This paper focuses on the strategic direction of EITI and its implementing countries. Its findings may also help inform debate as governments and their development partners seek to support a recovery in line with a ‘well below 2°C’ world.
3. National and International Governance
For data, disclosures and dialogues to have impact, they must influence and improve governance. Spanning 53 producer countries with a population of almost 1.8 billion, EITI dialogues – facilitated by national secretariats and MSGs in each country – have unique reach. Effective EITI engagement with energy transition and climate change – and their implications for the good governance of extractive resources – could be transformative. This chapter sets out some of the ways in which EITI could contribute to improved governance at the national and international level, and help support an orderly and equitable transition. Given the strategic and capacity constraints to EITI’s involvement in global discussions on energy transition and climate change, this chapter emphasizes the potential of partnerships, and the need to avoid the duplication of efforts at national or international level.
National governance
By providing a forum for the exchange of well-informed discussion, EITI’s national dialogues have the potential to raise awareness of the economic and energy implications of transition, and encourage a more integrated approach to extractives governance, ensuring that decisions taken in the sector are aligned with wider economic, energy and climate goals, and accountable to the public.
Supporting policy alignment
While EITI is framed in the language of sustainable development, its engagement with the UN Sustainable Development Goals (SDGs) – particularly those relating to affordable and clean energy (SDG 7) and climate action (SDG 13) – has so far been limited. Energy transition and climate policy increasingly intersect with the sustainable development agenda, and shape the options available to developing countries. Donors and MDBs are now realigning their finance and policy assistance with the Paris Agreement, in many cases halting their support to fossil fuels while scaling up their support for climate finance. Energy transition is just one part of a wider transition to a decarbonized economy, but political and economic dependence on carbon-intensive sectors represents a real barrier to transition. Dependence on fossil fuels has until recently represented something of a ‘blind spot’, with initiatives such as the MDB joint framework for alignment with the Paris Agreement focusing largely on the facilitators of transition, rather than the barriers to it.37
The impact of extractive industry decisions on national energy transition and climate commitments warrants particular attention. All EITI-supporting and -implementing countries have submitted Nationally Determined Contributions (NDCs) to the UN Framework Convention on Climate Change (UNFCCC) under the Paris Agreement. These are designed to increase in ambition over time, and they will be accompanied by long-term emissions reduction plans to 2050. As noted above, extractive industries are often among the largest sources of energy demand – and of emissions – in developing countries. They can also lock in carbon-intensive infrastructures and consumption patterns, which may constrain a country’s ability to deliver its NDC commitments and increase its climate ambition over time. While many countries have included commitments to clean energy and afforestation in their NDCs, few have included commitments relating to the extractive industries. Nigeria is one of those that have, committing to ending gas flaring by 2030.38 There is now increasing discussion about whether to include extractive sector commitments in NDCs, including among new producers. Uganda is considering including its oil and gas sector – which stands to increase its annual emissions by around 10 per cent – in its revised NDC.39
Box 4: Indonesia’s experience
Indonesia joined EITI in 2011; it is a major producer of fossil fuels and minerals, and the world’s largest exporter of coal. Production of oil and gas is now declining, and the country is increasingly reliant on imports of fuel oil, the consumption of which is heavily subsidized. I-EITI notes several policy challenges relating to energy transition. Most of Indonesia’s emissions emanate from its forestry and energy sectors. The country has made clear commitments to climate action (in terms of both mitigation and adaptation) under its NDC, and national policies, including the draft National Medium-Term Development Plan for 2020–24 and the national energy policy, aim to reduce domestic fossil fuel use. However, there are challenges relating to policy alignment, due to overlapping responsibilities between ministries and inconsistencies in technical implementation, given the highly decentralized nature of governance in Indonesia.
