Jan 20, 2023 - World

The global debt crisis is becoming a climate crisis

A solar project in Groenfontein, South Africa. Photo: Guillem Sartorio/Bloomberg via Getty Images

The global energy transition was near the top of the agenda at this week's World Economic Forum in Davos, Switzerland, whether it was the carbon-cutting potential of everything from green hydrogen to AI, or tensions between the U.S. and Europe over climate-related subsidies.

The flipside: Less discussed in the halls and in the sessions, at least the ones Axios attended, was the debt crisis in the developing world. But the link between those two issues will have lasting ramifications.

State of play: The global energy crunch exacerbated by the war in Ukraine led countries in Europe and beyond to revert to dirtier energy sources in the short-term while intensifying their efforts to secure alternative sources in the longer-term.

  • Meanwhile, the U.S. is offering huge incentives under the Inflation Reduction Act to develop everything from electric cars to green hydrogen in the U.S.
  • "I think we'll look back on this [crisis] and see that it did accelerate a transition toward clean energy," Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, said during an Axios event in Davos.

Yes, but: "The story, I fear, may be different in the developing world," Bordoff says. "And that is where most of the growth in carbon emissions from this point forward are going to come from."

  • 54 developing countries, accounting for nearly half the world's population, face such high debt burdens that without relief they have little hope of financing an energy transition, according to a report from the UN Development Program (UNDP).
  • Many of those countries are in Africa. "The continent will connect another 1.4 billion to 1.6 billion people to the global electricity matrix by 2050," UNDP administrator Achim Steiner told Axios during an interview on the sidelines of the forum.
  • That's a good thing. "Electricity is the fundamental driving variable of development," Steiner said. But as it stands, many developing countries are likely to struggle to supply sufficient energy of any sort in the coming decades, let alone from renewable sources.

Decisions from developed countries can actually exacerbate that situation.

  • Europe's scramble to secure enough energy for the winter drove up prices in developing countries. Some of the same countries that reverted to coal in 2022 have committed not to fund new fossil fuel projects overseas.
  • The irony is not lost on Pakistani climate minister Sherry Rehman, who noted at an Axios event in Davos that her country accounts for less than 1% of global emissions but is facing some of the worst effects of climate change.
  • "Even if we go totally green and totally renewable tomorrow, we will still be facing the impacts of extractive economic policies by others," she said.

What to watch: With a string of defaults possible in 2023, G20 countries are struggling to come to a coherent position on debt relief.

  • "I think it is fair to say that what we have witnessed over the last 36 months is an erosion of the capacity to act collectively," Steiner says.
  • Meanwhile, fears of a global recession could slow both public and private-sector climate investments in the developing world. Rehman is among those calling for the IMF and World Bank to be retooled to tackle that challenge.
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