To 'Build Back Better,' We Must Ditch Public Financing of Fossil Fuels

The fact that the Paris Agreement on climate change even exists is an incredible feat of French diplomacy. Now, amidst a global pandemic, France is embarking on an equally important diplomatic effort this November, bringing together 450 global development banks that control $2 trillion in public money. The objective? For these public banks to declare that their contribution to the economic recovery from COVID-19 will support climate, sustainable development, and biodiversity goals.

However, vague commitments to goals already agreed by governments worldwide will not be sufficient to make the "Finance in Common Summit" a success. The world needs concrete action. The time is now. And one of the sectors in which action is desperately needed is the energy sector.

Overall, public finance institutions still present an obstacle to the energy transition. Climate science shows that we need a rapid transition from fossil fuels to renewable energy in order to limit global warming to 1.5oC. Yet governments worldwide plan to produce 120% more oil, gas and coal by 2030 than is compatible with the 1.5oC warming limit--supported by huge volumes of public money.

The G20 governments provide over $77 billion in public finance for fossil fuel projects each year through institutions like public development banks. Despite the mounting urgency of the climate crisis, this number has remained virtually unchanged since the Paris Agreement was adopted and is three times the amount they provide for renewable energy.

"The way out of our current crisis is not through propping up the old economy, but through a globally just, green, and healthy recovery that helps build back better, by accelerating climate action, creating quality jobs, and building societies that are more resilient to future shocks."

Some argue that this government-backed fossil fuel finance is necessary to spur development and access to electricity, but the data gives the lie to this argument. The largest recipients of support for fossil fuels are not the poorest countries, and where fossil fuel finance does flow to lower-income countries, it typically benefits multinational corporations and wealthy "donor" countries over local populations, often while causing human and indigenous peoples' rights violations and displacements, while degrading health and the environment.

As public finance institutions scale up their activity in response to the COVID-19 crisis, the trend of public finance propping up the fossil fuel industry must be reversed if we hope to limit warming to 1.5oC. Yet early indications are cause for concern.

Canada, the second-largest financier of fossil fuels in the G20 (per capita, it's the highest), has given government-backed Export Development Canada a major role in the COVID-19 response, through two major financing programs that specifically prioritise the fossil fuel industry, without clarity on a financial ceiling for these programs. And while the UK government is allegedly working on a policy to exclude oil and gas from export credit agency financing, the Prime Minister's office last week agreed to put UKEF money into an LNG terminal in Mozambique, spearheaded by France's Total. This clearly undermines the UK's efforts to position itself as a climate leader in the lead up to COP26.

Even if the world did not face a climate crisis, throwing public money at fossil fuels would be a bad economic bet. Coal, oil, and gas markets were showing signs of permanent decline well before the COVID-19 crisis hit. During eight of the last nine years, oil and gas stocks underperformed the broader market, while renewable stocks outperformed the index by 20% in 2019. The recent crash in oil prices demonstrates that dependence on these volatile commodities is a bad idea.

The way out of our current crisis is not through propping up the old economy, but through a globally just, green, and healthy recovery that helps build back better, by accelerating climate action, creating quality jobs, and building societies that are more resilient to future shocks.

Public banks, controlling $2 trillion in public money and driving private investment, have a crucial role to play in leading this transformation. To implement the 2030 Sustainable Development Goal agenda, they should integrate indigenous traditional knowledge and solutions to climate mitigation and adaptation, and deliver support as close as possible to local communities.

A number of public finance institutions, including the European Investment Bank and Swedfund, have already taken steps to exclude fossil fuels from their financing. France's development agency, AFD, one of the Summit's organizers, is itself moving in the right direction, after banning oil and gas exploration and production, as well as most fossil fuel-fired power plants from its financing.

As the Finance in Common Summit gets closer, these institutions have an opportunity to leverage their leadership by joining with other major public finance institutions to announce an end to their fossil fuel financing, and a commitment to support a just transition away from fossil fuels. This is an ambitious and concrete outcome that the Summit must deliver for it to succeed and to raise the bar for climate leadership in the lead up to COP26.

A version of this open letter also appeared at Reuters.