Chronicle of a debt foretold: Green debt strategies in a fossil fuel-dependent economy

Sovereign debt burdens constrain green investment in fossil-fuel-dependent economies through two compounding channels: debt service obligations and external vulnerability. As the world’s fifth-largest coal exporter, Colombia illustrates this challenge. Oil and coal account for nearly 60% of foreign-currency revenues and 20% of fiscal revenues, interest payments on public debt are nearly 30 times larger than public expenditure on environmental protection. We analyse how the design of environmentally conditioned debt instruments shapes the macroeconomic conditions under which such an economy can finance a green transition. Using a calibrated macro-financial Stock-Flow Consistent model of Colombia (GEMMES) combined with multi-objective robust decision analysis, we evaluate four instrument classes — concessional green loans, local-currency bond issuance, interest rate renegotiation, and principal cancellation — and their combinations across 12 macroeconomic indicators, including fiscal, external, financial, and productive dimensions. Principal cancellation yields the largest and most persistent gains in fiscal space for green investment, appearing in over 80% of Pareto-optimal strategies even under adverse market reactions. Unlike interest relief, it reduces debt-service obligations in perpetuity rather than deferring them. Local-currency bond issuance proves to be efficient at containing external vulnerability. The most robust strategies systematically combine these two instruments, pointing to a structural mismatch between the bilateral swap agreements favoured by international creditors and the instrument mix supported by macroeconomic evidence. Importantly, we find that no single instrument can close the green investment gap, underscoring the role of complementary industrial and export diversification policies.