Financing Carbon: Export Credit Agencies and Climate Change
Export Credit Agencies (ECAs) are financial institutions that promote exports and facilitate investments to overseas markets that are perceived as high risk. They cover or underwrite political and commercial risks to insure investments, and providing direct loans and equity (with favorable financing terms relative to those offered by commercial banks) to investors from their own home countries. For the period 1996-2001, Infrastructure accounted for the largest share of ECA-supported transactions ($128 billion) followed by power sector projects ($116 billion) and oil and gas developments ($98 billion) (World Bank, 2001).
These are long term investments that will remain in place for the next 10 to 50 years, and are a cause for concern given their significance to greenhouse gas (GHG) emissions: electricity and heat production alone account for around 38% of global carbon emissions (Dubash, 2002). Oil and gas production also contributes to emissions of GHGs. Methane leaks from natural gas pipelines were estimated at 10-20 million tons of methane (CH4) a year, and natural gas flaring at oil wells for 202 million tons of carbon dioxide a year in the late 1980s. In addition, petroleum refining is a highly-energy intensive process that consumes both purchased energy (gas, electricity) and refining by-products. Overall, the energy sector is responsible for about three-quarters of humankind’s carbon dioxide emissions, one-fifth of its methane, and a significant quantity of nitrous oxide (Environmental Chemistry, 2002). ECA financing is generally concentrated in 6 countries: Brazil, China, India, Indonesia, Mexico, the Philippines and Turkey; these countries are major contributors to global greenhouse gas emissions, and much of the investment in the power sector has gone to coal-fired and gas-fired plants.
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Continued investment in the energy sector without consideration for the environmental impact of its development will increase global greenhouse gas emissions. Through their financing of fixed capital, ECAs play an important role in the decisions that are made in the energy sector. ECAs are therefore in a position to contribute to improvements in the energy efficiency and intensity of developing country economies if they pay attention to the technological choices, fuel mixes and management practices of the projects that they finance. They are also in a position to play a standard setting role for financial institutions such as commercial banks and investment houses, and influence the behavior of their clients in an up-stream fashion.
Greening Export Credit Agency Financing
The ability of Export Credit agencies to finance more sustainable projects is to some extent restricted by the international norms that govern their operation. Export Credit Agencies of the Organization for Economic Cooperation and Development (OECD) countries abide by the terms of the “Arrangement on Guidelines for Officially Supported Export Credits” which was established in 1978 to prevent ECAs from distorting capital markets and competing with commercial financial institutions. The Arrangement effectively limits the amount of subsidy that ECAs can grant to exporters, and links ECA terms to prevailing commercial rates for comparable services in order to control undercutting and competition amongst ECAs. The Arrangement also establishes parameters for combining official export credits with official development assistance. Many governments choose to offer “tied aid”, which combines developmental aid grants with official export credits that requires the recipient to purchase equipment or goods from the donor country. Under the Arrangement, only low income countries are eligible to receive tied aid, and there is a minimum 35% grant component.
The Arrangement does, however, make some exceptions with regard to repayment periods for projects in particular sectors such as power plants, nuclear plants, ships and civil aircraft. A complementary agreement to the Arrangement, the Ex-Ante Guidance for Tied Aid, establishes that non-commercially viable projects qualify for the use of tied aid, and under this agreement tied aid can be used for renewable energy and distributed power projects. The fact that tied aid can only be used in low income countries prevents ECAs from being able to finance renewable energy and distributed power projects in the emerging market economies where ECA power sector lending tends to be concentrated. The rules that govern ECAs therefore make it more difficult to “green” ECA finance for the energy sector.
The environmental and social impact of ECA financing has received increasing attention in recent years, and in 1999 the G8 heads of state agreed to negotiate common environmental guidelines for Export Credit Agencies, at the same time also agreeing to create a taskforce to study how to accelerate the development of renewable energy technologies. Four years later, however, the G8 countries have yet to reach consensus on a set of environmental guidelines. There has been disagreement over what basis should be used for ECA environmental assessment standards, and what information ECAs should disclose to the public and affected communities about environmental impacts of their projects. Yet none of the environmental procedures or standards that were debated evaluates project impacts on greenhouse gas emissions or contributions to energy-efficiency improvements. There was also no discussion of reporting on project contribution to greenhouse gas emissions over time. Regardless of how the discussions on environmental standards are resolved, they are unlikely to produce tangible changes in lending to energy intensive sectors.
In 2001, the Renewable Energy Taskforce of the G8 recommended that ECAs extend the repayment periods for renewable energy projects to 12 - 15 years, making them exceptions to the standard terms of “the Arrangement” like nuclear plants, ships, civil aviation, or power plants. It also recommended that these ECA environmental guidelines include minimum standards for energy efficiency or carbon intensity, and common reporting methodologies to enable assessment of environmental impacts. To date, however, the G8 governments have largely ignored these recommendations.
Reducing the Carbon Footprint of ECAs
In order to reduce the carbon footprint of ECA financing it is critical that ECAs disclose what projects are being supported in the energy sector, in enough detail to identify the power generation technologies being emphasized, the fuel mix being developed, and the planned production capacity, to allow a meaningful public dialogue about the quality and direction of their financing portfolios. Portfolio targets can also be used to manage the environmental quality or risks of ECA exposures. It is also important that ECAs require or conduct a full cost assessment of energy and energy-intensive projects, identifying the full life-cycle cost of the project and identifying social and environmental externalities, in order to allow project developers to internalize these costs. In the long term, credible assessments of ECA contributions to a more sustainable energy future will require systematic tracking of their progress in order to evaluate their impact. In particular, there must be a methodology to measure the emissions to be generated by project during its construction and development, and the emissions it is likely to displace or eliminate. Such a process will allow for more objective decision making and strategizing.
An ECA role in the transition to more sustainable energy requires more than good will, interest and positive action by the ECAs. Export credit agencies respond to government directives and priorities from economy and finance ministries as well as foreign ministries responsible for international negotiations. Policymakers at the highest levels of these agencies must take up the issues of ECA reform. Just as important, environmental constituencies at domestic and international levels must engage in the ECA reform debate, and make improved environmental standards, particularly for climate change issues, a political priority.