Terrie O'Leary
Executive Director for Canada
World Bank, Room D12081
701 19th Street
Washington, DC, 20433

November 19, 1998
BY FAX - (202) 477-4155

Dear Ms. O'Leary,

Thank-you for taking the time to discuss with us over the telephone the Halifax Initiative Coalition concerns regarding "Fuel for Thought: A New Environmental Strategy for the Energy Sector". As promised, we are forwarding to you our recommendations which we hope you will take up at the Board level in order to better ensure that the World Bank Group meets its purpose of promoting sustainable human development.

We are aware that a draft has been done as of September 30, however this has not been made available to us. Therefore our comments are on the April 18, 1998 draft, however, judging from previous experience, we doubt that the September draft is substantially different than its predecessor.

The aims of the strategy -- and especially its speedy implementation -- are of great interest to our constituencies across Canada. As well, our views are shared by international NGOs who are working with their Executive Directors to ensure that a strategy is developed which will ensure more socially equitable and environmental lending.

As a coalition of environment, development and faith groups, the Halifax Initiative position is to ensure that the Bank energy and environmental strategy will achieve the following interrelated sustainable development goals -- to (a) assist the world’s two billion poorer people to have access to environmentally safe energy, (b) level the playing field for renewables and (c)reduce greenhouse gas emissions through reduction of reliance on fossil fuels.

The World Bank’s energy portfolios currently do not prioritize servicing those without access to electricity and basic energy services and instead it supports the traditional players and polluters in the energy sector. The proposed strategy is insufficiently specific and lacks the priority-setting needed to ensure that a clear change in direction will occur.

The strategy's scepticism regarding the role of greenhouse gas emissions in climate change is another disappointment. "And if greenhouse gas emissions destabilize the world's climate,...", page xi, xvi. If the Board accepts this as THE Strategy for the next few years, essentially this means business as usual, with no marked change of direction in any important respect. It lacks monitorable benchmarks and timetables for implementation. Thus, we submit that the Board should reject it without the changes suggested in the attached document.

The World Bank can ill afford another environmental strategy paper that is blatantly ignored by Bank Task Managers or Country Directors. In order to avoid this result, leadership is required at the highest levels of the World Bank Group.

We appreciate the opportunity to share our views on the Bank’s energy and environment strategy paper with you and look forward to hearing from you any overlap with the official Canadian position, and of course the outcome of the Board discussion.

Sincerely,

Pamela Foster
Coalition Coordinator

Recommendations for the World Bank Energy and Environment Strategy

1. Give Priority and Describe an Action Plan with Timelines and Indicators For Improving Energy Supplies for the Two Billion Poorest People.

At least two billion rural poor cannot meet even their basic energy needs (cooking, heating, lighting). In many places, renewable forms of energy are the most promising and least environmentally damaging of the energy options in providing for their energy needs, even leaving aside larger environmental benefits. This is true particularly for people who are off the grid.

An overarching policy goal of the World Bank Group should be to bring clean energy services to the approximately 2 billion poor people, mainly in rural areas, who presently lack basic energy services. The World Bank Group should develop action plans to achieve this for each region, starting with Africa, and should take the necessary steps to adjust their staffing in order to accomplish this policy objective.

In various documents the Bank has stated that it is fully committed to implement the excellent initiatives set out in the paper Rural Energy And Development: Improving Energy Supplies For Two Billion People. Regrettably, the rural energy paper has been given only the status of a Good Practice document. Various excuses have been made over the past few years as to why it is impossible for the Bank to take the necessary steps to operationalize and mainstream its recommendations. The time has come for a clear choice by the Bank to be a development agency committed to the poorest of the poor.

2. Name Natural Gas, Energy Efficiency, Distributive Co-Generation, and Renewable Energy as the Primary Tools To Achieve Sustainable Energy Project Lending

The present draft paper mistakenly focuses on investments in so-called clean coal and environmentally sound hydro as key elements of a more sustainable loan portfolio. The Institute for Policy Studies has just finished updating its latest report, done in conjunction with the Halifax Initiative, on the World Bank and climate change. Since 1992, the World Bank has lent over 25 times as much toward fossil fuels as it, together with the Global Environmental Facility (GEF), has disbursed on renewables. The World Bank is committing most of its energy and power portfolio to fossil fuels--$13.6 billion since 1992--and a large share toward coal. One in three of its energy/power dollars in the last year went to coal projects in China. Continuing the Bank’s coal bias would ensure neglect of cost-effective low-carbon investment opportunities, robbing client countries of viable options to meet development needs and environmental protection. We strongly oppose giving clean coal the largest increases in funding. These technologies are certainly dirty from a CO2 perspective, and are not economically competitive with gas-fired co-generation and some renewables -- particularly if the Bank’s focus is changed to delivering energy services to the rural poor.

