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

January 28, 1999

Dear Ms. O'Leary,

We are pleased that the World Bank Energy and Environment Strategy (EES) went out for a further round of external consultation following the November 24th Board discussion. The window for consultation is, as you know, small and therefore we fear that the number of inputs to this discussion from NGOs, especially in developing countries, will be limited. As Canada has taken leadership in multilateral fora to encourage civil society participation and transparency, we would like to ask you to track levels of participation and the ratio of Northern to Southern inputs in this consultation and to make recommendations for a more engaged and direct process.

Our comments, identical with those made by other NGOs, have not changed since our discussion before the Board, despite having access now to the latest draft. (For example, the strategy’s scepticism regarding the role of greenhouse gas emissions in climate change remains.) The priority for the EES must be poverty alleviation and sustainable development and therefore the focus should be on the integration of the Rural Energy and Development: Improving Energy Supplies for Two Billion People, and reducing reliance on fossil fuels. We were glad to learn from your office that the integration of the Rural Energy and Development paper was recommended by the Board at the discussion on the 24th. Without naming as a priority meeting the energy needs of the poorest, and without benchmarks, timetables and performance indicators to track commitments to clean energy lending, the EES will have little if any impact on World Bank lending.

As you know, earlier drafts of Fuel for Thought contained a 20% target for renewable energy lending, but the Bank now shies away from this approach; the staff arguing they cannot be given targets when they are only responsive to client countries. This argument is problematic on two levels. First, client countries are represented on the Board of the Bank. Therefore, it should be up to the client countries through their Board representation to determine what an appropriate benchmark would be. Then it would be up to the staff to facilitate the Bank meeting its own objectives, properly set by the Board in consultation with stakeholders. For the staff to argue that lending targets should not be set, this preempts what needs to be a Board discussion. Second, there is no question that Bank clients take seriously the advice of the Bank. If the Bank has benchmarks, it would provide the necessary incentive to staff to become better experts on renewables, thereby ensuring the provision of better service to their clients in way of advice and information. The Bank acknowledges that the capacities of their staff are limited in the area of renewables. Obviously, if a 20% benchmark was in previous drafts, some Staff at the World Bank, knowledgable in the energy field, feel that this is a reasonable target for the early years of the implementation of this Strategy.

We are also concerned that Fuel for Thought provides the Bank no mechanism with which to play a significant role reducing greenhouse gas emissions. Between 1993 and 1997, the World Bank Group committed over US$ 9.5 billion in loans, credits, guarantees, equity and other forms of financing to fossil fuel projects. (The World Bank and the G-7: Changing the Earth& Climate for Business, Institute for Policy Studies, June 1997). The projects include 51 coal, oil, or gas-fired power plants, 20 oil or gas developments, 10 oil or gas pipelines, four coal mining programmes that involve 26 mines and two oil refineries. Over their lifetimes, these projects will emit 9.4 gigatons of carbon into the atmosphere. Approvals of an additional US$ 4.1 billion worth of fossil fuel projects are pending. The 1998 Study of the GEF's Overall Performance is unequivocal regarding the World Bank's performance.

"The Bank has not succeeded (emphasis added) in systematically integrating global environmental objectives into economic and sector work or into the CAS process, nor has it taken meaningful action to reduce the impact of its traditional role as financier of fossil fuel power development...It has not yet undertaken any programming based on global environmental objectives..."

(GEF/A.1/5.March 2, 1998.xiv.)

"...continued financing by the World Bank for such projects (conventional fossil fuel power) is inconsistent with mainstreaming of the global environment in the Bank's regular operations." (GEF/A.1/5.March 2, 1998. p.45)

In order to avoid repeated comments such as those above, the EES must set targets for renewable lending, and take into consideration prior to project approval, the impact on climate change that all projects, not just in the energy sector, will have. The Bank should employ a methodology that will account for GHG from all projects and not just power plants. Without such monitoring and transparency, the Bank can conveniently ignore its role in lending long-term greenhouse gas emissions. The methodologies developed to measure emissions would then be useful for both private and public sectors as they develop plans to lower GHG emissions.

The strategy should make a difference to the operations of the Bank, a difference characterized by decreasing poverty and greenhouse gas emissions and increasing accountability and transparency. To effect these changes to the strategy, leadership is required at the highest levels of the World Bank Group. A list of recommendations is attached, which differs only slightly from the one provided in November (we too can be subtle in our revisions)!

We appreciate the opportunity to share our views on the Bank's energy and environment strategy paper with you and look forward to a substanstially revised EES.

