Fossil fuel exclusion policies

Methodology

This metric assesses policies to restrict fossil fuel finance across all three main types of fossil fuels: coal, oil and gas.  

For coal, the assessment both looked at policies on direct finance for coal as well as indirect lending policies, such as tracking private clients’ exposure to coal and ensuring that intermediary lending does not end up supporting clients’ coal investments. It looks at financing for coal mining, power generation and associated infrastructure.   

For oil, the assessment both looked at upstream oil (exploration, extraction, production and development) as well as downstream.  

For gas, the assessment covered both upstream and downstream investment. The downstream gas supply chain includes processing, selling, distribution and combustion.  

For downstream power generation, measures such as Emission Performance Standards (EPS) of a certain number of grams of CO2 per kWh (gCO2e/kWhe) can act as restrictions on investment in different types of fossil-based power generation and were therefore included here.  

We consider both official policies and unofficial statements made by public bank staff and senior management. 

Another element to consider is whether an MDB has signed the “Statement on International Public Support for the Clean Energy Transition”. Amongst other things, this statement commits the signatories to:

“end new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances that are consistent with a 1.5°C warming limit and the goals of the Paris Agreement”. 

The EIB is currently the only MDB to sign this statement.

Evolution of this indicator 

Further research work would be required to assess and evaluate the implementation of the stated policies in practice.  

In the future, this metric should also be extended to public bank approaches to low-carbon gases. Investments in “green hydrogen” produced by electrolysis and renewable electricity should be differentiated and prioritised over “blue” hydrogen produced using traditional natural gas, which should be avoided. Furthermore, consideration should be given to the financial risks surrounding investments in gas, the extent to which hydrogen is a realistic solution to decarbonisation and the extent that gas transmission and distribution networks can and will be converted to carry hydrogen. 

Background 

The studies below show that the goals of the Paris Agreement require a swift phase out of fossil fuel capacity and infrastructure, delivered by ceasing the build out of new capacity and in many cases early retirements of existing infrastructure.  

According to a recent study in Nature, committed emissions from existing and proposed energy infrastructure represent more than the entire carbon budget consistent with limiting warming to 1.5°C. The Intergovernmental Panel on Climate Change’s Special Report on 1.5°C made clear the use of all fossil fuels (coal, oil and gas) must decline significantly by 2030 to achieve a scenario of limited or no overshoot of 1.5°C. 

Analysis by the International Energy Agency (IEA)* suggests that wealthy OECD countries need to cease the use of coal power generation by around 2030 to enable the global energy sector to reach net zero emissions by around 2050, in line with the Paris Agreement goals and a 2°C scenario. Non-OECD countries need to quickly follow suit.  

Furthermore, E3G’s analysis suggests that 11% of coal power plants in the pipeline worldwide are publicly funded, with this proportion rising to 18% if you exclude India and China (see Figure below). This shows that shifting public finance for coal could have a significant impact on coal power plant deployment in years to come, although private sector measures are also needed to tackle the vast majority of coal plants in development.  

Figure: Public funding of coal power plant projects in the pipeline 

Source: E3G analysis Global Coal Plant Tracker data and Global Coal Finance Tracker data 

Despite being labelled a “transition fuel” for reducing emissions relative to coal, natural gas cannot credibly be considered low-carbon unless it is shown that there are no viable climate-neutral technology alternatives to meeting system needs, across the whole energy system. As their costs decline, the non-viability of alternatives is increasingly unlikely. Unchecked support for gas which does not consider this may displace climate-neutral alternatives (which may be more cost-effective), such as renewables, storage, interconnection, efficiency and demand-response technologies. The IPCC Special Report on 1.5°C is clear that global demand for gas must decline significantly ahead of 2030 to achieve a scenario of limited or no overshoot of 1.5°C. Given that, as noted above, expansion of gas infrastructure could endanger the Paris Agreement goals, public banks should focus their limited public taxpayer funded resources on providing support for climate-neutral technologies rather than on fossil fuels. 

As purveyors of public finance committed to upholding the Paris Agreement, public banks need to be the global leaders in setting standards and norms.