Given Indonesia’s dependence on coal exports and fuel oil imports, the MSG is particularly concerned about the transparency of data on exports and imports, as well as information on revenues and costs. The MSG has a clear work plan exploring fiscal risk. It notes the net contribution of the extractive industries to the economy, which is effectively negated by state support to the sector, and the contribution of fuel oil imports to Indonesia’s balance of payments, which are dependent on high levels of government subsidies. It highlights the potential for investment in extractives and energy infrastructure to present an ‘economic trap’, given the country’s energy transition ambitions. It also cites broader civil society concerns about rent-seeking, from the political influence of major coal and power companies (the ‘coal lobby’), to the market influence of oil importers (the ‘oil cartel’).
There are clear opportunities for I-EITI to help address these inconsistencies between Indonesia’s extractive sector planning and its wider energy transition policy. The MSG is encouraged to use high-level advocacy for engagement with energy transition, exploring how to leverage EITI analysis in policy dialogues, and considering the scope of useful information and disclosures, including the appropriate level of disaggregation (upstream, energy, SOEs), the mechanism (template, system) and the type of data (production cost, price, project-level emissions, deforestation, etc.). Where dialogue is concerned, I-EITI is engaging with SOEs that play a primary role in the power sector and encouraging independent power providers to operate with transparency and to be accountable to the public. Looking ahead, it plans to define a clear role for the MSG in NDC processes and build its capacity in areas related to climate and energy transition, including the extractive industries.
Based on: National MSG presentations at the expert workshop Climate Change, Energy Transition and the EITI, convened by Chatham House on 17 January 2020.
EITI’s national secretariats and MSGs are well placed to identify inconsistencies between decisions taken in the extractive industries and wider sustainable development goals, including domestic energy transition targets and international climate commitments. Indonesia, for example, has been exploring the impact of extractive sector plans on national energy transition ambitions (see Box 4). From the resilience of revenues, to the emissions associated with the extractive sector, the areas of analysis that were introduced in the previous chapter will present economy-wide challenges. With the right information, MSGs could play a key role in raising these issues on the national agenda, while continuing to play a central role in countering corruption and vested interests, which may act as a barrier to transition. Effective engagement here may also help address wider questions of economic justice, as well as those relating to a just transition away from fossil fuels and carbon-intensive industry over time. As a result, there is a clear case for EITI to encourage the development of a role for national secretariats and MSGs in SDG and NDC processes.
Addressing barriers to transition
The political economy that emerges around the extractive industries and state support to fossil fuels can act as a barrier to transition. This reinforces the importance of EITI’s core mission, enhancing transparency and addressing corruption. It also highlights the importance of transparency around fossil fuel subsidies and other forms of state support to the sector, including direct transfers, loan guarantees, preferential credit, tax exemptions and price support. These are typically opaque and hard to assess. The definition of a subsidy is also contested, with some countries arguing that the domestic cost of production and delivery should be the benchmark, rather than international market prices. The OECD and IEA follow the World Trade Organization (WTO) definition of subsidies as financial transfers from government – namely direct budgetary and tax support. They estimate total global subsidies to fossil fuels in 2018 at $526 billion.40 The definition used in IMF research is broader, and includes ‘post-tax’ subsidies, including environmental and physical externalities that impose public costs. The IMF’s estimate (for 2017) stands at $5.2 trillion.41
EITI could play an important role in reporting data on subsidies across a wider range of countries, and particularly where tax exemptions and opaque forms of support to the sector are concerned.
Beyond the opportunity costs and the tax revenue that is foregone, price support can create economic distortions. The sale of fuel to the domestic market untaxed, or below export prices, can disincentivize energy efficiency and widen inequality, as the rich use more energy than the poor and therefore benefit disproportionately. It also risks locking in rising fuel demand and locking out clean technologies and infrastructures.
The reform of fossil fuel subsidies features in several areas of national governance, and it is a central pillar of SDG 12 on responsible production and consumption. Commitments to subsidy reform also feature in the NDCs of at least 20 countries, often at subnational level.42 While subsidy reform can support SDG and NDC delivery, it comes with implications for affected workers and consumers, and thus raises the importance of a ‘just transition’ within countries, as well as between them.
