US Will Oppose Fossil Fuel Projects at Development Banks

By: Jake Schmidt, Senior Strategic Director for International Climate, Natural Resources Defense Council; Steve Herz, Senior Attorney for International Climate and Policy Campaign, Sierra Club

The Biden administration released new guidance that will lead the U.S. to oppose fossil fuel projects at the Multilateral Development Banks (MDBs). Effective implementation of the U.S. Treasury Department “Fossil Fuel Energy Guidance for Multilateral Development Banks” will require the U.S. to oppose fossil fuel projects at the World Bank Group, Asian Development Bank, African Development Bank, and InterAmerican Development Bank, except in extremely rare circumstances. This will help shift the financing from these publicly funded institutions away from fossil fuels and towards the clean energy future necessary to hold temperatures below 1.5°C.

This Treasury guidance is a first step in the implementation of the U.S. Climate Finance Plan, which directs agencies to “seek to end international investments in and support for carbon intensive fossil fuel-based energy projects [emphasis added].” The Treasury Department oversees the multilateral development banks so this guidance will regulate the U.S. “voice and vote” at these institutions. It is a part of the effort to ensure that the U.S. establish a “Clean Growth First” policy for overseas public investments, which is an important component of having a climate-centered U.S. foreign policy. As the saying goes: “put your money where your mouth is”.

This Multilateral Development Bank Guidance Matters

A recent report from the International Institute for Sustainable Development (IISD)—Step Off the Gas: International public finance, natural gas and clean alternatives in the Global South—paints a stark picture of the need to shift public financing away from fossil fuels and towards renewable energy and energy efficiency. From 2017-2019, gas projects received an average of $15.9 billion in international public finance per year –four times as much as wind or solar. Coal and oil weren’t too far behind, with overseas public financial support that is incompatible with a 1.5°C investment pathway (see figure).

The MDBs are a major player in this financing, with over 12 percent of the overseas public gas financing (around $2 billion) coming from the World Bank Group and around $750 million from the Asian Development Bank (see figure). And while the MDBs are still too heavily invested in oil and coal projects, the vast majority—75 percent—of the MDBs fossil finance in 2020 went to gas projects.

This financing is supporting fossil gas expansion throughout the supply-chain. As a result, any guidance that is aligned with addressing climate change needs to cover the full suite of investments. Investments in fossil gas power plants was on average around 27 percent of the financing between 2017 and 2019, with 36 percent of the financing going to liquefied natural gas (LNG) exports (see figure).

The U.S. is a major player throughout this overseas fossil fuel finance dynamic—especially for gas—so what the U.S. does to constrain public support for overseas gas will ripple around the world. The U.S. is one of the largest shareholders in the MDBs and U.S. bilateral assistance has been deeply supporting gas expansion around the world.

Treasury Guidance will severely restrict U.S. support for overseas fossil fuel projects

The guidance spells out how the U.S. will use its “voice and vote” at the MDBs on coal, oil, and fossil gas projects. The Treasury Guidance will require the U.S to:

Oppose all projects that expand the use of coal including those that support coal-fired power plants, mining, and transport. Previous Treasury Department guidance was limited to coal-fired power plants, so this expands the types of projects that will be rejected.

Oppose projects that support oil across the full value-chain including exploration, import and export terminals, pipelines, and end-use. No previous Treasury guidance covered oil projects so this is the first time that the U.S. has signaled it will oppose these projects at the MDBs.

Oppose all “upstream” fossil gas projects. The guidance states that the U.S. will: “will oppose upstream natural gas projects” (i.e., exploration and production of raw material), without exception.

Reject “midstream” and “downstream” fossil gas projects except in extremely rare circumstances. Any project of this type will have to credibly prove that they meet a set of four criteria as spelled out in the guidance (more on this below).

Oppose all “midstream” and “downstream” gas projects in high- and middle-income countries. A midstream or downstream gas project can only get an exception to the restriction if “the project supports IDA-eligible countries, fragile and conflict-affected states, or small-island developing states”. IDA-eligible refers to the low-income countries as defined by the World Bank Group. This list includes the poorest nations in the world. It also includes the country’s most vulnerable to climate change.

