The World Bank and the G-7: Changing the Climate for Business (June 1997)

 The consequences of the World Bank's fossil fuel expansion in the global South are proving devastating for the Earth's climate as greenhouse gases generated in mining and burning of fossil fuels are released into the Earth's atmosphere. The total of World Bank-financed fossil fuel-related emissions for Bank projects since the 1992 Earth Summit will result in 9.5 gigatons of carbon being emitted over the lifetime of the targeted oil, gas and coal fields, pipelines, and power plants; an additional 1.3 gigatons of carbon will be emitted from projects in the pipeline. This is more than the entire current annual global carbon emissions for planet, which is estimated at 7.6 gigatons of carbon.

Since July 1992, the World Bank Group has committed over $9.4 billion in loans, credits, guarantees, equity and other forms of financing to fossil fuel projects, and is on the verge of adding about $4.1 billion more. These projects target at least 51 coal, oil or gas-fired power plants (with a combined capacity of over 29,600 megawatts), 20 oil or gas developments, two proposed oil pipelines, 8 other gas or oil pipelines, and 26 coal mines.

The combined economic and environmental impact of these projects is staggering. With World Bank assistance, these oil, coal, and gas projects are shifting the natural resources and capital away from the alleged "beneficiaries" of the projects to hundreds of corporations, with many of the largest capital outlays going to corporations based in the G-7. These same G-7-based corporations own, invest in, provide equipment for, and/or use fossil fuels from these same projects. In nearly 90% of the fossil fuel projects financed by the Bank, at least one G-7 corporation has or is likely to have a direct capital role.

All of these projects must be approved by the World Bank's board of executive directors. The World Bank's executive directors representing G-7 countries hold almost half - 47 percent - of the Bank's voting power. The addition of Russia to the exclusive group of economic powers, the new "G-8," will tip the balance of power upward to 49.5 percent. The G-7 - and now, even more, the G-8 - thus has significant leverage and influence over the World Bank's investment portfolio.

Rather than using that leverage to benefit the poorest of the poor, the alleged World Bank "project beneficiaries," the World Bank and the G-7 have chosen to invest in projects which benefit the richest of the rich. Among the many G-7-based beneficiaries are corporations whose annual sales are larger than most developing countries.

Take the case of Enron. This little-known U.S.-based corporation had annual sales of $13.2 billion in 1996. Enron's annual sales exceed the 1996 GDPs for four countries in which it has benefitted from World Bank fossil fuel investments: Bolivia, the Dominican Republic, Guatemala, and Mozambique. Enron owns part or all of two gas fields, two gas pipelines, and two gas or diesel power plants that are connected to World Bank projects.

Few of the poorest of the poor share in the vast wealth generated by these projects. In fact, too often the poorest of the poor are absorbing a good share of the externalized costs of these projects - in the form of poisoned water, polluted air, loss of traditional livelihoods (such as fishing), resettlement, and social upheaval.

Furthermore, where electrical power is generated, most of it bypasses the poor on its way to large industries, many of them G-7-based transnational corporations. In fact, World Bank staff admit privately that, despite record quantities of capital outlays for energy expenditures in non-Annex 1 countries, for the indefinite future, the vast majority of the rural poor will not gain access to electrical power.

"There is no magic pool of money to deal with the 80 percent of people without power in rural [India]," the World Bank's Kari Nyman stated at a meeting with Washington NGOs on April 30, 1997, also attended by the World Bank's Jean Francois Bauer and Tjaarda Storm Van Leeuwen. These same World Bank staffers expressed unanimous agreement that universal access to electrical power for India's poorest was impossible for a long time to come, despite record expenditures on coal-fired power expansion, "unless someone from the outside was willing to provide financial support."

Today, less than 5 percent of the World Bank's energy budget is devoted to rural electrification; less than 3 percent of the Bank's energy lending budget is devoted to renewable energy; and about 2 percent is spent on fuelwood lending. Together, less than 9 percent of overall Bank energy lending has gone to service the 2 billion of the world's poorest people living largely in rural areas and dependent on fuelwood, crop waste, and animal dung for their basic cooking and heating needs.

