Letter to Francois Page, Advisor to the Executive Director for Canada, WB Re: WB energy strategy - July 16, 1999

Francois Page
Advisor to the Executive Director for Canada
World Bank
1818 H street, N.W.
Washington, D.C. 20433

Fax: 1-202-477-4155

16 July, 1999

Dear Mr. Page;,

Please thank Ms. O"Leary for forwarding to us the Draft Final Report on the Fuel for Thought: Environmental Strategy for the Energy Sector and the Proposal to Establish a Prototype Carbon Fund. We appreciate their provision in order to enable us to provide more relevant input to the Board discussion on July 20th. As you know, the Bank did not share your commitment to transparency. The Bank decision not to release the Strategy publicly is, as you can imagine, a great disappointment to all of us who have been engaged in consultations on this Strategy over the past year. We would appreciate if Canada can express its concern that the Strategy was not publicly released prior to the Board meeting.

The Strategy differs from previous drafts positively in three areas. Language skeptical of climate change has been removed. Reference to meeting the energy needs of the poorest has been more mainstreamed. Lastly, "monitorable progress indicators" have been included. However, these indicators are put forward without any context vis-à-vis current practices. It is therefore impossible to tell if they (a) reflect a substantial improvement in Bank lending or (b) if they can be achieved solely through related instruments such as the GEF and Trust Funds and therefore do not require the Bank to re-orient its energy portfolio.

Despite these efforts, the Strategy falls short of environmental protection or even environmental stewardship. It does not answer our concerns that energy sector lending of the Bank will first, reduce poverty, second, protect the environment and lead the way for other development financing institutions.

Continued emphasis on financing to fossil fuel exploration and development spells business as usual.

Bank projects for oil, gas and coal exploration and development are currently subject to Bank policies on environmental assessment and resettlement. Despite this, these projects continue to be problematic when measured for their environmental, human rights and poverty reduction impacts. The Brazil-Bolivia pipeline project is a case in point. The strategic objective to "promote environmentally sustainable development of energy resources" will not translate to greater sustainable development if the energy source is oil, goal or gas. There is only so much that the environmental and human rights impacts of exploration and development in this sector can be reduced. Even the most minimal impact is too much to justify public financing. Instead of financing projects which "clean or clean up" oil, gas and coal activities, the Bank should work with national governments to make the polluter pay, by supporting projects which strengthening environmental and investment policies. If the Bank continues to absorb these costs, it sends two signals. It sends the wrong market signal to polluters by subsidizing costs. It also signals to Bank stakeholders that the Bank is not using its development resources for the poorest.

Assumes that privatization, liberalization and subsidy removal = energy sector reform = greater energy efficiency.

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. External as well as internal research indicates that energy sector reform can impact negatively on the poor and have mixed results in terms of environmental protection. For example, competition in electricity in the United States has led to increased coal burning in the oldest dirtiest plants. Fuel for Thought should emphasize the development of appropriate regulatory frameworks, enforcement capacity, and environmental and efficiency standards. Success in the way of sustainable development is not de facto a result from energy sector reform defined by liberalization, privatization and subsidy removal.

Weak on commitment to renewable energy.

At least 15 energy efficiency "DSM"renewable energy projects of project components is far weaker than a 20 per cent benchmark. Indeed, this goal may reflect the number of projects currently in the pipeline. It may also reflect a Bank commitment to rely on other instruments such as the GEF to "green" its portfolio.

The concept of benchmarking or requiring projects to contain a certain proportion of renewables and energy efficiency has been applied quite successfully in Europe, the United States and Canada since the oil crisis of the 70s. It has been used extensively to encourage utilities to assist their customers to use energy efficiently. Regulatory bodies require the filing of plans etcetera during rate setting or licensing hearings. The utilities are then required to report on the results of these projects. There is a great deal of research on the success of these programs and how to apply them in practice.

In the last few of years the same principle has been applied to encourage the development of renewables as part of the deregulation of electricity in California, Pennsylvania and Texas. Each of these states used different methods to both mandate and encourage the introduction of renewable energy into their power grids while at the same time eliminating monopolies. The results in California and Pennsylvania have been remarkable. Electricity customers in California switched to electricity produced from renewable sources at a rate greater than phone customers switched companies after that industry was deregulated.

Germany, Denmark and the United Kingdom have all introduced mechanisms requiring the introduction of renewables in their electricity markets. Denmark began doing so in the early 1980s. Today its wind industry is the country's fastest growing and largest employer.

The success achieved so far would not have occurred without regulatory intervention in the market that mandated the development of alternatives for economic, social and environmental reasons. The World Bank could easily introduce similar measures into its lending policy by assisting borrowers to assess the impact of demand side management, conservation and efficiency.

Bank staff may argue that they cannot be held accountable for targets which ultimately must be met by their clients. However, clients go to the Bank due to strong relationships and the opportunity for better financing arrangements vis-à-vis the international market. Therefore the Bank by setting a benchmark will indicate to its clients that what type of projects it will prioritize for its lending in the energy sector. Communicating its financing priorities in this way would be a logical purpose of a Strategy Paper on Energy and the Environment.

In sum, without comparing the indicators to current practices, without an analysis of the impacts of energy sector reform on the poor and on the environment and with continued financing to fossil fuel exploration and development, particularly coal and oil, the Strategy does not set a new course for the Bank.

Our primary comment on the Prototype Carbon Fund is as regards to the timing.

The concept of assisting Developing and Annex 1 countries in developing and executing clean develop mechanisms is a laudable and likely to be useful. However, the rules which might apply to such transactions must be based on the outcome of the Conference of the Parties and not by the World Bank Group or other international institutions. By getting ahead of the COP, there is a danger that rules will be defined by the World Bank and not by the parties. We have already seen the political and administrative issues this can pose through the World Bank GEF pilot phase experience.

Besides issues with the Bank development of a flexible mechanism, we also have questions regarding the role of the Bank in the implementation of flexible mechanisms. The PCF presents a glaring conflict of interest. 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 marketbased system they anticipate, only five or six countriesthose like China and Nigeria whose energy supply already receives foreign investment will benefit from new investments, and countries in subSaharan Africa will largely be left out. Not only does this fail to meet the Bank's mandate, it undermines the whole idea behind the Kyoto Protocol's Clean Development Mechanism - effecting sustainable development in the poorest countries.

Your assistance in answering the following questions is needed.

    * Would not the involvement of third or fourth parties (as the World Bank would be) make project development, financing and verification unnecessarily cumbersome, time consuming and costly?
    * The COP created the flexibility mechanisms to allow Annex 1 countries to use the most economic means to reduce emissions. Why should poor developing countries be required to borrow public money to achieve this goal? Surely, the country seeking cost effective alternatives to emissions reductions at home should bear the entire cost of the project and not leave the developing country with a public debt as the result of participating in a CDM project?
    * Why is it necessary to setup a Carbon Fund when flexibility mechanism projects would certainly qualify for normal World Bank Group financing?
    * Wouldn't the most economic means of developing and delivering flexibility mechanism projects be the private sector?

A fuller critique prepared by Sierra Club of Canada is attached.

We thank-you for your ongoing leadership to improve the Bank’s environmental track record. We therefore ask for your support to postpone approval of the PCF until the Conference of the Parties, to request a benchmark for renewables , further study of energy sector reform impacts and a commitment to the phase-out of Bank financing to the fossil fuel sector.

Please call either myself or John Bennett at the Sierra Club of Canada if you would like to discuss these comments.


Pamela Foster
Halifax Initiative