This story was originally published in Foreign Policy.
AMBATO, Ecuador—Standing halfway up a hillside in the city’s outskirts, environmental engineer Andres Viteri Leroux peered down to a horizontal dirt shelf some 100 feet below. It was early December 2021, and he was visiting Ambato’s landfill. The dirt had been smoothed over years’ worth of waste like frosting on a cake, and dozens of narrow pipes poked upward from the flat surface like candles.
Heat-trapping methane rose out of the pipes and into the Andean mountain air. The greenhouse gas is a natural product of the waste’s decomposition. But when a hoped-for new landfill is finally built nearby, Viteri, who works for the city waste company, wants to instead capture the methane and use it to generate electricity.
“We can use it to power our own operations and sell it back to the grid,” he said. “And we could create dozens of new jobs in the process.”
On paper, Ambato’s proposed new eco-landfill is part of Ecuador’s official commitment to the United Nations to reduce its emissions and adapt to climate change by 2025, called a Nationally Determined Contribution (NDC). But there’s a catch: Unless an external funder steps in, this project might not be built at all. Neither the city nor the central government has money for it, so Viteri has spent over a year working on loan applications with at least four potential backers—one of them an international fund designed specifically for this type of project—with no luck.
Altogether, around half of the mitigation projects in Ecuador’s NDC are conditional on external support. The country is short an estimated $2.8 billion to finance the full plan, an environment ministry official told Foreign Policy.
Ecuador is not alone. In the wake of the COVID-19 pandemic, as rich countries have run huge deficits to launch public investment programs under mantras like “Build Back Better” and “The European Green Deal,” many countries in the global south have instead faced harsh budgetary restrictions that make green economic transitions harder to finance.
The constraints come from many sides. Even as the International Monetary Fund took some steps to give borrower countries budgetary space by issuing emergency loans and reserves that do not require repayment, the Bretton Woods institutions—as the IMF and World Bank are known—have stalled on plans for encouraging debt-for-climate swaps. These would involve creditors forgiving portions of a country’s debt in exchange for debtors redirecting would-be repayment money to environmental projects.
Many private and bilateral lenders have also shied away from major debt restructuring. Ahead of last November’s U.N. climate conference in Glasgow, Scotland, known as COP26, rich countries acknowledged they missed a benchmark target of providing climate finance to poorer ones—$100 billion per year by 2020. That money usually flows through multilateral development banks such as the World Bank and the Asian Development Bank, or multilateral climate funds such as the Green Climate Fund—where Ambato’s power-generating landfill project applied for a loan.
Against this backdrop, debt-saddled Ecuador has based its post-pandemic recovery plans around a target of doubling oil production in four years, by 2025. Oil is the country’s top export, and these revenues have historically been key to paying back foreign creditors. Conservative President Guillermo Lasso campaigned on the proposal in elections early last year.
Lasso’s government says it is simultaneously carrying out an “ecological transition” through steps like creating a marine reserve and seeking private investment for green energy projects, billing itself as a climate leader at a meeting of Latin American environment ministers in January. But environmental and Indigenous groups have fiercely criticized that characterization, even filing a lawsuit against an executive decree on boosting oil production.
Defending the oil target, Ecuadorian Environment Minister Gustavo Manrique said, “Within our ecological transition, we need to be able to meet basic needs in this country.”
In part, Lasso’s choice shows a hesitance to adapt as the world decarbonizes. But it is also evidence of how old status quos in global financial governance—including a glaring lack of climate finance—are holding developing countries back from green economic recoveries.
Ecuador faces a similar ticking clock to many other oil-exporting countries: Prices for renewable energy are projected to keep falling dramatically in the coming years and decades, and some economists predict that only the lowest-cost oil producers will be able to survive. In this scenario, Ecuador is unlikely to be among them: Its oil reserves are so close to spent that it could become a net oil importer within this decade, according to analysts at the government’s energy research agency. And as reserves wane, Ecuador’s oil could become much pricier to extract from the Amazon. Shifting the country’s economy away from dominance by oil would thus protect its financial bottom line in the medium to long term.
While Ecuador’s NDC explains how the country plans to pollute less, it does not lay out how Quito will replace its oil export earnings. Nor does it propose how people currently employed in the oil sector could make a living otherwise. Because of that, top officials in current and previous administrations have acknowledged that Ecuador’s green transition needs to go beyond simply carrying out the NDC and include boosting jobs in sectors other than oil, such as ecotourism, agriculture, and conservation.
