Biden Administration May Join the European Union in a Ban on Financing Fossil Fuels with Development Dollars

Poor Countries Must Be Exempt

Image by Gage Skidmore via Flickr (CC BY-SA 2.0), Desaturated and masked from original

Since taking office, the Biden Administration has taken several steps to address the climate crisis and plans to do more on the international stage. According to Special Envoy John Kerry, the Administration wants “to develop a U.S. climate finance plan, as well as a plan for ending international financing of fossil fuel projects with public money.” This trend will be in line with an earlier move by the European Union to “stop funding oil, gas, and coal projects at the end of 2021, cutting €2bn (£1.7bn) of yearly investments.”

As we have written, a blanket ban on fossil fuels is likely to stifle economic growth and make poor populations in Africa even more vulnerable to the impacts of climate change. For poor countries, now mostly located in Sub-Saharan Africa, the goal is economic growth—first in agriculture, where much of the population still works, and then in industry and services. Exempting them from a ban on the financing of fossil fuels is necessary to achieve this goal.

This point was recently driven home by Nigerian Vice President Yemi Osinbajo, who noted with concern, a “growing trend among development financial institutions to withdraw from fossil fuel investment.” He pointed out that however well-meaning this trend, it ignores the need to address energy poverty in African countries.

There are policy design options that acknowledge the energy needs of developing countries while still targeting emission reductions. One option is to simply use an income-based criterion, as defined by the World Bank’s International Development Association (IDA), which provides low-cost financing for poor countries. Eligibility for IDA support is decided by a threshold and updated annually. For fiscal year 2021, the threshold is $1,185; countries with a gross national income per capita below this amount qualify for IDA financing.

IDA also supports several small island economies that are above the income threshold; these countries are particularly vulnerable to climate change. Other countries, such as Nigeria and Pakistan, are IDA-eligible based on per capita income levels and are also creditworthy for more expensive loans. A total of 74 countries are currently eligible for IDA financing; this group could also be exempted from an international ban on the financing of fossil fuels.

Another option is to use an energy consumption and/or emissions thresholds, per former CGD colleagues and updated by our friends at the Energy for Growth Hub. The figure below shows the list of countries for which energy consumption is below 2000 kWh per capita and emissions are below 2 tons CO2 per capita (for comparison, levels in the US are about 13,000 kWh and 16 tons per capita). This option links directly to energy use rather than to the broader criterion of income. And putting a threshold ceiling would automatically select eligible countries. Using these criteria, 60 countries would currently be eligible for an exemption. Any of these threshold approaches would exempt poorer countries while leaving the ban in place for higher-emission, middle-income countries (which would have access to private markets).

Source: Energy for Growth Hub (2021)
Source: Energy for Growth Hub (2021)

Most African countries are already committed to an energy transition, bypassing coal for less carbon-intensive sources of energy. The Grand Ethiopian Renaissance Dam is one example of an African country going all-in on hydroelectricity because it was assessed to be the best long-term option for both Ethiopia and the region. Such a choice, however, is not universally available across the continent, and a blanket fossil-fuel ban would severely limit the choices of energy-poor countries hoping to build industrial capacity.

The bottom line is that, to deal with the effects of climate change, poor countries—in Africa and elsewhere—need roads, schools, and housing that can withstand hurricanes, typhoons, and extreme weather events. Rather than restricting investment, international financial institutions must acknowledge that adaptation to climate change requires energy and that not all of it can come from renewable sources. If anything, poor countries must have more flexibility to finance the projects that address poverty and improve resilience to climate change.

This piece is cross-posted at the Center for Global Development.