The strategy should unequivocally emphasize in its energy-related lending portfolios and policy advice energy efficiency, conservation, demand-side management, advanced co-generation and renewable energy as primary tools to achieve more sustainable energy project lending.

It should make reference to transport-related portfolios as a primary producer of greenhouse gas emissions, and set priorities for shifting lending away from roads and highway construction to rail, public transportation, traffic demand management, road safety, and projects that benefit non-motorized transport users who are often the poorest segments of society.

3. Restore A Clear Benchmark For Renewable Energy Lending

The July 1997 draft of the Strategy included a provision to allocate at least 20% of the Bank’s energy project portfolios to renewable energy over a five-year period. That mandate was clear and enforceable. If followed, it would demonstrate the type of leadership that we have been calling for. Amazingly, that provision has been deleted from the latest draft without any explanation. Instead of a clear benchmark, Fuel for Thought lists only general initiatives to expand renewable energy projects, mainly through a new joint World Bank and Global Environment Facility Task Force. The deletion of a clear objective for the portion of the World Bank Group’s portfolios to be spent on renewables is a major weakness in the revised paper. The World Bank Group should restore the clear benchmark for renewable energy lending, which existed in earlier drafts of the strategy paper. Ideally there should be a target of 20% by 1999 of its total energy portfolio for investments in alternative and renewable energy, demand side management and energy efficiency programs, with a subsequent increase of 10% a year after 1999.

The World Bank continues to fail to exploit the renewable market and to develop its full potential. The IPS/Halifax Initiative research found for example, in West Africa, that the Bank is promoting a gas pipeline from Chevron's fields in Nigeria to CMS Energy's new power plant in Ghana, while the Economic Community of West African States is studying the solar and wind energy potential in each of the region's 16 states. In Morocco a 50-megawatt wind farm is being developed independently near a 696-megawatt coal-fired power plant funded by the World Bank.

It is disappointing that the Bank will continue to rely on non-traditional lending instruments to "level" the playing field for renewables. This seems particularly foolish in light of the Strategy’s expressed interest in levelling the playing field for renewables, as the traditional instruments of the Bank Group will under the proposed strategy remain focused on fossil fuel.

4. Outline an Open, Transparent Process For Reviewing Energy Elements Of Each Country Assistance Strategy

The Strategy recognizes that if reforms in are to be realized, then major upstream policy changes are required. The Bank is well aware that there are strong economic and political pressures blocking these reforms in most developing nations and transition economies. Only if those policies and investment decisions must be debated in an open and transparent way will civil society and NGOs be able to help overcome those barriers. We are pleased that the April draft discusses integration with CAS process, however, full information on all energy options must be given, in part though full participation of civil society. The April strategy itself states that renewable projects are driven by client demand.

The Bank needs to develop a common framework for full integrated-resource planning within each country energy plan, as well as assembling a multi-sectoral panel to review the adequacy of each plan. The plans should also be open for public comment by citizens in the client country, as well as internationally. Finally, such plans should be made an integral part of each Country Assistance Strategy (CAS). The inventory of environmental issues in the energy sector is only one aspect of the necessary review of the energy sector if the move away from fossil fuels and to full access to energy can be facilitated.

As a footnote to this recommendation, we reiterate the long-standing call of NGOs around the world for the CAS process to be fully open to participation by civil society, and for the relevant documents to be publicly available in both their draft and final forms.

5. Commit to Full Cost Accounting of Greenhouse Gas Emissions Across Bank Lending and to per Portfolio Reductions of GHG Emissions

In keeping with the Bank commitment made last June at the Rio review conference, the CO2 emissions associated with every World Bank Group energy-related loan should be calculated, on a lifetime basis. Those figures should also be part of the annual report. So far, we are unaware of any published figures on the annual and lifetime CO2 emissions associated with World Bank lending.

The Strategy should commit to the calculation of the full life-cycle of greenhouse gas emissions associated with all its lending, not just from power plants, which amount to less than an estimated 10% of energy-related emissions and potential emissions.

