Annex I: MDB and Donor Case Studies
The World Bank Group’s support to energy, extractives and climate change156
The World Bank Group (WBG) has 189-member countries and is composed of five institutions including: the International Bank of Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA).
The World Bank Group recognizes that its twin goals of ending extreme poverty and boosting shared prosperity cannot be achieved ‘without tackling climate change’. In 2017 alone, the WBG provided $12.8 billion in financing to over 200 climate-related projects. It has indicated that it will increase climate financing to 28 per cent of its portfolio – or around $29 billion per year by 2020. It has set out five priorities for this finance commitment:
- Integrating climate change into development priorities;
- Accelerating the energy transition;
- Facilitating expansion of sustainable infrastructure;
- Boosting the climate resilience of communities and ecosystems; and,
- Unlocking private finance for greater benefits.
Beyond being the largest multilateral financier of climate action in the world, the WBG also hosts the Climate Investment Funds, which have provided cutting edge climate expertise and financial support to developing countries for the past 10 years. This includes the Clean Technology Fund, which has been a key driver of frontier technologies, including Concentrated Solar Power. The World Bank was a first mover on supporting the establishment of global carbon markets. It created the first ever carbon fund and today is trustee of 15 carbon initiatives. These funds have supported more than 145 active projects in 75 countries and since 2000, these initiatives have reduced the equivalent of 187 million tons of carbon dioxide emissions. The WBG is also a leading global advocate for carbon pricing, leading and hosting the Carbon Pricing Leadership Coalition, which continues to mobilize political and business leadership for carbon pricing. The WBG is among the world’s leaders and largest issuers of green bonds, raising over $16 billion in over 200 green bonds since 2008 for climate and environment-related investments.
Recognizing the importance of the extractives sector to many resource-rich developing country economies, the WBG provides extractives-related development assistance that focuses on effective governance, transparency, and financial, social and environmental sustainability. Cumulative investment over the past decade has been about $3.3 billion. The WBG believes that if managed effectively, the sector can help provide jobs, shared infrastructure, government revenues, and benefits for local economies. The IFC states that its goal in oil, gas and mining is to ‘help developing countries realize these benefits, while helping promote sustainable energy sources’.
In line with the WBG’s commitments to the Paris Agreement and to help countries accelerate the transition to sustainable energy, policy is moving away from support for high emissions sectors. As outlined in its 2013 Energy Sector Directions Paper, the WBG can only provide financial support for greenfield coal power generation projects in ‘rare circumstances’, such as to meet basic energy requirements in countries with no feasible alternatives to coal. The WBG has not financed a new coal-fired energy project since 2010.
In 2017, the WBG announced that it would no longer invest in new upstream oil and gas after 2019 ‘unless under exceptional circumstances’ – where there is ‘clear benefit to energy access, and this is consistent with countries’ NDC commitments’. This decision does not affect finance to natural gas investments for transport, distribution and power generation.
As of 2017, the WBG began to design and apply shadow carbon pricing to its economic analysis of projects in high-emitting sectors with the intention of mainstreaming this practice.
The African Development Bank: Towards mainstreaming climate policy157
Aligning climate, extractives and good governance goals is a priority for the AfDB given that 51 of its 54 member countries are exploring for or producing petroleum and all will be deeply affected by climate change. The AfDB projects that the region’s total extractive-based annual government revenue will reach $30 billion over the next 20 years. In spite of the economic potential, the AfDB recognizes the history of regulatory and governance weaknesses, environmental and human rights impacts, and poor redistribution of resource wealth to citizens. Meanwhile, adapting to climate change over this period is expected to cost the continent around $7–$15 billion per year by 2020, increasing to $35 billion annually by the 2040s, and up to $200 billion annually by the 2070s in a world in which temperatures rise by 4°C above pre-industrial levels.
The AfDB’s Ten-Year strategy (TYS) 2013–2022 is thus strongly invested in two concepts:
- Inclusive growth – Broadening prosperity across age, gender and geography, with deep reductions in poverty and increasing economic opportunity.
- Green growth – Transitioning the continent to growth that will protect livelihoods, improve water, energy and food security, promote the sustainable use of natural resources, build resilience to climate shocks, and spur innovation and economic development. This includes ‘green industrialization’.
