Even in a one-country world, the link between climate and debt leads to complicated questions. However, the planet consists of many countries, each with its own interests and resource limitations. This creates an additional challenge related to aligning individual country interests with the global interest of limiting temperature rises.

This report discusses these challenges by focusing attention on how climate mitigation and adaptation is paid for, and who pays for it. This requires thinking about instruments such as sovereign bonds, carbon credits, conditional official grants, and debt relief from both public and private sources.

The report suggests that no single instrument is right for all countries or at all times and puts forward six proposals and policy recommendations that can jointly address climate change and debt sustainability by focusing on financial instruments as a means of incentivising and committing governments to do the right thing and providing fiscal space for climate investment in countries that could not otherwise afford it.

The Geneva Reports on the World Economy are published annually by CEPR and ICMB and have been providing innovative analysis on important topical issues facing the global economy since 1999. Global warming is already happening. The amount of CO2 which is already in the atmosphere has led to an increase in average global temperature by about 1°C over preindustrial levels. Scientists estimate that, at current emission levels, the remaining carbon budget, if the 1.5°C goal is to be reached with high likelihood, will be exhausted in less than eight years. Mitigating and adapting to climate change is both a matter of survival and of economic rationality. Investing in mitigation and adaptation will reduce the economic costs of climate change. In that sense, it saves money. But compared to an alternate world in which climate change does not exist, mitigation and adaptation will be expensive. Debt is needed to distribute the burden of climate action across generations. […]