The majority of World Bank loans, as this report shows, goes instead to large fossil fuel-powered plants and oil and gas projects. Large dams and roads are also favored in the Bank's energy investment portfolio; however, large dams are increasingly proving less attractive to the Bank, for two reasons: 1) peoples' movements in the global South have begun to gain momentum and broad support in their opposition to the scale of resettlement usually involved in large dams; and 2) the long delay between construction and completion of dams, as compared to coal-fired power plants, makes them a less attractive financial investment.

A Conservative Estimate

It must be emphasized that our figure of 9.5 gigatons of carbon, while staggering, is nevertheless only a fraction of the total greenhouse gas emissions directly attributable - and less directly attributable - to the World Bank over the past five years. For example:

  • This figure does not include the carbon emissions that would be emitted from Russian coal mining. Nevertheless, the Bank is now playing a leading role in slashing work forces at Russia's coal mines - the first step in privatization, greater profitability for investors and, inevitably, increased coal mining activity. Because the Bank has not, as of yet, invested in any additional coal-fired power or coal-fired power equipment in these mines, we have not included this in our calculations. Were we to do so, calculating emissions generated over the life of these mines, our total emissions estimates related to World Bank financing would skyrocket to 85 billion tons of carbon, or more than 10 times the current annual global carbon emissions from fossil fuels.
  • This figure does not include greenhouse gases generated as a consequence of transportation loans made by the World Bank, because of the difficulty in quantifying the additional greenhouse gas emissions produced due to road-building. However, it must be pointed out that the World Bank's role in financing road-building - rather than the financing of public transportation and rails - is considerable, and that this financing will inevitably lead to more automobile use, more fossil fuel combustion and, thus, a warmer world.
  • This figure does not include Bank loans to energy-intensive industries like steel, aluminum and cement plants, whose greenhouse gas emissions are also significant.
  • This figure does not include methane - another even more potent greenhouse gas than carbon - which is released in coal, oil, and gas extraction, transportation and burning.
  • Finally, this figure does not include the greenhouse gases generated as a consequence of the Bank's virtual neglect of its purported mandate - that is, improving the standard of living of the poorest of the poor and, in this case, improving their access to energy resources. This under-attention will translate into additional biomass burning, and a reduction in the amount of carbon that could have been sequestered, but will not be, in forests and other forms of biomass by the 2 billion increasingly desperate rural poor in the global South.

Catalyzing Climate Change

The Bank's catalytic role in the fossil fuel industry is perhaps even more significant than its direct involvement in individual projects. The Bank supplies only about 3 percent of the total financing requirements of the energy sector in developing countries; private sector flows are four times greater than official development flows. Nevertheless, by its own admission, the Bank plays a key role in setting the standard by which other energy projects are judged, and thus in exerting an influence disproportionate to the size of its investment portfolio alone. The World Bank funnels $3 to $4 billion into energy projects in the global South per year, and leverages an additional $20 billion in private finance.

In virtually every country in which the Bank has financed a new power plant or oil field, it has done so only after demanding and receiving regulatory reforms - such as the removal of subsidies, privatization of the power sector, and lowering of tariffs on imports - which open the country's fossil fuel sector to foreign investment. The financing of a fossil fuel project by the Bank or by other private investors is the symbolic "marriage" between World Bank economists and the country's politicians.

Thereafter, the country is open for exploitation by some of the world's most powerful corporations, like Shell and Exxon. These corporations then develop and, often, own, many more fossil fuel projects than are directly financed by the Bank.

When ownership of Bank-financed projects does not fall into G-7 corporations' control, the host governments of these companies can be counted on to express their displeasure. Late last year, Zimbabwe's President Robert Mugabe decided to award a privatized Bank-financed coal-fired power plant to a Malaysian company. Companies from France, the U.K. and the U.S. were among those rejected by Mugabe. The reaction from Western governments was furious. Zimbabwean ambassadors in Western capitals were summoned to explain the decision. "I told them to go to hell," said the President, "because Hwange thermal plant is ours and we do what we want with it."

Privatization: Fiscal Space or Fiscal Nightmare?