Alongside the TYS is the AfDB’s Second Climate Change Action Plan (2016–2020). The AfDB is committed to devoting 40 per cent of its total financing – $5 billion a year – by 2020 to climate-related projects and plans to achieve parity in financing mitigation and adaptation projects.
In 2013, the AfDB created the African Natural Resources Center (ANRC) to assist its regional member countries in maximizing development outcomes derived from natural resources. This includes advice to countries and multilateral corporations on ‘integrated natural resource development’ plans, which adopt a long-term perspective that promotes green and blue (referring to sustainable use of ocean resources) economic principles, including initiatives to combat desertification, deforestation and degradation.
In order to mainstream climate change and green growth through its operations, the AfDB has developed several tools to inform its decision-making through the project cycle. These include a Climate Safeguards System, a Greenhouse Gas Accounting Tool and the Additionality and Development Outcomes Assessment (ADOA) among other project appraisal tools. This is driven by the idea that Africa cannot afford to ‘grow today and clean up tomorrow’.
The AfDB expects to increase assistance on implementation of NDCs, some of which are hydrocarbon sector specific. Inadequate donor financing remains a major obstacle so the AfDB is focusing on access to alternative funding through bond issuance (particularly green bonds), multilateral climate funds, and private finance through public–private partnerships (PPPs).
The European Bank for Reconstruction and Development (EBRD) is supporting the ‘greening’ of transition economies158
EBRD’s overall mission is to ‘promote transition to open, market-based economies’ in the 39 countries in which they operate – from Central and Eastern Europe, to Central Asia and the southern and eastern Mediterranean to North Africa. The EBRD works towards this goal through financial investment projects that help promote the environment for business.
Between 2006 and 2013, EBRD invested a total of €11.12 billion across 155 energy and power sector projects. Analysis of EBRD’s accounts suggests that in 2006–13, support to hydrocarbons-related projects equalled around €2.5 billion. A shift towards sustainable energy has been taking place. The EBRD’s revised Energy Sector Strategy for 2014–18, identifies energy efficiency as the first response to global energy security. The strategy also reinforces the Bank’s growing support for renewable energy – highlighting the organization as ‘an enabler’ of renewables and ensuring that EBRD does not finance coal-fired generation, ‘except in rare and exceptional circumstances where there are no feasible alternative energy sources’. In 2015, the EBRD also launched the Green Economy Transition (GET) approach. The approach aims to put investments that bring environmental benefits to the centre of their investment strategy, seeking to increase the volume of green financing (beginning with renewable energy and energy efficiency) from an average of 24 per cent of EBRD annual business investment in the 10 years up to 2016 to 40 per cent by 2020.
A number of the EBRD’s countries of operation are producing or planning to produce more fossil fuels (including Russia, Kazakhstan, Egypt, Mongolia, Lebanon), and EBRD’s most recent strategy document recognizes that fossil fuel rich countries face great uncertainties – in terms of timing, policy choices and carbon prices. Technical cooperation and support activities amount to less than 2 per cent of EBRD’s assistance to the extractives resources and energy sectors, but increasingly EBRD is questioning what climate constraints mean for future growth pathways and economic stability – particularly where fiscal policy and fossil fuel subsidies are concerned – and is now engaged in efforts to tailor policy recommendations to enhance country understanding of the channels through which climate risks and impacts may occur. One pilot initiative works with ministries of finance in two hydrocarbons exporting countries to assess how carbon risk could affect their economies over the next two decades and what measures they might put in place to build greater resilience.
The UK Department for International Development’s (DFID) strategy159
DFID’s 2017 Economic Development Strategy places economic growth, productive jobs and investment at the heart of its efforts to eradicate extreme poverty, deliver SDGs and end reliance on aid. It recognizes that extractive resources play a role in shaping a country’s development path, and outlines DFID’s commitment towards a low-carbon transition, including by supporting partner countries to manage their extractive resources.
