Spillover Effects: The Fossil Fuel-Debt Trap in the Global South
Rising debt distress and fossil fuel reliance are interdependent crises. Countries in Africa, Latin America, the Caribbean, the Middle East and parts of Asia are caught in a structural trap where governments are forced to prioritise short term liquidity and revenue over long-term transformation. A new report, Spillover Effects: The Fossil Fuel-Debt Trap in the Global South, outlines the ways in which high debt service obligations drive fossil fuel expansion while crowding out investments in renewable energy and hampering the ability of nations to respond to the impacts of climate change and deliver health and educational services.
A new report, Spillover Effects: The Fossil Fuel-Debt Trap in the Global South, demonstrates that the linkage between fossil fuel dependence and sovereign debt is systemic, not incidental. Released by the Fossil Fuel Treaty Initiative, MENAFem Movement For Economic, Development, and Ecological Justice, and Oil Change International, the report includes case studies of how this trend is playing out in five countries: Colombia, Egypt, Guyana, Jordan and Sri Lanka.
The escalating debt crisis confronting the Global South is a structural crisis rooted in historical patterns of extraction, unequal financing and imbalanced power relations. In 2024, this debt rose to an all time high of US$8.9 trillion and interest payments reached an unprecedented US$415.4 billion. Bottomline – more resources are going to servicing debt than to health, education, or climate action.
Countries are locked into continuing and/or expanding fossil fuel extraction to service debt. This means that for fossil fuel importing countries, oil and gas price volatility destablises trade balances and widens deficits. For exporters, commodity cycles and stranded asset risks expose public budgets to long term instability. Fossil fuels are also the biggest cause of climate-driven loss and damage which is escalating into trillions of dollars across the Global South. Millions of premature deaths and degradation to ecosystems due to fossil fuels add massive costs to lives and economies.
Spillover Effects unpacks the drivers of the fossil fuel-debt crisis and provides illustrations of how structural injustices are manifesting in Colombia, Egypt, Guyana, Jordan and Sri Lanka. The country case studies highlight the same dynamics are in play across contexts from import vulnerability to emerging fossil fuel production and crisis-induced default.
The report shows the global transition away from fossil fuels is incumbent on building fairness into the global macroeconomy by addressing unjust debt and unfair rules of the international financial system which are grounded in an extensive body of evidence. It offers five core recommendations for all levels of decision makers:
- International Financial Institutions and Multilateral Banks – Dismantle carbon lock-in and debt reproduction at the source. Implement debt cancellation; end all fossil fuel finance and realign portfolios towards transition-enabling public goods; reduce renewable energy costs through de-risking; and uphold human rights in lending.
- Global North Governments – Stop blocking the transition away from fossil fuels and be a genuine partner for macroeconomic and climate justice. Pay a fair share of climate finance through grants, not loans; end public finance for fossil fuels at home and abroad; lead on the transition with commitments through national plans and by accepting differentiated timelines across the Global South; stop blocking reform of the global financial system; reject false solutions such as carbon capture and storage; and facilitate free and open patent transfers for green technologies.
- The United Nations – Build multilateral rules for debt and transfer. Establish a binding mechanism on debt resolution; create a global public debt registry; and strengthen anti-corruption and public financial governance.
- Global South Governments – Seek and champion an equitable global pathway of transition that addresses fiscal and political constraints. Commit to differentiated, managed fossil fuel phase outs in national plans; replace fossil fuel revenues and manage transitional deficits; advance green industrial policy; mobilise national development banks and pension funds to finance the green transition; strengthen democratic control over debt and public finance; build collective power through South-South cooperation; and promote regional energy sovereignty through grid integration.
- All Decision Makers – Centre justice as an institutional and political process. Plan for a just and equitable phase out of fossil fuels. In addition, safeguard the energy transition through enforceable just transition frameworks that include procedural justice and democratic participation; labour protection and economic security; equitable access to energy and public services; prevention of new forms of extraction and financialisation; and institutional accountability for long-term planning.
Fossil fuel finance and sovereign debt are mutually reinforcing mechanisms of climate injustice. Escaping this trap requires coordinated transformation across global finance, debt governance and energy systems – anchored in justice and executed with political economic reform.