Transparency around the real costs of subsidies and the implications of their removal is crucial, yet beyond the OECD and G20 countries, reporting remains limited. In its input to the G20 Energy Transitions Working Group, the IEA/OECD stated that ‘increasing transparency on the use of scarce public resources is one way to maintain the momentum for fossil-fuel subsidy reform’.43 EITI could play an important role in reporting data on subsidies across a wider range of countries, and particularly where tax exemptions and opaque forms of support to the sector are concerned. It could also support wider conversations about the net contribution of the extractive sector to the economy over time. The disclosure of ‘unseen’ subsidies including public health and environmental damages may also support the development of natural capital accounting approaches within government, and encourage discussions about the changing value of natural resources over time.
International governance
National engagement with international discussions can help ensure that international tools and approaches are shared with developing countries, and put into practice where they are needed most. Enhanced awareness of and coordination with international processes could help address the current asymmetry of information between developing countries and their international partners, where the management of the economic impacts of transition is concerned. It could also help support international efforts to deliver an orderly, equitable transition.
Managing the economic impacts of transition
Climate-related financial risk
Just as EITI focuses on transparency and disclosure, so do emerging international efforts to manage the economic impacts of climate change and encourage the transition to a decarbonized economy.44 There are two key mechanisms at work here: the Task Force on Climate-related Financial Disclosures (TCFD) and the Central Banks and Supervisors Network for Greening the Financial System (NGFS).
The TCFD was established in 2016 with the objective of developing a consistent voluntary disclosure mechanism at company level. It now has over 1,000 supporters, with a combined market capitalization of almost $12 trillion.45 A shift towards mandatory disclosures looks increasingly likely. The UK’s Green Finance Strategy, launched in mid-2019, suggests that all listed companies and major asset owners will have to make TCFD disclosures by 2022, and HM Treasury has established a taskforce to explore how this could be implemented.46 At present, however, only 15 of 60 EITI-supporting companies are TCFD supporters. The EITI Board could also encourage EITI-supporting companies to support the TCFD and provide links to their disclosure of climate-related financial risks.
The NGFS was established in 2017 with the objective of sharing best practice among central banks and regulators, mainstreaming frameworks to manage climate risks, and supporting an orderly transition towards a sustainable economy. It now has 65 members (consisting of central banks and regulators) and 12 observers (including the major MDBs, the IMF and the OECD).47 They are working towards the development of data-driven scenarios to help central banks and regulators assess climate risks.
Emerging and developing economies with a dependence on extractives production and exports are among both the most exposed to the economic impacts of transition, and the least prepared.
Both the TCFD and the NGFS highlight the need to work with emerging and developing economies to ensure that they too build the capacity to identify and manage climate-related financial risks. Emerging and developing economies with a dependence on extractives production and exports are among both the most exposed to the economic impacts of transition, and the least prepared.48 Norway’s Climate Risk Commission, for example, has stressed the need for full sight of climate-related financial risks and effective management of them, due to Norway’s exposure to oil and gas.49 Raising awareness of these approaches and tools within MSGs could help ensure that governments draw upon international experience and best practice in managing the economic impacts of transition. It could also help create a feedback loop, making these mechanisms relevant to developing economies as well as to emerging and advanced ones.
The TCFD and the NGFS also both highlight gaps in the type of granular, asset-level data that is required across jurisdictions to build an accurate assessment of climate-related financial risk. They are encouraging the relevant government authorities to make such data publicly available. With its focus on project-level data, EITI has the potential to contribute to this effort, with disclosures relating to the viability of projects and the resilience of the revenues they generate, and the full scale of SOE assets and public finance reinvested in the extractive sector, for example. In both cases, the MSGs of EITI-implementing countries that also participate in the NGFS – including Colombia, Germany, Indonesia, Mexico and the UK – would be well placed to explore the opportunities.
