Ms. Daphne Wysham
Institute for Policy Studies
733 15th Street, NW Suite 1020
Washington, D.C., 20005 TJSA

December 2, 1997

Dear Ms. Wysham:

This letter is in response to your letter to Mr. Wolfensohn of November 4, 1997, following up on your electronic mail communication dated July 17, 1997.

Enclosed are two documents which address the points raised in your correspondence. The first is a point-by-point response to the many erroneous findings presented in the IPS report, "The World Bank and the G-7: Changing the Earth's Climate for Business." In one case on financing ratios, once confronted with the facts you have admitted that your results were off by a factor of nearly 17, yet have not seen fit to issue a correction or a retraction. Other accusation regarding greenhouse gas emissions exaggerate the real situation by a multiple of five but you have not acknowledged estimation errors, to the detriment of my organization's reputation and your credibility.

The second is a report commissioned by the World Bank entitled the "Carbon Backcasting Study" which examines many of the same investment portfolio and climate change questions as raised in your study. The Executive Summary of the report has been available on the Internet for many months now, and copies of the draft full report have been similarly available upon request. The Bank-initiated retrospective portfolio review presents a more balanced picture of the situation.

Beyond arguments about data and analyses, there are two broader aspects of your inquiry which I find troublesome. The first relates to the over-simplification of the issues surrounding the very complex question of reconciling climate change and development. As Mr. Wolfensohn noted at the UN General Assembly Special Session in June, the energy needs of Bank client countries are great while their greenhouse emissions, in historical and per capita terms, are small. Viewed in this context, the climate change impacts of even the Bank's most recent coal-fired power generation in China are not unambiguously negative. This Bank-supported plant employs state-of-the-art supercritical combustion technology and will achieve a level of efficiency comparable to coal conversion technologies presently eligible for support under the GEF's climate change program. And this short-term efficiency improvement is being complemented by longer-term efforts, including the China Renewable Energy Project which when approved will be the largest single renewables investment in the world.

The second concerns the process. My impression is that no attempt was made to inform or involve the Bank in your study, nor were we requested to review underlying data or comment on a draft report. This is hardly in the spirit of open inquiry which has globally characterized the scientific and political debate on climate change to which the non-governmental community has contributed enormously. Neither does it characterize the Bank's own investigation of the issues as framed, inter alia, in the Carbon Backcasting Study.

I would now like to turn to the questions you raise on integration of climate change concerns into the Bank's operations, which are relevant and forward-looking. As you know, the Bank Group is presently involved in re-examining its environment strategy in the energy sector, including how to strengthen its efforts to address climate change. Current World Bank policies to address the problems at the energy-environment nexus are based on principles such as sector-wide efficiency improvements through economic policy reform and market-based economic restructuring; competition and private sector investment to stimulate efficiency gains in production, fuel substitution, and trade; and production and end-use efficiency pursued to the same degree as has been demonstrated for sector reform and restructuring.

While the environment strategy for the energy sector is still evolving in consultation with internal and external stakeholders, the basic principles of our climate change policies are that the World Bank Group, consistent with the UNFCCC., will: (1) actively support its member countries in building capacity and undertaking investments, and (2) seek additional resources to ensure that goals for national economic development and environmental quality are not compromised. These principles will be operationalized by the following actions:

Some of these actions involve better implementation of the Bank's existing policies. For example, the estimation of greenhouse impacts at the project level is already provided for in directives on economic evaluation and environmental assessment; the latter documents are publicly available 180 days before Executive Board loan approval.

Because of their interest in the matter, I am copying this reply to the co-signers listed in your original communication.

Sincerely yours,

Robert T. Watson
Director Environment Department

World Bank Response to Changing the Earth's Climate for Business

This is a background note in response to Changing the Earth's Climate for Business, a report released on 6/17 by the Institute for Policy Studies (IPS), and three affiliates. The report is highly critical, inaccurately, of the Bank's energy lending record.