Opening the world economy to transnational corporate investment has been the modus operandi of the Bank from its inception. The Bank has always urged that such "privatization" - backed by massive multilateral and bilateral aid - is the pathway to poverty alleviation. The argument made by Bank economists, simply put, goes as follows: Public sector control of energy resources results in economic inefficiencies, fiscal losses, and subsidies that distort the true cost of power production; thus, privatization of a public utility will result in the more efficient use of energy, thereby generating more power for the same amount of money while freeing up capital resources. This "fiscal space" created by privatization, the Bank argues, frees up government funds for social sector spending.

This "fiscal space" is proving to be a fiscal nightmare for many countries. Indeed, some countries are already straining under the financial weight of commitments made to construct power plants their countries can ill afford.

For example, in Pakistan, as this report elaborates on p. 102, the Hub River power station, Hubco, has created a boondoggle for Prime Minister Nawaz Sharif, newly elected to succeed former Prime Minister Benazir Bhutto. Although Bhutto sang the praises of the project, claiming that the World Bank and G-7-financed power plant was a sign of Pakistan's "energy revolution," in 1996, analysts at an investment firm estimated that the plants will increase the cost of fuel imports into Pakistan from $1.5 billion to $4 billion. In addition, Pakistan's government is having to pay an overwhelming $1.3 billion a year toward Hubco alone, and might have to raise power rates by 33 percent to pay for the plant.

The Equity Argument: Crocodile Tears

Another rationale routinely used by the World Bank for expansion of fossil fuel use in the South argues that, because per capita emissions in countries like China and India are a fraction of those in the G-7, these countries have every right to exploit their fossil fuel reserves, and the Bank is not contravening the Climate Convention in helping them do so:

...The demands for commercial energy in developing countries are likely to grow substantially in the next few decades under any development scenario, including an energy efficient scenario. This is because a) developing country per capita consumption levels are very low - less than one-tenth, and in the case of electricity, less than one twentieth - of those of rich countries; b) two billion people are dependent on fuelwood and dung for cooking, and two billion are without electricity (90 percent of the population in Africa); and c) not meeting their demands efficiently would facilitate large-scale impoverishment; increasing dependence on fuelwood and dung on a more massive scale as populations rise would be environmentally unsustainable.

While these statements are true, the implication is that the World Bank's energy strategy of privatization and removal of subsidies in the power sector will ameliorate, and not aggravate, the situation for the 2 billion rural poor. However, the World Bank's own energy strategists do not view rural energy, urban energy, and industrial energy strategies as part of a seamless whole. They admit that the 2 billion rural poorest dependent on fuelwood and dung will remain unserviced for the indefinite future under any scenario.

Orissa: World Bank "Model of Privatization"

Not only does the World Bank strategy fail to improve the lives of the rural poor in developing countries, however; in many cases, these struggling communities will find themselves worse off thanks to the Bank's energy program.

For example, in Orissa, the first state in India to privatize its power sector, the removal of subsidies for household consumption in 1997 has resulted in a five-fold increase in electricity prices for the less than 20 percent of households that have access to power; meanwhile, the price of power for industry has dropped by 23 percent. The resulting low power tariffs for industry are among the lowest in the world, and proving an irresistible magnet for energy-intensive industries like aluminum smelting and steel manufacture.

The immediate consequence of this rapid industrialization for the people in villages nearby is devastating. Most villagers in rural Orissa still exchange rice rather than coins; the only wealth they've knownis a plot of land blessed by a good monsoon rain and a plentiful harvest. But now, as open-caste (or strip) mining of coal expands, their black maws gaping at the sky, thousands of villagers are ousted, resettled on land that is a fraction of the plot they once owned - if they're lucky. The unlucky ones join the ranks of the "self-employed," an experiment in poverty alleviation (which all indications suggest will be a dismal failure) being tried by the World Bank.

Dead rivers now carry toxic effluent and coal ash through villages where people still rely on the blackened water for drinking, bathing and irrigation. Agricultural productivity has dropped for farmers dependent on the river water; fishing communities have been wiped out. Water tables have dried up due to mining activity in some areas, and groundwater has been contaminated in others by industrial pollutants. Chronic diseases like cancer, bronchitis, and other lung and skin diseases are soaring. But because such costs are not measured in the gross domestic product, all reports trumpet Orissa as a "model of development and privatization," and a bellwether of things to come for the rest of India.

