Comments submitted on the Overseas Private Investment Corporation's Environmental Guidelines

by
Daphne Wysham and Chris Sherry, 
Institute for Policy Studies
Washington, DC
June 22, 1998

Overview

IPS has reviewed and commented on the Overseas Private Investment Corporation's Environmental Guidelines, and has submitted the following comments for consideration. Broadly, our concerns center around four areas:

1) That OPIC's guidelines suggest a less than full implementation of the National Environmental Policy Act (NEPA) as mandated by the US Congress;
2) That OPIC has failed to include both sectoral--or cumulative-- environmental impacts as well as individual project-related environmental impacts in its guidelines, particularly as they relate to global climate change;
3) That there is an inherent conflict of interest in OPIC's Environmental Assessment process;
4) That OPIC has provided for less than full public disclosure around projects which have serious environmental impacts.

Fossil Fuels in OPIC's Portfolio

The 1997 OPIC annual report states that "OPIC projects support U.S. foreign policy and development objectives" through the "export of America's concern for the environment." Yet a significant portion of OPIC's resources are helping support fossil fuel-driven development in developing countries, engendering a structural reliance on fossil fuels in the pursuit of economic and social development. This financing is ensuring a long-term development strategy that threatens the welfare of people in developing societies who are assumed to be at greatest risk as the climate grows more unstable. It also runs counter to US foreign policy-to attain broader participation by developing countries in the Kyoto Protocol to limit future greenhouse gas emissions.

OPIC's lending is divided into two categories: insurance and direct project finance. In 1997, over 76% of OPIC's direct project financing was in the electric power generation and oil/gas development sectors, with a commitment of $539 million in loans out of a total of $707 million; 41% of OPIC's entire assistance portfolio (both insurance and project finance) was committed to projects in the power generation and oil and gas sectors. Because of the climate change implications of this lending, this emphasis runs counter to U.S. foreign policy goals¹, OPIC's goals, and the U.S. Congress' stated goal of garnering greater participation by developing countries in slowing the rapid pace of fossil fuel combustion and the increasing reliance on fossil fuels as an energy resource in developing countries².

1. National Environmental Policy Act

The courts have held that NEPA applies to Federally supported projects outside of the United States that lead to significant and adverse environmental impacts in the United States (See Sierra Club V. Adams). In signing the 1992 UN Framework Convention on Climate Change, the US acknowledged that increasing emissions of atmospheric greenhouse gases will adversely impact the environment of the global environment, which by definition includes the United States. Application of NEPA to OPIC-backed fossil fuel projects is therefore also required since, individually and collectively, these projects contribute to significant adverse impacts on the global climate, which in turn have significant and adverse impacts on US territory.

Under NEPA (and also Executive Order 12114), OPIC is required to prepare and take fully into account an EIS for any project significantly affecting the environment of the global commons outside the jurisdiction of any nation. While OPIC may believe that individual fossil fuel projects are not likely to "meet the test of 'significant impact' on the global commons to warrant an EIS" (as stated in the proposed Environmental Handbook), and therefore do not require an environmental impact statement addressing global impacts, the cumulative effects of OPIC's lending portfolio on the global environment are substantial.

OPIC acknowledges as much, stating that the "cumulative impacts of several large projects could conceivably have an impact on extraterritorial waters or the atmosphere sufficient to trigger the requirement." Current proposed OPIC policy further states:

In the environmental assessment process, the term 'cumulative impacts' means recognition of the total environmental impact of pre-existing projects, the proposed project, and imminent future projects. Cumulative impacts can result from individually minor but collectively significant actions taking place over a period of time. Assessing associated impacts recognizes that certain other industrial processes are directly and indirectly linked with the project being assessed and their environmental impacts must be incorporated into the environmental assessment.