The IPS report's main claim is that G-7-based oil, gas and coal corporations reap large profits from World Bank energy loans to developing countries since these corporations are awarded the majority of procurement contracts for Bank-financed energy projects. IPS then concludes that the Bank is, in effect, subsidizing climate change by supporting fossil-fuel-focused energy corporations.

IPS claim: Since 1993, Bank-financed fossil fuel projects will emit over their lifetimes 9.8 billion tons of carbon (or 36 billion tons of carbon dioxide), which is more than ALL current annual global emissions of 6.3 billion tons of carbon (28 billion tons of carbon dioxide).

Fact: IPS uses a dishonest statistical trick by comparing one year's global carbon emissions to 20+ years of emissions for power plants financed by the Bank. It is also misleading to base the comparison on power plant emissions plus the total of emissions from the entire fossil fuel reserve in which the Bank has participated in project financing. The life of fossil fuel reserves is longer than 20 years and their use would account for over 90% of the 36 billion tons of CO2, estimated by IPS.

Fact: IPS made mathematical errors, unrealistically assumed 100% annual power plant utilization and as a result over-estimated emissions from power plants by a factor of two. New Bank financed power projects financed since FY93 will emit only 64 million tons of C02 per year (not 117) using typical capacity utilization factors.

Fact: According to recent analysis by Bank consultants (the Carbon Backcasting Study), annual emissions from Bank-financed energy projects represent only about 1% of average annual emissions in the 1990-2015 time period. This is equivalent to 2% of average annual emissions of Bank client developing countries as a group, which is consistent with the proportion of Bank funding to total energy financing in developing countries (3% of total financing).

IPS Claim: The Bank invests 100 times more in promoting climate change than averting it.

Fact: Projects that directly address climate change (with GEF components) have grown from negligible amounts at the beginning of the 1990s to an average of 13% of annual energy lending. Cumulative GEF lending is $700 million which has leveraged an additional $740 million in IBRD/IDA financing for these same projects. Including other financing, the total value of these projects is over $2 billion over five years, or $400 million per year. In addition, Bank Group projects without GEF financing routinely finance improvements in operational efficiency through sector reform and rehabilitation. Macro reforms aided by the Bank in lending and non-lending operations help to reduce the energy intensity of national economies as is occurring in the economies in transition.

Fact: The IPS claims the Bank financed $9.4 billion worth of fossil fuel-based projects since FY93, which is equivalent to $2.3 billion per year. When compared with the total annual financing for GEF climate change abatement projects, Bank lending to fossil fuels is only 6 times more, not 100.

IPS Claim: The Bank's energy strategy undermines the Climate Convention.

Fact: The Bank has placed emphasis on energy efficiency since the early 1980s particularly through Technical Assistance, policy change and other non-lending activities to advise clients on the implementation of efficiency strategies. All Bank energy loans promote consistency with the Climate Change Convention by improving energy efficiency on the supply and demand sides. This has been increasingly true since the signing of the Climate Convention in 1992 and the issuance of two major energy policy papers in 1992.

Inconsistency in IPS report: The Climate Convention recognizes that energy needs of developing countries is growing rapidly and in total will soon exceed that of the OECD countries. But per capita energy consumption in the developing world is currently less than one-fifth of the OECD per capita level. World Bank lending to energy is a response to the funding requests from its client countries which will develop their lowest cost energy resources with or without the Bank's involvement. Bank involvement helps to reduce the overall environmental impact through the introduction of cleaner, more efficient technologies through international competitive bidding.

IPS Claim: Bank energy finance bypasses the rural poor.

Fact: Over the last 15 years, 120 directly targeted projects have directly benefited the rural poor through rural electrification, renewable energy and fuelwood projects. The total investment in these projects is $2 billion per year with Bank loans averaging $350 million per year. In addition, rural development projects use energy to deliver services and other energy projects benefit the poor through better performance of the energy companies, greater efficiency, and better service. Greater effort is needed to improve access for the poor and a strategy which the Bank is fully committed to implement has been set out in Rural Energy and Development: Improving Energy Supplies for Two Billion People.

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