Continuing to introduce new fossil fuel subsidies, World Bank undermines its own climate change commitments and forest protection efforts
New analysis of Bank’s $5-billion-dollar policy loans shows lender supporting investment incentives for coal and other fossil fuel projects in Southeast Asia, South America, Africa and the Middle East, threatening climate change efforts, indigenous groups and natural resources
World Bank Information Center, Washington, DC (January 26, 2017)—World Bank policy loans are creating subsidies for coal, gas and oil projects and undercutting initiatives to build wind, solar and geothermal power infrastructure and protect vulnerable rainforests, including the Amazon, a new report by the Bank Information Center (BIC) and worldwide partner organizations finds. The study, which examines seven World Bank policy operations from 2007 to 2016 totaling $5 billion in four countries—Indonesia, Peru, Egypt and Mozambique—reveals that funds intended to boost low-carbon growth are instead supporting investment incentives for projects that put the climate, forests and people at risk.
The report sheds light on the Bank’s little-scrutinized yet highly influential Development Policy Finance (DPF) operations, which account for approximately a third of all World Bank funding—equal to more than $15 billion in 2016. DPF operations provide funding in exchange for national policy and institutional reforms mutually agreed to by the Bank and the borrowing government. As part of its Climate Action Plan, the World Bank identifies DPF operations as the main instrument for incentivizing countries to transition to low-carbon economies. To meet national commitments to reduce greenhouse gas emissions, new investments in low-carbon infrastructure, especially in the energy sector, are critical. The BIC study therefore examines DPF-funded policy reforms involving investment incentives for large-scale infrastructure projects.
“The World Bank has pledged to help countries adopt a low-carbon development path specifically by phasing out fossil fuel subsidies and promoting a carbon tax,” said Nezir Sinani, Europe and Central Asia Manager at BIC. “However, the Bank’s policy lending does the opposite by introducing tax breaks for coal power plants and coal export infrastructure.”
The report was published by BIC in collaboration with Derechos, Ambiente y Recursos Naturales (DAR) Peru, Egyptian Initiative for Personal Rights (EIPR), Greenpeace Indonesia, Friends of the Earth Mozambique, and 11.11.11 Belgium. See the Executive Summary below.
Key findings include the following.
In Peru, World Bank DPF measures provide subsidies to government-proposed public-private partnerships (PPP) that will develop: a liquid petroleum gas pipeline, a diesel/gas power plant and, in the Amazon, three natural gas pipeline networks and 26 new oil and gas concessions. They will also support two energy efficient street lights and the development of hydropower. No solar or wind power projects are planned.
In Indonesia, the World Bank DPF established subsidies for PPP infrastructure projects, which include four coal power plants and three coal transport railways (on the forest-rich islands of Kalimantan and Sumatra). There are no geothermal, solar or wind PPP projects in the works.
In Egypt, upcoming infrastructure projects targeted to receive DPF-supported subsidies include: more than a dozen oil and gas projects, 12.5 gigawatts of new coal power plants and 12 pending oil and gas exploration agreements.
In Mozambique, Bank DPF-supported subsidies are slated to benefit four coal power plants, three coal port terminals and two coal transport railways. Other planned projects include one hydropower plant and one natural gas plant. No geothermal, solar or wind projects are targeted by the subsidies.
The report points to several substantial climate change concerns and measures that contradict the World Bank’s climate change pledges.
Introduction of new fossil fuel subsidies. The DPFs introduced subsidies for coal in three (Indonesia, Egypt and Mozambique) of the four countries studied. Bank-supported subsidies for coal infrastructure in Indonesia have helped the country become one of the world’s top coal exporters. By propping up coal infrastructure with subsidies in Mozambique, the Bank’s DPF is turning the country, highly vulnerable to climate change due to droughts, floods and cyclones, into a major coal producer.
In addition, Bank-supported subsidies benefitting new investments for coal power plants in Indonesia and Egypt contribute to the planned significant rise in coal’s share of the power generation mix for these countries—from 35 to 66 percent and from zero to 20 percent by 2022, respectively.
According to the Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report (2014), meeting the internationally agreed goal of limiting global average temperature increase to 2 degrees Celsius requires at least two-thirds of existing fossil fuel reserves must be left in the ground. BIC’s study shows that World Bank policies supporting oil and gas exploration subsidies directly contradict the 2-degree goal.
Specifically, in Mozambique, the Bank supports an accelerated rate of depreciation for oil and gas exploration, which significantly reduces the overall tax rates, and thus, government revenue, associated with these fossil fuel investments. Not only is this a significant fossil fuel subsidy but the loss to government coffers further threatens Mozambique’s debt sustainability crisis.