DFID’s extractives portfolio includes policy and regional programming that supports initiatives such as the Extractive Industries Transparency Initiative (EITI) and Skills for Oil and Gas Africa (SOGA), as well as country-level programs that provide technical assistance and capacity-building for government, civil society and the private sector. Priority areas include curbing illicit and illegal financial flows linked to the extractives sector, maximizing job creation in and around the sector, and leveraging data and technology to increase accountability in the sector. It only works directly with countries on sector development issues when invited to do so.
DFID’s climate portfolio supports countries in their transition to a climate-smart future; assistance ranges from strengthening partner governments’ capability to deliver on their NDC commitments, to making environment and climate-related considerations more central to development capital, and working with multilateral institutions to scale up climate finance by 2020. The need for strong action on climate change in order to ensure long-term economic and societal resilience is also stressed; particularly in light of both the rising cost of natural disasters and the rapidly declining cost of low-carbon and clean technologies.
DFID is increasingly taking a whole system approach to its work on energy and climate. It begins with assessing the demand for energy services by poor households and firms, and looks back across the stages (and delivery modalities) of energy systems needed to deliver these e.g. distribution, transmission, and generation, right back to decisions on extraction. A major focus of this approach is to strengthen alignment with other parts of the UK government (such as the Department for Business, Energy and Industry (BEIS) and the Foreign and Commonwealth Office (FCO) and ensure the UK is speaking with one voice in relation to developing countries and partners.
Norway’s development strategy160
Given its own successful oil industry, which is seen as a model for ‘avoiding the resource curse’ around the world, Norway offers technical assistance to other countries developing their petroleum. The ‘Oil for Development’ (OfD) programme comes under the Norwegian Agency for Development Cooperation (Norad), which sits within the Department for Economic Development, Gender and Governance and is jointly governed by five ministries including the Ministry of Petroleum and Energy, and the Ministry of Climate and Environment.
OfD’s role is to offer ‘assistance to developing countries in their effort to manage petroleum resources in a sustainable manner’. Its primary objective is poverty reduction and it works to support this by assisting in the responsible management of petroleum resources in those countries that formally request its support. Its main functions are technical: assisting countries with the political and legal framework for the sector, building the competence of relevant authorities governing the sector, and working with civil society so that they can hold those authorities to account. To date, it has worked in about 35 countries, and currently works in 14, including some newer hydrocarbons producers.
Climate change and the environment is one of the eight thematic focus areas for Norad, which states that climate change and the environment are ‘the main focus for Norwegian Development Policy’ and cross cutting concerns for all Norwegian development programs, including OfD. As early as 2008, Norwegian embassy reports on ‘greening Norwegian development assistance’ in key countries, such as Mozambique and Angola, were highlighting ‘green’ linkages to OfD’s work, although the scope for these recommendations was typically limited to the ‘greening’ of oil and gas sector activity, as opposed to wider market and sustainable development risks.
More recently, in its 2014 annual report, OfD cites ‘issues related to climate change’ under the environment as part of its holistic approach to petroleum management. In 2016, to strengthen the environmental aspects of the programme OfD entered into a strategic partnership with the UN Environment Programme (UNEP). Meanwhile it is scaling up support for renewables and clean technologies through its Clean Energy Initiative. Norad strategy addresses climate change systematically and in various ways, conveying Norwegian experience on:
- Information about emissions from the petroleum sector, as well as legal and financial tools to reduce emissions;
- Regulations on gas flaring, which was prohibited in Norway in the 1970s;
- Application of a carbon tax, which was implemented in Norway in 1991; and
- Assistance in mapping, measuring and reporting of climate gas emissions from the petroleum sector, including as part of the NDCs under the Paris Agreement.
This policy framework strongly supports countries making their own choices and policies for promoting economic growth, but also aims to ‘encourage countries to draw up forward-looking development strategies that are robust to climate change’. The government white paper underpinning this policy states that ‘Africa now has the opportunity to choose a planned, sustainable, robust low-carbon path of development’ and promotes renewable energy through its contribution to the Global Energy Efficiency and Renewable Energy Fund while Norad has a section devoted to renewable energy.
Moreover, Norway pursues a strong leadership role in the climate change mitigation agenda internationally, and implements a carbon tax regime domestically. Its sovereign pensions fund has divested from coal internationally on the grounds of both climate and financial risk.