Follow the money
16. Adaptation finance, debt-for-nature swaps, and moon dust
Note: The views expressed here are the author’s own and do not reflect the views of Energy Impact Partners.
Adaptation finance
In the climate community, the vast majority of time, money, and attention goes to climate change mitigation, while a comparatively tiny fraction goes to climate adaptation. I’m based in the US, so things may be skewed relative to the rest of the world, but I’ve speculated in the past that the balance is about 5% adaptation, 95% mitigation. That being said, I never had hard data to back it up; it was just a feeling.
Well it turns out that in late 2021, the Climate Policy Initiative put out some hard data in their report, “Global Landscape of Climate Finance.” Here’s the key graphic, a Sankey diagram of all climate finance, averaged across 2019 and 2020.
As a DOE alum, I love a good Sankey. After taking it in, here’s what stands out:
More than half of climate finance goes to energy systems – “renewable fuel production, renewable power and heat generation assets, transmission and distribution networks, as well as support to policy and national budget and capacity building.”
Climate finance is about half public, half private; there’s twice as much debt as equity finance; more project capital than equity capital.
Adaptation is indeed a small sliver (7%) compared to mitigation. My 5/95 guesstimate wasn’t far off. But it’s a small sliver of a huge pie! $46B is nothing to ignore.
The report helpfully breaks down adaptation finance further, which makes a few other things clear:
Adaptation finance is dominated by debt (72%) and grants (21%) rather than equity. This is characteristic of the type of adaptation happening today: concrete-and-steel adaptation, or in other words, building out stuff we already know how to build. On the other hand, balance sheet financing – the kind that VCs do – is virtually nonexistent.
98% of adaptation finance came from public sources.1
More than a third of adaptation finance went toward water and wastewater.
“Other” is such a large category (47%) that it’s virtually meaningless.2
To summarize, these capital flows look wildly different today:
What does this all mean? Well for one, adaptation finance is in early stages, driven more by necessity than by opportunity. It’s dominated by government and government-adjacent bodies, it’s a low-tech enterprise, and it’s somewhat poorly characterized. It’s a tragedy of the commons, an afterthought in the world of climate finance.
I tend to think this situation won’t last. Climate change is showing up in weird, nonlinear ways, and after the next few major climate shocks in major centers of finance, I think the community’s attention will turn toward adaptation. Look what happened in mitigation: the sky turned orange for a day in San Francisco and six months to a year later, dozens of new climate VC funds sprang up.
There’s reason to think we’re starting already. Over the past 10 years, adaptation finance has grown by 4x. In another 10 years, I think adaptation finance will be 10x what it is today, increasingly private, and increasingly active in equity and balance sheet financing. The Climate Policy Initiative seems to publish this report every two years, so we’ll see how this prediction turns out toward the end of 2023.
Debt-for-nature swaps
Let’s say you’re the IMF. Here’s a classic way you help countries restructure their debt:
A country determines it is insolvent and can’t service its debts. It is out of good options, so it comes to you.
Your team does some work and proposes a debt restructuring plan for the country. There are two key terms:
The country’s creditors agree to take a 45% haircut, because they’d rather get 55% back than nothing at all.
You provide policy recommendations to help the country return to good financial standing. To receive your funds, the country must agree to follow them. These are policies like “raise taxes” and “spend less,” which are painful and boring and don’t help leadership stay in office.
Nonetheless, the country negotiates a deal with the IMF and its creditors, then begins paying down its restructured debt.
Sure, the IMF takes its share of criticism, but the system mostly works. For the sake of the global economy, it’s worthwhile to have a lender of last resort.
But it’s not hard to imagine the non-financial terms becoming fairly ideological. You’re debating fundamental questions: What are the core economic issues for the country to resolve? What measures are necessary to address them? What is each party willing to give up to take those measures? There aren’t easy answers.3
Now let’s say you’re not the IMF, but rather a climate-motivated financier. You might throw climate-related terms into the negotiation. We’ll take a haircut on our debt, but only if the country agrees to do a better job protecting its oceans. That might be more palatable to everybody. It’s at least not a boring austerity program.
It turns out The Nature Conservancy has started doing just this:
Big global banks are eying some of the world’s most fragile countries for a new experiment in financial engineering: debt relief in exchange for environmental protections.
Called “debt-for-nature swaps,” they present a tempting solution for the rising number of nations in distress, particularly those with ecosystems to protect. A country gets to avoid default and lower its debt burden, as long as it’s willing to earmark some of the savings to salvage a coral reef, preserve a forest or build a wind farm, for example. Global investors get better returns and enhanced green credentials. Wall Street takes a cut.
As much as $2 trillion of developing country debt may be eligible for this kind of restructuring, according to a rough estimate by the Nature Conservancy, a US nonprofit that’s taking a lead role in these deals. Belize inked a $364 million nature swap in 2021; Gabon signaled plans for a $700 million restructuring in October; Ecuador is said to be working on a $800 million transaction, and Sri Lanka is considering a $1 billion deal.
