Energy for Growth Hub
Blog Nov 07, 2022

Hub vs Hub: The debate over development finance for natural gas is messy. Here are two pragmatic solutions.

The fight over when – or even whether – to use development finance for gas-fired power plants in…

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The fight over when – or even whether – to use development finance for gas-fired power plants in poor countries has become overly contentious and counterproductive. Binary framing of emissions versus development is an unnecessary false choice that creates entrenched positions. Instead, we propose two pragmatic alternative solutions to break this debate dead-end.

Here’s the real issue: We all agree that both climate and poverty are urgent global crises and that solutions must be fair to the world’s poor while not unduly harming the planet. Countries that lack sufficient energy – that is, nearly all of Africa and large swathes of Asia, Latin America, and the Middle East – must attract vastly more capital for infrastructure. Development finance, which is the investment by public agencies to reduce interest rates or mitigate risk, is an essential tool for catalyzing greater investment in these markets. Most public funders already agree that development finance should not support coal or upstream oil and gas production. That still leaves downstream uses for natural gas with potentially high social impact, such as electricity generation, cooking fuel, or industries like fertilizer. So the unresolved policy question is when and where should development finance go toward downstream gas projects in poor countries? What kind of rules would create big development wins without big climate losses?

At the Hub, we encourage open debate and healthy disagreement. And on the question of gas financing rules, we have a variety of views. All four authors agree that the extreme positions are untenable.

  • An inflexible or total prohibition on all downstream gas projects is a terrible idea because it would block many high-impact projects without making much of a dent in global emissions.
  • A wholly laissez-faire policy toward emissions is also a bad idea because it could wind up ignoring potential harm from some projects and would miss the opportunity to steer countries toward cleaner energy choices.

So, what are the different approaches to gas financing rules that could be both climate-aware and pro-development?

Katie & Rose propose: Ensure high-impact and low damage with a clear project screen

Development funders have a responsibility to deploy public funds in ways that do the most good possible while causing the least harm. Given the damage caused by natural gas, both in terms of local pollution and global emissions and the ways in which today’s energy investments shape energy use decades into the future, it’s entirely appropriate for funders to apply a higher level of scrutiny to gas-fired infrastructure, even in IDA-eligible countries.

Making a project-filter work, and not become a de-facto ban, depends on avoiding an overly-complicated process. Instead of a rigid checklist, agency staff need to be given clear guidance on the goals and empowered to make judgment calls in a timely manner, before projects are sent to their Boards for final approval.

Staff should ask about:

  • Viable alternatives: Is this gas project the best available option to meet the country’s specific needs? Regardless of the country’s income status, a gas-fired power plant won’t always be the best available way to advance development goals. Will the gas plant likely provide necessary power or a beneficial service (e.g., reliability, flexibility, cost decrease)? Is there a viable cleaner alternative (i.e., an actual project that is economically feasible and capable of being developed on a similar timeline) that the funder could be prioritizing instead? Asking these questions is especially important in countries that rely on unsolicited project proposals rather than open bidding.
  • Harm reduction alternatives: How can we develop this project as cleanly as possible? Building new gas-fired infrastructure today can be part of a low- or even zero-emissions future when carbon risks are proactively mitigated. Funders can work with project developers and governments to weigh different approaches and problem-solve for efficiency.
  • Transition planning integration: What else can be done to make any new gas investment part of a broader energy transition? Ultimately, the goal is a functional, affordable, zero-carbon energy system that enables people and economies to thrive. This will include making complementary ecosystem investments – such as power transmission and distribution infrastructure that is desperately needed to improve reliability today and also a prerequisite for high renewables penetration in the future. Alongside investments in hard energy infrastructure, funders can prioritize working with governments to support the creation of comprehensive energy plans that prioritize low-carbon development and situate any specific investments within these broader goals.

This project filter is largely aligned with the approach already laid out by institutions including the US Treasury. The main downside risk of a project filter is in implementation. Without clear goals and an efficient decision process, uncertainty and confusion will wind up obstructing projects with high development impact and low climate risk in energy-poor countries. Established procedures already exist for assessing environmental and other local impacts as well as project risk. Instead of adding unnecessary new bureaucratic layers through extensive checklists or onerous approval processes, this can work by allowing common sense and thoughtful questions. Hire smart people, and trust them to do their jobs.

Vijaya & Todd propose: Just exempt the poor with a simple country-based screen

The least-complicated option is to tier gas financing rules based on country income categories or World Bank lending windows, such as an exemption on extra carbon-related conditions for projects in the 74 IDA-eligible countries. The case for a simple approach like this is based on ethics, efficiency, and pragmatism.

  • Ethics: The poorest countries are the least responsible for causing climate change. These 74 countries are all below per capita incomes of $1,255 (or are highly vulnerable small islands) and combined account for just 1.67% of global cumulative emissions. Today, they emit on average just 0.8 tonnes per person (versus 14.2 in the US and 9.8 in all high-income countries). As low-carbon energy technologies get better and cheaper, the realistic prospects for any of these countries becoming emitters large enough to matter globally is close to zero. And because countries graduate from IDA as they get (slightly) richer, this policy contains a natural circuit-breaker. Let’s not police the innocent.
  • Efficiency: The marginal benefit from new carbon emissions is greatest in these countries. Financing rules will affect the allocation of future emissions, so they should be trying to minimize costs and maximize benefits. Every additional ton of CO2 emitted does the same damage no matter where it originates, yet the positive impact on humanity is highest in the places with the greatest development needs. In other words: the next ton of CO2 does far more good in Liberia or Haiti than in Germany or Japan. So the gas rules should prioritize the remaining carbon budget for the poorest countries, not the richest ones – which is, unfortunately, how global finance works today.
  • Pragmatism: A simple country exemption removes the confusion and uncertainty that inevitably surrounds complicated rules or opaque waiver processes. While some funders are moving toward project-based filters, in practice added layers of risk and hassle create strong disincentives for projects in exactly the places where development finance is supposed to help. Projects already must navigate multiple safeguards and onerous project approval processes. Asking the poorest countries to jump through additional hoops that do not apply to rich countries building the same types of projects is exactly backward – and will have the real-world effect of blocking good projects. (Indeed, anecdotal evidence suggests this is already happening.)

The main potential downside of a country-based rule, such as an exemption for IDA-eligible countries, is largely political. All the normal due diligence and project risk assessment would still apply, but this approach is likely to lead to some green-lit projects igniting a backlash from activists who put more weight on emissions than development. The World Bank, for instance, is already a frequent target for critics and this approach will almost certainly create additional complaints from protestors – and even some of its own shareholders.

In the end, however, a simple approach that allows downstream gas projects in IDA-eligible countries is likely the best way to ensure that climate policy is not standing in the way of development while concentrating aggressive climate mitigation in the high emitters. If low-income low-emitting countries are not the climate problem, let’s not overcomplicate the solution.

Conclusion: The most important energy, development, and climate questions are not about gas.

We’ve laid out two different ways to finance gas projects in energy-poor countries that would be pro-development and climate-aware. However, gas financing is a very specific question, not the main event. Whatever path is followed by development funders, we should not allow such debates to distract from the core tasks of mobilizing all the support needed for a just and equitable global energy transition. Gas financing has become the lightning rod, but the most important questions are really around designing viable pathways based on data and national objectives, investing in the complementary enabling infrastructure for resilient clean energy systems, and, ultimately, the creation of new jobs and industries in a low carbon high-energy future for everyone. So let’s find a pragmatic rational way to triage high-impact gas projects in poor countries, so we can move on to the bigger challenges facing humanity.