World Bank Energy Strategy Review

The World Bank Group’s (WBG) response to the climate crisis has been uneven and, until quite recently, fairly single-minded. Its emphasis since it first started explicitly addressing climate issues after the 1992 Rio Earth Summit has overwhelmingly been on facilitating market-based solutions, chiefly through creating markets for carbon credits. A number of initiatives, such as the Prototype Carbon Fund, the Clean Development Mechanism (CDM), and, most recently, the Forest Carbon Partnership Fund (FCPF), have been in large part designed and managed by the WBG.

In the last two years, the WBG has finally decided that it must do more to address the contribution to climate change made by the projects it finances. Yet it has had difficulty in devising an approach that satisfies the often-opposed interests and perspectives of its governmental members. Consequently, the effort to produce operational guidelines and policies that will guide the WBG has had to settle for a more nebulous “framework” that will provide little in the way of binding direction. It is likely to satisfy neither developing governments concerned about their prospects of economic development and access to energy nor activists concerned to see that the straightforward principle of making those responsible for the climate crisis – the wealthy countries – take responsibility for fixing the problem.  Both groups want to ensure that the wealthy countries do not pass the costs onto the more vulnerable impoverished countries, which are likely to suffer the most from the effects of climate change.  But in the absence of firm, enforceable rules from institutions like the WBG, that is precisely the direction we are headed.

Indeed, the need for a shift to decisive policies that clearly and effectively prioritize the environment and the interests of the impoverished is nowhere more important than at the WBG. No other institution has a comparable level of influence over government policy, at least in developing countries, and on the standards that both the public and private sectors follow in building the kind of projects that will determine whether we will have any success in reversing the climate crisis.

While the World Bank Group has moved aggressively, if belatedly, to position itself as a pace-setting institution on climate and development issues, it has yet to develop an approach that responds satisfactorily to the triple imperative of 1) reducing climate change impacts; 2) expanding energy access in developing countries (countries that bear little culpability for the climate crisis); and 3) providing resources for vulnerable countries to adapt to the impact of climate change.

World Bank Investment Funds

Only with the rather hurried granting of control over the Climate Investment Funds (CIFs) through 2012 has the World Bank taken on a tangible and significant role in devising more climate-conscious development projects. The CIFs, which fall under the Strategic Framework on Development and Climate Change (SFDCC), are the most recent financing mechanisms approved by the Bank’s Board to support its increased engagement in climate change. In September 2008, donors from ten countries pledged $6.1 billion for the CIFs, with the majority coming from the US ($2 billion), the UK ($1.5 billion) and Japan (up to $1.2 billion). The CIFs include two funds, the Clean Technology Fund and the Strategic Climate Fund.

The Clean Technology Fund (CTF) provides finance for low carbon energy projects or energy technologies that reduce emissions.  It will not limit the types of technologies eligible for financing to new renewables (like solar, wind, small hydro power), but instead keeps the door open to support for “clean coal” and large hydroelectric dams.  According to the Bank, “clean coal” represents “highly cost effective opportunities for significant GHG emissions reductions and/or there is potential for developing readiness for carbon capture and storage.” Thus, the CTF supports technologies that reduce the carbon intensity of development, but not necessarily overall GHG emissions.  Critics argue that the CTF supports a “business-as-usual” approach, rather than a real transition to clean energy development.

Under pressure from introduced Congressional bills connected to US funds, investment guidelines excluding supercritical coal and projects not CCS-ready were promised at the Annual Meetings, but the official framework documentation has yet to include any real limitations on coal-fired power eligibility.

The Strategic Climate Fund (SCF) will be more broad and flexible and will support a variety of programs that tackle climate change. The primary program of the SCF is the Pilot Program for Climate Resilience (PPCR – which replaces the previously proposed Adaptation Pilot Fund).

While the CIFs will provide a substantial sum of money to address climate change, they have not been accepted without controversy.  Some question whether or not CIFs will draw money away from the parallel UNFCCC structures that are already in place and whether their creation was necessary.  Furthermore, many developing country governments believe that the CIF framework lacks the transparency and equitable governance structure of the UNFCCC. 

These questions raised must be considered because given its size and influence, the WBG has a predominant voice in determining social and environmental standards for development finance in general. When the Bank adopts standards, regional development banks often follow. The IFC Performance Standards form the basis of the “Equator Principles,” to which over 60 large financial institutions subscribe (as of late 2008), effectively setting the standards for about 70% of global project finance.