NEPA requires that Environmental Impact Statements be conducted when the cumulative impacts of Federal and other actions have significant and adverse environmental impacts. "Cumulative impact" is defined as:

"[T]he impact on the environment which results from the incremental impact of the action when added to other past, present, and reasonably foreseeable future actions regardless of what agency (Federal or non-Federal) or person undertakes such other actions. Cumulative impacts can result from individually minor but collectively significant actions taking place over a period of time." [Council on Environmental Quality Regulations for Implementing the Procedural Provisions of the National Environmental Policy Act; 40 CFR Parts 1500-1508]

OPIC's financial assistance for power projects and fossil fuel exploration entails a long-term future commitment of greenhouse gas emissions, as well as a significant dedication of investment capital that cannot be redirected to other more environmentally benign development projects in the future. It is our view that OPIC's past and present fossil fuel assistance portfolio is large enough to trigger the requirements of NEPA, and that the original intent of NEPA mandates that OPIC consider the cumulative global environmental impact of its fossil fuel/power generation portfolio over the entire operational lifetime of these projects.

2. Sectoral Emissions Impacts

The financing of large conventional power projects and fossil fuel field development has wide-sweeping effects on the energy sectors of developing countries, encouraging further utilization of fossil fuel energy and power plant development. According to OPIC's draft Environmental Handbook, the Agency is to 'take into account in its decision-making process the overall environmental effects of which its involvement is a part.' However, no defined criteria nor methodology is offered to demonstrate the manner in which OPIC is to evaluate the cumulative environmental impacts of its portfolio. Since OPIC is increasingly focusing its efforts on the electric power and fossil fuel sectors, it is imperative that the organization include rigorous and detailed proposals for such evaluation of the entire sector, specifically with regard to the overall climate change impacts of OPIC activities. This evaluation should incorporate OPIC's plan to track aggregate greenhouse gas emissions (including latent emissions connected with fossil fuel exploration and development) stemming from its assistance portfolio into a thorough analysis of the sectoral climate impacts of OPIC commitments, and fully evaluate other economic alternatives.

OPIC environmental guidelines should attempt to account for the indirect and qualitative effects of projects on the energy sectors of developing countries, recognizing that large power plant and fossil fuel development projects often divert disproportionate amounts of development capital, thereby often functionally locking-in developing energy sectors into certain structural patterns and fuel mix requirements. Equally important, OPIC projects may have a significant indirect sectoral impact on energy development in developing countries-in a positive sense. This information, developed as part of a "sectoral EIS," or otherwise, would give real meaning to OPIC's development mandate and its pledge to evaluate 'cumulative and indirect impacts.'

OPIC should include in its definition of cumulative and indirect impacts the effects of OPIC projects on the future structural qualitative and quantitative development within developing country energy sectors and the future environmental effects that such development patterns may engender. OPIC should consider past and present cumulative impacts of its projects within the energy sectors of a host country and address the sustainability of future energy sector development that its programs may play a structural role in determining.

A sectoral EIS would require an expansion of OPIC's Cumulative and Associated Impact Assessment when evaluating all power and fossil fuel related projects. However, such an expansion of OPIC's guidelines can be justified both for reasons related to the impact on the global commons (as elaborated above) and in order to provide transparent calculations for future JI or CDM activity in the region.

The sectoral EIS should also evaluate the purpose and the actual need for proposed individual projects and identify a thorough range of alternative applications that are renewable and climate-friendly, while meeting host country energy needs.³ Examples include Energy Service Companies (ESCOs), as being developed by the European Bank for Reconstruction and Development, demand-side management options, and energy efficiency alternatives to fossil fuel-based power plant construction such as have been supported by Export-Import Bank's Environmental Export Program.

Project-Related Greenhouse Gas Emissions

The leaders of the Group of 8 (G-8) industrialized countries endorsed the following language in their final communique May 17, 1998:

..."We must ensure that the policies and operations of the World Bank and other International Financial Institutions take full account of climate change..."

