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Signaling more independence from the US, the World Bank phases out its support for fossil fuels
January 17, 2018 5.12am SAST •Updated January 17, 2018 11.02pm SAST
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Jason Kirk
Associate Professor of Political Science and Policy Studies, Elon University
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Jason Kirk does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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World Bank President Jim Yong Kim, left, and French President Emmanuel Macron. AP Photo/Francois Mori
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The World Bank, which provides developing countries about US$60 billion a year in financial assistance, is officially phasing out its support for the oil and gas industries.
This move brings its actions more in sync with its overarching commitment to slowing the pace of climate change and keeping the Paris agreement on track. Based on my research regarding international relations, I see this move – which World Bank President Jim Yong Kim announced in December – as significant for two reasons.
The bank has signaled that the international community is taking the fight against global warming more seriously than ever. And it shows that the bank intends to keep playing a leading role in that battle at a time when its most powerful shareholder, the U.S., is turning its back on global environmental leadership.
Climate leadership
Kim has been taking the World Bank in a direction that climate change activists and other critics have long advocated by positioning the institution as a global environmental leader since he became its president in 2012.
In 2013, the bank decided to stop financing the construction of coal-fired power plants, except in cases where no viable alternatives existed.
Three years later, the World Bank pledged that it would make 28 percent of all of its transactions by 2020 advance climate action.
The bank’s climate efforts are wide-ranging. It lends money to build solar and wind farms, requires its borrowers to take steps to shrink their carbon footprints, and has a goal of “greening the whole financial system.”
World Bank Group President Jim Yong Kim, former U.S. Vice President Al Gore and other leaders speak during a panel on climate-related finance during a meeting hosted by the bank and the International Monetary Fund. Grant Ellis / World Bank, CC BY-SA
U.S. relations
Kim’s announcement, which rules out new lending but does not affect loans made in the past or in the next year or two, may portend some political drama. But President Donald Trump has not yet commented on it.
That could change, given that Trump has declared that the U.S. would withdraw from the Paris agreement. Exiting the world’s most far-reaching global climate compact, signed by nearly every country on the planet, until now has appeared to be a largely symbolic gesture. Trump has even said that he might “conceivably” change course.
However, his administration has sought to cut some of the funding for the World Bank and similar institutions.
Although the U.S. wields veto power over changes to the World Bank’s structure and has historically selected its top leader, Kim’s tenure is apparently safe. He began a second five-year term in July 2017, and Trump has supported him so far.
On Jan. 10, 2018, President Donald Trump said that the U.S. “could conceivably go back in” and rejoin the Paris climate agreement.
The fine print
When the bank swore off coal in 2013, Kim argued that “poor people should not pay the price with their lives of mistakes that people have been making in the developed world for a very long time.”
Since then, the bank’s primary lending division has only considered one loan for a coal project, a Kosovo power plant.
But the World Bank Group’s two private sector arms, the International Finance Corp. and the Multilateral Investment Guarantee Agency, have continued to support new fossil fuel ventures, including coal, in African and Asian countries – and elsewhere.
For example, the IFC, has indirectly funded 41 new coal-fired power plants in countries like Bangladesh and the Philippines by financing banks that lent money to build them – despite the bank’s refusal to directly make loans like those.
The IFC also directly invested $200 million in Citla Energy, a Mexican oil company, in 2016.
Likewise, when Kim made this announcement, he did not completely rule out all future support for gas investment. Instead, he held open the possibility of continued support for natural gas “in the poorest countries where there is a clear benefit in terms of energy access for the poor and the project fits within the countries’ Paris Agreement commitments.”
To be continued
For an institution whose mission seeks a “world free of poverty,” the impulse to continue lending for fossil fuel projects could be strong. Recent experience with coal suggests that while the bank’s direct lending indeed may end in all but isolated cases, its indirect support for private sector investment may continue.
The alternative to this support for poor countries is usually to partner with private investors, including corporations and big countries such as China, which is lending developing countries about $40 billion a year, according to economist David Dollar.
Given the Bank’s emphasis on climate action, supporting oil, gas and coal production – the main cause of climate change – makes little institutional sense.
But we expect developing countries to continue to exploit their oil and gas deposits even without the World Bank’s help, even if that means they reap less revenue from these industries due to their weaker bargaining power. For this reason, the bank will weigh carefully whether to pull out of fossil fuels entirely in the very poorest countries.
