The World Bank’s conflicted role in energy

Controversy among the Bank's executive directors

15 February 2010

A spat between the US administration and some middle- and low-income shareholders in the World Bank highlights political tensions carried over from Copenhagen climate talks. While the Bank showcases its ‘clean’ energy investments, projects in the pipeline for 2010 look set to continue large-scale investment in fossil fuels.

During the Copenhagen negotiations the US Treasury quietly released a guidance note for multilateral development banks (MDBs) on developing countries and coal-fired power generation. The guidance emphasises that MDBs should build demand for no- or low-carbon energy sources. It also provides step-by-step procedures it wants MDBs to follow in order to ensure full consideration of no- or low-carbon options before approving fossil fuel power generation or retrofit projects.

However nine executive directors (EDs), representing a number of middle- and low-income countries, have sent an angry letter to World Bank president Robert Zoellick, protesting against the US trying to use its influence as the Bank’s biggest shareholder to direct Bank operations. Signatories include representatives of India, China and Saudi Arabia. The letter reminds Zoellick that under the United Nations Framework Convention on Climate Change, “the incremental cost of such mitigation measures will be met through grant assistance provided by developed countries.”

Stephen Kretzmann of NGO Oil Change International says, “this letter is a defence of multilateralism and UN authority, and an attack on US unilateralism. It appears to be a reaction to the process at Copenhagen and the US insistence on the centrality of the Bank.”

If the US wishes to accelerate the deployment of clean energy in developing countries, let it also pay its fair share of the incremental costs of moving away from coal

The US note has highlighted conflicting opinions among World Bank shareholders as to the extent that the Bank should continue to lend to fossil fuel projects. As the Bank begins consultations for this year’s energy strategy review (see Update 67), some environmentalists have welcomed this initiative as a political signal that the US is serious about helping support low-carbon development in developing countries.

The EDs’ letter cites the Bank’s Strategic Framework on Development and Climate Change (SFDCC, see Update 62), which provides that “the Bank could support client countries to develop new coal power projects subject to certain prescribed conditions.” In early February, the board discussed the staff guidance note for choosing coal projects according to the SFDCC criteria, which could result in the note’s revision. However, according to the letter from the southern EDs, the Bank has already responded to the US guidelines by dropping Pakistan’s Thar Coal and Energy Project.

The letter’s objection to developing countries having to use loans to finance more expensive renewable energy is a clear reference to the failure of Copenhagen to provide climate finance (see page 4). Raman Mehta from ActionAid India, adds that “the developing countries are not asking for the right to pollute. They are defending their right to access energy. If the US wishes to accelerate the deployment of clean energy in developing countries, let it also pay its fair share of the incremental costs of moving away from coal.” Vinuta Gopal from Greenpeace India also points out the need for the US to put its own house in order. “While it is right for USA to point out that funding of coal is not what the World Bank should be doing and funding renewable alternatives instead, it is hypocritical too. If America was really concerned about impacts on climate change, they should be regulating the coal industry in the US and should have committed to a fair, ambitious and binding deal at Copenhagen. They failed to do that.”

Bank’s dual personality

As the Bank seeks to position itself as a suitable institution for future climate finance (see page 4), it has tried to shift attention away from its fossil fuel investments. It has trumpeted its increase in funding for energy efficiency and renewable energy to 40 per cent of its energy sector portfolio in 2009 (see Update 68), though observers have noted that this includes retrofitting of coal plants.

However, a three year analysis on the Bank’s annual average lending to the energy sector (2007-2009) by NGO Bank Information Center shows an annual average of $2.2 billion going to fossil fuels each year including $470 million for coal. Only $780 million goes to renewables (see Update 68). This looks set to continue, not least because a $3 billion Bank loan to the South African electricity company Eskom to complete a 4,800 megawatt coal-fired power plant is currently in the pipeline (see Update 65). The Bank has also recently agreed to loan $180 million to India for the renovation and modernisation of coal-fired generating units in the states of Haryana, Maharashtra and West Bengal. The sponsors of the Nabucco gas pipeline, which is designed to carry gas from Central Asia to Europe, have reported that they approached the Bank’s private-sector arm, the International Finance Corporation, about investing in the $1.5 billion project.

Meanwhile the Bank’s climate investment funds have begun paying out money. Recent disbursements from the Clean Technology Fund (CTF) have included $500 million to new renewable and energy efficiency in South Africa and $750 million to fund five concentrated solar power (CSP) programmes in Algeria, Egypt, Jordan, Morocco and Tunisia.

Bank exacerbates resource curse

A recent Independent Evaluation Group (IEG) report on the failed Chad-Cameroon oil development and pipeline programme highlights the Bank’s troubled past in fossil fuel investments, confirming longstanding civil society critiques (see Update 56, 49). It found that “poverty developments were not adequately monitored, a serious shortcoming for a programme whose main objective was poverty reduction through the use of oil revenue,” and that during the period of funding “the oil revenue windfall was associated with a resurgence of civil conflict and a worsening of governance.” The lessons of the Chad-Cameroon pipeline will be important for the energy strategy review (see Update 68) as well as the current review of the IFC’s safeguards (see Update 67).