund (IMF) Resilience and Sustainability Trust (RST) is an additional source of climate finance that helps countries with limited financial resources. The RST is catered to assist vulnerable low-income and middle-income countries, as well as SIDS build resilience to external shocks. The IMF established the RST to make affordable financing accessible to countries in need of longer-term balance of payments stability. It provides SIDS with the opportunity to strategically plan their national budgets ahead of time to avoid accruing debt.


To counter the use of a country’s GDP as an indicator for debt-relief qualification, the RST screens SIDS against a vulnerability index, like the one designed by AOSIS. This is an excellent outcome for the Caribbean, where most countries are classified as middle-income countries, yet are as vulnerable as low-income countries to climate disasters.


Conclusion


There is an urgency for a new climate finance architecture that effectively responds to the realities that SIDS face. Moreover, the international community and SIDS nations have recognized that the current climate finance instruments and mechanisms are no longer effective or are wholly inadequate in addressing the climate crisis in SIDS. Therefore, it is imperative to rethink and diversify these instruments, transitioning from traditional grants and concessional financing to innovative approaches such as the debt-for-swap mechanism, particularly to address the pressing issue of SIDS accruing debt due to climate-related challenges.


Furthermore, while the initiatives resulting from annual COP negotiations are vital for fostering collaboration among SIDS, to maximize the effectiveness of financial resources directed towards SIDS, it is imperative for nations and development partners to refine the climate finance architecture. An evolution in this architecture is needed to better address the unique challenges and vulnerabilities confronted by SIDS.


 

CCAP stands committed to bolstering the resilience of SIDS in the face of the daunting climate challenges they confront. 

  • The Recycle Organics Program in the Caribbean (4) and Pacific (2) funded by Environment and Climate Change Canada (ECCC)

  • Supporting waste management and GHG quantification in the Maldives, funded by the Climate and Clean Air Coalition (CCAC) 

  • Support provided to the government of Seychelles for tracking climate finance in the energy sector funded by IRENA and the NDC Partnership

Recognizing the urgency and gravity of the situation, CCAP is committed to supporting SIDS. Our goal is to collaborate in close association with SIDS, leveraging our expertise in climate action and policy—specifically climate finance, carbon markets and methane mitigation—to catalyze tangible change. Through strategic partnerships, capacity-building initiatives and innovative solutions, CCAP seeks to foster a more equitable and sustainable future for SIDS, where their unique cultures, environments and aspirations can flourish despite the array of unique challenges faced. 

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CCAP’s mission is to support every step of climate action, from ambition to implementation. A recognized world leader in climate policy and action, CCAP creates innovative, replicable climate solutions, strengthens capacities, and promotes best practices across the local, national, and international levels to accelerate the transition to a net-zero, climate resilient future. CCAP was founded in 1985 and is based in Washington, DC.

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