SEEN

Banking on Climate Change

How Public Finance for Fossil Fuel Projects

Is Short Changing Clean Development

Authored by Kate Hampton

The Sustainable Energy and Economy Network

Institute for Policy Studies, Transnational Institute

Washington, DC

Amsterdam

London

November 17, 2000

For further details on the greenhouse gas emissions estimates from fossil fuel projects financed by the World Bank, OPIC, Ex-Im, and EBRD cited above and elsewhere in this paper, please see our reports on our web-site at <http://www.seen.org>.

Key Findings

1. While hopes for carbon emissions reductions and clean technology transfer are pinned on the Clean Development Mechanism, these anticipated benefits are vastly outweighed by the continued transfer of public moneys from industrialized countries to developing and transition economies in support of fossil fuels.

Between 2008 and 2012, non-sinks projects under the Clean Development Mechanism (CDM) are expected to lead to reductions of 50-375 megatons of carbon (MtC) per year.[1] Meanwhile, the emissions from fossil fuel projects supported by multilateral development banks and export credit agencies in an average year already exceed this amount many times over. For example:

In an average year of financing between 1992 and 1998, the World Bank supported fossil fuel projects with lifetime emissions of 1457 MtC; this is at least four and as much as 29 times the amount of emissions reductions anticipated under the CDM per year.

In an average year of financing between 1991 and 1996, the European Bank for Reconstruction and Development (EBRD) supported fossil fuel projects with lifetime emissions of 296MtC; this is three-fourths and as much as six times the expected emission reduction value of the CDM per year.

The U.S. Overseas Private Investment Corporation and the U.S. Export-Import Bank[2]-supported projects with lifetime emissions values of 1139MtC in an average year between 1992 and 1998; this amounts to at least three and as much as 23 times the carbon reductions expected under the CDM.

2. If only 20 percent of the financing by these four institutions, the World Bank Group, the EBRD, OPIC and U.S. Ex-Im, had been diverted away from fossil fuels and into investments in energy efficiency and renewable energy, the emissions avoided each year would have equalled more than one-and-a-half times the amount of carbon averted under a best case scenario for the CDM.

Even if the CDM were to include removals of 100MtC per year by carbon sinks projects - and it unlikely that sinks will actually provide net reductions - this figure of 20 percent for clean energy for only four public institutions is still substantially more than the annual reductions expected under CDM. If one were to include all public institutions now funding fossil fuels in the calculus, the carbon averted by CDM projects would seem even more minuscule. Moreover, this calculation is based on the optimistic assumption that non-sinks CDM projects also provide net reductions, i.e. that CDM credits are only provided for renewable energy and energy efficiency projects. If fossil fuel projects are included, CDM projects may even result in substantial net emissions.

How Much Clean Development?

The purpose of the Clean Development Mechanism (CDM) is to provide financing for projects in developing countries that will help reduce the threat of climate change while contributing to sustainable development. CDM projects will result in certificates that show the amount of emissions reductions achieved as a result of the investment. Certified emissions reductions (CERs) can then be used by the investor country to count towards its own emissions reductions targets. Investors in the CDM will include all governments that are required under the Kyoto Protocol, as so-called Annex 1 countries, to reduce their greenhouse gas emissions.

This paper examines the significance of emissions reductions under the CDM relative to the existing climate footprint of North-South public financial flows. We conclude that, while the CDM is a laudable concept, it is like the proverbial left hand not telling the right hand what it is doing: While industrialized governments are prepared to invest in the CDM to reduce climate instability and contribute to sustainable development in developing countries, they are simultaneously spending billions of dollars a year on fossil fuel projects in those same countries, thereby undoing what little climate benefit the CDM might provide with these investments.

Box 1. The Clean Development Mechanism

The Clean Development Mechanism (CDM) is an instrument of the Kyoto Protocol, defined in Article 12 of the agreement. Projects under CDM will be conducted as partnerships between Parties (i.e. national governments) that have undertaken commitments to reduce their greenhouse gas emissions and developing country governments. Countries with emissions targets are called Annex I Parties; countries that have not signed up for emissions targets are therefore referred to as non-Annex I Parties. Due to the disproportionate amount of pollution generated by industrialized countries, Annex I Parties tend to be rich country governments and non-Annex I Parties tend to be the governments of poorer developing countries. Economies in transition are split between Annex I Parties (most Central and Eastern European countries, the Baltic States, Russia and Ukraine) and non-Annex I (the remaining members of the former Eastern Bloc).

