Europe’s investment bank sets pace on fossil fuel lending

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First movers get to set the rules — which is why the European Investment Bank’s decision to end lending for fossil fuel projects could have a global impact.

The bank is the world’s largest multilateral lender, and it’s also the first to set a lending policy tied to the goals of the Paris Agreement — something other development banks have also pledged to do.

“We do believe we are helping to set the standard for all international institutions for what it means to be Paris aligned,” Andrew McDowell, the bank’s vice president in charge of energy, told reporters on Friday.

The shift in policy approved late Thursday in Luxembourg sends a clear signal that business as usual when it comes to financing big energy projects is dead. Getting the bank’s stamp of approval and cheap finance is crucial for project developers, allowing them to more easily tap private markets.

The rules will end lending to fossil fuel projects as of 2021. That’s a year later than the EIB had originally suggested, but their 2020 proposal sparked a storm of protest from the European Commission and some of the 28 EU countries that are the bank’s shareholders.

The new rules were passed Thursday night after an all-day board meeting with 20 votes in favor representing over 90 percent of the bloc’s capital.

The 2021 cut-off will allow for the financing of a last wave of infrastructure projects that have already received EU backing — a compromise the Commission pushed for and said it’s “satisfied” with. By 2025, half of the bank’s investments — it loaned €55.6 billion last year, of which about €16 billion went for energy projects — will go to climate and sustainable investment projects.

From 2022, the bank will only fund gas infrastructure projects if developers make “specific, realistic, time bound commitments” to inject growing shares of low-carbon gases such as hydrogen and biogas into the pipelines, said McDowell.

By 2040 “all these assets are going to be 100 percent carbon free … what we offer in return is long-term, low-cost financing to support them in this process, because it won’t be cheap,” said McDowell.

The bank also set a strict limit for financing power generation projects of 250 grams of carbon dioxide per kilowatt-hour — replacing the old standard of 550 grams. The tougher guidelines exclude not only coal-fired power (which the bank has already stopped financing) but also unabated natural gas — that means projects will have to incorporate technologies like carbon capture and storage to squeeze under that threshold.

The Luxembourg decision will be closely watched by the world’s other development banks | Ina Fassbender/AFP via Getty Images

In order to soften the blow for the bloc’s poorer countries, the EIB will support the Commission’s plan to set up a Just Transition Fund, aimed at helping higher-emitting regions decarbonize. It will also lend up to 75 percent of the value of projects in the bloc’s 10 poorer countries, instead of its normal threshold of 50 percent.

Even that wasn’t enough to bring all EU countries around.

The new rules were passed Thursday night after an all-day board meeting with 20 votes in favor representing over 90 percent of the bloc’s capital. Six countries abstained, and Hungary, Poland and Romania voted against, two people familiar with the discussion said.

Germany, which had originally been part of a pro-gas bloc, shifted position and backed the rule change.

“The EIB is becoming a climate bank and promoting investment in the protection of our climate, which is good, we have been involved and Germany has approved the new guidelines,” Finance Minister Olaf Scholz said in an emailed statement.

“We still believe today it still makes sense to finance gas, but ask me in 10 years and it could be a different answer” — Cristian Carraretto, associate director of the European Bank for Reconstruction and Development

The EIB “has been Europe’s climate bank for many years. Today it has decided to make a quantum leap in its ambition,” Werner Hoyer, the bank’s president, said Thursday.

The Luxembourg decision will be closely watched by the world’s other development banks.

At the 2018 U.N. climate summit in Katowice, Poland, the world’s largest multilateral lenders including the EIB, the World Bank, the European Bank for Construction and Development, the Inter-American Development bank, the African Development Bank, the Asian Development Bank and the Islamic Development Bank all committed to aligning their activities with the goals of the Paris climate agreement.

“We’re constantly asked to do more about the green side, and less on brown side,” said Cristian Carraretto, associate director of the European Bank for Reconstruction and Development. “We still believe today it still makes sense to finance gas, but ask me in 10 years and it could be a different answer.”

The EIB is answering that question now.

“While the EIB could have agreed to phase out fossil fuel financing earlier, this is an important step for the financial sector broadly,” Leonardo Martinez-Diaz, director of the Sustainable Finance Center at the World Resources Institute, an NGO, said in a statement. “We strongly encourage the boards of the other multilateral development banks to match or exceed this level of ambition and leadership.”

Kalina Oroschakoff contributed reporting.

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