Oppose funding for fossil fuel policy support. The MDBs often support fossil fuels through general policy support (e.g., the host country should reform a certain government policy to attract more finance). The U.S. will oppose all MDB policy reforms under the same principles as if the investment was directly for a fossil fuel project.

Oppose funding to intermediaries or equity investments that support fossil fuels. The MDBs are notorious for funding fossil fuels through intermediaries, such as by making equity investments in large infrastructure funds that hold a significant portfolio of coal or gas power plants. The U.S. will now oppose MDB investments in intermediaries or equity that expands fossil fuels under the same principles applied to direct financing.

The Treasury Guidance does allow fossil gas projects to be supported in narrowly defined circumstances. The guidance sets out a four-part criterion for any “midstream” (e.g., transportation and storage) or “downstream” (e.g., power generation, refining, distribution, and retrofitting) project to receive an exemption from the overall ban on support for gas projects. All four criteria will have to be met for any project of this type to be approved. Effective implementation of these four criteria should mean that very few (if any) natural gas projects are accepted (as we’ll discuss in more detail below). These restrictions need to be effectively implemented to ensure that this is a climate-centered policy that moves the world aggressively to keep temperatures below 1.5°C. If they are implemented according to best practices for sound financial investments, strong development projects, and climate-centered strategies, very few projects will meet the criteria.

Getting the Gas Exception Criteria Right: Effective Implementation Matters

The Treasury Guidance directs the U.S. to oppose all MDB support for midstream and downstream gas projects unless they meet all four of these criteria:

1. The project supports IDA-eligible countries, fragile and conflict-affected states, or small-island developing states;
2. There is a credible alternatives analysis that demonstrates that there is no economically and technically feasible clean energy alternative;
3. The project has a significant positive impact on energy security, energy access, or development; and
4. The project is aligned with and supports the goals of the Paris Agreement as outlined by the joint MDB Paris-alignment methodology, which factors in a country’s decarbonization pathway, greenhouse gas reduction strategies, and avoiding carbon lock-in.

Implementing these correctly will be critical to ensuring that this is a climate-centered policy. We’re confident that the U.S. can do this in a manner that protects the climate, poor and vulnerable communities, and the financial viability of scarce investments.

Key elements of a “credible alternatives analysis”. Alternative analysis is already common practice; however, they aren’t always credibly done. Too often, they are self-serving exercises in justifying the dirty project that the sponsor wants to build. There are tons of approved projects that are sitting idle or on tenuous financial ground because the real-world didn’t match the paper analysis. A credible alternative assessment should include the following elements:

• Assessment of the end-use demand to be met and the energy services to be provided. For example, this would require a detailed modelling of the energy demand, including documenting key assumptions critical to determine if that demand production closely approximates the real-world electricity demand. This should also include sensitivity scenarios for the demand projections to understand how dependent the demand projections are on certain factors that may significantly change during the life of the project (e.g., changes in GDP growth or industrial product utilization that may change, etc.). This is all basic information, but a lot of bad projects have been approved based on dubious assumptions about the future energy picture.
• Analysis of the availability of alternative lower carbon technologies or strategies to meet the same end-use objective. The project needs to first consider whether that energy need can be met with renewable energy, improved energy efficiency, or better demand management. Project proponents should have to prove that those clean energy options aren’t viable compared to a proposed gas project. This can’t just be a hand-waving exercise but an actual assessment that the gas project is the only viable means to meet the specific need the project is proposed to address. Every country in the world has untapped renewable and energy efficiency potential, the cost of renewable energy is already competitive with gas in most countries and applications (as the Stockholm Environment Institute report documents), and the cost of renewable energy is consistently dropping so that it will be competitive very soon in places where it isn’t currently competitive. As a result, any gas project will have a hard time proving that it is the only viable option over the expected 20–40 year life of the project
• Economic cost assessments including externalities and subsidies. Such an analysis should assess the full economic costs and risks of each option, including externalized costs such as fossil fuel subsidies, public health impacts, environmental impacts, decommissioning and remediation costs and the social cost of carbon. A project can’t pretend that it will have no impact on local pollution or the climate. And no project can simply assume that it will run for its full life as there is strong likelihood that a gas plant will become uncompetitive compared to renewables or will need to close to align with national net zero targets, well before the end of their useful lifetimes (i.e., leading to stranded assets). For example, In Southeast Asia, 65 percent of existing and planned gas plants are incompatible with the 1.5°C temperature target, according to researchers at the University of Oxford.
• External analyses and sensitivity assessments. The analysis should include details on costs from outside sources, assessment of likely improvements by the time of project ground-breaking, and other technology factors that are likely to change. This is especially important given the rapidly falling costs of renewables and storage, the ubiquity of very low-cost end-use efficiency options, availability of new low-carbon industrial applications, and other factors that are changing a breakneck speed. This should also include sensitivity analysis of key assumptions such as costs of specific technologies given that those costs could be different at ground-breaking than at the time of the analysis. A project proponent can’t assume that gas prices will stay constant or pretend that renewable costs won’t decline. Neither assumption is reasonable.
• Equity considerations. The analysis should consider the equity and environmental justice implications of the project. As the U.S. “Executive Order on Tackling the Climate Crisis at Home and Abroad” states: “Agencies shall make achieving environmental justice part of their missions…to address the disproportionately high and adverse human health, environmental, climate-related and other cumulative impacts on disadvantaged communities, as well as the accompanying economic challenges of such impacts.” As a result, the alternatives analysis should consider factors such as cumulative impacts (including how the project will combine with other impacts to create environmental, health, or economic impacts), the impact on minority communities impacted by other issues, and the extent that the project disproportionately impacts disadvantaged communities.
• Independent review of alternatives assessment. Any credible analysis will be vetted by experts other than those commissioned by the project proponents. Proponents have an inherent bias to ignore factors that push against the rationale for the project.