By the year 2005, 1 percent of global greenhouse gas emissions will come from this small corner of the planet - one-third the share India now generates as a country of 937 million people.

The World Bank is not alone in promoting the development of Orissa's mineral resources; it is joined by virtually every G-7 country. Bilateral U.S., Italian, French, British, Japanese, German and Canadian government financing is coupled with World Bank loans and financing from other multilateral development banks like the Asian Development Bank. Together, these banks and countries have funnelled $2.85 billion into the Orissa economy since 1993.

This story of Orissa, unfortunately, is being repeated around the globe: As industrial growth plateaus in the North and accelerates in the global South, global investors are increasingly seeking out regions where energy resources--the cornerstone of industrial development - are cheap and plentiful. Under the banner of "poverty alleviation" and economic growth, the World Bank Group is assisting them in this process, thereby playing a central role in making a mockery of the Climate Convention while destroying sustainable, traditional economies in the developing world.

The World Bank's Self-Defense

Inside the Bank, there are some who deny that the situation is as bad as it is. World Bank Public Relations Officer Nick Van Praag told an Italian newspaper in April 1997: "The World Bank is not contributing to climate change." Others within the Bank are more candid, claiming that this financing of fossil fuel-driven industrialization is the lesser of two evils: "If the Bank didn't finance these coal-fired power projects, someone else would, but with lower environmental standards than ours," World Bank Senior Operations Officer Hiraoki Suzuki told NGOs in Washington, in April 1997.

The Bank's own documents on climate change policy reveal an internal lack of coherence with regard to interpretation of Climate Convention policy:

...Since its foundation, the World Bank has always ensured that its activities were consistent with international conventions...Defining what policies and investments are "consistent" with the Convention is of course very difficult, especially regarding the developing countries...Guidance from the [signatory] Parties as to when and how such growth must be moderated in order to be consistent with the Convention will only evolve over time.

The World Bank and Climate Change Policy

The World Bank's role in aggravating the problem of climate change, with the aid of G-7 monies, contains many ironies. Primary among them is that its energy strategy contravenes another of its official missions: climate change prevention. At the Rio Earth Summit, the Bank, together with the United Nations Environment Programme and the UN Development Programme, was entrusted with the task of mobilizing the financial resources needed to implement the Climate Convention. The Global Environmental Facility (GEF), housed within the World Bank, was created as a temporary mechanism for compensating developing countries for undertaking activity to preserve biodiversity and restore balance to the earth's climate, activity they otherwise would view as prohibitively expensive. Thus, as Andrew Steer, director of the World Bank's environment department, has written in a recent letter to a concerned non-governmental organization (NGO), the Bank has become "the world's largest single financier of carbon emissions reduction projects."

Yet Steer could just have easily left "reduction" out of this phrase and been more truthful: the left hand of the Bank finances climate-friendly activity to the tune of $110 million a year, while the right hand of the Bank finances climate changing activity to the tune of $2 to $3 billion a year - or more than 100 times what the GEF has spent since the Earth Summit in "averting" climate change.

Another ironic twist in the World Bank's promotion of fossil fuels has unfolded over the past five years in the corridors of Washington policy-makers. Beginning in 1992, after a lengthy consultation process with NGOs and endorsement by the Bank's board, the Bank produced two policy documents on energy issues. These documents, "The World Bank's Role in the Electric Power Sector" and "Energy Efficiency and Conservation in the Developing World," laid out the Bank's following policies:

  1. A commitment to transparency in decision-making;
  2. An agreement that least cost energy planning, long pushed by environmentalists, should be advanced;
  3. An agreement that energy subsidies for fossil fuels and other traditionally environmentally unsustainable energy resources should be removed;
  4. An agreement with environmentalists that demand-side management and energy efficiency were approaches to be preferred over energy expansion;
  5. "Pollution reducing technology" needed to be more aggressively pursued in its energy lending; and
  6. Concurrence with environmentalists that all of the above policies should be integrated into dialogues with its clients and given high visibility in loan agreements.

