Jolie Schwarz and Christian Donaldson
Last week, we heard the shocking (if not surprising) news that we’re about to pass the point of no return if we don’t take decisive steps to stop burning fossil fuels, which are the main culprits for the climate crisis. The Intergovernmental Panel on Climate Change (IPCC, the United Nations body for assessing the science related to climate change) released a sobering report that sounded a clamoring alarm.
It underscored, again, the devastating and unequal impacts of the climate crisis. Despite being the least responsible, the poorest and most vulnerable communities experience the hardest blows. The weather events causing floods, wildfires, and droughts have displaced over 20 million people from their homes every year over the last decade.
On the heels of the report, the US Treasury Department published guidelines for how it will phase out international financing of carbon-intensive fossil fuel-based energy at the multilateral development banks[1] (MDBs). The guidance sets an important precedent, and we welcome the effort by this administration to expand beyond previous Treasury guidance; once limited to coal, it now includes oil and gas, and covers trickier forms of MDB lending (e.g., through intermediaries or budget support).
However, the guidance also lacks critical details that will determine how it will be implemented.
While wealthy countries are the main perpetrators of global warming—and must cut their emissions first and fastest—MDBs play an important role in helping developing countries transition away from fossil fuels and toward renewables. However, these MDBs are still actively financing fossil fuels; the World Bank alone financed at least $1.6 billion per year in fossil fuels from 2018 to 2020.
It’s possible that the much-anticipated Treasury guidance could spur the MDBs to transition away from fossil fuels more quickly. However, more clarity is needed. Below, we lay out three key concerns, and recommend how Treasury should implement the guidance to ensure it has the strongest impact:
1. The criteria for when Treasury will support natural gas projects is too vague.
While the guidance sets very clear expectations as to when Treasury will support coal projects (never), and provides narrow and specific exceptions for oil-based projects, it is a bit more complicated when it comes to natural gas.
The guidance says Treasury will provide “narrow” support for natural gas; it specifies that it will oppose all upstream projects, but not midstream and downstream projects if they meet certain vague criteria (including that they are accompanied by “credible alternatives analysis” and that they have a “significant positive impact on energy security, energy access, or development”).
More detail is needed to understand how Treasury will actually evaluate a natural gas project on these terms. Treasury could develop and post explanatory guidelines for how it evaluates gas projects. It could also publicly post the justification for their positions on energy projects on its website—where it already posts positions on “significant Bank Operations” as well as “Projects with Significant Environmental Impacts.” At the very least, Treasury should make clear that the US will oppose projects that don’t publicly disclose alternatives assessments for independent parties to scrutinize such decisions.
2. The bar around indirect support for fossil fuels by MDBs is too low.
MDB lending through policy-based operations (PBOs), which provides unearmarked budget support, and financial intermediaries (FIs), such as commercial banks, are highly fungible and notoriously lack transparency. However, the guidance does not address either of these issues head-on. Instead, in both cases, the guidance only states that Treasury will oppose direct support for fossil fuels by these instruments, and leave its indirect support—which is most concerning and difficult to track—to “case-by-case” analysis.
PBOs are often developed without public input, and people are often unaware that a harmful project has been funded by an FI with MDB support—even the MDB itself! As it implements this new guidance, Treasury must consider the myriad ways these opaque and unaccountable instruments are supporting fossil fuels, and put the MDBs—and the public—on notice for what it will or will not support; for instance, it should draw red lines where projects reduce tax obligations for the fossil fuel industry, provide producer subsidies, lead to higher energy tariffs for the poor, or expedite permits to enable investments in fossil fuels.
Alternatively, it should clarify that it will support good governance, transparency, and accountability initiatives within the energy and extractive sectors, including efforts like the Extractive Industries Transparency Initiative and support for civil society. For both PBOs and FIs, the US should oppose any project proposal if it does not have an explicit and disclosed exclusion list of fossil fuel-related activities for which such financing cannot be directed.
Treasury should also oppose support for an FI that does not have a plan for phasing out its own investments in coal, oil, and gas-related activities, or that does not agree to disclose all high- and medium-risk subprojects and investments in its portfolio. A troubling line in the guidance admits that even Treasury can be “unable to determine how the funds will be used” in some FI investments, yet it does not commit to demanding greater transparency.
3. Treasury needs to commit to proactively pursuing policy reform at the institutions.
This guidance primarily applies to how Treasury will determine its own voting positions on individual projects that come to the boards of directors at the MDBs, of which the US is only one member (albeit the most influential). The guidance mentions that it should also be used to “inform” Treasury’s positions on fossil fuel energy policies and strategies as well as projects, but MDBs have a host of policies that govern how the institutions shape a project proposal that fall outside of energy policies and strategies.
Moreover, the US cannot unilaterally veto a project; it is critical that Treasury seeks to work with other chairs that have shown an appetite for stronger climate policies at the MDBs, to align the policies and practices of the MDBs with these higher standards, or risk playing an ineffective game of whack-a-mole as projects that fall below these thresholds continue to be proposed.
Overall, the guidance is a welcome step forward, but is lacking in critical areas. The climate crisis demands a clear and decisive shift of resources away from fossil fuels toward a just transition and expansion of energy access for communities living in poverty.
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[1] According to the federal website: “The Department of Treasury leads the Administration's engagement in the multilateral development banks (MDBs), which include the World Bank, Inter-American Development Bank, Asian Development Bank, the African Development Bank, and the European Bank for Reconstruction and Development.”