Bruce Rich’s excellent new book about the World Bank, features two chapters about the Bank’s role in climate and energy finance. Rich describes this as “arguably the most critical and intractable development issue facing the Bank and the world at large as global warming accelerates”.
Foreclosing the Future: The World Bank and the Politics of Environmental Destruction builds on Rich’s 1994 book, Mortgaging the Earth. Unfortunately, in the intervening years, the Bank has learned few lessons and continues to finance socially and environmentally destructive projects. The Bank’s role on climate change has been to cook up carbon trading schemes which not only fail to address climate change, they actually make matters worse.
This post looks at Rich’s chapters: “The Carbon Caravan” and “A Market Like No Other”. A forthcoming post will focus on Rich’s analysis of the World Bank’s role in REDD.
The World Bank didn’t produce a climate strategy until 2008 – 16 years after the Rio Summit and the negotiation of the UNFCCC. Perhaps surprisingly the climate strategy did not recommend a stop to funding climate damaging projects. Instead, Bank management decided that,
[A] simplistic approach of withdrawal from ‘carbon-intensive’ sectors, such as thermal power or transport, will not serve either climate change or the development agendas.
The Bank “went on a coal-plant financing binge”, Rich writes. In the two years after producing its climate strategy, it handed out loans of US$6.75 billion for coal plants in the Philippines, Chile, Botswana, India and South Africa.
Rich cites an internal review that described the Bank’s problem as “unfounded institutional optimism based on pervasive institutional amnesia”. A better description of the Bank’s on-going support of carbon markets would be difficult to find.
In 2000, the Bank set up its first carbon fund, the Prototype Carbon Fund, and over the next 11 years, it added 13 more carbon funds. The largest is the US$1.2 billion Umbrella Carbon Facility launched in 2006. By 2012, the Bank claimed to be managing a total of US$3 billion in its carbon funds.
Clean Development Mechanism projects were supposed to reduce greenhouse gas emissions (in the Global South) and bring local sustainable-development benefits. “Unfortunately,” Rich writes,
the CDM turned out to be a major failure in terms of both goals, and the Bank’s carbon funds played a significant role in contributing to that failure.
Rich looks at “additionality”, the “central concept of the CDM”, and points out that,
In practice it was extraordinarily difficult to prove whether a particular CDM subsidized project, say, a wind farm in India or a hydroelectric project in China, would or would not have been built but for the CDM subsidy, and whether it would displace a cheaper, climate-unfriendly investment, such as a coal plant. Indeed, the major developing countries that would host most of the CDM project were rife with state manipulation of energy investment and markets, not to speak of corruption. The underlying operational concept of the CDM was arguably an exercise in futility, and an invitation to both gaming the system and outright fraud.
In a 10 year review of its carbon funds, the Bank admitted that showing additionality was “very challenging” and “constantly subject to questioning”. Nevertheless, between 2002 and 2012, the Bank used its carbon funds to buy about US$57 million worth of carbon credits from an industrial tree plantation in Brazil.
The money subsidised 23,100 hectares of monoculture eucalyptus plantations owned by a company called Plantar. The Bank claims the plantations produce “sustainable” and “climate-neutral” charcoal. Rich writes that,
In the Alice-in-Wonderland world of the carbon funds, the project reduced CO2 emissions that otherwise would have taken place: Plantar claimed that without millions of dollars in CDM grants, it would make its pig iron by burning coke, which is even more carbon intensive.
In fact, Plantar had been using eucalyptus plantations for decades, as 143 Brazilian NGOs pointed out in a letter to the CDM board protesting Plantar’s application for CDM subsidies. The company owned 180,000 hectares of land, planted mainly with eucalyptus for charcoal. It provided management services for another 590,000 hectares of tree plantations used by Plantar and other companies.
