August 26, 1998

Dear [Sir],

China: Fossil - Fueled Power Plants - Changsha Project

I refer to your recent letter registering opposition to the World Bank's financial support for fossil fuel plants in China. This was one of several that were received raising similar concerns. While I appreciate and share your concerns about global environmental issues, I feel that you are not taking adequate account of the complexity of the problems facing developing countries such as China.

It is quite clear that developing countries will not lift themselves out of poverty without increased use of modern forms of energy. No one would expect people in rich countries to give up the social and economic benefits of modern energy use and it is not realistic to expect people in developing countries to deny themselves similar benefits. Since the World Bank's mission is poverty alleviation, we cannot ignore this aspect of development. Nevertheless, we are fully aware of the environmental consequences of increased fossil fuel consumption by all countries in the world. We have recently been engaged on a major international consultative process regarding the policy we should adopt to determine whether to invest in the energy sectors of member countries. Although this process is on-going, criteria presently under consideration include: (i) the country must show commitment to improving efficiency of its power sector whether by restructuring the sector or by reforming its policies; (ii) the country will support competition, private-sector investment, and sound regulation of the sector; and, (iii) the country will promote energy efficiency both on the supply side and the demand side, and integrate energy pricing with environmental policies.

China meets these criteria and we believe that there is a useful role that we can play in assisting China to deal with the significant energy-related environmental issues it is facing and will face in the future as it continues to develop. Regarding the specific issue of coal consumption, the Government of China recognizes that it needs to reduce the power sector's reliance on coal although the abundance and comparative economic advantages of this resource dictate that it will necessarily remain a key pillar of national development for a long time to come. In this sense, China's situation is similar to that of the US, the largest producer of greenhouse gas emissions in the world which, for the foreseeable future, has no option but to remain heavily dependent on fossil fuels even though these are the source of its pre-eminent position in terms of impacts on the global atmospheric environment.

Given China's situation, there are two separate but equally important parts to the Bank's investment strategy; the first part is to engage the problems of the thermal power sector to promote rationalization and efficiency gains so that the energy produced per unit of greenhouse gas emission is maximized. To do this, we are working with Government through a range of investment projects to: first, develop large size coal-fired units to avoid proliferation of and gradually replace small and highly polluting units; second, free up the market so that generators will increasingly adopt the most efficient means of energy production which, in many cases may divert them away from coal, and third, promote adoption of improved environmental management technologies based on best international practice. The furtherance of these strategies is a key part of every thermal power investment that the Bank is making in China.

The second part of our investment strategy seeks to promote more efficient energy usage where ever possible and the use of alternative and renewable energy sources where the opportunities arise. Regarding increased efficiency, we are financing: (a) conservation activities to achieve large, sustained and growing increased measures in energy efficiency, and associated reduction in growth of carbon dioxide emissions and other pollutants; (b) investments to reduce methane losses from gas transmission systems to reduce reliance on small scale and inefficient coal-fired boilers for production of domestic and low grade industrial heat. Under an upcoming Renewable Energy Development Project, the Bank will be financing installation of 190 MW of wind farms in four Provinces plus installation of 200,000 household and institutional photovoltaic power systems (this project alone more than double China's grid-connected wind power generation capacity); and (d) financing investments to promote introduction of advanced fuel efficient technologies for industrial boiler production.

Regarding the specific points that were raised in your letter and several others relating to this subject, I can advise as follows: (a) the World Bank is not proposing to finance a coal-fired power plant in Changsha, Hunan Province. However, the Bank does propose to finance a thermal power project (2 x 300 MW coal-fired units) in the southern part of that Province. However, this project will minimize the growth of carbon dioxide emissions because it mandates that the Loan Beneficiary must retire ten high coal consumption units totaling about 300 MW prior to the full commissioning of the new units. This investment, like all of our thermal power investments in China, will be made by the International Bank for Reconstruction and Development and hence will not use taxpayers' funds from any of the shareholders of the Bank; (b) the World Bank's procurement procedures are designed to provide transparency and efficiency in procurement of goods and services. The procedures are not intended to provide a basis for discriminating against any organization of group because of its political beliefs.

Finally, I will submit your suggestions to concerned departments and working groups involved in developing the Bank's lending policy.

Sincerely yours,

Julian F. Schweitzer

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