World Bank climate funds: “a huge leap backwards”

1 April 2008

The recently proposed climate investment funds to be administered by the World Bank are under heavy fire for proposing a governance structure that replicates the inequities of the Bank’s board, undermines the UN framework convention on climate change (UNFCCC) and fails to clarify whether money to these funds would be additional to G8 commitments on overseas development aid. Meanwhile World Bank’s support for coal-fired power generation is on the increase.

The Bank’s initial portfolio would consist of three funds:

The Clean Technology Fund: will assist with transformation to low carbon economies, mitigation of green house gas emissions, and international cooperation on climate change; and to complement existing financing. Target size: $5-10 billion.

the proposed governance structure makes that of the GEF look positively progressive

The Forest Investment Fund: will “provide financial incentives to reduce emissions from deforestation and degradation. It would support countries participating in the Forest Carbon Partnership Facility (see Forest carbon facility: more harm than good?). Target size: $1 billion.

The Adaptation Pilot Fund: will “pilot ways to mainstream climate risk and resilience into core development planning”. It will also influence the design of the Adaptation Fund recently agreed at UNFCCC, and initially focus on five to ten low-income or highly vulnerable countries such as a small island state. Target size: $1 billion.

The Clean Technology Fund was publicly proposed by finance ministers of the US, UK and Japan in a joint statement published in the Financial Times on 7 February. They commit to making “major commitments” to it and the other funds and urge other governments to do the same. The US has pledged $2 billion over three years and the UK will channel its $1.6 billion Environmental Transformation Fund into the funds. Japan will contribute $10 billion though it is not clear how this will be channelled through the Bank. So far no other donors have pledged support.

Donor control: “loaded dice”

The Bank’s January Consultation draft on climate investment funds states that each investment fund would have “an independent governance structure comprised of donors to that particular fund, which has ultimate control over that fund”. Questions raised in the draft regarding the “voice of recipient countries in the governance structure” remain unanswered. The decision making process would be made by consensus, as on the World Bank’s board.

The World Bank would host a secretariat for the funds, serve as trustee and collaborate with regional development banks on the selection of staff and provision of guidance for management of the secretariat. A minimum contribution for trust fund committee members, the level of which is still “to be decided”, will be set. This raises serious concerns that smaller countries may be excluded from the governance of the funds.

At a mid-March meeting of G20 energy and environment ministers in Japan, South African environment minister Marthinus Schalkwyk pointed out that it was only in the past few weeks that developing nations have even been consulted. He also pointed to the lack of clarity regarding whether money going into the funds would be additional to previously agreed overseas development aid. He said “The World Bank should keep its distance from global climate talks [and] shouldn’t become a player in the negotiations because that will load the dice against developing countries”

In a report One step forward, two steps back? The governance of the World Bank climate investment funds, Benito Müller, of the Oxford Institute for Energy Studies and Harald Winkler of the University of Cape Town point out that the World Bank is pushing ahead with “complete disregard” for the principles of partnership and mutual ownership of the Paris Declaration on Aid Effectiveness. Referring to the draft’s “paternalistic tone”, he finds that the proposed governance structure of the funds makes that of the Global Environment Facility- set up in 1992 to assist global environmental protection- “look positively progressive”.

The World Bank’s Adaptation Fund is seen by the G77 and many developing countries as a serious threat to the new Adaptation Fund agreed at Bali whose board would have a majority of developing country members and designated representation from least developed countries and small island states. It would meet in Bonn, the seat of the UNFCCC secretariat. The GEF and the World Bank would only be minimally involved in its management. By comparison Benito Müller and Winkler assert that the Bank’s fund is a “huge leap backwards”.

A letter to the UK Secretary of State for International Development, Douglas Alexander, from representatives of 22 UK-based and international NGOs reiterated these concerns and stated that the inclusion of the clean technology Fund into the Bank’s portfolio “could imply support for the US Major Emitters Meeting process, which lies outside the UN track of negotiations on a post-2012 framework”. They also pointed out that the suggestion to offer highly concessional loans, instead of grants, for adaptation financing is “inappropriate” given that the impact of climate change on developing countries was “largely created by rich countries”.

Despite high-level UK support, a recent report on DFID and the World Bank by the UK parliament’s International Development Committee concludes that “we are sceptical that creating a new frust fund in addition to the dozen or so that already exist within the Bank for such work is the best way forward for this money.” It recommends “that DFID conduct an audit of the current bilateral and multilateral funds available for international climate change work… before final decisions are taken.”

Coal-fired monsters

David Wheeler of the Washington-based think-tank Center for Global Development asks “does anyone really believe that donor-country taxpayers will continue supporting the Bank Group if it takes billions for the Clean Technology Fund with one hand and invests billions in coal-fired monsters with the other?” He undermines World Bank claims that it is providing value-added by supporting supercritical coal-combustion power plants, particularly given that fuel and construction costs have at least doubled since 2005 (see Update 59). He puts forward solar as an economically feasible alternative and recommends using the Clean Technology Fund to fill the remaining cost gap.

He analyses two supercritical coal-fired power plants that the Bank is considering funding: Tata Power’s ‘Ultra Mega’ 4,000 mega watt power plant in Mundra, Gujarat and the planned Mmamabula plant in Botswana, which would supply power to the South African electric grid. In the case of Mundra he points out that several other private and public sector supercritical plants are already under construction or planned in India, thus precluding the need for World Bank subsidies.

In Crossroads at Mmamabula: will the World Bank choose the clean energy path? Wheeler concludes that Botswana’s least-cost most environmentally benign option for large-scale power investment is solar thermal. The country’s solar energy potential, which could easily exceed the power expectation of Mmamabula, was recently documented in a Bank study. The Bank should adopt an explicit carbon accounting charge, which should be added to all proposed fossil-fuel energy projects. Though subsidies may be needed to induce clients to borrow for low-carbon projects, “client interest should increase as Bank programmes demonstrate the viability of large-scale low-carbon energy systems that have no local environmental impacts, no energy supply risks and no liability insurance requirements”.

At end March the Bank’s private financing arm, the International Finance Corporation’s (IFC) board was to discuss approving funding up to $750 million for Mundra. In mid-April it will discuss two loans of $150 million each to a Suez subsidiary in the Philippines for the financing of the Calaca coal-fired facility south of Manila. In November 2007 the IFC approved a loan of $275 million to Singapore-based AES Transpower for the Masinloc coal-fired power plant in the Philippines.