The role of export credit in climate change mitigation
Participant countries to the Arrangement on Officially Supported Export Credits have agreed to restrictions on export credit support for coal fired power projects from 01 January 2017.
In line with commitments by members of the Organisation for Economic Cooperation and Development (OECD) to drive down their own domestic emissions of greenhouse gases, OECD participants1 in the Arrangement on Officially Supported Export Credits (the Arrangement)2 agreed a new sector understanding on 17 November 2015 to limit their financial support for the development of coal-fired electricity generation projects abroad (the New Sector Understanding).
The New Sector Understanding will be incorporated into the next version of the Arrangement to be published early this year and will apply to final commitments for coal-fired electricity generation projects (including expansions of existing projects) as of 01 January 2017, save where the request for proposal was issued ahead of that date.
As export credit agencies from OECD countries provided nearly half of the financing for coal projects between 2007 and 2014,3 the New Sector Understanding represents a significant diplomatic feat achieved ahead of the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC) held in Paris in December 2015. In reaching consensus on the New Sector Understanding, a chief concern of participants was however whether the New Sector Understanding will actually encourage governments to alter their energy policies and plans and increase the share of renewables and more energy efficient technologies in the energy mix, or whether it will simply provide the exporters and investors of non-participants to the Arrangement, notably China, a competitive advantage. Perhaps critical to reaching agreement therefore was a joint US-China presidential statement issued ahead of the meeting of the participants indicating that China will seek to strictly control public investment into domestic and international projects with high pollution and carbon emissions.
In accordance with the New Sector Understanding a review will be undertaken in 2019 that will take into account (among other things) developments in the export credit policies and practices of non-OECD countries. These developments will likely impact any agreement to strengthen the terms of the Sector Understanding in a second phase to commence from 01 January 2021.
Key points to note:
- the New Sector Understanding complements the Arrangement
- where terms of the Arrangement are not separately addressed in the New Sector Understanding (for example, minimum interest rates) the provisions of the Arrangement will apply
- coal fired generation projects that utilise carbon capture and storage technology, or that constitute energy efficiency or hybrid (coal and renewable) projects will continue to be subject to the financing terms and conditions set out in Annex IV to the Arrangement (Sector Understanding on Export Credits for Renewable Energy, Climate Change Mitigation and Adaption, and Water Projects), and
- Participants’ support for coal fired generation projects will otherwise be limited to projects that meet specific technological, geographical and viability conditions, and to financing terms as detailed in the New Sector Understanding (extracted and summarised in the table below).
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* IDA-eligible countries are defined as countries eligible for International Development Association (IDA) resources (including IDA-only and IDA blend countries) at the time the relevant completed application for export credit is received; support may also be provided in countries where the National Electrification Rate is reported as 90% or below at the time the relevant completed application for export credit is received and for geographically isolated locations in non-IDA eligible countries where less carbon-intensive energy alternatives are not viable and the physical/geographic and existing grid features justify the proposed project ‘s efficiency category as the best available technology. ^ Subject to exceptions if evaluation of less carbon-intensive energy alternatives has been carried out and such alternatives are not viable. |
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1 The participants to the Arrangement include Australia, Canada, the European Community, Japan, Korea, New Zealand, Norway, Switzerland and the United States.
2 The Arrangement is a “Gentlemen’s Agreement” that seeks to level the playing field encouraging “competition among exporters based on quality and price of goods and services exported rather than the most favourable officially supported terms and conditions” (Article 1 b) of the Arrangement); while there is overlap between the Arrangement and the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), the Arrangement, unlike the SCM Agreement, does not embody a formal enforcement mechanism.
3 As reported by environmental advocacy groups: http://docs.nrdc.org/international/files/int_15060201a.pdf
