According to a Reuters analysis of data from the United Nations and Organization for Economic Cooperation and Development, wealthy countries like Japan, France, Germany, the United States, and others are benefiting economically from a global initiative designed to assist the developing world in coping with the effects of climate change to the tune of billions of dollars.
The financial benefits are a result of wealthy nations’ commitment to provide $100 billion annually to developing nations so they may assist them combat climate change and cut emissions. More than a dozen climate finance analysts, activists, and former climate officials and negotiators told Reuters that wealthy countries defy the widely accepted idea that they should make up for their long-term pollution that caused climate change by reinvesting program funds back into their own economies.
According to a review by Reuters and Big Local News, a journalism program at Stanford University, wealthy countries have loaned at least $18 billion at market-rate interest. These loans include $10.2 billion from Japan, $3.6 billion from France, $1.9 billion from Germany, and $1.5 billion from the United States. That is not typical for loans for assistance projects, including those connected to climate change; these loans often have minimal interest rates.
Nearly majority of the additional $11 billion in loans came from Japan, and they obliged recipient countries to hire or buy goods from their businesses.
Furthermore, according to Reuters, at least $10.6 billion in subsidies from 24 nations as well as the European Union included similar requirements, requiring beneficiaries to engage businesses, organizations, or government agencies from certain countries—typically the donor—to complete the task or supply the necessary supplies.
Money intended for developing nations ends up returning to wealthier ones when climate loans are offered at market rates or aid is contingent on employing specific enterprises.
“From a justice perspective, that’s just deeply reprehensible,” said Liane Schalatek, assistant director of the Washington chapter of the Heinrich-Boll Foundation, a German research tank that favors environmental legislation.
Loans are preferred above grants by three of the top four contributors to climate funding
Japan, Germany, France, and the United States reported the largest contributions to developing countries in climate funding between 2015 and 2020. Representatives for climate money from these major nations assert that loans are suitable for big, revenue-generating projects in countries with robust economies.
The majority of climate loans are given to middle-income nations
Even though many of these nations already have enormous debt, more than two thirds of the climate money that middle-income nations got between 2015 and 2020 came in the form of loans. Climate finance specialists and climate officials for poor nations told Reuters that loan repayments limit the amount of money these countries can spend on essential social services and can hinder their capacity to anticipate and respond to catastrophic weather occurrences.
According to analysts, grants with restrictions requiring beneficiaries to use suppliers in affluent nations are less damaging than loans with similar requirements because they don’t need to be repaid. They said that in certain cases, where recipient nations lack the capacity to deliver a service, the agreements are even required. Other times, however, they help the economies of donors at the expense of developing countries. According to the climate and finance sources, such defeats the purpose of assisting vulnerable countries in building resilience and technological tools to deal with climate change.
Schalatek stated, “Providing climate finance shouldn’t be a business opportunity.” “Serve the needs and priorities of recipient developing countries” is how it should be put.
A large percentage of the grants and conditional loans that Reuters examined went toward the industrialized world’s commitment to donate $100 billion annually to less developed nations by 2020 that are disproportionately affected by climate change. The pledge was first made in 2009 and was reiterated in the 2015 Paris Climate Agreement. Between 2015 and 2020, payments totaling over $353 billion were made. The $189 billion in direct country-to-country transfers that made up this amount were the subject of the Reuters investigation.
Approximately 54% of the direct cash was provided in the form of loans rather than grants, which infuriates some delegates from heavily indebted poor countries like Ecuador. They argue that their difficulties, which are mostly the result of the industrialized world, shouldn’t require them to take on more debt.
Andres Mogro, the former national director for adaptation to climate change in Ecuador, stated that nations in “the global south are experiencing a new wave of debt caused by climate finance.”
Simultaneously, a number of economists stated that wealthy nations are exaggerating their contributions to the $100 billion commitment since some of their climate funding returns home in the form of interest, labor contracts, and loan repayments.
“The main goal of funding climate action in developing countries is disproportionately overshadowed by the benefits to donor countries,” stated Ritu Bharadwaj, principal researcher on climate governance and finance at the UK policy think tank, the International Institute for Environment and Development.
Wealthy countries justify their support for climate change
Speaking on behalf of the primary organizations in charge of overseeing climate financing for the United States, Japan, Germany, and France—the four nations that report the highest amounts of such money to the United Nations—representatives of these organizations stated that their decision-making process takes into account a country’s current debt load. They claimed to give help to the world’s poorest nations first priority.
According to a Reuters analysis, grants accounted for almost 83% of the climate assistance given to the lowest-income nations. However, compared to higher-income countries that mostly got loans, those countries also received, on average, less than half as much support for climate change.
Heike Henn, director of climate, energy, and environment at Germany’s Federal Ministry for Economic Cooperation and Development, said that “a mix of loans and grants ensures that public donor funding can be directed to countries that need it most, while economically stronger countries can benefit from better-than-market rate loan conditions.” Of the $45 billion in climate investment, 52% came from loans made by Germany.
Atika Ben Maid, the deputy head of the Climate and Nature Division at the French Development Agency (AFD), stated that the organization provides cheap credit rates to developing countries that are often exclusive to the wealthiest nations on the open market. France contributed $28 billion, the most of any country, with loans accounting for around 90% of the total.