Inadequate support for renewable energy. Each country examined in the study has potential to develop renewable energy, including vast solar and wind resources in Egypt and geothermal resources—among the world’s largest—in Indonesia. The assessment found that in Indonesia, Egypt and Mozambique, the DPFs did contain actions on new renewable energy laws with feed-in tariffs for one or more forms of renewable energy. However, the report finds that, when effectively used, the World Bank DPFs, could have removed further barriers to renewable energy investments. These barriers include, among others, inadequate legal frameworks, a lack of feasibility studies and a lack of incentives for geothermal exploration.
Undermining environmental governance and threatening forests. In three of the case study countries (Indonesia, Peru and Mozambique), the DPF operations ushered in expedited licensing and land acquisition procedures for infrastructure investments. These changes exacerbate already-existing weak environmental governance, ineffective land tenure rights and pressures on forests. Indonesia and Peru have the third and fourth largest, respectively, extent of rainforest in the world. Their forests are of paramount importance not only to the many indigenous peoples that depend upon them for their livelihoods, but also to the climate. Indonesia is the world’s sixth largest emitter of greenhouse gases due to deforestation; the forests of Peru store more carbon than the US emits every year.
Many of the upcoming PPP infrastructure projects in Indonesia and Peru examined in the study include components that could damage forests. These include oil, gas, coal and mining; large hydropower; and roads. As much as 84 percent of the Peruvian Amazon has been granted as oil and gas concessions. The study shows that licensing and land acquisition reforms prompted under DPFs undermine efforts to improve the governance structures critically needed in Indonesia and Peru and to abate forest loss and climate change.
In Indonesia, for example, the DPFs sped up land acquisition procedures that undermined the ability of local communities to protect their lands from development. One particular project, the Central Java coal-fired power plant, had been delayed for over four years due to local landowners’ refusal to give up their land. A law propped up by the Bank gave the government the power to ultimately evict them.
Kate Geary, BIC’s forest campaign manager and a report contributor, said, “Rather than using its development policy lending muscle to protect forests and combat climate change, the Bank is helping to weaken vital environmental laws and governance and undermine local communities’ rights to the resources they rely on for their livelihoods.”
The report urges the World Bank to heed its own advice on confronting climate change by providing the right incentives for a clear pathway to low-carbon development. The report argues that the Bank must go beyond supporting some incentives for renewable energy to steer developing countries towards a low-carbon transition.
“The climate crisis and staying under 2 degrees Celsius warming not only requires increasing investments in renewable energy but also drastically decreasing fossil fuel investments,” Sinani said.
The report calls on the World Bank to support incentives for more renewable energy through DPFs, and to be transparent about the measures and incentives tied to DPFs, as well as the projects that DPFs are slated to support.
“We also want a more rigorous climate- and forest-related assessment of DPFs before they are approved,” Nezir Sinani said. “This call has resonated with several World Bank Executive Directors who believe that the Bank’s approach to environmental and social safeguards should be applied to all types of its lending. At present, the Bank’s DPF falls outside the social and environmental safeguards applied to direct project lending.”
The Reports: Is the World Bank providing the right incentives for low-carbon development?
Indonesia Case Study:
Peru Case Study:
Mozambique Case Study:
Egypt Case Study:
World Bank comments and BIC responses:
- World Bank comments on BIC report on DPOs in Egypt
- BIC response- Egypt
- World Bank comments on BIC report on DPOs in Peru
- BIC response- Peru
The World Bank has not as of yet sent feedback on the Indonesia and Mozambique case studies. Once received, the comments will be published here.
About the Bank Information Center (BIC):
The Bank Information Center (BIC) partners with civil society in developing and transition countries to influence the World Bank and other international financial institutions (IFIs) to promote social and economic justice and ecological sustainability. BIC is an independent, non-profit, non-governmental organization that advocates for the protection of rights, participation, transparency, and public accountability in the governance and operations of the World Bank Group and regional development banks. @BIC_Updates
Sunshine is plentiful in Nigeria, and is increasingly becoming a source of power for those not connected to the country’s electric grid. Credit: Getty Images
A fast-growing energy solution is springing up in Nigeria, Africa’s largest country, where three-quarters of people still have little or no access to electricity. Off-grid solar-powered kits, consisting of a single rooftop solar panel and a suitcase-sized battery, are beginning to electrify rural homes, powering small appliances, mobile phones and fans using the nation’s abundant sunshine.
The do-it-yourself kits are replacing candles, kerosene lighting and diesel generators that are costly and have health and safety risks. But what is making them increasingly popular is how easy they are to pay for.
