COP26: Canada, US, and 23 others pledge to end public finance for overseas fossil fuel projects
A group of 25 countries and development banks said they will end public finance for overseas fossil fuel projects by end-2022, the first such kind of pledge that covers oil and gas investments.
Dozens of countries—including G20 and some Organisation for Economic Co-operation and Development (OECD) members—had already promised to cut finance to power plants running on coal, the most carbon-intensive fossil fuel.
During the Glasgow COP26 summit, Canada, Italy, the UK, the US, and some other nations and public financiers went a step further to restrain nearly all types of fossil-fuel financing.
"We will prioritize our support fully towards the clean energy transition.… We will end new direct public support for the international unabated fossil fuel energy sector," according to their joint statement issued 4 November.
The UK, which had already made a similar promise in December 2020, estimated the latest joint effort could trigger a shift of $17.8 billion per year from fossil investments to clean energy.
"Building clean energy systems across the world will help us achieve our climate goals and build a prosperous future for everyone," Canada's Minister of Natural Resources Jonathan Wilkinson said in a statement. "In signing this declaration, Canada is aligning its international investments with its climate ambition."
As G7 members, Canada, Italy, the UK, and the US had already committed to halting state financing for overseas coal plants by the end of this year. Their combined public finance commitments for international oil and gas projects amounted to $18.3 billion per year in 2018-2020, according to a joint study by Oil Change International and Friends of Earth. The EU-owned European Investment Bank, another signatory, had $1.47 billion.
But some major funders within G20 did not come onboard. The two non-profit organizations recorded $9.22 billion public investments per year from South Korea in the same period, $8.84 billion from Japan, $3.95 billion from China, $2.74 billion from Germany, $2.28 billion from Russia, and $1.42 billion from Saudi Arabia.
Those countries see gas as a transition fuel in their decarbonization efforts. Kate DeAngelis, international finance program manager at Friends of the Earth US, said the "laggards" should step up and join the pledge.
Other signatories include Albania, Costa Rica, Denmark, Ethiopia, Fiji, Finland, the Gambia, Mali, the Marshall Islands, Moldova, New Zealand, Portugal, Slovenia, South Sudan, Switzerland, and Zambia.
"A just energy transition…[requires] a focus on the emerging markets and developing economies. Public finance needs to kickstart the shift in these countries with a high cost of debt and largely lacking incentives for private investors," think-tank E3G's Senior Policy Advisor Maria Pastukhova said.
Experts said the joint commitment could lead to a further squeeze on oil and gas investments, even though its current scope is limited in comparison to what is required in a zero-emission world. And it comes at a time when oil and gas prices are more than 50% higher than they were a year ago, which some analysts say is indicative of what occurs when insufficient capital investment is made to replace ongoing production.
"This pledge does not cut off the flow of financing to fossil fuels. It only applies to public financing and does not include some of the world's largest international sources of financing for fossil fuels," said Conway Irwin, a research and analysis director at IHS Markit. "And from the language available so far, we can assume that fossil fuels that deploy abatement technologies will still be eligible.
"What we are likely to see in the oil and gas sectors is what we have already seen in coal, which is a gradual process of tightening restrictions on capital flows."
The International Energy Agency said total fossil-fuel investments reached $726 billion in 2020. This compared with up to $390 billion in renewable energy investments.
Oil, gas, and coal account for more than three-fourths of global CO2 emissions. But their share in primary energy supply has remained above 80% in recent decades.
If the world wants to limit global warming to 1.5 degrees Celsius, the OECD's energy watchdog estimated annual investments in clean energy will need to reach nearly $4 trillion by 2030. Extending this to 2050, the idea of spending $130 trillion over 30 years on the energy transition is widely seen as tkey to reaching a carbon-neutral economy.
Pastukhova admitted the current commitment could only prompt a modest shift away from fossil-fuel finance. But she said its impact could be strengthened if it creates political momentum for other countries and public finance institutions to join the effort.
"Details need to be worked out between the signatories … but if these are developed in an ambitious manner, and the scope for exceptions is as narrow as possible, the statement has the potential of becoming the global 'gold standard' for international public energy finance," Pastukhova added.
Before the public-sector's pledge, asset managers had already been diverting their funds away from fossil fuels without necessarily raising renewable energy investments.
But US officials sought to link the two: reduce fossil fuel spending, and increase spending on renewable energy. And others attempted to present the business case as well for shifting to investments in renewable power, as it becomes increasingly cost competitive.
"We absolutely have to cut carbon pollution.… [And] we have to meet the growing energy needs of our people," US Secretary of Energy Jennifer Granholm said during COP26. "There is a straightforward solution, which is that we need to build out as much clean, dispatchable, affordable baseload power as we possibly can."
In the private sector, the energy members of UN-backed Race to Zero group—including Enel, Iberdrola, and Ørsted—3 November committed to reach 750 GW of installed renewable energy capacity by 2030.
Race to Zero's members include nearly 4,800 companies that aim to halve emissions in the next decade and achieve carbon neutrality by 2050. Over 20% of the group's major companies by revenue have committed to meeting all power requirements from renewable sources, according to the UN.
Such efforts can contribute to the virtuous cycle of reducing reliance on fossil fuels and thus reducing the need to invest ever-greater amounts in oil and gas production, said advocates for a rapid energy transition. "The ever-reducing cost of solar and wind energy now contrasts markedly with the high prices for fossil fuels," said Johanna Bowyer, a lead research analyst at the Institute for Energy Economics & Financial Analysis.
"Such pricing dynamics—especially for import-reliant countries such as China, India and Vietnam—are likely the catalyst for many countries accelerating their inevitable transition to renewable energy."
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