TNC has been up to some interesting things lately. Back in November, we covered their role in an innovative form of disaster insurance. In this case, they’re bringing climate goals to the table in sovereign debt restructuring. Here are the mechanics:
The Nature Conservancy set up a Delaware-based subsidiary, Belize Blue Investment Company, and raised $364 million from Credit Suisse
BBIC loaned those funds to Belize so it could buy back $553 million in debt, at a 45% discount from bond holders
Credit Suisse, via a special purpose vehicle in the Cayman Islands, issued $364 million in blue bonds to finance the deal
Belize will pay back the new, smaller loan from BBIC over 19 years with an interest rate starting at 3% and rising to 6% in 2026. It must set up a $24 million conservation endowment, and commit to spending $84 million on conservation and to protecting 30% of its oceans
The US International Development Finance Corporation insured the BBIC loan, essentially putting the US government on the hook if Belize can’t pay
There’s a lot more to this in the article, including some concerns about high transaction costs and large spreads in borrowing rates. I’d encourage you to check it out if you’re into that sort of thing. But what I’m left scratching my head about is the incentives. They just seem a little odd to me.
For one, financiers need to monitor what’s happening in the country. When the thing to monitor is fiscal policy, it’s easy. But when it’s the performance of an ocean protection program, that’s harder and more subjective, or at least really different. Your incentive as the financier might be to over-zealously enforce the deal so that you can catch any slip-ups and extract more climate concessions.
Then there’s the issue of double-counting the same environmental asset across two deals. This has been an issue in forestry-based carbon offsets. You’d have to protect against that here. The cash-strapped country’s incentive would be to make the most of this environmental asset that others suddenly think is valuable.
And then you get to the fact that the conservation programs are mandated by external actors. If you’re Belize, how motivated are you to operate your $24MM conservation endowment efficiently? Your incentive is to do the bare minimum to keep TNC and your creditors happy. There are probably ways to get this right, but it seems tricky.
Last, in an overarching way, it seems like the climate financier’s incentive would be to keep countries insolvent. This would mean more environmental concessions! For this reason, it makes sense for a nonprofit to be in the driver’s seat. I’d be more worried if that weren’t the case, but I’m still a little worried.
I don’t know, is this really going to be a sustainable solution? I have some doubts. But you do have to hand it to them, it’s a creative idea.
Moon dust
Last month, we talked about the climate implications of launching lots and lots of rockets into space. The problem was black carbon – solid particulates resulting from the incomplete combustion of rocket fuel. At ground level, black carbon is an extremely potent global warmer, but in the stratosphere, there’s reason to think it might be a singularly potent global warmer. The high-level math looks pretty unforgiving.
But it doesn’t have to be the case that all dust in the upper atmosphere is warming. We’re just getting unlucky that black carbon is, you know, black. It absorbs light and re-emits the energy as heat. If black carbon were concentrated in space rather than the upper atmosphere, it might act more like a shade than a blanket. If black carbon were reflective, it might even be extremely cooling, not warming.
Well, some researchers have started thinking about this. A team at the University of Utah published a study exploring the idea of launching dust from the Moon into Earth’s orbit at high enough levels to block 1.8% of sunlight and make a dent in climate change. This is a bold new geoengineering scheme, so unsurprisingly, it caught the attention of a few reporters. The Washington Post published a piece on it, along with a long list of other publications. It even made the Post’s TikTok:
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The idea sounds crazy, but the team isn’t making any wild assumptions. The study just puts together pieces of information we already have. Here’s the abstract:
We revisit dust placed near the Earth–Sun L1 Lagrange point as a possible climate-change mitigation measure. Our calculations include variations in grain properties and orbit solutions with lunar and planetary perturbations. To achieve sunlight attenuation of 1.8%, equivalent to about 6 days per year of an obscured Sun, the mass of dust in the scenarios we consider must exceed 10¹⁰ kg. The more promising approaches include using high-porosity, fluffy grains to increase the extinction efficiency per unit mass, and launching this material in directed jets from a platform orbiting at L1. A simpler approach is to ballistically eject dust grains from the Moon’s surface on a free trajectory toward L1, providing sun shade for several days or more. Advantages compared to an Earth launch include a ready reservoir of dust on the lunar surface and less kinetic energy required to achieve a sun-shielding orbit.
Does anyone have ideas about how to move tens of millions of tons of dust from the Moon to Earth’s orbit? That seems to be the hard part. I’m guessing the asteroid mining folks might have something to say.
Elsewhere:
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Thanks for reading!
Please share your thoughts and let me know where I mess up:
This wasn’t clear from the graphic, but the report itself spelled it out.
The report defines the Others & Cross-sectoral category as “miscellaneous projects including policy and national budget support and capacity building, biodiversity, land and marine conservation, and disaster-risk management.”