The systems—already prevalent in Kenya, Rwanda and India—are being sold in Nigeria by Lumos, a five-year-old startup based in the Netherlands. They cost about $75 upfront and then customers pay for the electricity they plan to use through pre-paid cash mobile phones, which have been revolutionizing commerce across Africa. No bank accounts or credit cards are required.
Lumos, which works with mobile giant MTN, announced in December it raised $90 million, with $50 million coming from the Overseas Private Investment Corporation, a U.S. government agency. The investment doubled the world’s previous largest investment in off-grid solar energy sector, to Off Grid Electric.
Investment in companies offering pay-as-you-go solar systems has mushroomed in recent years, to $223 million last year from virtually nothing in 2012, according to Bloomberg New Energy Finance. There was a 40 percent increase between 2015 and 2016 alone.
“The Lumos investment is the next milestone in an industry that is rapidly growing,” said Koen Peters, executive of Global Off-Grid Lighting Association, a trade association. “There’s a lot of unmet demand, and once companies establish themselves, it’s a big blue ocean.”
Rural Nigerians are among the 1.2 billion people on the planet who are not connected to an electric grid. The pay-as-you-go solar model could help hasten energy access for the world’s poor and make new coal- and gas-fired power plants and transmission lines less necessary, according to experts. That makes them a tool in the climate change fight, like other distributed energy or microgrid solutions.
The world’s nations agreed to deep decarbonization in the Paris climate agreement and getting developing nations such as Nigeria to “leapfrog” over fossil fuels is seen as crucial to that goal. The idea runs counter to the theme some large fossil fuel corporations promote: that the world’s poor need cheap and plentiful fossil fuels in the mix of lower-cost, low-carbon solutions.
Amara Nwankpa, director of the Public Policy Initiative at Shehu Musa Yar’Adua Foundation, a Nigerian nonprofit with a focus on governance and the environment, said he’s not surprised Nigeria is a target market. Nigerians spend between $10 billion and $13 billion every year for kerosene and diesel fuels, he said. “Any part of that annual expenditure for fossil fuels that you can repurpose for renewables would be attractive for investors.”
The way it works is simple. Lumos customers pay an initial fee their solar kit, which comes with a Chinese-manufactured, 80-watt solar panel and a yellow box that contains a battery device and eight sockets, as well as a satellite link. Lumos kits, which are light enough for an individual to carry home or on a motorcycle, come with instructions for mounting the panel on a rooftop.
Customers buy credit for electricity by sending a text message and the payment gets deducted from their prepaid balance with the mobile operator. Once 1,500 days of use are paid for, the customer owns the kit and can get the power for free.
Half a dozen other companies, operating mostly in sub-Saharan Africa and South Asia, have products that vary by size, method of payment or some other factor, but the basic pay-as-you-go formula is the same. U.K.-based Azuri Technologies and Germany-based Mobisol, for instance, offer comparable service to consumers in countries including Kenya and Rwanda.
“Reducing cost first for consumers is so important,” said Kristina Skierka, campaign director of Power for All, a San Francisco-based group that advocates for decentralized renewable energy. But so is getting power for free after several years. “All the companies in this sector are using the money these consumers are already spending on fuel and throwing it down the drain.”
The allure for Lumos’ investors is its relationship with mobile provider MTN, which has 39 percent of the mobile market in the country. MTN advertises the Lumos kits, sells them in its stores and provides customer service through its call center.
“We avoided the headache of building a marketing and distribution system across Africa,” said Ron Margalit, a principal at Lumos. “MTN already knows how to reach the masses.”
Lumos has sold 30,000 kits in rural Nigeria, and said it aims to sell as many as 10 million over the next five years, at a cost of $2 billion. (The Nigerian government, for comparison, has set a goal to electrify 10 million rural households, mostly by connecting them to the national grid at a cost of more than four times that.) In 2015, Nigeria got 82 percent of its electricity from fossil fuel sources, mostly natural gas.
In addition to the $50 million raised by the Overseas Private Investment Corporation, a federal agency whose clean energy portfolio could be in jeopardy as President Donald Trump seeks to roll back climate policies and slash the federal budget, $40 million was raised by a consortium of private companies, including Pembani Remgro Infrastructure Fund, VLTCM and Israel Cleantech Ventures.
Until a year ago, startups such as Lumos were attracting mostly the attention of philanthropists and impact investors focused more on development goals than profits.
“It seems at the moment that pay-as-you-go solar is the clearest blueprint for at least partially addressing this problem of the 1.2 billion” people on the planet with no electricity, said Itamar Orlandi, the head of applied research at Bloomberg New Energy Finance.