These principles were praised by environmentalists, but have proven hollow over time: They have not been backed by the financial commitments necessary to make them a priority within the Bank. A study produced in 1994 by the Environmental Defense Fund and the Natural Resources Defense Council, "Power Failure," concluded that only 2 out of 46 electricity loans were consistent with its own policies as laid out above. A World Wildlife Fund study, commissioned in 1996, reconfirmed this conclusion. The WWF study examined 56 energy loans and found only 3 that complied with the policies that were endorsed by the Bank's board in October 1992.

Then, in the sleepy days of August 1996, the Bank's own legal department pulled a "stealth attack" on these principles. Perhaps in response to internal criticism, or perhaps out of concern over successful challenges posed by the Bank's newly constituted Inspection Panel, the legal department began reformulating its mandatory "operational policies" on energy, downgrading them to non-binding "good practices." (GP 4.45 Electric Power Sector"; GP 4.46 Energy Efficiency") NGO response was swift and unified in its criticism. Nevertheless, the Bank's legal department argued that the Bank's board had not been in full session when the policies were approved; they claimed the policies were approved "during a board seminar" and thus, were not bona fide policies that could be used in a claim to the Inspection Panel.

Not Enough Banking on Renewables

The Bank has undertaken several positive measures on the renewable energy front: In 1994, the Bank launched the Solar Initiative, which aimed to raise awareness among Bank staff and clients about how to commercialize renewable energy technologies. However, to date, the budget for renewables has been insignificant. Furthermore, the ideology promoted in this and other Bank initiatives on renewable energy is to demand that renewables be promoted in a subsidy-free manner - a tactic that fails to address the lack of a level playing field of renewables vis-a-vis non-renewable energy resources.

The Bank's solar initiative is making some small progress - with a new and notable program which will lend $44 million in credit to Indonesian banks this year and provide solar systems for about one million Indonesians. However, as the Bank admits, their customers will mostly be "small businesses" - or the middle and upper class rural dwellers with access to capital to "create the market" for renewables. Thus, the thorny issue of financing for the target market of 2 billion rural poor, who have no access to credit or other forms of financing, is once again avoided.

Yet, innovative approaches to financing for the poorest abound: Around the world, a groundswell of support is growing around microcredit - targeted at the poorest, particularly women. Indeed, the Bank has recognized the success of this movement by creating its own microlending arm, the Consultative Group to Assist the Poorest. However, even here, the Bank applies the same "trickle-down" economic approach which is its hallmark, failing to fully internalize the lessons and challenges posed by such revolutionary bankers as the Grameen Bank of Bangladesh and the Self-Employed Women's Association of India.

In most developing countries, cooking is a major - if not the major - use of fuel. Women are traditionally the ones to gather and manage this fuel in virtually every developing country; women also comprise the vast majority of the world's poorest citizens. Yet the Bank's own rural energy planners fail to even allude to the gender dimensions of the rural energy crisis, thereby ensuring that the solution does not adequately address the problem.

Shadow Carbon Tax

The World Bank has recently begun an exercise to evaluate whether, in fact, a "shadow price" for carbon would influence its investments in the energy sector. A shadow price for carbon would, without imposing an actual tax, allow economists to evaluate the costs and benefits of avoiding carbon-intensive energy projects. Not surprisingly, this exercise has found that a conservative shadow price of $20 per ton of carbon avoided would, in fact, result in significant changes in energy choices. Renewables would suddenly become more attractive investments, coal a pariah.

World Bank Environmental Assessment Advisor Robert Goodland, perhaps recognizing the pivotal role the Bank plays in the current climate crisis, passionately urges his institution to embark on a two-phase process of internalizing the true price of carbon in its project calculations:

This paper advocates that all activities emitting or saving carbon emissions should internalize the carbon cost inflicted or avoided by new projects involving a two-stage approach...First to incorporate carbon costs in project analysis only theoretically in order to differentiate objectively among alternative designs involving carbon emissions of varying degrees....Second, we advocate a rigorous process of passing through estimated carbon costs to the ultimate users of the services of carbon emitting projects and processes...Since the time available is limited, the paper points out the urgency of these proposals that are crucial for sustainability.

