OECD members reach deal to limit export finance for coal technologies

1 December 2015

Several of the world’s richest economies clinched a deal to restrict government support for technology exports for coal-fired power plants during a meeting of the Organisation for Economic Co-operation and Development (OECD) that concluded on 17 November in Paris, France. The new rules should help curb official export credits for least efficient coal-fired power plants – a first for international arrangements in this area.

According to a senior OECD official speaking with BioRes, historically countries have not sought to restrict the types of technologies or sectors to which export credits can be provided, focusing instead on providing a level playing field and setting common terms and conditions for these in order to limit potential trade distortions.

The deal concludes two years of behind-the-scenes negotiations by participants of the “Arrangement on Export Credits,” an informal body under the umbrella of the broader 34-member OECD. Participants to the arrangement – representing the majority of OECD export credit providers – include the US, Canada, Japan, New Zealand, Norway, Switzerland, South Korea, Australia, and the 28-member states of the EU as one.

Various EU nations, the US, and several multilateral development banks have already taken measures to limit financing of inefficient coal-fired power plants. However, the OECD decision is significant as it solidifies the participation of countries such as Japan and Korea that continue to provide significant export financing to coal technologies, including to some energy-hungry developing regions.  

This signals to some observers an acceptance among the world’s wealthiest countries that financing inefficient, high-emission coal plants stands in stark contrast with international efforts to combat climate change, with nearly 200 governments looking to seal a new climate pact at UN talks due to be held in Paris, France, next month.  

“The agreement represents a first important step towards aligning export credit policies with climate change objectives to achieve lower emissions,” said Pekka Karkovirta, chairman of the participants to the arrangement, upon the OECD’s announcement.

Export credit agencies in OECD countries provided US$34 billion to finance coal projects between 2007 and 2014, according to a report spearheaded by the World Wildlife Fund for Nature (WWF), which also claimed that none of this was directed at low income countries where energy access needs are acute.  

Efficiency focus

National export credit agencies typically help to lower the risk for investors of making deals abroad, specifically by providing guarantees, government-backed loans, and insurance coverage under certain conditions.

The newly agreed OECD rules restrict participating countries’ export credit agencies from supporting the construction of certain coal plants based on criteria related to plant size, technology type and corresponding level of efficiency, and level of development of the project host country.

“The agreement negotiated at the OECD encourages both exporters and buyers of coal-fired power plants to move away from low efficiency towards high efficiency technologies,” reads a statement released by the OECD at the conclusion of the meet.

The agreement removes support for large, less technologically efficient “super” and “sub-critical” coal-fired power plants, which have greater than 500-megawatt (MW) capacity.

The decision does, however, support the use of export credits for smaller, “sub-critical” plants of less than 300 MW in poorer developing countries, and the construction of medium coal plants of 300-500 MW in countries where ten percent or more of the population lacks access to electricity. The most-efficient “ultra-supercritical” coal-fired power plants will still be eligible for export credit backing.

These exemption provisions were reportedly included to appease concerns voiced by South Korea and Australia. Nevertheless, the policy would still eliminate public financing for 85 percent of currently proposed coal plant projects, according to a senior official involved in the talks.

The rules are scheduled to go into effect from 1 January 2017 and are up for a mandatory review in 2019; however, they may be strengthened sooner based on the release of new climate science and policy development in both importing and exporting countries.  

The agreement must still pass through the EU’s internal decision-making process before being treated as final by participants to the OECD Arrangement on Export Credits. 

Japan, US compromise

According to media reports, an unexpected agreement between the US and Japan in late October helped make a compromise on these OECD rules feasible.

Japan had previously resisted any measure to limit the export of coal technologies, given concerns over competition with China. However, the tide turned in late September when China and the US reinforced their bilateral efforts to combat climate change and announced several new initiatives, including a call for China to reconsider the financing of high emissions projects. (See BioRes, 30 September 2015)

“China will strengthen green and low-carbon policies and regulations with a view to strictly controlling public investment flowing into projects with high pollution and carbon emissions both domestically and internationally,” reads the US-China joint presidential statement.