Macroeconomic stability
Extractives transparency may also help manage climate-related risks in the global financial system. The IMF has been exploring the role played by macroeconomic and financial policies in mitigating climate change.50 It is also considering the implications of a rapid energy transition for oil and gas producers.51 Most recently, questions around debt have returned to the fore, and are being exacerbated by the COVID-19 crisis. Many fossil fuel exporters are already facing severe economic distress, due to the collapse in oil demand and prices, and the rising healthcare and economic costs of the crisis. Like climate change, the impacts of COVID-19 – and the economic stimulus measures being developed in response to it – underscore the importance of timely and accurate data, scenario analysis and public debate around different pathways, including the long-term viability of high-carbon industries and the sustainability of sovereign debt.
Greater transparency around the links between the extractives industries and the wider economy – and the implications of different transition pathways for economic stability, energy systems and industrial development – could help support the integration of scenario analysis in Article IV Consultations and Financial System Stability Assessments, for example. It could also help incorporate transition risks – and national preparedness for them – into sovereign credit ratings and the price of sovereign bonds. EITI already works with the IMF to align accounting standards, and has previously explored the ways in which EITI data might help credit ratings agencies.52 Disclosures on the resilience of resource revenues and the scale of public finance at risk in the extractive sector could contribute here.
Accounting standards
Accounting standards boards are considering whether the value of assets, including extractive resources and associated infrastructure, may be prematurely written down due to climate commitments and energy and investment trends. The Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) issued a note in 2019 stating that ‘qualitative external factors’ – including the sector in which a company operates, and investor expectations of the company – may present material risks that warrant disclosure in financial statements.53 The International Accounting Standards Board (IASB) has advanced this argument, highlighting requirements in the International Financial Reporting Standards Foundation’s (IFRS) Standard that could help companies make judgments on the materiality of climate-related financial risks, ranging from impairments to assets, to changes in contingent liabilities.54 In late 2019, the Spanish oil company Repsol became the first to issue an asset impairment, in line with its commitment to become a net-zero emissions company by 2050.55
These shifts will almost inevitably affect public accounting standards in time. Where flows such as revenues are concerned, EITI has already worked to align its reporting requirements with the IMF’s Government Finance Statistics. Where stocks, or natural assets, are concerned, there is less guidance. While EITI does not require the disclosure of reserves, many countries include them as contextual information in their reporting, and the scale and carbon intensity of these reserves will be of relevance where the assessment of climate risk is concerned. The International Public Sector Accounting Standards Board (IPSASB) is considering the reporting of natural resource revenues and assets under its Strategy and Work Plan for 2019–23.56 Early coordination with international accounting standards boards and their evolving approaches could help ensure alignment and build country capacity.
Supporting international climate action
Emissions reporting
The architecture of the Paris Agreement is based upon voluntary national commitments to emissions reductions within each signatory country’s national borders. The integrity of the process is dependent on the transparent reporting of progress towards these commitments. Under the Paris Agreement’s Enhanced Transparency Framework (ETF), developed countries will provide updates every two years, including providing greenhouse gas inventories and reporting their progress towards NDCs, which are subject to technical expert review and a multilateral peer review process. These updates support country assessments of progress, and alongside other inputs, contribute to a regular ‘global stock take’, where collective progress towards the long-term goal of the Paris Agreement is assessed. EITI engagement with emissions reporting could help develop national capacities and support the development of sector-specific commitments within NDCs, for example.
Supply-side policy
International climate negotiations have traditionally focused on the source of emissions – or the demand-side of fossil fuels. The discussion of supply-side policies with the objective of curbing fossil fuel supply is now beginning to emerge within UNFCCC processes. Proposed measures range from fiscal tools, such as production taxes, to regulatory measures including unilateral moratoriums and multilateral treaties on fossil fuel production.57 Alongside demand-side initiatives like the Powering Past Coal Alliance (PPCA), they reflect the growth of national policies and international coordination designed to manage the decline of fossil fuel production. At subnational level, transparency around the progress towards these commitments – and the finance and assistance that will be required to deliver them in an equitable way – will be crucial to maintaining societal support for transition. At international level, addressing the question of equity – and particularly which countries should be the first to wind down fossil fuel production – will also be crucial. Transparent data on fossil fuel production could help assess progress towards supply-side commitments within UNFCCC processes, where countries make them. The authors of the Production Gap report recommend the reporting of emissions associated with extraction on a voluntary basis under the UNFCCC, following extractive-based accounting methods.58
37 The MDBs are now focusing on a just transition. See the High Level MDB Statement at the UN Secretary-General (UNSG) Climate Action Summit, 22 September 2019, https://www.adb.org/sites/default/files/page/41117/climate-change-finance-joint-mdb-statement-2019-09-23.pdf (accessed 11 May 2020).