Another controversial World Bank fund is the Forest Carbon Partnership Facility (FCPF), which was launched in December 2007 in order to assist countries in their “REDD” efforts (Reducing Emissions from Deforestation and Degradation).  The FCPF, part of the Bank's Carbon Finance Unit (CFU), is comprised of two structures: a readiness mechanism and a carbon finance mechanism.  Its goal is to provide an incentive structure for the maintenance of forests and to promote their sustainable use as a means of combating deforestation and the emissions that accompany the process. As part of the readiness mechanism, individual countries develop R-PINS, Readiness Plan Idea Notes to address how to best develop strategies to meet REDD benchmarks.  In their November 2008 report entitled “Cutting Corners: World Bank’s forest and carbon fund fails forests and peoples,” FERN and the Forest People’s Programme highlighted several areas of concern with regard to the FCPF mechanism, with lack of consultation outside of the government and international NGO realm at the top of the list.  The report also focused attention on issues of human rights, land tenure rights, an inconsistent view of the various drivers of deforestation, FCPF consistency with WB safeguard policies and the lack of a monitoring mechanism for the social impacts of the REDD plans.

Climate Change and the World Bank's Track Record

The following is a brief timeline of World Bank commitments with regard to climate change:

• The Global Environment Facility, 1991: A resolution by the World Bank's Board of Executive Directors in 1991 led to the establishment of the Global Environment Facility (GEF), which was designated as the financial mechanism for the U.N. Framework Convention on Climate Change in 1992. Since then, the WBG has administered the GEF trust fund and has been the GEF's primary implementing agency for investment projects meant to address climate change (note the GEF was set up to also specifically address biodiversity and desertification).  
• World Bank Group Energy Sector Strategy, 2001: The World Bank’s 2001 Energy Sector Strategy specified the four main goals of energy supply to be helping the poor directly, improving macroeconomic and fiscal balances, promoting good governance and private sector development and protecting the environment.  It further delineated 2010 targets for greenhouse gas emissions and energy efficiency in developing and transition countries.  The Energy Sector Strategy also supported various policy measures with regards to fossil fuels.
• Extractive Industries Review/Bonn Commitment, 2004: In the Management’s Response to the Extractive Industries Review (2004) and at the International Renewable Energies Conference in Bonn, June 2004, the World Bank Group announced a commitment to scaling up lending for new renewable energy and energy efficiency by at least 20% annually over five years (FY05-FY09), and leading a Renewable Energy and Energy Efficiency Financing and Policy Network for developing countries.
• Clean Energy Investment Framework, 2006: In 2006, responding to a request from the G8, the Bank developed the Clean Energy Investment Framework (CEIF) intended to help scale up investments in clean energy and integrate climate change into development assistance. The CEIF set out four primary World Bank strategic activities: Promoting transition to a low-carbon economy – especially in Brazil, China, India, Mexico, and South Africa – by increasing analytical, knowledge, and investment support; accelerating investments that help increase supplies of clean energy; improving access to affordable energy for the poor, particularly in Africa; and assisting developing countries with adaptation to the impacts of climate change through analytical work and development of risk-management tools.
• Strategic Framework on Development and Climate Change, October 2008: At the October 2008 annual meetings, the Bank’s Development Committee approved the successor to the CEIF, the Strategic Framework on Development and Climate Change (SFDCC), which spells out a much broader role for the Bank in climate change issues. The SFDCC provides the IFC, MIGA, IDA, IBRD, and other entities of the Bank Group objectives, guiding principles, areas of focus, and major initiatives to guide operational response for the next three years.

The Framework is based on six action areas, each addressing both adaptation and mitigation:

1. Support climate actions in country-led development processes;
2. Mobilize additional concessional and innovative finance;
3. Facilitate the development of market-based financing mechanisms;
4. Leverage private sector resources;
5. Support accelerated development and deployment of new technologies; and
6. Step-up policy research, knowledge and capacity building.

An extensive multi-stakeholder global consultation was undertaken between April and September of 2008 to draft the Framework in an inclusive and transparent way. The following are summaries for Phase I and Phase II of the consultations:

Phase I – Consultations on Concept and Issues Paper (WB website)

Phase II – Development and Climate Change (WB website)

Strategic Framework for Development and Climate Change (WB website)

• Climate Investment Funds, 2008: The Climate Investment Funds (CIFs), which fall under the SFDCC, are the most recent financing mechanisms approved by the Bank’s Board to support its increased engagement in climate change. In September 2008, donors from ten countries pledged $6.1 billion for the CIFs, with the majority coming from the US ($2 billion), the UK ($1.5 billion) and Japan (up to $1.2 billion). The CIFs include two funds, the Clean Technology Fund and the Strategic Climate Fund.

1. The Clean Technology Fund (CTF) provides finance for low carbon energy projects or energy technologies that reduce emissions.  It does not limit the types of technologies eligible for financing to new renewables (like solar, wind, small hydro power), but instead keeps the door open to support for “clean coal” and large hydroelectric dams.
2. The Strategic Climate Fund (SCF) will be more broad and flexible and will support a variety of programs that tackle climate change. The primary program of the SCF is the Pilot Program for Climate Resilience (PPCR – which replaces the previously proposed Adaptation Pilot Fund).