At first, the COVID-19 crisis—and ensuing waterfall of stimulus packages passed by countries around the world—seemed like a potent juncture for Ecuador to do just that. Throughout the pandemic, high-profile global leaders have suggested that stimulus money pumped out by governments and development banks could facilitate decarbonization not only in rich countries but also in poor ones.
“We can steer toward zero emissions by 2050, and we can help create millions of new jobs,” IMF Managing Director Kristalina Georgieva said in October 2020. A few months prior, that July, the Inter-American Development Bank and the International Labour Organization released research saying that 15 million net new jobs could be created by 2030 in Latin America and the Caribbean as part of a net-zero transition. And in November 2020, G-20 leaders said that amid the recovery, they were committed to “building a more environmentally sustainable and inclusive future for all people.”
Georgieva’s words, in particular, carried weight, because the IMF often determines developing countries’ policy responses to crises when it acts as an emergency lender. The fund has a history of mandating the kind of strict budget cuts that would preclude any major new environmental investment.
In September 2020, a group of private foreign creditors restructured $17.4 billion in Ecuadorian debt on the condition that Ecuador would embark on a reform program with the IMF. Later that month, the IMF made a loan to Ecuador that would require the country to cut its primary deficit to 5.5 percent of GDP lower than its 2019 level by 2025.
The cuts required were dramatic: By comparison, a deal Argentina recently negotiated with the fund requires the country to reduce its deficit by only 0.4 percent of GDP over the same period. (In late 2021, Ecuador and the IMF revised their plan to cut only 4.5 percent.) Ecuador plans to implement its austerity measures though cuts to areas like government jobs and capital investments; this year, it slashed the budget for a public investment program that helped fund such projects as the Quito Metro in the past.
It’s not only private creditors and the IMF but also foreign government creditors that hold sway over Quito. When the pandemic hit, Ecuador owed around $7 billion to other countries, chief among them China. In February, the two countries agreed to explore debt renegotiation talks. Lasso’s government also proposed last year that creditors agree to a debt-for-nature swap in exchange for the preservation of a new ocean reserve around the Galápagos Islands. So far, no such swap has been agreed to.
Both debt and climate policy are set to be discussed at the IMF and World Bank’s spring meetings this week—though it is unclear whether they will announce institutional support for debt-for-climate swaps.
Given its tight fiscal restrictions, Ecuador carried out a pandemic stimulus program in 2020 that was among Latin America’s smallest. The social fallout of the crisis remains stark in the country. As of December 2021, unemployment and poverty had still not returned to pre-pandemic levels. According to the latest government data, only 31.7 percent of people in the Ecuadorian labor market have full-time jobs earning the minimum wage or higher.
Ecuador’s slow recovery has also led to levels of outward migration not seen in nearly 20 years—an explosive regional side effect. The net outflow of Ecuadorians totaled 81,758 people in 2021, according to government statistics. Many joined the Latin American exodus northward to the United States.
“Everyone wants to go,” said Silvia Alvarado, a parking lot attendant in Quito. “If I had the money, I’d go too.”
Because of Ecuador’s domestic austerity measures, many of the actions it is taking to green its economy are only possible with foreign backing.
Government officials are applying to the same pool of climate-related loans that Ambato’s waste company is courting. Quito is being advised by the Inter-American Development Bank about which kinds of green jobs to incentivize. And the French Development Agency is helping Ecuador create a long-term decarbonization plan that extends to 2050, versus 2025 for its NDC.
But the international support is vastly insufficient in scale, said Kevin Gallagher of the Boston University Global Development Policy Center. “If you flick off oil in Ecuador, there is going to be mass unemployment,” he said. “That adds a couple more zeros onto all this stuff. And the funding is not there.”
To Gallagher and Richard Kozul-Wright of the U.N. Conference on Trade and Development, part of the solution lies with the IMF and the World Bank. In December 2021, they released the book The Case for a New Bretton Woods, calling for those institutions to abandon austerity requirements and cooperate with other development banks to boost worldwide financing for just green transitions to the tune of hundreds of billions of dollars.
