SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
Several years ago, the city of Guayaquil, Ecuador, opened a new aerial tramway. This is a system of floating gondolas that travels between Guayaquil and a neighboring city.
WAILIN WONG, HOST:
The tramway was pitched as a way to reduce emissions because people would ride the gondolas instead of driving. And the expectation was that 40,000 passengers would use the system every day.
WOODS: But that number turned out to be closer to 8,000 people a day. A television news program called "El Doce" recently dispatched a correspondent to check out the tramway.
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UNIDENTIFIED PERSON #1: (Non-English language spoken).
UNIDENTIFIED PERSON #2: (Non-English language spoken).
UNIDENTIFIED PERSON #1: (Non-English language spoken).
UNIDENTIFIED PERSON #3: (Non-English language spoken).
WONG: Anchor and the correspondent are saying, there's no one here. The reporter ends up riding one of the gondolas by himself. I got to say it's not, like, the most riveting broadcast.
WOODS: What do they call it - long television? - where you just kind of watch and chill out?
WONG: It's just vibes. It's just vibes (laughter).
WOODS: And for this relaxing experience, the city government borrowed almost $120 million from France for the project. A French company also helped build the system. So Guayaquil ended up borrowing money from France to pay a French company for gondolas that may not be cutting emissions by that much, given the low ridership. This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
WONG: And I'm Wailin Wong. Projects like this one are drawing scrutiny of how climate projects in lower-income countries get funded. Today on the show, we look at how the climate crisis is reviving a debate over how money should flow from rich to less-rich countries.
WOODS: When it comes to funding economic development in lower-income countries, whether it's a job training program or a new solar power grid, the money typically falls into two broad categories. It can be a grant, meaning it doesn't have to be paid back, or it can be a loan, which does need to be repaid - and usually with interest.
BELINDA ARCHIBONG: In terms of the general debate about loans and grants, which are better for - especially for developing countries, this is a very, very old conversation.
WONG: Belinda Archibong is an economist at Barnard College of Columbia University. She says one of the long-standing critiques of loans is that they often come with strings attached, like requirements for how the money gets spent. And Belinda says lenders have acknowledged these critiques and gotten better in the last couple of decades.
ARCHIBONG: We've come a long way since trying to do these types of strings-attached loans. But it's now become a debate that's reemerged in the era of climate financing.
WOODS: This has been a hot topic at the last few COP climate conferences. In 2022, rich countries agreed to create a fund called the Loss and Damage Fund. It would compensate lower-income countries for damage caused by climate change. And by last year, a number of countries had pledged more than $400 million.
WONG: Now, this is not the first pledge of this kind. Back in 2009, rich nations like the U.S., Japan and France committed to sending $100 billion a year to lower-income countries that need help dealing with the ravages of climate change. The wealthy nations reaffirmed their pledge in the 2015 Paris Climate Accord.
WOODS: In both cases, the Loss and Damage Fund and the hundred-billion-dollar pledge, money flows from a wealthy country to a less-wealthy country. But there is a key difference. The Loss and Damage Fund will provide either grants or what are called concessional loans. That's a jargon term that means financing with friendly terms, like low interest rates.
WONG: But that $100 billion pledge, the one reaffirmed in the Paris Climate Accord doesn't require such generous terms. The money could be in the form of grants, but it could also be in the form of loans that have higher interest rates.
WOODS: Jackie Botts is a journalist at Reuters. She worked with a fellow reporter at Big Local News, which is a journalism program at Stanford University. They looked into the money that was sent under this hundred-billion-dollar pledge over a period of five years.
JACKIE BOTTS: We found that wealthy nations have been finding creative ways to funnel some of their climate finance back into their own economies.
WONG: Here's one way that happens. Some of the loans required borrowers to hire or buy materials from companies based in the countries lending the money. Jackie says these kinds of requirements tend to make projects more expensive for the governments who are borrowing the money.
BOTTS: They're not allowed to consider cheaper contractors from other countries. They're also, in some cases, not able to develop local expertise because they end up being required to bring in a foreign company to build the thing.
WOODS: France loaned the city of Guayaquil money for the aerial tramway as part of this $100 billion pledge. There were no requirements of this kind, but a lot of the money flowed back to France anyway. The contracts to build the system ended up going to a French company, along with a Latin American company founded by a French citizen. These companies also operate the tramway, so they get the money from passenger fares.
WONG: Jackie says another way that wealthy nations are benefiting from climate loans is by lending money at market interest rates. That's instead of those much lower concessional rates that are envisioned with the Loss and Damage Fund.
WOODS: So for that aerial tramway in Ecuador, planning documents showed that the interest rate for the loan was expected to be nearly 6%. The average interest rate for a concessional loan is less than 1% according to recent data.
WONG: Jackie and her reporting colleague found in their investigation that over $18 billion of loans had market interest rates.
BOTTS: These high numbers of market-rate interest loans that we see contradict the spirit of the pledge, according to many of our sources.
WONG: The market-rate loans contradict the spirit of the climate finance pledge because it's wealthy nations that are largely responsible for emissions. The lower-income countries are the ones bearing the harm, but they're borrowing money from the wealthier polluting countries to address that harm. It's like I punch you in the face, and then instead of giving you money to cover your hospital bill, I loan it to you at 5% interest.
WOODS: I would not be happy with that deal.
WONG: What if I require you to go to the hospital that I own?
WOODS: You're doing pretty well out of this.
WONG: Oh, yeah. I'm making out like a bandit.
WOODS: Wealthy countries like the U.S. have pointed out that they do provide grants to countries, and they say that loaning money allows them to help fund big projects. But there's also an argument that loans essentially have no place in climate finance at all and that it should be primarily grants. Here's how Rishi Bhandary explains it. He's a researcher at Boston University's Global Development Policy Center.
RISHI BHANDARY: The climate-justice-oriented argument says, look, many of these countries have polluted so little, and they are facing the ravages of climate change primarily because a set of industrialized countries have polluted for so many years. And therefore, if you accept the principle that polluters have to pay, then it is incumbent on the polluters to have to pay up.
WONG: Another argument against loans is that many low-income countries are already struggling with big debt loads. They borrowed heavily to get through the pandemic, and now interest rates have been on the rise in the last couple of years.
WOODS: According to the U.N., nearly half of the world's population lives in a country that spends more on debt payments than on health or education. And when debt payments suck up a lot of resources, there is less money to spend on climate priorities, like reducing emissions or preparing for extreme weather events.
WONG: Rishi recently worked on a proposal that calls for the international community to lighten the debt burdens carried by lower-income countries. The idea is for these countries to negotiate friendlier repayment terms on the debt they already have. This will then free up what Rishi calls fiscal space. In other words, these governments can redirect money from interest payments to ambitious climate investments.
BHANDARY: If many countries are at risk of debt distress, many of them will not be super enthusiastic about increasing ambition, even though they may very well want to. It's really drawing that connection between how fiscal space is hemming in ambition, especially on climate action.
WOODS: This November, countries are going to meet in Azerbaijan for the COP29 climate conference. The intertwined debt and climate crises and who's going to foot the bill for addressing them are once again expected to be a big topic on the agenda.
WONG: This episode was produced by Cooper Katz McKim, with engineering by Neal Rauch. It was fact-checked by Sierra Juarez. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.
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