BP bought some of Plantar’s carbon credits, to offset emissions from a polluting oil refinery in Scotland. Meanwhile, in Brazil, Plantar’s plantations displaced local people, polluted water supplies, dried up rivers and streams, depleted soils, destroyed livelihoods and exploited workers. A 2008 documentary brought together communities from Brazil and Scotland, both of which were suffering as a result of this carbon trading programme.
The World Bank promoted carbon credit subsidies for coal plants, hydropower dams, wind farms and geothermal projects. In 2010, the Bank’s Independent Evaluation Group reported the lack of additionality in projects supported by the Bank’s carbon funds. Rich writes that,
These investments, and the economic returns from them, were on a much larger scale than Bank’s relatively modest carbon-credits purchases; the Bank’s use of carbon-fund money to top them off made no appreciable difference in whether the projects would go ahead or not.
The Bank even boasted that it jumpstarted the global carbon market for HFC-23 reductions. HFC-23 is a by-product created during the manufacture of the refrigerant gas HCFC-22. It is an extremely powerful greenhouse gas. By destroying the gas (rather than releasing it to the atmosphere), factories can generate huge numbers of carbon credits. But the cost of destroying HFC-23 is small, and the CDM created a perverse incentive to increase HFC-23 production to cash in on the carbon credits.
In 2006, the Umbrella Carbon Facility agreed to spend more than US$1 billion on carbon credits from two HCFC-22 factories in China. Rich writes:
After the Bank started purchasing credits from the two Chinese factories, they substantially increased their production of this most powerful of GHGs in view of obtaining massive carbon-credit windfalls for its abatement.
Eventually, in 2010, the CDM suspended credits from five HFC-23 projects, including the two that the Bank was buying credits from. In 2011, the EU agreed to ban the use of HFC-23 credits starting in April 2013.
The Bank was left holding virtually worthless carbon credits, for which it had paid more than US$1 billion. In 2011, Bloomberg described them as “junk carbon credits”. The Bank actively lobbied the CDM board and the EU to continue to allow HFC-23 offsets. Fortunately, for the climate, it was unsuccessful.
But the end result was that the CDM issued a total of more than US$6 billion in HFC-23 credits. The actual cost of destroying the HFC-23 was about US$130 million. “A grotesque squandering of scarce international finance for fighting climate change,” Rich comments.
Another systemic problem in the carbon markets, Rich notes, is pervasive fraud. The US Government Accounting Office has pointed out that the companies that carry out independent verification of carbon reductions have a perverse incentive to ignore whether a project really reduced greenhouse gas emissions. Rich writes:
The profits are in getting carbon credits approved, selling them, buying them, and trading them. That the underlying commodity was bogus made no difference so long as it could be traded.
A handful of companies carries out practically all CDM verifications. In 2008, the CDM suspended Det Norske Veritas after DVN was caught verifying some projects without even visiting the project site. In 2008-2009, four companies, accounting for two-thirds of CDM project verifications were suspended (but reinstated after a few months).
A WikiLeaks released cable from the US Embassy in New Delhi revealed that companies kept two sets of books – one for the banks (to get loans) and one for the CDM (to show the need for CDM finance).
The Bank, “was not the origin of the problems in the CDM,” Rich writes, “but it was an accomplice and enabler of its defects.”
There was no question that the problems in the CDM, and in the Bank’s carbon-fund projects, were linked to fundamental flaws in the whole concept of a global carbon market. The offsets were politically created, virtual notions – they represented something that supposedly would not happen, i.e., a quantity of GHG emissions that otherwise would be emitted. But the business-as-usual scenarios (and hence the profits) were calculated – or fabricated – by people who had a clear financial stake in these transactions.
In 2011, the Bank produced a draft energy strategy that called for scaling up carbon markets, a new market for forest carbon, and as Rich notes, “with no indication of any lessons learned from the CDM debacles”.
Bruce Rich’s new book, “Foreclosing the Future: The World Bank and the Politics of Environmental Destruction”, is published by Island Press.