Is black the new green? The Green Climate Fund and dirty energy financing

by Oscar Reyes on .

Will the UN’s Green Climate Fund support fossil fuels and other forms of ‘dirty energy’? This is the third in a series of three blogs on critical issues facing the GCF. The first looks at how much money the Fund is likely to contain and who is likely to provide it. The second looks at the role of international financial institutions like the World Bank, and the potential consequences for ‘country ownership’.

The GCF is supposed to be “transformative”, helping developing countries to avoid relying on fossil fuels and other destructive technologies. But there’s a significant risk that it could end up financing “clean” coal and other fossil fuels, destructive dams, or even nuclear power in the name of “low-emissions” energy – prompting a large coalition of civil society groups to demand that dirty energy be kept out of the Green Climate Fund.

The GCF’s Songdo Board meeting in May did not take final decisions on energy financing, but it did reach some broad agreements on how such decisions would ultimately be made. The Fund’s Board will decide on project or program proposals based on recommendations made by the GCF secretariat, according to rules set out in the fund’s investment framework. The secretariat will make that judgement on the basis of project/program assessments made by a variety of “implementing entities or intermediaries,” which could include (amongst others) multilateral development banks, commercial banks, UN or government agencies. National authorities would also have a right to object to projects or programs.

The investment framework agreed to in Songdo is a step in the right direction. Projects and programs will be chosen in relation to criteria that include looking at their “mitigation impact” (capacity to reduce greenhouse gas emissions) and “paradigm shift potential” (including consistency with a policy pathway that keeps global warming below a 2 degree C temperature rise from pre-industrial levels). But the framework avoids the tunnel vision of narrowly focusing on the tons of greenhouse gas emissions potentially avoided while ignoring broader development questions. It rightly recognizes consistency with national climate and development plans as crucial to securing a “transformation.”

Proposals will also be assessed against “sustainable development potential” (including environmental, social and economic co-benefits, and gender-sensitivity), the needs of the recipient country, and coherence with national policies and climate change strategies. More problematically, a final criteria of “efficiency and effectiveness” will seek to measure “financial viability”, which could dampen the Fund’s enthusiasm for innovative proposals if applied too strictly, since (almost by definition) these may not be viable under current market conditions.  The point of the Green Climate Fund is to make bold actions financially feasible.

Key questions remain to be answered, however, on the Fund’s potential energy lending. In debating the investment framework, there was resistance to limiting fossil fuel and other ‘dirty energy’ proposals from various quarters. Some donor countries, most vocally Japan, see the GCF as a potential source of financing for their technology exports – including components for coal and gas plants, and nuclear power facilities. On the recipient country side, China sought assurances on a number of occasions that the criteria for a “paradigm shift” would not automatically exclude fossil fuels.

In addition, the fund’s staff and consultants who could play a key role in providing technocratic justifications for financing fossil fuel programs such as gas flaring reduction (despite that being illegal in many cases) or the extraction of coal-bed methane include former staff of the World Bank Group that have been directly involved in providing dirty energy financing.

The shape of the Fund’s energy portfolio, and what it excludes, will be determined by how the broad principles contained in its investment framework are interpreted in practice, as well as by a number of policies that have yet to be finalized. ‘Activity-specific’ investment criteria are due to be defined at the next GCF Board meeting in October. These may reference tons of CO2 reduced, the extent of ‘low-carbon’ energy deployed, or even – in the words of draft criteria – the extent of “support to development of negative emission technologies (Number of carbon capture and storage projects, tCO2 sequestered).” The precise definition of these criteria is unlikely to exclude dirty energy financing, and in fact could encourage energy that may be low-carbon emitting at the power plant, but dirty throughout it’s production chain.

The GCF Board also agreed an initial “results management” framework in Songdo, which seeks to measure whether the Fund as a whole is achieving “reduced emissions through increased low-emission energy access and power generation”, as well as counting the number of “low-emission power suppliers” supported by its specific projects and programs. Further performance criteria, such as the “level of capacity (MW) from low emission sources” may be adopted in future, although the Board dodged attempts to define the relative weight that its investment and results management frameworks are likely to have on decision-making.

Moving forward, the Fund’s risk management committee is required to “expand its analysis beyond financial risks.” That could include considering more fully the reputational risk that financing fossil fuels or, say, hydroelectric dams that result in the displacement of communities, would pose to the Fund’s ability to attract support. It should also include the adoption of an exclusion list.

In advance of the Songdo meeting over 300 organizations, a majority of them representing communities on the front line of climate change in developing countries, wrote to the GCF Board denouncing the possibility that it could fund fossil fuels, nuclear power and other ‘dirty energy’ projects. Their letter, alongside thousands of emails sent by supporters of civil society groups in the UK and USA, called on the Fund to adopt an ‘exclusion list’ that would explicitly rule out financing fossil fuels and other forms of dirty energy.

Exclusion lists are already the norm at other international financial institutions like the International Finance Corporation, which rules out support for nuclear power, and the US Overseas Private Investment Corporation. The concept achieved support from Germany and France at the GCF’s Songdo Board meeting, but it was not yet taken up. Civil society organizations, including IPS, will continue to push for such a list to be created.

Further reading

Filling the Green Climate Fund

Passing the bucks: the Green Climate Fund, country ownership and the role of international financial institutions