New Discussion Paper Proposes “Debt-for-Carbon” as Next Evolution of Debt-for-Climate Swaps

Freiburg, Germany / New York, USA - Perspectives Climate Research (PCR) and Environmental Defense Fund (EDF) today announced the publication of a new discussion paper, Debt-for-Carbon: Using Carbon Credits for Debt Relief, which proposes debt-for-carbon swaps as a next-generation evolution of existing debt-for-climate instruments.

As climate-vulnerable countries across the world face rising debt distress alongside escalating climate impacts, the paper acknowledges that current debt-for-climate swaps-while politically visible-remain too small, complex, and lack transparency to deliver systemic impact. To address these structural weaknesses and unlock larger-scale, performance-based debt relief, the authors propose embedding high-integrity carbon credits into sovereign debt.

"Many countries are trapped in a vicious cycle where debt limits their ability to invest in climate action, while climate impacts further undermine debt sustainability," said Igor Shishlov, co-author of the paper and Managing Director for Climate Policy at Perspectives Climate Research, "Debt-for-carbon swaps offer a pragmatic way to break this cycle by linking debt relief directly to verified mitigation outcomes-making results-based climate finance possible without adding to countries' debt burdens or requiring new grant allocations from donor governments."

Carbon markets as a solution to core weaknesses of debt-for-climate swaps

The paper shows how carbon markets can help overcome the persistent challenges of debt-for-climate swaps by simplifying transactions, enhancing transparency and credibility and incentivizing larger swap volumes:

• Simplification: Using carbon credits as eligible assets for debt relief and common performance metric can streamline negotiations and align debt relief with countries' Nationally Determined Contributions (NDCs) under the Paris Agreement.
• Transparency and credibility: Established carbon market Measurement, Reporting, and Verification (MRV) systems provide standardized, independently verified climate outcomes.
• Scale: Carbon credits introduce a tradable, performance-based asset that can increase the financial attractiveness of debt swaps for creditors to incentivize more and larger transactions.

"Carbon credits-when they meet high integrity standards-can translate climate ambition into a concrete, tradable financial asset," said Holly Pearen, co-author and Lead Counsel for the Environmental Defense Fund's Carbon Pricing group. "They offer creditors measurable and verifiable financial and climate returns, while giving debtor countries a credible pathway to monetize mitigation outcomes."

Relevance for creditors, MDBs, and financial system reform

The paper is particularly relevant for sovereign creditors and debtors, multilateral development banks, and climate finance institutions seeking innovative tools to address the growing intersection of climate change and sovereign debt distress. By embedding carbon credits into debt restructuring, debt-for-carbon swaps could help align debt sustainability frameworks with global climate goals and support broader reforms of the international financial architecture.

The authors emphasize that success will depend on robust credit quality standards, legal clarity, and coordination between finance and environment ministries, as well as growing Article 6 readiness under the Paris Agreement. [TK: Forthcoming work will provide additional detail to guide implementation, expected in spring 2026.]

Download the paper

The discussion paper Debt-for-Carbon: Using Carbon Credits for Debt Relief is available for download on the websites of Environmental Defense Fund and Perspectives Climate Research.