”This is a classic example where a bad loan, which has been given to a country in the garb of climate finance, will create further … financial stress.”
Ritu Bharadwaj, principal researcher on climate governance and finance at the International Institute for Environment and Development
According to a spokesman for the US State Department, loans are “appropriate and cost-effective” for initiatives that generate income. Other kinds of initiatives in “low-income and climate-vulnerable communities” usually receive grants. Thirteen percent of the $9.5 billion in climate money granted by the US came from loans.
When asked if receiving market-rate interest and other financial rewards goes against the spirit of the climate finance program, the spokesperson responded, “It should also be emphasized that the climate finance provisions of the Paris Agreement are not based on’making amends’ for harm caused by historic emissions.”
The idea that rich countries should make up for past emissions is not explicitly stated in the Paris Agreement. It does make mention to the concepts of “equity” and “climate justice,” noting that nations have “common but differentiated responsibilities and capabilities” when it comes to addressing climate change. It is unambiguous that wealthy nations are required to contribute to climate financing.
According to Rachel Kyte, an Oxford University climate policy professor and the World Bank’s special envoy for climate change in 2014 and 2015, many read such phrasing to suggest that affluent countries have an obligation to assist in resolving climate-related issues that they have a disproportionately large part in producing.
However, the agreement lacked sufficient details. According to the commitment, countries should raise money for climate change using “a wide variety of sources, instruments, and channels.” It was not clear whether grants or loans should take precedence. It also didn’t stop affluent countries from enforcing conditions that benefited them.
The approach has been compared to “setting a building on fire and then selling the fire extinguishers outside,” according to Ecuador’s Mogro, a former climate negotiator for China and the G77 group of poor nations.
Large requirements, little money
44,539 records of climate finance donations submitted to the U.N. Framework Convention on Climate Change (UNFCCC), the organization in charge of monitoring the commitment, were examined by Reuters and Big Local News. The donations were made between 2015 and 2020—the most recent year for which statistics are available—and came from 34 nations as well as the European Union.
Countries are not required by the UNFCCC to provide important information about their financing. In order to find employment requirements connected to funding linked to climate change throughout the same time frame, reporters also examined 133,568 documents gathered by the Organisation for Economic Cooperation and Development (OECD).
The analysis verified that industrialized nations’ $100 billion pledge for climate finance included some conditional funding. Reuters was unable to ascertain whether or not all of this help was counted due to the UNFCCC records’ lack of specificity.
Reporters spoke with 38 analysts and scholars of climate and development finance, activists, former and present climate officials and negotiators for developing countries, and representatives of development agencies for wealthy nations to gain a deeper understanding of the funding patterns uncovered by the data.
As nations attempt to agree a new, higher objective for climate finance by year’s end, the Reuters findings are released. According to U.N. estimates, the Paris Climate Agreement’s goals, which included preventing the average global temperature from increasing more than 2 degrees Celsius (3.6 degrees Fahrenheit) over pre-industrial levels, will require spending at least $2.4 trillion year.
This expenditure is little compared to that. Rich nations most likely achieved the $100 billion yearly target in 2022 through bilateral assistance from development banks and climate funds, as well as direct payments from nation to nation. In addition to direct national payments, the OECD calculates that affluent countries channeled at least $164 billion (about 80% of which was lent) toward the climate finance promise via international organizations between 2015 and 2020.
Due to inconsistent reporting by multilateral organizations, Reuters was unable to ascertain what proportion of such loans had market interest rates or employment requirements.
According to a June 2023 Reuters investigation, at least $3 billion of the direct investment was allocated to initiatives that achieved nothing to assist nations in lowering emissions or protecting themselves from the effects of climate change. A coal plant, a hotel, chocolate stores, and other ventures with little to no link to climate initiatives received large sums of money.
A hole that gets deeper
Countries with high levels of debt are faced with a vicious cycle: paying off debt restricts their capacity to invest in climate solutions, and severe weather results in significant financial losses, which frequently pushes them to take out more loans. More than half of the 54 developing countries with the highest levels of debt were also determined to be among the most susceptible to the consequences of climate change, according to a 2022 research by the UN Development Program.
Climate loans of billions have been given to debt-ridden countries
Between 2015 and 2020, these ten highly indebted countries borrowed a total of $11.5 billion through climate financing loans.
Notwithstanding, other researchers contend that loans must be included in the equation for climate finance because the quantity of funding available for climate initiatives is still far short of what is required.
According to members of the European Commission, Japan, France, Germany, and the United States providing development aid, loans allow them to allocate far more funds to important projects than they could if they only depended on grants.
In interviews with Reuters, eight delegates who have worked on climate-related issues in developing countries stated that, considering the meagre resources wealthier nations have set aside for climate finance, they saw loans as essential to financing ambitious initiatives. However, they stated that going forward, promises ought to mandate wealthy countries and multilateral organizations to provide greater transparency on the conditions of loans and provide safeguards against loans that result in crippling debt.
The former World Bank climate envoy Kyte, who recently provided advice to Britain in climate discussions, stated, “The way the international financial system works at the moment… is to dig even deeper a hole.” “No more digging—we’re going to fill the hole and raise you up,” is what we have to say.