NGOs are joined in our call for a full accounting of greenhouse gas emissions in the World Bank's portfolio by the G-8 Environment Ministers, who wrote in their May 1998 communique: "We must ensure that the policies and operations of the World Bank and other International Financial

Institutions (IFIs) take full account of climate change..."

Meeting the terms of this communique will not be a simple exercise. The World Bank is currently relying on the Intergovernmental Panel on Climate Change (IPCC) to guide it in calculating greenhouse gas emissions, and limiting its calculations to power plant emissions. Yet the IPCC does not have a methodology for calculating GHGs associated with IFIs--only for countries. Countries and banks are clearly very different entities when it comes to calculating their impact on the global climate: Countries are rightly requested to calculate emissions at their point of release. However,

to get an accurate accounting of IFIs' impact on the global climate, it is essential to calculate carbon emissions that WILL be released from projects they help finance. This calculation of the future impact of IFI lending is necessary, both to meet the terms of the G-8 communique, and to gain full

transparency and accountability in the World Bank's lending portfolio--particularly with regard to developing countries' future greenhouse gas emissions.-prior to project approval. Our own research suggests this exercise is critical in halting the disproportionate flow of public funds toward fossil fuels in developing countries.

After global criticism peaked following the release of the report, "The World Bank and the G-7: Changing the Earth's Climate for Business" at the 1997 Earth Summit II in New York, World Bank President James Wolfensohn pledged to calculate greenhouse gas emissions associated with World Bank energy lending and "where there is cause for concern, explore other more climate-friendly options." Yet because of the lack of a clear methodology for IFIs and GHGs, less than 10 percent of all World Bank projects are being calculated for their impact on the climate. By its own admission, the World Bank will exclude from its calculations all coal, oil or gas reserves which the Bank helps open up for exploitation; our figures suggest that these projects constitute roughly 90 percent of the future emissions associated with World Bank energy lending. Instead, the Bank only calculates emissions from power projects it helps fund--and even here, takes credit for only one-third of these emissions over a 25-year lifespan for power projects. An internal OED review found that, despite an operational directive to do so, even this narrow set of calculations were conducted less than half of the time. The necessary methodologies to include externalities into its evaluation of potential projects and all cost-benefit analyses, including those associated with global climate change should be developed.

Without these methodologies, little wonder then, that the World Bank claims it was responsible for "only" 1.4 billion tons of carbon for projects funded between 1992-97 rather than the 9.5 billion tons of carbon our 1997 study showed. (By way of reference, all the world's countries released 6.5 billion tons of carbon in 1995.)

If full cost accounting is done by portfolio it will be possible to take immediate steps to reduce portfolio carbon emissions by at least 10% per year.

The Bank's role could also then shift away from establishing a market for carbon credits through the so-called "Prototype Carbon Fund". Instead, the Bank should implement a carbon offset program for its own projects. By incorporating the costs of environmental externalities into Bank lending, this would induce development that is much more sustainable and climate friendly.

6. Lay out Methods and Timelines for Monitoring, Analysis and Annual Progress Reporting on Implementing This Strategy

The Bank has pledged to move away from a "culture of approval" and toward a "culture of results." Thus, we recommend that the Bank begin to analyze annually whether it is, in fact, making any progress in meeting the energy needs of the world’s poorest, whether for cooking, heating or lighting. That such a basic assessment tool has not been created yet is inexcusable for an institution that repeatedly backs up its energy investments in the developing world by claiming that the poor are intended to be the ultimate beneficiaries.

The decline in carbon emissions should be reported in an annual global carbon emissions report, which calculates carbon emissions resulting from the Bank's portfolio of all power, transport, forestry, and fossil fuel related projects.

The Bank should report annually with specific figures on the share of energy lending going to each major technology area, broken down by country, and should assess progress on the necessary policy reforms in each country. Ideally, such a report should be prepared by an internal team in the energy and environmental departments, and be open to public review by an outside, independent panel.

The strategy continues to emphasize the push for privatization and liberalization of the energy sector as a prime goal of the energy portfolio. Monitoring and analysis of the environmental and equitable results of this is required in order to influence this process both to better meet the needs of the poorest without access to basic energy and to introducing renewables.

7. Agree To A Moratorium On Lending Or Guarantees For Any Project That Involves New Exploration For Fossil Fuel Reserves In Natural Forests, Pristine And Frontier Areas

NGO research has established that the World Bank has spent about 100 times more on fossil fuel development and use since the Earth Summit in 1992 than it has on more climate-friendly energy projects. A Declaration on Climate Change, Fossil Fuels and Public Funding, calling for an end to this bankrolling of the fossil fuel industry with public development funds, was launched by NGOs, including FoEI and Oilwatch, at the UN Climate Summit in Kyoto. The Declaration was signed by more than 250 organizations in 58 countries.

