Fossil fuel exclusion policies

Explanation

Through discussions with the IDB, it has been confirmed that exemptions to fossil financing are in practice based on the specific cases set out by the Guidance on Fossil Fuel Energy at the Multilateral Development Banks issued by the US Treasury in 2021. Formal published exclusions are set out in the IDB’s Environmental and Social Policy Framework. IDB Invest’s own Environmental and Social Sustainability Policy Framework commits it to the same exclusions for coal, oil, and gas, as the IDB Group.

In practice, the IDB provides little finance to fossil fuels (see the “Non-fossil to fossil energy ratios and climate finance” metric), including to downstream oil and gas. However, the lack of any public-facing endorsement of the US Treasury exclusion criteria, and their absence from the IDB’s own published exclusion lists, remains concerning.

Coal  

The IDB in its Environmental and Social Policy Framework excludes all “thermal coal mining or coal-fired power generation and associated facilities”. This marks a strong improvement from its previous guidelines on coal-fired power plants. The exclusion is subject to a caveat stating that the policy “applies only to associated facilities for which the primary objective is related to the production, trade, or use of coal for power generation or to the transition of energy generated by a coal-fired power plant (e.g. a dedicated transmission line)”. 

Oil and gas 

The Environmental and Social Policy Framework excludes upstream oil exploration and development projects. With respect to natural gas, the Bank commits to exclude “upstream gas exploration and development projects. Under exceptional circumstances and on a case-by-case basis, consideration will be given to financing upstream gas infrastructure where there is a clear benefit in terms of energy access for the poor and where greenhouse gas (GHG) emissions are minimized, projects are consistent with national goals on climate change, and risks of stranded assets are properly analysed”.

The IDB Group’s Paris Agreement alignment methodology for the energy sector establishes criteria that any finance for midstream or downstream gas projects should meet to be considered Paris aligned (transitional). The methodology states that using “exceptional circumstances” as justification for financing upstream oil and gas activities “is not envisioned” in practice. This is due to the likely difficulty in ever demonstrating the direct impact of such activities to a sufficient level to justify the IDB’s support. Despite this claim, there is still uncertainty surrounding the analysis and specific criteria in place to determine the “exceptional circumstances” where fossil fuel financing would be deemed permissible.

Supply side energy efficiency 

When possible, the IDB will support enhancing power generation efficiency, through upgrading power plants or installing combined cycle generation in open cycle power plants. It will also promote the adoption of new technologies and concepts such as smart grids in the power subsector to strategically manage demand. 

Recommendations:

• Given an already limited degree of investment in fossil fuels, the IDB should consider a full fossil fuel exclusion which includes downstream oil and gas. This should not preclude continued support for just transition initiatives that support fossil fuel phase-out. As part of this, the IDB should consider joining the Clean Energy Transition Partnership, launched at COP26.
• Greater clarity should be provided regarding the analysis process to determine the “exceptional circumstances” under which upstream fossil financing is considered permissible. This should detail how exactly these “exceptional circumstances” are defined, including all relevant assumptions and thresholds used in the analysis and relevant decision making process. In cases where such financing is approved, the Bank should commit to identifying and engaging with the factors preventing renewable alternatives from being deployed, in line with the “climate transition gaps” approach of its Paris alignment methodology.
• Supply side energy efficiency investments should be made based on robust and transparent analysis which aims to guard against any contribution to the lock-in of high-emitting stranded assets. The analysis should include a comparison with alternative economically and technologically feasible low-carbon pathways. If deemed viable, such energy efficiency investments should be supported by a net zero transition plan for the relevant asset(s).