It’s good advice: when you find yourself in a hole, you stop digging. The same should hold true now when the world finds itself headed for a 4-degree temperature increase: it’s time to stop digging – for fossil fuels.
Financing for fossil fuels at the major international financial institutions overall appears to be on a slight downward trend. From 2008 to 2010 World Bank Group financing for oil, gas and coal averaged $4.7 billion a year, and from 2011 to 2013 financing averaged $2.3 billion annually.
But according to a new Oil Change International analysis, World Bank Group finance for projects that included fossil fuel exploration was highest in FY2013, at nearly $1 billion out of $2.7 billion total for fossil fuel projects that year.
The World Bank put out a landmark report in late 2012, outlining the terrible consequences if climate change continues unabated. World Bank Group President Jim Yong Kim said at the report’s release, “A 4 degree warmer world can, and must be, avoided – we need to hold warming below 2 degrees.”
Yet we know that the world’s ‘carbon budget’ – the amount of CO2 we can still emit if we are to meet the target of limiting warming to 2 degrees – is diminishing every year.
The International Energy Agency and the Intergovernmental Panel on Climate Change have both said that a majority of the world’s current, proven reserves of oil, gas, and coal must not be burned if we are to avoid the worst impacts of climate change.
But in the last decade, the world’s commercially viable (‘proven’) fossil fuel reserves have increased: coal reserves have declined, but oil and gas reserves have more than made up for it.
And oil and gas companies spent $129 billion last year exploring for new reserves.
As it turns out, these companies’ exploration activities are being supported by international financial institutions – and in particular, the private sector arms of the World Bank Group: the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA).
The major multilateral development banks financed almost $4.5 billion in projects that include exploration activities between 2008 and 2013, with the International Finance Corporation alone supporting $2.3 billion.
Support from these institutions, particularly in developing countries, decreases perceived risk and often leverages additional financing for exploration activities.
Of further importance to developing countries, this support from international financial institutions may cause projects that are financially risky in the long term because of climate change to become viable in the short term.
Current financial forecasts do not consider climate change risks, and consequently would put the world on track for a 6-degree temperature rise. Once regulators and financial markets wake up to the constraints posed by climate change, the cost curves for these carbon-intensive projects will rise, potentially creating stranded assets.
Former World Bank chief economist Lord Nicholas Stern has voiced strong concerns about the impact of this growing ‘carbon bubble,’ which threatens a financial crisis as the world wakes up to the realities of climate change.
These are not the energy production trajectories that the World Bank Group should be encouraging developing countries and emerging economies to follow.
If the World Bank Group is taking climate change as seriously as it says, then it must stop supporting exploration for fossil fuels – immediately – as a first step to phasing out the remaining fossil fuels in its portfolio.