There is a global drive for countries to increase environmentally sustainable practices that are beneficial to the global community’s goal of net-zero emissions. At the same time, the debt of many developing countries continues to increase as they accelerate structural transformations – oftentimes experiencing 3-5x debt growth over the past decade. This debt is issued by public entities, such as World Bank and bilaterally via governments, and private creditors, such as commercial banks. In recent years, the payments required to service debt obligations has become disproportionate relative to the GDP of the countries.
It has become a challenge for developing countries to finance projects that promote environmental sustainability and other infrastructure programs. This blog post further explores how the financial benefit to a country could be maximized in return for their continued support and participation in carbon reduction and removal programs.
At Xalte, we believe developing countries should be rewarded for their contribution to the transition to green economies and the sustainability of our environment.
One approach is to benchmark a financial value to the carbon credits generated within a country with direct application to the existing debt burden based on:
Alleviating the debt burden of developing countries enables investments in other transformational areas within their economies.
Accounting for all carbon credits and carbon offsets generated within a country is a way to guarantee direct impact to the country – maximizing the financial impact derived from participation in the environmental industry.
An approach to is to catalog all carbon credits and carbon offsets that are issued for projects within the borders of a country. Examples of these carbon credits include:
The financial value could be calculated with consideration for the type of credit and the operating entity. In today’s complex carbon ecosystem, private corporations that own and operate carbon removal projects are issued credits without maximizing benefit to the country where the project is located. Other projects may be directly funded and executed by a governmental organization. Our proposed solution maximizes the monetary impact to the country’s outstanding debt for all credits originated within the respective country.
One approach is to include a predetermined, fixed price to the carbon credits that would be based on the credits categorization and used exclusively for debt payments. For example, a nature-based credit for reforestation may include a $2.50 premium for debt relief in comparison to a Biochar credit that may include a $10.00 premium.
If the buyer of the carbon credit pays the cost premium, the premium amount could be remitted directly to the government and used to paydown their debt obligations. This may be viewed as a fee-based tax associated with credit generation and sale. This would be comparable to the value premium on carbon credits that meet United Nations Sustainable Development Goals (SDGs) due to their secondary benefit.
Alternatively, a buyer may not pay the premium that is allocated to paying down debt. In this case, the World Bank could formulaically value the credits generated and use the output for debt forgiveness. This approach creates an incentive structure for designated countries to participate directly in the carbon markets and promote projects that provide emissions reductions and removals in their countries.
In both cases, participating countries would benefit from all credits generated within their borders.
Xalte is excited to progress discussions with the World Bank Group and International Monetary Fund at the upcoming Annual Meetings from October 21-26, 2024 in Washington, DC.
In parallel, our team continues to interact with several African countries on ways the carbon ecosystem could maximize financial benefits within their countries.