The World Bank includes 188 member countries besides the U.S. Even if the institution’s bucking of fossil fuels proves somewhat less than absolute, any progress in that direction shows how hard it would be for the Trump administration to truly undermine the Paris climate deal.
This article has been corrected to reflect the fact that the World Bank has not approved the Kosovo coal loan that it has considered making.
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2 Comments
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Robin Guenier
I suggest Jason that, although you touch on it, you may not have really come to terms with the huge change in geopolitics that has occurred over the last twenty years or so. No longer does the West (essentially the countries of Western Europe and North America) have the power and influence over the rest of the world (ROW) that it’s enjoyed for at least the last two hundred years. That’s especially true regarding the newly industrialised economies such as China, India and South Korea.
One result of this is that the World Bank – essentially a Western body despite widespread ROW involvement – no longer calls the international investment shots. And that’s especially true of support for new power generation plant. China provides the most egregious examples. For example, a major component of China’s important “One Belt, One Road” project (to which you refer indirectly) involves investment in new coal-fired power generation and coal mining plant throughout the world. Examples are found in Kenya, Botswana, Ghana, Malawi, Nigeria, Tanzania, Zambia, Zimbabwe, Brazil, Myanmar, Cambodia, Bangladesh, Vietnam, Malaysia, Mongolia, Pakistan, India, Indonesia, Romania, Iran, Turkey, Serbia, Uzbekistan, Russia, the United States, the UAE and Egypt. Some references: LINK, LINK and LINK. And this report provides a comprehensive picture of what’s happening. Two extracts:
Our research shows that between January 2014 and September 2017, the global banking sector provided and mobilised financing in excess of $600 billion for the top 120 coal plant developers, via lending and underwriting. And approaching half of this sum – $275 billion – has been provided since the Paris Agreement was signed in 2015, despite their coal plant development plans being fundamentally incompatible with the objectives of this agreement.
Standing at 60% of the overall total of financing between January 2014 and September 2017, most of the financing to the top 120 coal plant developers came from Chinese banks, the vast majority of this through the issuance of bonds. Coming second, 8% of the total financing came from Japanese banks, this time mostly through lending to coal plant developers. Indian banks rank third, channelling 7% of the total financing.
And that’s just coal – support for which the World Bank is supposed to have phased out five years ago. But finance is also provided for gas and oil and, judging by what’s happened with coal, that’s very likely to continue after the WB’s phase out.
(The David Dollar paper to which you refer provides more useful data on the above.)
You say:
the international community is taking the fight against global warming more seriously than ever.
But, as indicated above, that’s not borne out by what’s really happening. Your referenced IFC and other indirect WB investments show that fossil fuel investment is far from over – and the Chinese coal investments to which I refer go even further. But what was agreed in Paris in 2015 provides the best example of global reality. Your link to the Conversation article on the Paris Agreement provides an indication of many of its problems. But what it overlooks is how the Agreement exempts developing countries (i.e. the ROW) – responsible for 65% of global CO2 emissions (LINK) – from any obligation, legal or moral, to reduce those emissions: LINK. This outcome was the result of years of careful negotiation by the newly industrialised countries, led by India and China, that established their “first and overriding” right to prioritise economic development and poverty eradication.
So Kim may be “positioning the institution as a global environmental leader” but only a handful of countries seem interested in following that lead.
I believe that the Paris Agreement is a major obstacle to any realistic hope of substantial, if any, emission reduction. I’m not a Trump fan, but his proposal that the Agreement should be renegotiated (LINK) – not undermined as you seem to believe – is arguably the best and possibly the only way forward. Unfortunately, it’s most unlikely to happen.
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10 hours ago
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Jason Kirk
Associate Professor of Political Science and Policy Studies, Elon University
In reply to Robin Guenier
Thanks, Robin, these are good points. I study India so I am aware of the “huge change in geopolitics” that you mention. It is the central theme of my teaching, and many of my students are waking up to it (some for the first time).
The Paris Agreement is far from perfect, I agree. My point that the international community is taking climate change “more seriously than ever” is a relative assessment (compared to 20, 10, or even 5 years ago) that certainly doesn’t mean “seriously enough.” I have very a hard time believing Mr. Trump is sincere in his call for a renegotiation; I’d love to be wrong about that. But either way, I agree with you that such renegotiation is unlikely to happen in the foreseeable future.
One can also do so much in a 900-word essay; I tried to note the real significance of Kim’s announcement while also pointing out that the World Bank’s shift may be less than meets the eye. Thanks for elaborating on reasons to be skeptical…
9 hours ago
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