Sincerely,

Pamela Foster
Coalition Coordinator

Recommendations for the World Bank Energy and Environment Strategy

1. Focus on the Two Billion Poor Who Lack Access to Electricity

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. The World Bank acknowledges this problem in Fuel for Thought, but doesn't make concrete commitments to solve it. The paper calls for upstreaming via the Energy-Environmental Review (EER)/Country Assistance Strategy (CAS) process, but focuses more on efficiency and sector reform than it does on the two billion poor lacking energy. Fuel for Thought assumes that reforming the EER/CAS process will automatically lead to a trickling down of energy services to the rural poor, but this is misguided. While the World Bank has created pilot programs such as the Solar Development Corporation and the Energy Sector Management Assistance Program, Fuel for Thought makes no commitments and guarantees no shifts of funding or focus to provide the rural poor appropriate energy services. Specific and goal-oriented action plans are needed.

2. Shift Energy Portfolio Away from Fossil Fuels and Toward Renewable Energy

Previous drafts of Fuel for Thought included clear targets for renewable energy lending. The World Bank should restore the benchmark, ideally aiming to devote 20 percent of its total energy portfolio to investments in alternative and renewable energy, demand-side management, and energy efficiency programs, with a subsequent increase of 10 percent a year after 1999.

Some World Bank management and Board members contend that quantitative benchmarks are ill-suited to the Bank's country-driven lending, and Fuel for Thought states "countries vary widely in terms of their starting points, priorities and resources, making the choice of policy tools and approaches more a matter of analysis and judgement than one of applying a uniform policy prescription." In addition to concrete lending targets, the Bank is also considering more middle-of-the-road means to effect a portfolio shift; these include an incentive framework that would encourage staff to fast track clean energy projects in the CAS process and inducement of a dialogue between Board members and clients. However, since Fuel for Thought attributes the Bank's failure to effect an overall shift toward renewable energy to a "lack of commitment in implementation," it is clear that clear targets and incentives are needed.

3. Take Full Account of Greenhouse Gas Emissions and Climate Change

The World Bank should fully account for climate change in all of its operations. The Bank currently applies IPCC methodology to account for greenhouse gases resulting from its lending. This only accounts for emissions at the point of release, and the Bank furthermore applies it to a

limited number of projects. Additionally, the Bank admits that their calculations carry a 10-15 percent error in accounting for emissions. The Bank argues that they cannot deviate from the IPCC methodology, since it has been adopted by the Parties to the UNFCCC, and says that rather than attempting to improve upon the current methodology it will focus on expanding the range of projects to which it applies this rudimentary accounting.

The Bank is correct to extend its methodology to a wider range of projects, and should account for not only power plants but transportation, fossil fuel exploration, and eventually land use change and forestry. However, since the Bank is not a signatory or even a party to the UNFCCC, it should not restrict itself to the IPCC methodology. Rather, it should develop an innovative methodology that it applies to all projects well before they are approved, taking into full account the global environmental and human health costs associated with fossil fuels. The leaders of the G-8 support such action, stating in a May 1998 communiqué that "we must ensure that the policies and operations of the World Bank and other IFIs take full account of climate change."

4. Create an Independent Energy Efficiency Unit

The World Bank should house an energy efficiency unit and employ it on every project it finances, to avoid badly-designed and inefficient systems, lack of maintenance, reliance on burning low-cost fossil fuels and an overwhelming emphasis on energy-intensive industry. The European Bank for Reconstruction and Development estimates saving approximately 900,000 tons of oil equivalent per year, and avoiding 2.8 million tons of CO2 emissions per year since creating an energy efficiency unit a few years ago.

Currently, the Bank's Energy Efficiency Thematic Group and its Rural and Renewable Energy Thematic Group (operated under the auspices of the Energy Sector Board) address the issues an energy efficiency unit would. In theory, the thematic groups' super-departmental nature should make them an effective tool for including energy efficiency in Bank operations across the board. However, Bank staff admit that the groups are inadequately funded and thus ineffective. Given this admission, and Fuel for Thought's acknowledgement of "problems of commitment in implementation," the Bank should create an independent unit which will ensure specific focus to the issue of energy efficiency.

5. Place Energy Sector Reform Before Privatization

The World Bank Group should fully integrate its energy and environment strategy into all operations prior to financing further privatization or commercialization operations in the energy sector. Fuel for Thought characterizes privatization as unequivocally good, but Bank experience (and an OED report) shows otherwise. The Bank should reevaluate its experiences with privatization schemes, and incorporate lessons learned into Fuel for Thought. It must then ensure that host countries have appropriate regulatory frameworks, enforcement capacity, and environmental and efficiency standards before they privatize their energy sectors. Privatization schemes will be inconsistent with updated energy strategies if the correct sequencing does not take place.

