Climate contradictions: World Bank sets up shop in Bali

4 December 2007

The key role that the World Bank is preparing to play in December’s international climate change conference in Bali sits uncomfortably with its continued commitment to fossil fuel funding and failure to make a meaningful shift in its energy portfolio towards clean, renewable energy options.

At the annual meetings, President Zoellick announced his intention for the Bank to act as a clearing house on carbon trading and a source of expertise on technology, including carbon sequestration and ‘clean coal’. A statement released on the same day and signed by more than 200 organisations from 56 countries called on the Bank and other IFIs to end subsidies to the oil industry. The groups referred to ‘oil aid’ as one of the most glaring barriers to fighting climate change and addressing energy access in developing countries.

Instead of rapidly scaling up its commitment to ‘new renewable’ energy, as recommended in the 2004 extractive industries review, the Bank has turned increasingly towards avoided deforestation (see Update 56) carbon trading and carbon finance. The latter is finance provided to a project to purchase green house gas emission reductions. The Bank states that over the past 7 years its carbon finance activities have grown from the prototype carbon fund worth $180 million, to nine funds worth a total of $1.9 billion.

80 per cent of the Bank's 'low carbon lending' is for large hydropower and carbon finance

In October the World Bank released the latest in a series of action plans of its investment framework for clean energy and development (see Update 55, 51), work in progress since the G8 meeting in 2005 in Gleneagles and due for completion at the G8 in Japan in July 2008. The framework will rely heavily on private sector participation and finance through investment support, barrier removal and competitive markets, though specific details have yet to be confirmed. It also lists the Global Environment Facility, the UN Framework Convention on Climate Change adaptation fund and the forthcoming IDA replenishment as key sources of concessional financing.

Civil society was quick to refute the paper’s claims that “substantial progress has been made since the spring meetings”. The Bank asserts that it will “exceed the forecast for overall energy lending of $10 billion over the FY 06-08 period, compared to $7 billion in the FY 03-05 period”: However in 2006 oil, gas and power commitments accounted for 77 per cent of the Bank’s total energy programme, while ‘new renewables’ accounted for only 5 per cent.

Bank “financing for the energy sector in Sub-Saharan Africa increased significantly in 2007 in line with the Africa Action Plan”: this is mostly due to the approval of funding for two controversial mega dams: $360 million for the Bujagali dam in Uganda and $297 million for the Inga dam in the Democratic Republic of Congo (see Update 56 ).

“‘Low-carbon’ represented 40 per cent of Bank energy lending in FY 07, and support for hydropower was the highest since 1996 with the approval of nine projects for $748 million, and $66 million in carbon finance”. Eighty per cent of the Bank’s ‘low carbon lending’ is for large hydropower and carbon finance.

“The action plan includes two new carbon facilities to scale up the use of carbon finance for climate change mitigation: the Carbon Partnership Facility and the Forest Carbon Partnership Facility” (the latter will be launched at Bali, see Update 57). Many forestry experts fear the FCPF may benefit industrial scale logging and are cautious in light of previous IFI-induced forestry disasters such as in the Democratic Republic of Congo. An NGO statement was recently sent to the World Bank in November articulating these concerns.

Also of note is that since spring 2007 four low carbon country growth case studies – India, China, Mexico and Brazil – were initiated, with plans for a fifth one in South Africa in 2008. Apparently this aims to help countries identify: “the carbon emissions-reduction potential, the incremental costs and benefits of “lower-carbon” growth strategies, policy support requirements; and initiatives that contribute to growth and development objectives whilst lowering increases in emissions”.

IFC offsets its own lending

The Bank prepared a paper on climate change for the IDA 15 replenishment meeting in November. Estimates based on scenarios from the Stern review- a November 2006 report on the economics of climate change- predict that the increase in IDA funding that would be required to maintain the net level of benefits to recipient countries at their ‘without climate change’ level range from 6 to 21 per cent of total IDA credits per year. The document states that “the negative potential impacts of climate change in IDA countries require appropriate adaptive measures”, yet donors have failed so far to use the political space offered by the negotiations to influence the Bank to shift its energy investment towards renewable solutions.

Critics point to the irony of increased IFC donations to IDA, given the impacts that the $645 million that the IFC has provided for oil and gas projects so far in 2007 – an increase of at least 40 per cent since 2006 – are likely to have on climate change and poverty. In effect the IFC could be mitigating the impacts of its own lending.

Power and poverty

A recent report by UK NGO Christian Aid, Power and poverty provides a critical examination of the World Bank’s energy sector lending, focussing on Nicaragua and Nigeria. It finds that the Bank is still prioritising a privatised and centralised model for reforming countries’ energy sectors. This threatens to perpetuate energy poverty and lock in high-carbon energy infrastructure. Moreover, power sector liberalisation continues in advance of full impact assessments and essential preparatory work on regulation. Full-cost recovery models are unlikely to deliver quality, affordable services to a large number of poor users, especially those formerly excluded.

Christian Aid finds that in Nicaragua the process of energy sector privatisation has reduced poor people’s access to energy through increased tariffs, and locked the country into high oil imports and high carbon emissions in its power generation. In Nigeria it concludes that the current energy privatisation process is unlikely to ensure that poor people benefit, or yield a progressive system fit for a low-carbon global economy. Christian Aid recommends that UK and European governments should:

  • link IDA funding to a phasing out of economic policy conditions and funding for fossil fuel projects (see page 6);
  • critically evaluate the Bank’s model of development to ensure it is compatible with pro-poor development in a world where green house gas emissions must now be severely restricted;
  • push the Bank to adopt criteria for energy sector reform projects to ensure that they operate within a finite carbon budget; and
  • work with the Bank to ensure its policy advice and technical assistance include proper debate on the arrangements under a privatised model.

IMF calls for renewable subsidies

The IMF has addressed the issue of climate change for the first time in an annex to its flagship publication, the World Economic Outlook. The section addresses the macroeconomic challenges posed by climate change, though largely confines itself to an explanation of the background to the issues, a list of the potential economic effects and a theoretical discussion comparing the appropriateness of carbon taxes to a cap-and-trade system for controlling emissions.

Of note is the IMF’s admission that there may be a place for public subsidies of renewable energy solutions: “public subsidies to develop new, immature, or strategically important energy efficiency, energy storage, renewables, nuclear, and carbon sequestration technologies may be a useful supplement to emissions taxes and cap-and-trade schemes if there are significant positive externalities related to their development and production. Private developers of new technologies may not reap the full social returns from developing new technologies (perhaps because they can be easily copied), which leads to underinvestment in the absence of subsidies.”

The Fund forsees that adaptation “is likely to occur through private market decisions, with no need for public policy interventions. … Policy support is likely to be needed, however, in response to extensive market failures that impede efficient adaptation.”

Former IMF managing director Rodrigo de Rato indicated at the annual meetings that the Fund was going produce more in-depth analysis on this topic in the future.