This statement alludes to China regulating export credits for coal in the near future, therefore putting political pressure on Japan to reach a compromise with the US ahead of the OECD meet, according to experts closely involved in these developments. The precise implications of the US-China statement, meanwhile, remain to be seen and officials hope that the new rules under the OECD arrangement might offer a standard for Beijing to follow.

Over the eight years analysed in the WWF report, Japan provided over US$20 billion to coal projects in developing countries, while Chinese and Russian public finance for coal in the same period was roughly estimated at around US$17 billion, though with the caveat that finance data from Beijing is difficult to obtain.

Stakeholder reactions

The new OECD official export credit rules have drawn mixed reactions from observers. The World Coal Association welcomed the recognition by the OECD countries that financing needs to continue so that coal power plants can swiftly and affordably tackle energy poverty concerns in developing countries.

On the other hand, some experts are more sceptical of the continued support for coal since firms in developed countries will still benefit from selling technologies for coal-fired power plants abroad, with several analysts suggesting the new rules’ formulation may allow a lot of coal finance to slip through.

For other experts the decision is a step forward, albeit a limited one, for developed countries to shift away from supporting high-emitting energy sources.

“This agreement is a sign that using scarce public financing to support overseas coal expansion is coming to an end,” Jake Schmidt from the Natural Resources Defense Council told The Washington Post. “It will help spur more renewable energy opportunities by redirecting this financing towards climate solutions instead of climate destruction,” he continued.

Schmidt added that although coal-fired power plant project developers and technology exporters could still seek backing from private sources, many banks follow the government-led OECD guidelines a benchmark for their own lending rules, suggesting the move could have a “ripple effect.”  

UN talks ahead, climate finance

For some climate observers, the decision to phase out some financing mechanisms for coal sends a burst of momentum for the upcoming UN climate talks in Paris, scheduled from 30 November to 11 December.

Countries are aiming to clinch a new, universal deal that would help prevent global temperature rises from exceeding two degrees Celsius relative to pre-industrial levels, in order to stave off the worst consequences of climate change. In order to reach this temperature threshold, more than 80 percent of the world’s known coal reserves need to stay in the ground, according to a recent scientific report by the journal Nature. 

Some observers have pointed to the potential implications of the new OECD rules on the Paris negotiations, as developing countries look to secure a significant amount of funding for clean energy technologies in order to achieve low-emissions economic transformations.   

Removing sources of support for future coal projects, including in developing countries, could add pressure on developed nations to deliver support for cleaner energy initiatives in a world where around 1.3 billion people continue to lack access to electricity. Many poorer governments face the twin challenges of decoupling planetary-warming emissions from economic growth and ensuring modern, safe energy for all.

Nonetheless talks on both climate finance – and, to a degree, related discussions on technology transfer and deployment – remain a tremendous point of contention between parties to the UN Framework Convention on Climate Change (UNFCCC). These divisions touch on differences over responsibility for climate action, ensuing moral obligations, shifting geo-economics and capacity, as well as competitiveness in a global economy mindful of energy prices, among other issues.

Developed countries are under pressure in Paris to clearly outline a roadmap for meeting an international promise to provide US$100 billion in climate financing annually by 2020 and potentially boosting this figure in the following decade. Such funds could be used on energy projects but will also likely have a wider reach. Developing nations, meanwhile, have warned that financial support will be essential to help them tackle climate change.

Developed countries need to fill an approximate US$40 billion annual gap, according to an OECD report released in October, which estimates an annual average of US$57 billion was provided in climate financing in 2013 and 2014.

The removal of fossil fuel subsidies, estimated at some US$600 billion a year globally, and the diversion of export credits away from fossil fuels towards renewable energy sources have been slated by some policy advisors as two mostly untapped areas of potential to channel much-needed finance into building low carbon energy systems. (See BioRes, 29 September 2015)

ICTSD reporting. CLIMATE HOME, THE FINANCIAL TIMES, THE WASHINGTON POST, REUTERS

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