Perhaps acknowledging the inadequacy of its climate change strategy last iterated in 1995, "The World Bank and the UN Framework Convention on Climate Change," the Bank is about to release a revision of that policy. Unavailable at the time of release of this report, it will likely extend policies now embraced by the Bank, namely: "joint implementation" or emissions trading, removal of all subsidies for fossil fuels and other energy resources, and privatization of power production, transmission and distribution.

The Clinton Administration is particularly vocal in its support of joint implementation (or "JI") - as a "flexible" strategy for emissions reduction. Critics contend that JI would simply allow the fossil fuel industry to do more of what it is doing already - namely, migrating to non-Annex 1 countries to do their dirty work there. They also contend that JI does not place sufficient pressure on the highest greenhouse gas producing countries - which are also the richest countries - to cut their emissions, because for a relatively small sum, they can maintain an unsustainable pattern of growth.

Currently, fossil fuels get a "free ride" around the world - of externalized costs and internalized subsidies, making their consumption the path of least resistance. Some estimates show fossil fuels currently enjoying annual subsidies of about $200 billion. The universal removal of subsidies for fossil fuels could be a step in the right direction provided that it is accompanied with a tax scheme that would create a market for clean renewable energy sources. However, the priority given to market expansion and free competition for all energy resources would likely mean a removal of subsidies for renewables, making them uncompetitive with others in terms of costs.

Subsidies come in many forms, and are difficult to calculate with scientific accuracy. For example, risk-bearing is a major subsidy provided by the World Bank for infrastructure projects, either formally, through MIGA, or less formally, through IBRD guarantees. It allows an investor to reduce the amount of risk insurance he would otherwise pay, passing that on to the Bank.

Tax burdens - and tax-free investment opportunities - are an additional subsidy. The World Bank pays no property taxes on their Washington, DC, office space. Government-provided goods and services - which otherwise would have to be purchased on the free market - are another subsidy, and one the Bank tends to focus on most in energy privatization.

Privatization, while theoretically imposed to remove the inefficiencies of government control, is, as this report shows, also about some of the largest corporations on the planet gaining access to energy markets, which are some of the most lucrative markets on the planet. Privatization allows for a nation's vital energy resources to be used for private gain - not public welfare. And, in case study after case study, we find that it is the environment and the poor who suffer the direct consequences of this private gain.

The G-7 and Climate Policy

The ironies of the World Bank's role in aggravating climate change continue to abound when placed within the context of their controlling members, the G-7. At the G-7 Summit in Halifax, Canada, in May 1995, the member countries made the following statements:

We place top priority on both domestic and international action to safeguard the environment...We underline the importance of meeting the commitments we made at the 1992 Rio Earth Summit and subsequently, and the need to review and strengthen them, where appropriate. Climate change remains of global importance.

Why, then, would the G-7 undermine the Climate Convention? The G-7, with the newest addition to their ranks, Russia, now comprise just shy of 50 percent of the votes at the World Bank. They could vote to slow the pace of carbon-intensive projects, or, at the very least carry out the World Bank's mandate of poverty alleviation for the world's poorest. Instead, they have chosen instead to accelerate carbon-intensive projects and vote for projects which line their own pockets.

Procurement contracts for development are big business, not charity. As then undersecretary for international affairs in Treasury, Larry Summers, told the U.S. Congress: For every dollar the U.S. government puts in the World Bank's coffers each year it gets $1.30 in procurement contracts for U.S. transnational corporations. This formula is relatively predictable: The larger a nation's contribution to the World Bank's coffers, the greater the voting power on the Bank's board of directors, and the larger the number of procurement contracts awarded to contractors from each respective country.

For example, prior review procurement contracts awarded in 1994 and 1995 went to contractors from the following G-7 countries, in order of dollar amounts awarded for contracts: the United States ($779 million), France ($500 million), the United Kingdom ($428.5 million), Germany ($296 million), Japan ($209 million), Canada ($128 million), and Italy ($124.5 million). It should be noted that these figures are an underestimation of the total amount awarded to G-7-based contractors for two reasons: 1) prior review contracts comprise, by the Bank's own admission, only 60-80 percent of all contracts; and 2) hidden within other G-77 procurement contracts are countless subsidiary corporations of G-7-based transnationals. Within the entire portfolio of procurement contracts, the oil, gas, and power sectors are significant.