“Significant positive impact” on energy security, energy access, or development. Project proponents over the years have justified projects based on dubious development, energy access, or energy security rationale that have failed to deliver for communities on the ground. The International Energy Agency has consistently shown that meeting the energy access needs of the poorest people is best served by supporting a renewable energy project. As they stated: “In our Energy for All Case, most of the additional investment in power plants goes to renewable’.

“Aligned with and supports the goals of the Paris Agreement”. U.S. policy (as spelled out in the U.S. 2030 climate target) is to keep “within reach a 1.5 degree Celsius limit on global average temperature increase”. Investments in new gas infrastructure, most of which will last at least 20-40 years, are inconsistent with the kind of investments necessary to move the world towards the 1.5°C and net zero future we need. Between 2020 and 2030, gas consumption declines in almost all the 50 scenarios conducted for the Intergovernmental Panel on Climate Change (IPCC) Special Report on 1.5°C. In these 50 scenarios, the median global gas primary use declines 15 percent for 2020-2030 and 42 percent for 2020-2040. In the International Energy Agency’s “Net Zero by 2050” report, natural gas use in all sectors declines by 13 percent between 2020 and 2030, with a drop of 70 percent between 2020 and 2050. In the power sector the drop is even starker with “unabated natural gas” (i.e., without carbon capture and storage) dropping by 90 percent between 2020 and 2040. Any proposed gas project will face unrelenting climate math that clearly shows expansion of gas is inconsistent with a 1.5°C aligned pathway.

Getting the Indirect Bans Right: Effective Implementation Matters

The restrictions on “policy support” and “intermediaries or equity investments” are critical. MDBs can no longer act as if their broad financial investments aren’t propping up fossil fuel projects. Every such proposed investment will now need to go through an even greater scrutiny to ensure that the MDB knows exactly what those resources will be used for, what kinds of projects are included in the overall investment vehicle, and how any broad investment will conform with the climate-centered requirements of the U.S. Treasury Guidance. MDBs and project developers will carry a high burden of proof to show clearly that their investment conform.

Creating a surge away from fossil fuel financing and towards low-carbon energy

This is just the beginning of a clearer signal that the U.S. will move away from supporting overseas fossil fuel projects that make it impossible to meet our climate goals. The next round of guidance will cover additional U.S. support and continue to move the U.S. towards a “Clean Growth First” policy for overseas public investments.

As the largest shareholder at the MDBs, this guidance should help steer these institutions away from fossil fuel financing. Hopefully, other major shareholders will join this guidance and ensure that all public financing is supporting the clean energy future that we need to stave off the worst impacts of climate change.

Article courtesy of NRDC