Exploitation of fossil fuels in natural forests, which are critical ecosystems in the maintenance of climate stability, results in numerous impacts on these vital areas through deforestation and pollution from drilling operations, and ultimately forest degradation from global climate change. At the same time, mining and drilling for coal, oil, and gas results in substantial local and regional environmental consequences, including severe degradation of air, forests, rivers, and farmlands, the impacts of which are becoming increasingly regional in character as the number and size of fossil fuel projects increases.

Fossil fuel exploration continues to move into ecological frontier areas, home to some of the Earth's most vulnerable species and indigenous human populations, resulting in accelerated losses of biodiversity and traditional knowledge, ultimately ending in ethnocide and genocide.

The burning of even a portion of known economically recoverable fossil fuel reserves will ensure a climate catastrophe in the next century. Under these circumstances, it is clear that lines must be drawn to put certain large areas completely off limits to exploration for new reserves. The World Bank Group should be a leader in that effort. In order to address the threat of climate change, we would urge the Bank to steadily disengage from investments in conventional fossil fuel exploration, exploitation and use, and to set benchmarks for doing that.

We urge the World Bank Group to accept the challenge in the Oilwatch Declaration, by agreeing to an immediate moratorium on funding for fossil-fuel development projects in natural forests, pristine and frontier areas. We hope that this would lead to a phase out of lending and guarantees for any world bank project that involves coal and oil extraction.

8. Institute A Moratorium On Lending Or Guarantees For Fossil-Fuel Power Projects Pending:

A review of the impact that World Bank lending in this area has on private sector investment. The rationale of the Bank is to demonstrate best practice, however no studies have ever been done to show that the massive amount of private sector flows to these projects have been altered by Bank projects. Indeed some studies done in Canada indicate that regulation is necessary for the adoption of cleaner technologies for it will not be taken on voluntarily.

    * Evaluations of all current and future power projects in full consultation with the communities most affected by the project, respecting the right of the local populations to decline a project which may adversely impact them
    * The consistent implementation of environmental impact reviews on all future power projects which fully examine options for demand-side management and clean, renewable, decentralized energy options such as wind, solar, and micro-hydro
    * The full and public availability of these reviews to project- affected peoples in local language

9. Include In All World Bank Contracts A Legally Binding Obligation To Restore Areas Degraded By Oil, Gas, And Coal Development By The Corporations Or Public Entities That Are Responsible

The absence of such a clause in normal contracts at present leads to extremely damaging impacts to the environment and human health. Energy companies, both public and governmentally controlled, have a horrific record in many developing countries as well as transitional economies. The World Bank should take the lead in making it absolutely best practice for the burden to be shifted to the perpetrators of these environmental, health and human rights abuses.

10. Shift The Bank's Role Away From Establishing A Market For Carbon Credits

We share the Business Council for Sustainable Energy’s negative views about efforts by the Bank to initiate a carbon trading system, and specifically the Carbon Investment Fund. Instead, the Bank should implement a carbon offset program for its own projects. That would induce much more sustainable energy development by incorporating the costs of environmental externalities into Bank lending.

Regarding the Prototype Carbon Fund, we continue to have serious reservations about it. Senior Bank staff continue to make deals in secret - they appeared to be very active, although it was all invisible. However, we learned that Switzerland has withdrawn its support for the PCF, and we are pleased that Canada has refused so far to put up the funds requested, and that several other countries are said to be reconsidering their involvement.

11. Institute A Moratorium On Lending Or Guarantees For Large Hydro Projects Pending Implementation Of The Recommendations Of The World Commission On Dams

The Strategy makes reference to supporting large hydro projects under the "right" conditions, however it does that specify what those conditions are. We congratulate the World Bank for its role in sponsoring the World Commission of Dams (WCD). Now that the WCD has been established, the Bank should cease providing loans and guarantees for large hydro projects -- those with an installed capacity greater than 10 megawatts -- until the WCD recommendations pertaining to the World Bank’s involvement with dams, resettlement and related issues have been implemented. Further promotion of large hydro by the World Bank will call into question the sincerity of its commitment to the WCD process, and in particular its willingness to accept the findings of the WCD concerning the projected and actual costs and benefits of larger scale hydropower.