Can we take the Government’s announcement to ban fossil fuel financing abroad at face value?
The Government announced on 12th December that it would be banning the funding of fossil fuel projects through export credits.
Furthermore, the Prime Minister confirmed that UK aid and trade promotion would also stop supporting fossil fuels, reflecting the ambitious domestic policies towards net zero and satisfying article 2C of the Paris Agreement for developed countries to “[make] finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”
These steps will have positive effects domestically and abroad reducing the immediate ecological impacts of fossil fuel extraction and production; mitigating the longer term impacts of climate change; driving growth in renewables and green jobs; and, significantly bolstering the UK’s standing as a global leader on climate change policy, ahead of hosting the UN’s COP26 in November 2021.
What are export credits?
Export credits are a form of insurance for private companies exporting to high-risk countries to facilitate international trade at no net cost to the UK taxpayer. UK Export Finance (UKEF), the UK’s Export Credit Agency (ECA) has faced intense scrutiny of late, with several inquiries noting its lack of transparency and accountability and how it undermines our other global climate efforts such as International Climate Finance (ICF). Since 2016, £21 billion worth of fossil fuel projects have been funded through UK export credits. According to the Environmental Audit Committee’s inquiry found that between 2013/14 and 2017/2018, £2.6 billion worth of credit supported the energy sector, and 96% of that supported fossil fuel projects. While UKEF’s support for fossil fuels only makes up 0.02% of oil and gas investment worldwide, the UK Government is taking on risk for the private sector, and its position sends a message to the financial markets.
Policy weaknesses & recommendations
Bold pledges to address climate change are not often followed up with meaningful action: for example, since the Paris Agreement was signed, the G20 have provided $77 billion worth of public finance annually for fossil fuels violating article 2C.
It is vital the Government ensures its policies to ban the funding of fossil fuel projects are robust and implemented as soon as possible to encourage other countries to make similar commitments before COP26. The measures have not passed the consultation phase yet, and although Number 10 promised to implement them before COP26 in November, UKEF can still consider applications for export credit to fund fossil fuels until they come into force. This could lead to technological ‘lock-in’ for developing countries, committing them to carbon intensive development pathways, or leaving them with stranded resources and assets. The UK Government should not undermine its current position of strength by approving any fossil fuel related projects before this policy is adopted. In addition, to avoid contributing to the problem of stranded assets, the Government should adopt a broad definition of fossil fuel projects to include infrastructure projects that are critical to, and dependent on, future fossil fuel exploitation. This broad definition of fossil fuel projects should not exclude natural gas and put limits on fossil fuel related activity such as the production of cement and steel. Despite its image as a ‘clean transition fuel’, the expansion of natural gas is incompatible with the Paris Agreement. Not only do existing known oil and gas reserves take us beyond warming of 1.5°C, but methane leakage associated with the production and transportation of gas negates the lower emissions of gas when burned as a fuel.
This policy should apply to all forms of support through UK Government funding, including the CDC Group, a development finance institution owned by the UK government, who announced their new Fossil Fuel Policy and Guidance on Gas Power Plants shortly after the announcement to ban UKEF’s fossil fuel financing. The incoherence between the CDC’s and UKEF’s positions undermine the Governments ambitions and position as a global leader in climate governance. To demonstrate credibility, the Government should increase transparency and publish all forms of current UK fossil fuel support, in a similar format to the Development Tracker.
With the consultation deadline fast approaching, it is vital the Government strengthens this potentially ground-breaking policy, setting an example to other ECAs and the wider investment community.