Barbadian Prime Minister Mia Mottley made a similar proposal at COP26, calling for the IMF to issue $500 billion per year in special reserves for climate finance. And some of the world’s biggest banks and asset managers said at COP26 that they were working on a plan to use public-private partnerships to fill the green finance gap for developing countries. Their announcement escalated the international debate over whether public or private finance is better suited to serve countries’ decarbonization goals. Hedge funds are not rushing to back Ambato’s proposed eco-landfill, for example, which could take years to turn a profit.
For now, all of those proposals remain on paper. SOAS University of London economist Amir Lebdioui told Foreign Policy that given Ecuador’s lack of financial options, extracting more oil in the short term in order to pay for renewable energy investments could indeed be part of a “coherent vision” for a green economic transition, as the government claims.
But it all depends, he said, on “whether they have a specific plan.”
While global financial flows are decisive in Ecuador’s ability to carry out a green economic transition, so too are domestic politics.
The country’s business elite have long been invested in its oil-centric economic model, as have presidents of all political stripes, including leftist firebrand Rafael Correa, who ruled from 2007 to 2017. Lasso, for his part, is a free marketeer who did not center environmental issues in his successful 2021 campaign or his two previous presidential runs. Once in office, his administration set a 2023 deadline for announcing its long-term decarbonization plan while in its earliest months overhauled regulations to attract oil investments—prompting criticism that a green transition is simply a low priority for Lasso.
“This is just putting green paint on the same thing that was being done before. There is no structural transformation,” said economist Alberto Acosta, a former Ecuadorian mining and energy minister under Correa.
Acosta told Foreign Policy that despite Ecuador’s tight budget, the central government could and should be taking stronger steps to develop green industries and boost small-scale agriculture. He also suggested Quito push back against IMF-imposed austerity requirements, which is what Argentina did to secure its more favorable deal.
Lasso is weak in Ecuador’s congress, where his party holds only 9 percent of seats. But opposition parties have not pushed a unified agenda around a green economic transformation, though Indigenous politician Yaku Pérez—who campaigned pledging to protect the environment—almost made it to last year’s presidential runoff, earning 19.39 percent of the vote in the first round of the election to Lasso’s 19.74 percent.
Instead, some of the most vocal advocates for a greener economy during Lasso’s administration have come from civil society. Engineer Inty Gronneberg successfully advocated for a provision in Ecuador’s November 2021 tax reform to make some investments in green start-ups and environmental projects tax-deductible. The proposal was inspired by Gronneberg’s experience getting his own start-up off the ground: His company, which removes plastic from bodies of water using barrier and turbine systems, benefited from early-stage funding from the British government while Gronneberg was a Ph.D. student in the United Kingdom.
In the Amazon rainforest, Indigenous Ecuadorians brought a successful lawsuit that may yet slow Lasso’s drive to expand oil drilling. The case at Ecuador’s top court, won by the A’i Kofan community of Sinangoe in January, increases Indigenous groups’ say in whether oil and mining companies can carry out projects on their lands.
“We know an economy that is not based on oil extraction is possible,” said Nixon Andy Narvaez of the Sinangoe community guard.
Indigenous Ecuadorians are pushing for a green transition in other ways as well. In early December, Narvaez met a group of Indigenous solar technicians on the banks of the Aguarico River near Ecuador’s border with Colombia. Using motorized canoes, they transported shimmering navy blue solar panels to their installation sites at two newly built community lookout stations. Without solar power, the stations would have used gasoline-fueled generators for electricity. Meanwhile, on the Pastaza River to the south, Achuar Indigenous communities have pioneered the use of solar-powered boats.
Both the A’i Kofan and the Achuar initiatives are currently supported by international nongovernmental organizations, as solar panels are not widely available in rural Ecuador. But they are a stepping stone to a wider ecosystem of solar power in the country: Ignacio Criollo, a A’i Kofan part-time solar technician who coached the Sinangoe guards through their installation, said that he hopes to study engineering and go on to a career in solar technology.
In Quito, Gronneberg continues to promote environmentally friendly legislation. He said that when he first shopped the green tax incentives proposal around to different political parties last year, they lacked “a clear understanding” of its potential.
Still, when they heard Gronneberg’s appeals, several parties got on board. Importantly, so did the minister of environment himself.
Civil society, Gronneberg said, will continue to push lawmakers to prioritize green development—“not as an alternative, but as the only solution we have.”