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New US Guidelines on Overseas Coal Project Financing: The good aspects & missed opportunities

Jake Schmidt

Posted November 4, 2013 in Solving Global Warming

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The U.S. released new guidelines that direct how the U.S. will vote on coal projects proposed by development banks such as the World Bank, European Bank for Reconstruction and Development, and the Asian Development Bank. Over the past 5 years these development banks have financed almost $13 billion in coal projects, including some of the world’s largest coal plants. These new guidelines are very important both in terms of real projects and the signal that they send to other financial institutions. They are a big deal.

Right after the release of the guidelines I touched briefly upon the details of what the Treasury Department  guidelines require. In this post I’ll add more detail on the specifics of the guidelines – the good and the missed opportunities.

KEY PROVISIONS SET OUT A VERY HIGH STANDARD

With clean energy booming and significant damages from coal power plants, few (if any) coal power plants will meet the tests outlined in these guidelines. In particular, these five key aspects set a very high standard for the development banks as the guidelines:

1.  Require that that the development banks make clean energy investments a priority in their engagement with borrower countries. That means that when the development banks engage with a country their first priority for energy must be clean energy like wind, solar, geothermal, and energy efficiency. The first question from the development banks should be: “how can we help you tap into clean energy to a greater extent”. There are no countries that are maxed out on use of their wind, solar, geothermal, or energy efficiency potential so this policy doesn’t mean “no to energy” as the U.S. coal industry claims, but rather yes to the right energy.

2.  End funding for coal power plants in middle-income countries unless they capture the carbon and completely offset the incremental carbon pollution over the life of the plant. Most of the historic coal funding from these development banks has occurred in middle-income countries like South Africa and India. While many of these countries aren’t actively pursuing coal projects at the development banks, many middle-income countries are considering significant coal expansion. In these countries the guidelines direct the U.S. to vote no on coal projects that:

  • have an emissions performance over 500 g-CO2/kWh. This could be met by a coal project that deployed carbon capture and storage (CCS) technology – it couldn’t be met with so-called “CCS-ready”. It will be important for the development banks to withdraw funding if any such projects don’t actually deploy CCS.
  • don’t include a series of mandatory policies and projects that offset the incremental life-cycle carbon pollution. This means that any project with emissions that exceed the next best alternative (e.g., wind) would have to fully offset the incremental carbon pollution with mandated clean energy investments. It will be important for these development banks to guarantee the deployment of these clean energy investments by withdrawing funding if the country doesn’t follow through (as occurred in the South Africa project).   

3.  Require that projects will only be allowed in lower-income countries in rare circumstances where alternative sources of energy aren’t available. The development banks have funded several projects in these countries over the years and there are a couple of pending projects that will test these principles (e.g., Kosovo coal power plant). In particular the guidelines for these countries require that:

  • a robust assessment occur before any coal project is even considered. This assessment must include analysis that proves that the project overcomes “binding constraints on national economic development” and that no other sources of energy are available. And analysis of the project viability will have to take into account the damaging health and climate pollution from these plants.   
  • the coal plant use the “best internationally available technology”. This should be limited to Advanced or Ultra-supercritical Combustion or Integrated Gasification Combined Cycle. It should also require that the plant have the most advanced emissions controls.

4.  Cover all types of financial support that the banks provide and all types of coal power plant projects.  The guidelines cover all the various mechanisms that these development banks use to support projects as it states they: “apply to financial intermediary, sector, or other loans in which one or more coal-fired power plants have been identified as likely subprojects.” The development banks use a variety of tools to aid projects – as the World Bank Group is currently doing for a coal project in Indonesia—so this guidance would cover these as well. And they cover all types of coal power plants when it states: “coal projects refer to greenfield plants, captive plants, retrofits, and coal plants constructed as a direct result of the project seeking financing”. Coal plant financing isn’t always as simple as a loan for a particular project – sometimes it is a loan for a mine that is tied to a new coal power plant (as the World Bank Group has done in Mongolia).

5. Set a high-bar for any retrofit project. The guidelines cover retrofits to existing power plants. As far as the guidelines are concerned a retrofit project that increases the size of the power plant capacity (i.e., megawatts) would no long be considered a “retrofit” – it would instead be a new greenfield project and therefore subject to all the requirements for that type of project (e.g., CCS deployment, in a poor country, etc.). Unfortunately they didn’t specify this distinction for projects that extend the  life of the power plant – and therefore increase overall carbon pollution – but don’t necessarily increase the electricity capacity of the plant.

WHERE THE GUIDELINES MISSED AN OPPORTUNITY (or are unspecific)

There are several aspects where the U.S. guidelines missed an opportunity or were too unspecific. Unfortunately the guidelines:

1.  Don’t require that these banks stop funding coal mine projects. Since coal mines, coal export, and coal import projects support the use of coal which is driving climate change and is often used in coal power plants it is unfortunate that these revised guidelines don’t cover these destructive investments. Since 2007, these banks have invested over $3 billion in coal mining projects, according to data compiled by Oil Change International.

2. Fail to establish clear, measurable and transparent metrics to judge that the proposed project helps the poor gain access to electricity. With over 1.2 billion people lacking access to electricity, these development banks must focus on how to spur access to energy for these people. While the guidelines hint at this, they fail to define explicitly how this will be judged. Too often the definition of “enhanced energy access” is energy provided to a country that has need of more energy, not necessarily whether that particular project will aid the poor in gaining access.

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These new U.S. guidelines set strong standards against which all coal projects before the development banks must be judged. The guidelines will direct the U.S. to vote no on projects that don’t live up to these standards. As the largest shareholder at these institutions the U.S. has significant sway. These are common sense guidelines that should be used by all countries to judge whether their public money is being well spent.

Fortunately these guidelines don’t mean less investment in energy. Instead the guidelines mean that the development banks will have to dedicate all their resources to investing in the right kind of energy – ones that don’t drive carbon pollution, cause damage to human health and communities, and that are smart over the long-term. We know they can do it as they have invested in a number of wind, solar, geothermal, and energy efficiency projects in a host of countries.

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Switchboard is the staff blog of the Natural Resources Defense Council, the nation’s most effective environmental group. For more about our work, including in-depth policy documents, action alerts and ways you can contribute, visit NRDC.org.

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