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Bankers are ahead of politicians on climate policy

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Among the European institutions, a new leader on climate policy implementation looks set to emerge. The European Investment Bank (EIB). The EIB is currently one of the biggest financiers of renewables and energy efficiency in the world, and in 2012 around 25% of its overall lending went toward climate action. The EIB also introduced in 2010 a shadow economic price of carbon. This is set at a much higher than the price set by the Emissions Trading System, as it was conceived to reflect the full externalities of carbon emissions for any projects they finance. The EIB carbon price was €25 per tonne of carbon dioxide in 2010 and increases €1 each year, so is now €28. However, this shadow carbon price has not stopped EIB lending EUR 1.88bn to lignite and coal-fired power plants since 2007. The latest loan of €650 million – made in March 2013 and deplored by civil society groups – was to a 600MW Slovenian unabated lignite power plant.

In June 2013, the EIB published a new proposals setting out how – reflecting changing European priorities on energy and climate – it will select future projects for financing. The pressure from civil society groups over the past few years had been troubling for the EIB. But an outright ban on coal and lignite plants is unlikely for now in the absence of European Policy on 2030 being agreed. Instead the EIB has elected to introduce a new screening tool for all projects considered for financing: an emissions performance standard (EPS). An EPS places a limit on the amount of CO2 a power plant can emit per unit of electricity produced.

These will be discussed by directors on 23 July. The proposals include. The proposed limit is 550 grams of carbon dioxide per kilowatt hour (gCO2/kWh). The most efficient new coal station, without CCS or combined heat and power, has emissions of around 740 gCO2/kWh.[1] So, if the proposal is accepted by directors next week, EIB will only lend coal projects if the coal is to be burnt in a highly efficient combined heat and power station or in a power plant with CCS, or if it is to be mixed with biomass.

The Bank has used the level of emissions reduction necessary to meet the target of the ETS directive to calculate the figure of 550. The decision to base the proposal on an existing EU directive was sensible. This directive is legally binding and member states will find it hard to justify voting against a measure that is in line with existing legislation. However, to meet the EU’s economy-wide 2050 emission reduction target of at least 80 per cent, the power sectors will have to be virtually carbon-free. It would be more economically efficient to lower the limit to, say, 450, so that the electricity industry starts to invest in lower carbon sources from now on, rather than leaving steeper reductions until later.

There are some proposed exceptions to the new rule. The proposals say that investment in coal or lignite plants that emit more than 550 could be justified if: they are necessary for isolated energy systems (such as islands); they are necessary to provide back-up to intermittent renewables like wind or solar; they will have a significant and impact on poverty alleviation (this is for projects outside the EU). Directors should not accept any of these possible exemptions. The European Council has agreed that no Member State will remain isolated from gas and electricity markets by 2015. This will require new infrastructure to connect Cyprus and Malta to the rest of the network. It is implausible that new investments in coal and lignite could become operational before this timeline. Neither Cyprus nor Malta uses coal for electricity generation at present. Coal and lignite are not effective fuels for back-up to renewables: gas is much better as gas stations can be turned on and off more quickly. The third proposed exemption should also be discarded on the grounds that it is access to energy, not to coal per se, that delivers growth and alleviates poverty.

What are the prospects of EIB directors accepting the staff proposals? Directors represent member-states (and the vote is taken by qualified majority). So the directors’ views will reflect domestic politics and policy on coal. Germany generated 44 per cent of its electricity from coal in 2010. Since then, coal use has increased due to the post-Fukushima decisions on nuclear. Germany is allowing new coal stations without CCS. They would not support an EU EPS regulation to prevent this. However, the EIB cannot prevent new coal projects being built. It can only decide not to lend to them. Angela Merkel may judge that, in the run-up to the Federal Elections in September, it is better to forego the possibility of EIB loans than to take an ‘anti-green’ stance.

France is likely to support the proposals, as it gets most of its electricity from nuclear and only 5 per cent from coal. Italy gets most of its power from gas and only 14 per cent from coal, so will probably also support the proposals. The Dutch (22 per cent) and Finns (20 per cent) are also likely supporters. Sweden (only 1.8 per cent) will almost definitely back the EIB proposals. Denmark is also likely to back them, despite getting 44 per cent of its power from coal. The Danish Commissioner has the Climate Action portfolio. The current Danish government has said that it will phase out coal as quickly as practicable. Denmark also has significant shale gas potential – and shale gas power plants would meet the proposed EPS.

Spain will probably oppose. Spain got only 9 per cent of its power from coal in 2010. This went up to 15 per cent in 2011. The increase was partly due to low hydro following drought, but partly also to an increase in coal subsidies. The Spanish coal industry is politically influential. Other likely opponents include Poland (88 per cent coal), the Czech Republic (59 per cent), Bulgaria (49 per cent) and Romania (37.5 per cent).

Directors supporting the proposals should point out that both the IMF and the World Bank are making significant moves on decarbonisation. The IMF is calling on government to end fossil fuel subsidies and introduce of increase pollution taxes. It also argues for institutional reforms to depoliticise energy decisions.
The World Bank allocated almost half of its energy lending to renewables last year. Like EIB, it is currently reviewing its policy on energy lending. World Bank staff proposals are that: “The World Bank Group will cease providing financial support for greenfield [new] coal power generation projects, except in rare circumstances where there are no feasible alternatives available to meet basic energy needs and other sources of financing are absent.” Projects using coal for district heating or for CCS could also be financed.[2]

There are also European banks that EIB directors should cite in support of the proposals. The Nordic Investment Bank will not finance projects mainly fuelled by coal or fuel with a similar carbon intensity. Between 2006 and 2012, Germany’s public bank KfW allocated just 0.4 per cent of its total lending to coal. There are even some private sector banks that already have policies similar to the ones that EIB staff have proposed. HSBC will not lend to large coal projects which would have carbon emissions above 550 (or 850 in developing countries). West LB (now part of Portigon) requires applicants to provide third party expert reports confirming that there is no feasible less greenhouse gas intensive alternative than coal.

So parts of the banking sector are leading on decarbonisation. There is, however, one public bank that is bucking this trend. The European Bank for Reconstruction and Development (EBRD) appears to be wedded to coal. It has at least been consulting its member countries during 2013 about a new energy policy, and aims to get a new policy adopted by December. No draft is yet available. However, Riccardo Puliti managing director in charge of energy and natural resources, is on record as dismissing any request to stop funding coal as “ideological”. [3]

This needs to change. As the World Bank president has said, climate change threatens to undo all the progress made on development. A request to stop funding coal need not be ideological. It can be simply humanitarian. But altering EBRD’s policy and practice will require political leadership. Despite the name of the bank, the USA is a member of EBRD (as are countries from all five continents). So this is another role that President Obama should play. Climate policy cannot be left entirely to the bankers.

[1] IEA, ‘Technology Roadmap: High-Efficiency, Low-Emissions Coal-Fired Power Generation’, December 2012

[2] World Bank, ‘Toward a sustainable energy future for all: Directions for the World Bank Group’s energy sector’, undated draft

[3] http://www.guardian.co.uk/environment/2013/may/12/riccardo-puliti-ebrd-europe-coal-funding

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