38 See Nigeria’s first NDC. Government of Nigeria (2017), Nigeria’s Intended Nationally Determined Contribution, UNFCCC NDC Portal, https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Nigeria%20First/Approved%20Nigeria’s%20INDC_271115.pdf (accessed 11 May 2020). Nigeria’s NEITI has previously argued that penalties for gas flaring have not provided a sufficient deterrent, and has made a series of recommendations in its EITI reports to enforce gas flaring penalties. See NEITI (2015), Final Report on 2015 NEITI Oil and Gas Industry Audit, https://eiti.org/files/documents/neiti-oil-gas-report-2015-full-report-281217.pdf (accessed 11 May 2020).
39 As discussed at the New Petroleum Producers Discussion Group (New Producers Group, or NPG) National Seminar, held in Kampala in November 2019. The NPG is a peer learning group convened by Chatham House, NRGI and the Commonwealth Secretariat. See Chatham House (2020), New Petroleum Producers Discussion Group, https://www.chathamhouse.org/about/structure/eer-department/new-petroleum-producers-discussion-group-project (accessed 21 May 2020). Climate risk and energy transition training and discussions, led by Chatham House, featured in NPG Annual General Meetings and National Seminars in Kampala (2019), Accra (2018), Georgetown (2017), Nairobi (2016) and Dar es Salaam (2015).
40 Based on the International Institute for Sustainable Development (IISD) Global Subsidies Initiative (GSI) presentation to the Chatham House workshop. Data available at IEA (2020), Energy subsidies – Tracking the impact of fossil-fuel subsidies, https://www.iea.org/topics/energy-subsidies (accessed 21 May 2020).
41 See the IMF explainer (2020), ‘Energy Subsidies’, https://www.imf.org/en/Topics/Environment/energy-subsidies, and a supporting study on post-tax subsidies: Coady, D. et al. (2019), Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates, IMF Working Paper No. 2019/89, https://www.elibrary.imf.org/view/IMF001/25712-9781484393178/25712-9781484393178/25712-9781484393178.xml (both accessed 21 May 2020).
42 Global Subsidies Initiative (2019), Raising ambition through fossil fuel subsidy reform: Greenhouse gas emissions modelling results from 26 countries. Geneva: Global Subsidies Initiative of the International Institute for Sustainable Development, https://www.iisd.org/sites/default/files/publications/raising-ambition-through-fossil-fuel-subsidy-reform.pdf (accessed 1 Jun. 2020).
43 IEA/OECD (2019), Update on recent progress in reform of inefficient fossil-fuel subsidies that encourage wasteful consumption, Contribution by the International Energy Agency (IEA) and the Organisation for Economic Co-operation and Development (OECD) to the G20 Energy Transitions Working Group in consultation with: International Energy Forum (IEF), Organization of Petroleum Exporting Countries (OPEC) and the World Bank, 2nd Energy Transitions Working Group Meeting, Toyama, 18–19 April 2019, https://www.oecd.org/fossil-fuels/publication/OECD-IEA-G20-Fossil-Fuel-Subsidies-Reform-Update-2019.pdf (accessed 21 May 2020).
44 ‘Increasing transparency makes markets more efficient, and economies more stable and resilient’ (Michael Bloomberg). See Task Force on Climate-related Financial Disclosures (undated), www.fsb-tcfd.org (accessed 21 May 2020).
45 TCFD (2020), ‘More than 1,000 Global Organizations Declare Support for the Task Force on Climate-related Financial Disclosures and its Recommendations’, Press Release, 12 February 2020, https://www.fsb-tcfd.org/wp-content/uploads/2020/02/PR-TCFD-1000-Supporters_FINAL.pdf (accessed 11 May 2020).