Annex I Parties (or corporations and other institutions in these countries) will finance projects in developing countries that lead to fewer greenhouse gas emissions. This might be done in a number of ways, including:

- sequestering emissions from the atmosphere, e.g. by planting trees,

- reducing current emissions, e.g. through an energy efficiency scheme, or

- displacing new emissions, e.g. by reducing the need for new fossil fuel use by building a power plant that uses renewable energy.

In order to determine how many emissions have been avoided, participants in CDM projects need to calculate the likely level of emissions that would occur without the project. This �business-as-usual� baseline is entirely theoretical unless the purpose of the CDM project is to reduce the emissions that are already occurring (e.g. from an existing power plant) where one could calculate emissions before and after the CDM project occurred. However, in many circumstances, the calculations will be more complicated. For example, if the United States invests money to build a coal-fired power plant in China, and this investment makes it more efficient than it would otherwise have been with fewer emissions than would otherwise have occurred, then the US will get a certificate that shows the value (e.g. in tons of carbon) of this theoretical reduction. The US will then be able to count this reduction against its own emissions target, as if the project had taken place in the US itself. Exactly what types of projects will qualify for the CDM and how the theoretical baselines will be calculated is up for discussion at this round of negotiations.

The rationale for the CDM is the same as for the other instruments of the Kyoto Protocol, international emissions trading and Joint Implementation: The CDM will enable richer Annex I countries to meet their climate targets at a lower cost than would be possible at home by buying reductions from poorer countries. This is because reducing emissions in rich countries is usually more expensive than it is in developing countries. In return for their investment in helping reduce emissions, Annex I Parties will receive certificates called Certified Emissions Reductions (CERs) that can count against their emissions targets. Thus, CERs are really permits that enable their owner to emit an amount equivalent to the CDM reduction they helped finance.

An expert workshop was held at the Royal Institute for International Affairs (RIIA) in August 2000 to provide a range of estimates for the demand and supply of carbon credits under the Kyoto flexibility mechanisms, including the CDM. The results of this workshop are found in Box 2 below. It is expected that, between 2008 and 2012, CDM projects will yield between 50 and 375 million tons of carbon reductions per year and between 40 and 100 million tons of carbon removals by sinks per year.

Box 2: Emissions reductions expected under CDM

The emissions gap for OECD countries, i.e. the difference in greenhouse gas emissions between business-as-usual projections and Kyoto targets, was estimated by the RIAA at a range of 600 to 1400 megatons of carbon (MtC) per year during the five years of the first commitment period (2008-2012). After domestic reductions at a marginal cost of between $25 and $50, the emissions gap was estimated at 400-1000 MtC per year for CO₂ only while the gap for all greenhouse gases was estimated at 300-700 MtC per year. These figures represent the total demand for flexibility under the Kyoto Protocol, of which the CDM will be only one of the three mechanisms for compliance in addition to further domestic reductions.

The supply of CDM projects involving sinks, i.e. projects like afforestation that may sequester carbon, was estimated by the RIIA at 40-100 MtC per year at a cost of $10-40 per ton of carbon, while the supply of non-sinks projects was estimated at 50-375MtC per year at a cost of $5-40 per ton of carbon. Some models have resulted in estimates that exceed these values; however, they tend to be top-down studies based on marginal cost curves rather than bottom-up assessments that reflect the nature of CDM as a project-based mechanism thereby quantifying potential supply rather than the likely flow of finance to actual projects. Unfortunately, figures for Joint Implementation were not provided, excluding most economies in transition from the analysis.

The RIIA workshop involved experts from research institutes, the World Bank, and government departments and agencies from the UK, Japan, the Netherlands, and Germany.

Source: http://www.riia.org/Research/eep/quantifying.html

CDM projects will constitute a new addition to financial flows between North and South, or form an additional part of existing projects. These existing financial flows to developing countries include public funds in the form of grants and loans from multilateral development banks, like the World Bank Group, and credits and guarantees provided by export credit agencies.

Climate Change and International Finance

At present, no multilateral development bank or export credit agency (ECA) systematically reports the greenhouse gas emissions of the projects it supports. However, studies undertaken by the Institute for Policy Studies and others have sought to provide calculations based on what little information is publicly available. The studies set out the lifetime carbon emissions for fossil fuel projects from the World Bank Group (1992-1998), the European Bank of Reconstruction and Development (1991-1996), and the Overseas Private Investment Corporation (OPIC) and the US Export-Import Bank (Ex-Im), the two export credit agencies of the United States (1992-1998).

