Fossil fuel exclusion policies

Explanation

Fossil fuels represented approx. 21% of the EBRD’s energy sector financing over 2019–2023.

Coal

The EBRD, in its Energy Sector Strategy (ESS) 2019–2023, committed to exclude from financing all thermal coal mining or coal-fired electricity generation capacity. This includes upgrades to existing plants as well as the construction of new capacity. This exclusion is reiterated in the ESS 2024–2028, where it is explicitly stated to cover intermediated operations as well.

The ESS 2019–2023 further added that the Bank will not finance port terminals principally dedicated to thermal coal, nor will it finance transport links principally dedicated to carrying thermal coal. This exclusion is not reiterated in the ESS 2024–2028.

In the ESS 2019–2023, the EBRD commits to not financing any investment in coal-fired heat-generating plants. It may, however, “finance district heating companies that use coal as part of their energy mix provided that the investment is not related to, or is outside the boundary of, coal-based heat generation”. Once again, this exclusion is not reiterated in the ESS 2024–2028, and clarifications on this would be welcome.

Oil and gas 

The ESS 2024–2028 builds on and goes further than its predecessor’s exclusion of upstream oil exploration and development (with exceptions for the latter in exceptional circumstances) by fully excluding the upstream oil and gas sector from Bank financing. In addition, the ESS commits the Bank not to finance midstream oil, including any oil transportation and/or storage.

The exclusion criteria differ for intermediated transactions. For transactions where subtransactions are known, all fossil fuel financing is excluded (including midstream gas and oil and gas-fired power generation), except for gas-fired heat generation. However, for projects where subtransactions are not known, the criteria are less strict: only coal and upstream oil and gas are excluded. It is not clear why different exclusions are applied when subtransactions are not known.

All remaining oil and gas investments have to be aligned with the goals of the Paris agreement as per the EBRD’s Paris alignment methodology. The methodology puts forward tests that projects are subjected to do determine their Paris alignment, including:

• Review against NDCs, Long-Term Strategies and other policy plans underpinning them: the project must not be ruled out by national policy plans.
• Review against low-carbon pathways: the project must fulfil the criteria set by a credible national low-carbon pathway.
• Testing for carbon lock-in: testing against possibility of economically viable low-carbon alternatives and low-carbon-readiness of the project.
• Economic assessment: this includes testing against a shadow carbon price.

Furthermore, gas projects must include a clear plan to control and/or reduce methane leakages from the relevant asset.                                                               

While these criteria represent a positive step, they leave significant room for individual interpretation by project teams. Furthermore, economically competitive clean energy alternatives are available for the vast majority of gas and oil uses. Where they are not, the Bank could adopt an approach similar to that of the Inter-American Development Bank’s (IDB) “climate transition gaps”, which requires identifying and overcoming the barriers to the deployment of climate-transition-compatible technologies, in cases where they are not considered technically or financially feasible. This could enable a pathway to a full fossil fuel exclusion, as has been implemented by PDB peers such as the European Investment Bank (EIB) and Agence Française de Développement (AFD).

Supply-side energy efficiency 

The EBRD establishes energy efficiency (both demand and supply side) as a cross-cutting priority in the ESS 2024–2028. For fossil fuel projects, the EBRD will only finance projects that aim to decommission existing assets or repurpose them for lower-carbon fuels (such as coal to gas district heating for example). However, the EBRD has seemingly not implemented an emissions performance standard for power generation projects.

The upgrade and expansion of energy networks and storage solutions to integrate renewable energy sources is also a priority in the ESS 2024–2028. This would allow more efficient renewables deployment, and deliver more reliable, flexible, resilient and therefore efficient energy systems. On energy networks, the EBRD will support the shift from distribution “network” operators to distribution “system” operators, further development of regional power systems and the digitalisation of energy networks. On energy storage solutions, the EBRD will support investments in storage solutions, battery manufacturing and recycling, and will support power-market design reform with the aim to make investments in storage and system balancing more financially attractive.

Recommendations:

• The EBRD should commit to a phased but robust fossil fuel exclusion policy that excludes all support, including for oil and gas, following the example of PDB peers which have done so, such as the EIB and AFD. These exclusions should also be applied to indirect finance.
• The EBRD should apply stricter and more consistent exclusion criteria for intermediated transactions by aligning the fossil fuel exclusions for projects with unknown subtransactions to those of projects where subtransactions are known. For all intermediated projects, exceptions such as for gas-fired heat generation should be clearly justified and accompanied by stringent monitoring and reporting requirements to ensure Paris alignment.
• The EBRD should set an emissions performance standard for power generation projects to provide an additional safeguard from carbon lock-in. This could be done by adopting the criteria for “do no significant harm” set by the EU Taxonomy – 250g CO₂e/KWh – as has been adopted by the EIB for instance.