This instruction from the G-8 applies equally to bilateral and multilateral development banks, including OPIC, and suggests the G-8 leaders wanted a full assessment of the climate change impacts of lending by publicly supported financial institutions, including OPIC. However, current proposed OPIC policy is to "track and report, on an aggregate basis, the annual greenhouse gas emissions from its power sector projects [emphasis added]." Power sector projects comprise a small minority of the OPIC-backed projects which have or will have an impact on the global climate. OPIC is providing insurance and direct project finance to numerous petroleum exploration ventures, to projects involving oil storage, oil field services, and gas pipelines. For example, in 1997, OPIC provided $116 million in direct finance to Marathon Oil Company for its oil and gas development on the Russian island of Sakhalin. This project is having and will clearly have impacts on the global atmosphere at the pre-combustion stages-at the exploration, production, processing, transmission or transport, storage and distribution stages--for Sakhalin's oil and gas, as well as at the final combustion stage. Nevertheless, OPIC only proposes to calculate emissions from power projects, which comprise a tiny fraction of the emissions associated with projects it helps finance.

In addition to violating the terms of NEPA and Executive Order 12114, and disregarding the instruction from the G-8 leaders, simply calculating greenhouse gas emissions from power plants alone is not in keeping with other US government policy. For example, the US EPA conducts pre-combustion calculations for fossil fuels as part of its requirements under the UN Framework Convention on Climate Change (UNFCCC); typically these emissions are fugitive releases of methane, a greenhouse gas more potent than carbon dioxide, but other pollutants are also associated with these processes. In the natural gas sector, recent studies have found that 1.4% of total gross production is lost to the atmosphere as fugitive emissions. Quantifying and reporting these emissions is part of the US Government responsibility to the UNFCCC and is required by the Intergovernmental Panel on Climate Change (IPCC) Guidelines, under Sector I B, "Fugitive emissions from fuels."

The US EPA's latest estimates are that natural gas and oil systems in the US are responsible for 6 million metric tons of methane in fugitive emissions or about 34 million metric tons of carbon equivalent (MMTCE). This is not an insignificant number: It is roughly equivalent to .5 percent of global fossil fuel emissions for 1995, and about 3 percent of US emissions for 1995. ⁴

OPIC should comply with NEPA, Executive Order 12114, and the instruction of the G-8 in an effort to support the UN Framework Convention on Climate Change and calculate fugitive and other pre-combustion emissions for all projects it funds.

We also suggest, in the interest of public disclosure and in an effort to provide greater guidance around which projects to avoid due to their significant impact on the global commons, that OPIC should calculate post-combustion greenhouse gas emissions associated with oil and gas fields and coal mines it helps finance. All OPIC projects should include a cumulative and an annual emission estimate which should be evaluated in relation to annual greenhouse gas emissions in the latest reference year, and in relation to anticipated global emissions, and their relative global environmental impact determined accordingly. All such global commons environmental impact statements should be made available on the Internet.

Estimating these emissions, while no easy task, is strictly a data gathering and calculational problem. By apportioning emissions from fuel production systems to end-use consumers, the EIS could provide a better understanding of the full impact of these activities funded by OPIC. Assigning responsibility at the national or institutional level gets a bit more complicated, but needs to be done-both for reasons to do with public disclosure (i.e., revealing the full, cumulative environmental impact on the global commons) and in the interest of advancing our foreign policy goals of getting developing countries and countries undergoing economic transition to develop transparent, reliable inventories of greenhouse gases. Such calculations, made publicly available in raw form, would not compromise confidentiality requirements of OPIC clients, but would provide greater transparency around the difficult task of determining, for example, what would happen in the absence of a given project, what is happening elsewhere as a result of a project, how the availability of a new resource may impact fuel mixes and behaviors, etc.-all critical informational tools both for the public sector in evaluating the desirability of a project, and the private sector in evaluating opportunities for Joint Implementation (JI) projects, and in the proper functioning of the Clean Development Mechanism (CDM).