World Bank

From the time the Climate Convention, designed to limit greenhouse gas emissions, was signed by a majority of the world's countries at the Rio Earth Summit in 1992 and 1998, an IPS study found that the World Bank Group has invested $13.6 billion on fossil fuel projects which will, over their lifetimes, release 37.5 billion tons of carbon dioxide into the Earth's atmosphere. Meanwhile, estimated global carbon dioxide emissions from fossil fuel combustion - the single greatest contributor to climate change - were approximately 28 billion tons of CO₂in 1995. Over the study period, the World Bank invested 100 times more money in promoting climate change through fossil fuel investments than it did on renewables in both its own portfolio and via the Global Environment Facility for climate change projects.

The study also found that the poorest one-third of the planet receive less than one-tenth of the World Bank's energy investments while absorbing most of the environmental and social costs of fossil fuels. The World Bank-financed fossil fuel intensive energy development is powering industrial expansion in developing countries, but bypassing the energy needs of the rural poor. About 78 percent of the World Bank's energy portfolio is devoted to oil, coal, and gas, most of which goes to power industry; less than 9 percent of overall Bank lending was devoted to helping the two billion people in rural areas with no access to electricity during the study period.[3]

European Bank of Reconstruction and Development

From its establishment in 1991 until the end of 1996, the European Bank of Reconstruction and Development (EBRD) has financed fossil fuel projects that will, over their lifetimes, release a total of 6.548 billion tons of carbon dioxide into the Earth's atmosphere[4]. While the EBRD has proven to be a leader in promoting energy efficiency, this positive role is outweighed by the role it is playing in helping to finance oil, gas, and coal projects that rarely provide for the energy needs of the people of the former Soviet Union - for example, providing central heating to households. Despite the former Soviet Union�s abundant supply of fossil fuels, consumers are finding fuel more expensive in many regions, and shortages more commonplace. Meanwhile, oil exports - primarily to Western Europe and Japan - have increased. In remote oil- and gas-producing regions, local populations still suffer through freezing winters.

Rather than working with the Russian fossil fuel and power industries to make existing oil and gas pipelines more environmentally sound and provide households with improved access to fuel and electricity, the EBRD and Western investors are largely focused on gaining access to and control over heretofore untouched oil and gas fields. These fields are often in remote and pristine regions where environmental and social impacts are particularly significant and the risk of accidents due to earthquakes or extreme weather events is dangerously high. Where the EBRD does make loans for rehabilitation, the projects are focused primarily on increasing production by modernizing and reconditioning abandoned wells, instead of paying close attention to the environmental aspects of, say, fuel transportation. The EBRD is not a concessional lender, like the World Bank, and is therefore entirely profit-seeking despite disposing of large public funds.

Export Credit Agencies

Export credit agencies (ECAs) are instruments of national governments that use public money to provide financing, guarantees and insurance to the private sector. They make it easier for companies to invest in risky overseas markets because they absorb much of the risk associated with such investments. ECAs are designed to promote exports.

The lifetime climate impact of projects supported by OPIC and Ex-Im between 1992 and 1998 has been estimated at 29.3 billion tons of carbon dioxide[5]. This figure - 29.3 billion tons of CO₂ - amounts to nearly 80 percent of greenhouse gas emissions from World Bank-supported oil, gas and coal projects during the same time period. (These calculations were made possible by the reporting requirements of these two agencies; the projects supported by other export credit agencies remain largely hidden from public scrutiny.[6])

A new study by the World Resources Institute calculates the dollar amounts associated with export credit agency support for energy-intensive sectors from 1994 through the first quarter of 1999. The results show that while U.S. Export-Import Bank (Ex-Im) is the largest guarantor and insurer for energy-intensive projects (including fossil fuel projects), it is only the third most important supplier of direct financing to these projects. The German export credit agency, Kreditanstalt fur Wiederaufbau, and the Export Import Bank of Japan, newly merged with another Japanese export credit agency into the Japanese Bank of International Cooperation, respectively, provide over three and four times more direct financing for energy intensive projects than Ex-Im does[7]. OPIC provides a similar amount of direct financing as Ex-Im does, but is ranked twelfth in terms of guarantee and insurance provision for energy-intensive industries globally.

The findings of the WRI study reinforce the key finding of work undertaken by the Institute for Policy Studies and Friends of the Earth: export credit agencies are major contributors to climate change[8]. The WRI study found that �fossil-fueled power generation and oil and gas development accounted for nearly 40 percent of project and trade finance flows to developing countries,� i.e. about $150 billion between 1994 and early 1999. Export credit agencies account for roughly 20 percent of this financing.[9]

Summary

In order to compare the results of these studies with the results of the RIIA workshop, we have averaged the findings over the study periods to provide a rough estimation of carbon that will be emitted over the lifetime of fossil fuel projects financed in an average year for each of the institutions above. The results are presented in Box 3.