6. Increase Transparency and Accountability Around Energy Sector Lending

The World Bank Group should increase transparency around its energy lending, and institute mechanisms that will enable stakeholders to evaluate their progress in implementing its energy strategy. First, the Bank should develop an open, transparent process for reviewing energy elements of every country's Country Assistance Strategy (CAS). Not only should the Bank shift its energy-related portfolios and policy advice toward energy efficiency, demand-side management, advanced co-generation and renewable energy (and its transport-related portfolios toward public transport), but it should do so while including local stakeholders. In the IDA's recent and twelfth replenishment, the IDA Deputies call for a more open CAS process which includes civil society participation. Fuel for Thought makes references to including stakeholders but doesn't specify how this will occur; nor does it suggest what information the Bank will provide the public in this process and how it will incorporate these concerns.

The Bank should also institute an annual "Energy and the Environment" report. Fuel for Thought provides no single mechanism for the public to coherently understand how the Bank is implementing its energy strategies, and no way for stakeholders to hold the Bank accountable for concrete progress in the energy sector. In tandem with the upcoming creation of new Operational Policies on energy efficiency and the power sector, the Bank should begin issuing an annual report that will enable the Board and civil society to monitor its adherence to the energy and environment strategy.

7. Avoid Financing Energy Projects that are Environmentally and Socially Damaging

In shifting its energy portfolio away from fossil fuels, the World Bank Group must also take care to avoid investing in projects that harm valuable ecosystems and local populations. Natural gas in particular raises serious concerns. Fuel for Thought acknowledges that gas reserves are often "in the wrong place," but paradoxically cites the Brazil-Bolivia gas pipeline-a project whose implementation has been fraught with serious environmental problems-as a model of the type of project the Bank should fund under its new energy strategy. To reduce climate change while simultaneously avoiding other environmental harm, the Bank should take steps to stop

investing in:

Infrastructure for or extractive projects in frontier and primary tropical, temperate or boreal forests, or areas where indigenous people live. Extractive projects include both underground resources such as oil, gas, and minerals and surface resources such as timber;

Projects in or impacting areas listed on the United Nations list of National Parks and Protected Areas, or Nature Reserves/Wilderness Areas, National Parks or National Monuments or proposed nature sites;

Projects that involuntarily resettle more than 500 people. According to its own assessment, the Bank's record on successfully resettling affected communities is a failure.

Large hydroelectric dams. Fuel for Thought's inclusion of hydroelectric dams as a long-term energy strategy presupposes the outcome of the World Commission on Dams (WCD) project that is currently underway. The Bank should cease all involvement in large hydro projects until the WCD recommendations are made available.

In addition, Fuel for Thought states that the Bank will seek to increase its collaboration with multinational oil companies. In many cases-consider the current situation in Nigeria-such collaboration will not only work at cross-purposes with larger Bank efforts to combat corruption and bad governance, but will seriously imperil local populations. Fuel for Thought should clearly establish instances in which the Bank will make exceptions and refuse collaboration with oil companies.

8. Avoid Participating in a Global Carbon Market

The World Bank Group should not participate in carbon offset markets with its proposed Prototype Carbon Fund (PCF). Although the Board has yet to approve the PCF, Fuel for Thought makes it clear that it is not a question of if but when. The PCF presents a glaring conflict of interests: The World Bank presently holds a large portfolio of fossil fuel investments, and from what we read in Fuel for Thought, it intends to continue investing large sums in that sector. Thus, setting up a carbon trading fund presents serious conflicts of interest. We recommend that the Bank focus on how to internalize the externalities associated with this portfolio and thereby do its part in helping alleviate global climate change. In addition, involvement in the PCF clearly deviates from the Bank's mandate to alleviate poverty. The Bank envisions the PCF as catalysing, not monopolizing, a carbon market that will eventually be run entirely by the private sector. They admit that in the true market-based system they anticipate, only five or six countries-those like China and Nigeria whose energy supply already receives foreign investment -will benefit from new investments, and countries in sub-Saharan Africa will largely be left out. Not only does this fail to meet the Bank's mandate, it undermines the whole idea--effecting sustainable development in the poorest countries-behind the Kyoto Protocol's Clean Development Mechanism.