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21 November 2019

EIB fossil fuel plan allows dirty projects to slip under the door

European Investment Bank statements widely reported in the press about it ceasing support for fossil fuel projects fall fairly wide of the mark. It will continue what it calls “abated,” projects where there is any attempt whatsoever to reduce, but not remove, carbon emissions.

After a mammoth meeting lasting 11-hours the EIB pushed a subtle compromises, which slipped under the radar of the press and created a loophole so that nations like Poland and the Czech Republic can jump continue fueling their love of natural gas and coal. Germany abstained from the vote, and may also look to take advantage of the situation.

Following months of debate, discussions for the EIB to cease future investment in fossil fuels had been delayed time and again, and Friday’s announcement of the strategy shift has been hailed by the press as a breakthrough in progressive climate policy. Describing the decision as a “quantum leap in ambition,” EIB President Werner Hoyer spoke of collaboration with dreams of a climate neutral Europe now sounding more like a reality. But beyond the headlines, the EIB press release only promises to “end the financing by the EU Bank of unabated fossil fuel projects,” which can only be seen as a red flag around the organization’s true intentions.

Promise of the fossil-fuel phaseout is only backed up in concrete by the new Emissions Performance Standard of 250g of CO2 per kWh, compared to the previous 550g standard, which will come into play in 2021. This is obviously a positive step, but the reality remains that gas-fired plants and even some coal-fired plants with carbon capture and storage (CCS) methods can quote a project emission intensity as low as 140g, despite emissions far-exceeding this in practice. Projects such as Drax power station, UK, for example, has reported emission savings as low as 10% through extended periods of time using CCS.

Analyst groups such as Bankwatch had urged the EIB to set the new limit at 200g of CO2 per kWh, while the EU taxonomy for sustainable investment had proposed a level of 100g of CO2 per kWh, in a report released in June. Raising the threshold to 250g means projects such as the Kiel Plant in Germany (230g/kWh) and PGE power generation in Poland (247g/kWh) may continue to receive financial support. In the detailed publication of the new policy, the EIB stresses “that the Bank appreciates the necessary role that gas will continue to play to decarbonize energy systems.” Backing the use of natural gas, which could well be accepted by the EIB under these regulations, would also ignore the vast upstream methane emissions which go unreported if resources are obtained through fracking.

This compromise in legislation is likely due to pressure from European powerhouse Germany, as well as coal-loving states like Poland, who have not been quiet in their opposition of previous proposals. Germany, which owns 16% of the shares in the EIB, has provided an obstacle to the movement, claiming that low-carbon gases will fill the gap left by the countries as they phase-out coal and nuclear power, and that the EIB’s strategy would undermine several European countries. Fears that these objections would lead to ‘watered down’ climate policy in the EIB therefore appear to be well founded.

In addition to the unclear extent of the fossil-fuel phase out and the possible inclusion of natural gas within financially supported projects, the EIB has identified 10 EU countries which face “specific energy investment challenges,” pledging to “finance up to 75% of the eligible project cost for new energy investment in these countries” as part of an Energy Transition Package. This strategy includes key objectors Poland, which is currently being dragged kicking and screaming towards renewables. The promise of a cash injection from the EIB would be another sign of Europe’s willingness to pay-out to Poland in its attempt to reach climate goals.

This comes along with news of Poland’s unambitious offshore wind bill last week, which would still see Poland on 50% coal by 2050, and the likelihood that EU will also have to step in for decarbonization. Similar movements are likely to be seen in countries like Italy, which may be impacted the most by the new policy, being the largest historic beneficiary of EIB gas lending, accounting for 51% of the billions invested in fossil-fuels. However, Italy will not benefit from the EIB’s Energy Transition Package and will likely look to fund gas projects through other avenues.

Historically the EIB has been a keen supporter of fossil fuel projects, with €11.8 billion ploughed into the industry between 2013 and 2017, primarily focused on natural gas, which is not dramatically less than the €18.4 billion invested in renewables. As recently as 2018, massive infrastructure projects have been financed to support the use of non-renewable methods of power generation, with €2.4 billion of loans approved for the controversial Southern Gas Corridor to reduce Europe’s dependence on Russian gas supply.

The new stated policy is remarkably similar to the EIB’s phase out in coal lending in 2013, which adopted a similar strategy in reducing emission intensity limits. Despite this, Bankwatch analysis has shown that from 2013 onwards, €3.9 billion was provided in loan funding to coal-based energy companies, regardless of their lack of plans to decarbonize their operations.

To achieve the newly proposed phase out properly, the EIB will have to be rigorous in assessing technology at an appraisal stage, and not be drawn in by false dreams of carbon capture technology. Threats of early call-backs on loans and withdrawn funding will have to be followed through if lifetime emissions exceed the 250g per kWh threshold.

Those who had campaigned for the EIB to become the “EU Climate Bank” have acknowledged the new policy as a positive step, and a significant improvement compared to its previous energy policy, “better aligning operations with the objectives of the Paris Agreement,” according to Counter-Balance, which has encouraged the EIB to go further in not approving further fossil fuel projects before the 2021 deadline, taking more immediate action. Currently however, the EIB “will continue to approve projects already under appraisal until the end of 2021,” rather than the 2020 deadline originally proposed.

As Forbes has highlighted, even if the EIB fully withdraws from fossil fuels, despite being the largest public lender, there are a wealth of private financing options open to large-scale energy projects. JP Morgan Chase extended $62.7 billion in fossil fuel financing in 2018 alone, with Wells Fargo among other private lenders not far behind. Investors may start feeling twitchy following the EIB’s decision – after all it is the largest global multilateral lender – with the risk that others may start to withdraw support from fossil fuels. The possibility has been highlighted that “lenders are likely to demand higher interest rates from fossil fuel companies, thereby increasing the costs of raising capital and making renewable energy or low-carbon alternatives look more attractive.”