46 HM Government (2019), Green Finance Strategy – Transforming Finance for a Greener Future, July 2019, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/820284/190716_BEIS_Green_Finance_Strategy_Accessible_Final.pdf (accessed 21 May 2020).
47 Central Banks and Supervisors Network for Greening the Financial System (NGFS) (2020), Membership, 16 April, https://www.ngfs.net/en/about-us/membership (accessed 11 May 2020).
48 Countries in NORAD’s Oil for Development programme participated in a scenario analysis exercise, drawing on TCFD/NGFS principles, as part of a climate risk and energy transition capacity-building course led by Chatham House and delivered in partnership with the UN Environment Programme and the Norwegian Environment Agency in Geneva.
49 Norwegian Climate Risk Commission (2018), Climate risk and the Norwegian economy, Official Norwegian Reports NOU 2018: 17 Summary, https://www.regjeringen.no/contentassets/c5119502a03145278c33b72d9060fbc9/en-gb/pdfs/nou201820180017000engpdfs.pdf (accessed 11 May 2020).
50 See for example Krogstrup, S. and Oman, W. (2019), Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature, IMF Working Paper No. 19/185, https://www.imf.org/en/Publications/WP/Issues/2019/09/04/Macroeconomic-and-Financial-Policies-for-Climate-Change-Mitigation-A-Review-of-the-Literature-48612 (accessed 11 May 2020).
51 See for example Cherif, R., Hasanov, F. and Pande, A. (2017), Riding the Energy Transition: Oil Beyond 2040, IMF Working Paper No. 17/120, https://www.imf.org/en/Publications/WP/Issues/2017/05/22/Riding-the-Energy-Transition-Oil-Beyond-2040-44932 (accessed 11 May 2020).
52 EITI and the UN-supported PRI (Principles for Responsible Investment) explored the potential role of EITI disclosures in credit risk assessments in 2015–16, although the issue of climate change was not raised at that time. See EITI International Secretariat (2015), Quantifying Intangibles – Using the Extractive Industries Transparency Initiative (EITI) in Credit Ratings Assessments, EITI Brief, Oslo: EITI International Secretariat, https://eiti.org/files/documents/20150825_eiti_brief_how-to-use-the-eiti-in-credit-rating-assessments.pdf; also Gordy, A. (2016), Using the Extractive Industries Transparency Initiative to Enhance Credit Ratings Assessments, UN PRI & EITI, https://www.unpri.org/download?ac=202 (both accessed 21 May 2020).
53 AASB and AUASB (2019), Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2, April 2019, https://www.aasb.gov.au/admin/file/content102/c3/AASB_AUASBJointBulletin.pdf (accessed 21 May 2020).
54 IASB (2019), IFRS Standards and climate-related disclosures, IFRS In Brief, November 2019, https://cdn.ifrs.org/-/media/feature/news/2019/november/in-brief-climate-change-nick-anderson.pdf?la=en (accessed 21 May 2020).
55 Repsol wrote down its assets by €4.8 billion in 2019. See Repsol (2019), Repsol will be a net zero emissions company by 2050, https://www.repsol.com/en/press-room/press-releases/2019/repsol-will-be-a-net-zero-emissions-company-by-2050.cshtml (accessed 11 May 2020).
56 See IPSASB’s Strategy and Work Plan 2019–2023, https://www.ifac.org/system/files/publications/files/IPSASB-Strategy-and-Work-Plan-2019-2023.pdf (accessed 21 May 2020).
57 See for example the Lofoten Declaration, http://www.lofotendeclaration.org/; and the Fossil Fuel Non-Proliferation Treaty, https://www.fossilfueltreaty.org/ (both accessed 21 May 2020).
58 SEI, IISD, ODI, Climate Analytics, CICERO and UNEP (2019), The Production Gap: The discrepancy between countries’ planned fossil fuel production and global production levels consistent with limiting warming to 1.5°C or 2°C, http://productiongap.org/ (accessed 11 May 2020).