3. Conflict of Interest

OPIC needs to substantially revise its environmental handbook. Under OPIC's current guidelines, initial review of the environmental implications of projects is conducted "by the applicant depending on the nature of the project." OPIC guidelines state: "The actual work [of preparing an EA] may be conducted by the applicant/sponsor or by a third party, such as an environmental consultant." With so many possible variable actors, and such a small environmental staff at OPIC, it would be difficult to determine the credibility and independence of each EA. Instead, OPIC should create an independent, government-audited environmental review body to review EA applications before they are submitted to OPIC insurance or finance officers for consideration.

OPIC guidelines suggest "EAs and other environmental records must be provided to OPIC as early as possible in the application process." This can create problems given that OPIC's board of directors are allowed to pre-approve projects before due diligence is complete. Hence this vague timeline will certainly be abused. In its stead, OPIC must insist that EAs and EISs be submitted before a project is considered by the board of directors.

Furthermore, as stated above under climate impacts, evaluation of the global effects of proposed projects should be determined by independent, professional environmental staff, and these impacts should be made public simultaneous with submission to OPIC for consideration of financing on the Internet.

Moreover, the language in OPICs draft environmental handbook, under Appendix A, Section 3, subsection C, suggests OPIC interprets its adoption of Order 12114 by providing the Investment Committee with sweeping authority to categorically exclude certain projects from the jurisdiction of the Order. The authority to make these types of determinations should rest with OPIC's professional environmental staff only.

Finally, current OPIC policy categorically excludes all thermal power plants under 200 MW from mandatory listing as Category A projects, requiring an environmental assessment. This arbitrary exclusion means a wide range of plants that may have significant local and regional environmental effects, and that may be interrelated, will not be scrutinized for their environmental impact. A limitation of Category A projects to those over 200 MW may significantly mask the regional impact of a group of power projects. Therefore, we recommend that this exclusion be lifted, and all thermal power plants, regardless of size, be required to submit an EA.

4. Public Disclosure

OPIC's current and proposed disclosure policies for environmentally sensitive projects are grossly inadequate for a publicly backed organization. OPIC now lists sensitive applications in process. However, current listings are inadequate to provide initial information to the public on potential environmental impacts of proposed projects. For instance, a posting of "Philippines, residual fuel-fired power plant" tells the public nothing about the actual project beyond the bare outlines. OPIC should, at a minimum, provide initial information on power plant size (MW), specific fuel mix (including grade of coal, etc.), and specific application (ex. combined-cycle natural gas, fluidized bed coal, etc.), major proposed consumer market (industrial, residential, etc.), environmental mitigation technologies utilized (scrubber, etc.), as well as more detailed information on location by region or locality.

NOTES

¹ State Department Secretary Madeleine Albright in her 1998 Earth Day speech to reporters called for "a diplomatic full court press to encourage meaningful developing country participation in the effort to combat global climate change."

² The US Senate, in the Byrd-Hagel Resolution, has advised the President that it views the meaningful participation of developing countries in the Kyoto Protocol to limit greenhouse gas emissions as critical, given their future role in either averting or exacerbating the problem of climate change.

³ When determining "energy needs," it is important to distinguish between energy "needs" of export-oriented industries and energy for such basic survival needs such as cooking, heating, and agricultural production. The displacement of one energy "need" by another with greater provision of financing means that aggregate greenhouse gas emissions may grow higher and faster than they otherwise would. For example, when women can no longer afford to buy gas for cooking fuel, they may turn instead to coal or biomass; when small entrepreneurs cannot gain access to reliable electricity, they may instead invest in diesel-powered generators. Informal sector greenhouse gas emissions are growing rapidly in developing countries, in part due to IFI fixation on providing energy for heavy industry and urban dwellers to the exclusion of energy for rural dwellers and the informal sector.

⁴ According to the International Energy Agency, total World emissions of CO2 from fossil fuel combustion were 22149 million tons of CO2 in 1995. According to the US EPA, US emissions of CO2 in 1995 were 5141 MMT of CO2.

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