Drilling Down on Treasury’s New Fossil Fuel Energy Guidance for Multilateral Development Banks
Stephanie Segal, Center for Strategic and International Studies, August 19, 2021
On August 16, the U.S. Department of the Treasury announced new fossil fuel energy guidance for multilateral development banks (MDBs), which aims to “promote ending international financing of carbon-intensive fossil fuel-based energy while simultaneously advancing sustainable development and a green recovery.” G7 countries, including the United States, had already committed to phase out direct government support for fossil fuel energy projects in third countries, while this week’s announcement by the United States, the largest single shareholder at the World Bank and a top voting member at the largest regional development banks, endeavors to extend this policy to the MDBs. The guidance, which precedes the UN Climate Change Conference (COP26) summit this fall, is a partial response to Executive Order 14008, which puts climate change at the forefront of U.S. foreign policy and calls for a government-wide approach to tackling the climate crisis.
Q1: What specifics are included in the Treasury guidance, especially as relates to MDB support for low-income countries?
A1: Treasury provides broad guidelines for how it intends to use the guidance to direct U.S. votes on new projects at the MDBs. Specifically, the United States will oppose all new coal-based and oil-based energy projects, with rare exceptions for the latter, for example in humanitarian crises or as backup generation for clean off-grid energy systems. Treasury will also oppose “upstream” (exploration) natural gas projects and will support “midstream and downstream” natural gas projects only if certain criteria are met (see below). Treasury also intends to oppose indirect financing by the MDBs through policy-based operations and financial intermediaries where it believes such financing will be used in a manner inconsistent with the guidance. Treasury also identifies areas it would be willing to support, including methane abatement, carbon capture utilization and storage, and efficiency improvements, provided they do not expand the generation capacity or lifespan of existing fossil fuel projects. Treasury also indicates it is encouraging MDBs to explore potential projects for coal decommissioning.
The guidance provides some flexibility to support low-income countries’ development goals by allowing for consideration of midstream and downstream natural gas projects, provided the project:
- Supports poor and vulnerable developing countries defined as International Development Association (IDA)–eligible countries, fragile and conflict-affected states, and small-island developing states;
- Is accompanied by a credible analysis that demonstrates that there is neither an economically nor technically feasible alternative nor means of achieving the objectives of the project through other means (e.g., through energy efficiency);
- Has a significant positive impact on energy security, energy access, or development; and
- Is aligned with the goals of the Paris Agreement.
Q2: How impactful will the guidance be on MDB operations?
A2: While “guidance” does not constitute a mandate, the United States’ large shareholding in the institutions translates into voting power and an outsize role in setting the institutions’ agendas and lending programs. The United States is the largest shareholder at the Inter-American Development Bank (IADB, 30.0 percent), World Bank (15.8 percent), and European Bank for Reconstruction and Development (EBRD, 10.1 percent); and it holds the largest voting share, along with Japan, at the Asian Development Bank (AsDB, 15.6 percent each) and the second largest share behind Nigeria at the African Development Bank (AfDB, 7.6 percent). These voting shares don’t give the United States a veto on individual projects, which generally require only a simple majority; however, other advanced economies, and European countries in particular, are likely to share U.S. concerns on climate. Indeed, the European Investment Bank already plans to phase out fossil fuel energy projects by the end of 2021. Moreover, MDB management is typically responsive to shareholder priorities, while the United States has the ability to veto major policy decisions at the World Bank and the IADB as a result of the higher voting thresholds for such decisions.
Q3: Where doesn’t the new guidance apply and how might China factor into the equation?
A3: The new guidance won’t directly impact institutions where the United States is not a voting member. These MDBs include the Asian Infrastructure Investment Bank (AIIB) and New Development Bank, two MDBs headquartered in China in which the United States doesn’t participate, as well as smaller regional institutions such as the Islamic Development Bank and Development Bank of Latin America, among others. Still, the announcement could have indirect effects, especially as China has sought to burnish its image as a leader in combating climate change. While the AIIB has announced it may discontinue coal financing by 2022, China has yet to make a commitment to end official support for fossil fuel projects abroad. It remains the world’s largest source of public funding for coal projects through the Export-Import Bank of China and China Development Bank, standing in contrast to the G7 leaders’ commitment to end government support for international thermal coal power generation and upping the ante heading into the COP26 summit.
Q4: What other economic tools does the administration have to shape its climate policy?
A4: Treasury’s new guidance is only one element of the Biden administration’s economic and financial efforts to confront the climate crisis. Earlier this year, the agency announced a new Climate Hub and the first-ever climate counselor to the treasury secretary, noting three distinct pillars to its climate-related policy work: (1) climate transition finance, (2) climate-related economic and tax policy, and (3) climate-related financial risks. This week’s guidance pertains to the first pillar and represents an area where the administration can act quickly and (mostly) independently of Congress. Other components, including climate-related spending such as that included in the pending infrastructure bill and the authority to tax, belong to the second pillar and require congressional action. The third pillar on climate-related financial risks could be significant in terms of the eventual impact on capital allocation, as well as climate-related outcomes. As such, this week’s climate-related announcement is unlikely to be the last.