Consultation Response

E3G responds to EBRD’s energy strategy review

Photo Underneath pylon by Julian Povey, Flickr

The European Bank for Reconstruction and Development (EBRD) is currently reviewing its energy sector strategy.

The strategy has not been updated since 2013 and therefore does not account for the 2015 Paris Agreement. The EBRD has publicly committed to scale up green investment, embed climate considerations into its strategies, and support countries and partners to accelerate climate action and ambition by 2020, including the development of long-term 2050 decarbonization pathways. The EBRD has made great progress in recent years, including becoming the first multilateral development bank to become a supporter of the Task Force on Climate-Related Financial Disclosures (TCFD). Now is an opportune moment to ensure the EBRD incorporates those commitments into its new energy strategy and that its financial flows are fully aligned to achieving the Paris Agreement goals. This means the EBRD must take further steps to completely rule out both direct and indirect support for coal plant projects and related infrastructure, as well as aligning any further fossil fuel investment with the ambitious goals of the Paris Agreement. It must also commit to help countries shift from coal to clean energy.

Consistency with the Paris Agreement

All hydrocarbon investments are to be “consistent with nationally determined contributions” (NDCs) (p.3 of the draft strategy), however, this is not the same as consistency with the Paris Agreement under which the temperature rise would be kept to well below 2 degrees Celsius of warming, and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels. Current NDCs collectively add up 2.6-3.2°C which is well over 2 degrees, let alone 1.5°C.

Consistency with NDCs is not sufficient to guard against stranded asset risks given that countries’ commitments are expected to increase in ambition over time. Under the UN Paris Climate Agreement, there are provisions to raise ambition over time, through the “ratchet mechanism” (also known as the “ambition mechanism”). This will change the economics of certain investment decisions, in particular on fossil gas. It would be sensible to not only test against consistency with NDCs but also test how a climate scenario of well below 2°C or 1.5°C would impact on the investment decision.

The strategy also seems to be informed by IEA's Sustainable Development Scenario (SDS) as a Paris Agreement-aligned pathway. The SDS however only provides a 50% chance of staying below 2°C while the Paris Agreement aims refer to “well below 2°C” and striving for 1.5°C of warming. Between 70-94% of the investments associated with this scenario would be stranded if we were to reach the Paris climate goals.

Oil investment

The new EBRD approach as outlined does not match up to the World Bank Group's policy on ending finance in upstream oil and gas. The draft strategy includes a categorical ban on oil exploration finance but permits other upstream oil development "in rare and exceptional circumstances”. As a European-based institution, the EBRD should be going further than the World Bank Group and definitively end all investment in midstream and downstream oil projects as well. Over 2015-16, EBRD did not invest in any oil projects in any case, according to analysis of data from Oil Change International. If EBRD does not definitively end all upstream, midstream and downstream investments in oil, this would be a missed opportunity to align EBRD’s policies with the reality of its current energy investment portfolio.

Fossil gas

On gas, the strategy should be strengthened so it is much clearer that renewable energy and energy efficiency will be the priority. As noted previously, even where a gas investment is in line with a countries’ NDC, this may not be in line with an upgraded or strengthened NDC commitment. Thus, in addition to the other tests for gas investment (p.14) EBRD must introduce a stress-testing of the investment against a “wide range of scenarios including a 1.5°C or well below 2°C scenario”.

It is concerning that under the category of “decarbonising power generation” (p.20) the EBRD has included “fuel switching to less carbon-intensive fuels, in particular coal to gas”.  This should not be a priority for ERBD’s investment if client countries are going to be facilitated to transition to a zero-emission economy in line with the goals of the Paris Agreement. Switching from coal to renewable energy sources or energy efficiency measures should be prioritised. Therefore, we propose this section should refer to fuel switching based on a carbon hierarchy or low-emission hierarchy.

Importantly, gas investment should not feature as a performance metric in the performance monitoring framework (p.24). This undermines other positive elements of the draft strategy. “Number/volume of investments in upstream gas” needs to be removed as an indicator as it could create a perverse incentive for additional and unnecessary gas investments.

Coal

It is positive that the draft strategy states that EBRD will not finance thermal coal mining or coal-fired electricity generation capacity; and will engage with countries of operations to shift away from coal.  The members of the Powering Past Coal Alliance make up a 45% shareholding in the EBRD, demonstrating that this topic is of importance to many of the EBRD government shareholders. However, missing from the strategy is a commitment to work with private sector clients or intermediaries to support a shift away from coal, as IFC has recently committed to do or to require new clients to report on coal exposure publicly (see below). Research has found cases where certain utilities investing in new and current coal capacity are benefitting from support by EBRD, such as Energa in Poland and CEZ Group which operates in southeast Europe and Turkey.

Carbon Pricing

A shadow carbon price will only be applied to investments that increase emissions. This is insufficient since gas projects could end up being classified as ‘reducing’ emissions compared to coal, even as they lead to long-term lock-in of fossil fuels.  Carbon pricing should be applied to the gross emissions of all investments. In the Annex on carbon pricing (p.33), the new carbon pricing approach should incorporate best practices including applying a carbon price to Scope 3 emissions for projects with significant Scope 3 emissions.

Private sector lending and engaging with intermediaries

The International Finance Corporation (IFC) recently announced it will be developing a green equity investment approach including requiring intermediaries to publicly disclose their coal exposure and helping them to shift away from coal. The EBRD should do the same. On companies/private lending (p.23), the EBRD should also commit that EBRD will ring-fence intermediary lending to ensure it does not go towards coal.  Importantly the new EBRD energy strategy should mention that all clients will be required to publicly disclose their coal exposure. This is a key part of the recent IFC announcement.  EBRD was the first multilateral supporter of the Taskforce on Climate-Related Financial Disclosures (TCFD) so this would fit well with EBRD’s existing commitments to the TCFD.