Box 3: Carbon emissions from projects financed by OECD governments

	World Bank	EBRD	OPIC and Ex-Im
Study period (number of years)	1992-1998 (7 years)	1991-1996 (6 years)	1992-1998 (7 years)
Lifetime CO₂emissions	37.5 billion tCO₂	6.548 billion tCO₂	29.3 billion tCO₂
Lifetime carbon emissions	10.2 billion tC	1.780 billion tC	7.970 billion tC
Lifetime carbon emissions expected from an average year of fossil fuel project finance	1.457 billion tC or 1457MtC	0.296 billion tC or 296MtC	1.139 billion tC or 1139 MtC

Source: http://www.seen.org

The figures include not only power plant emissions, but also those likely to be caused by increased access to fossil fuels resulting from upstream fossil fuel projects, such as oil and gas reserves and coal mines. This methodology, derived from Pace University�s �Environmental Cost of Electricity,� assumes that once an upstream project has been financed, a market for the product has been identified and the fossil fuel will eventually be burned. The methodology makes conservative judgements wherever there is doubt about a project, and avoids double-counting, both between projects and between insitutions. For a fuller explanation of the methodology and an opportunity to view responses to the studies by the respective institutions, please refer to the website above.

Conclusion

By comparing projections for emissions reductions achieved as a result of the average annual deal flow under the Clean Development Mechanism (CDM) in the first commitment period with the lifetime emissions resulting from the average annual deal flow for fossil fuel projects supported by multilateral development banks and export credit agencies in the 1990s, it is possible to draw inferences as to their relative significance in contributing to or averting climate change. The graph at the beginning of this report shows the magnitude of these carbon emissions next to the annual emissions reductions expected under the CDM including and excluding sinks, as well as the expected gap between the emissions targets of OECD countries and their business-as-usual projections.

The analysis shows that if money currently spent by OECD countries via multilateral development banks and export credit agencies on fossil fuel projects was spent instead on renewables or energy efficiency, the emissions avoided would outstrip the annual emissions reductions predicted for CDM projects in the first commitment period. In fact, if only 20 percent of the annual financing provided by the World Bank, EBRD, OPIC and Ex-Im had been diverted away from fossil fuels to investments in energy efficiency and renewable energy, the emissions avoided would have equalled 578.4MtC, still substantially more than the annual reductions expected under CDM projects, even including sinks. This analysis is based on the most optimistic scenario for CDM because it is not yet clear that CDM projects will provide net reductions in carbon. If fossil fuels are included in the CDM portfolio, CDM projects may result in net emissions by reducing less than they actually emit. Meanwhile, the scientific analysis on sinks is not yet clear on whether sinks will actually result in net removals of carbon from the atmosphere; in fact, they may also result in net emissions.

This paper does not seek to advocate that sound projects under the Clean Development Mechanism with net climate benefits should not proceed. Instead, the comparison has been undertaken to highlight the importance of integrating climate change policy as part of the policy guiding public international financial flows. Without this integration, developing and transition economies will be locked into a path of fossil fuel-driven development instead of benefiting from clean technology transfer. Reducing international public finance for fossil fuels should therefore occur in addition to CDM, while new funds for renewables and energy efficiency act as an instrument for technology transfer.

[1] Royal Institute of International Affairs, 2000

[2] OPIC and Ex-Im are the two U.S. export credit, investment and guarantee agencies.

[3] See IPS report, �The World Bank and the G-7: Changing the Earth�s Climate for Business,� June, 1997.

[4] See IPS report, �The EBRD: Fueling Climate Change,� November, 1998.

[5] See �OPIC, Ex-Im, and Climate Change: Business as Usual?� by IPS and Friends of the Earth, April 1999.

[6] NGOs, including IPS, are campaigning to make all ECAs make public their investments in projects around the world, and to make available greenhouse gas emissions estimates for all of these projects.

[7] The Climate of Export Credit Agencies, WRI, May 2000.

[8] See �OPIC, Ex-Im, and Climate Change: Business as Usual?� by IPS and Friends of the Earth, April 1999.

[9] This data is incomplete as the source does not cover all investments; however, it provides a much needed insight into the growing importance of bilateral finance in exploiting fossil fuels.

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