Economies of fail: relative efficiency gains don't mean a lot to the climate

According to the International Energy Agency (IEA), 80 percent of the cumulative CO2 that can be emitted between 2010 and 2035 if the world is to have a chance of keeping the global mean temperature rise below 2°C is already “locked-in” to existing capital stock. For a 2°C scenario, all investments after 2017 will need to be in zero-carbon utilities, unless existing infrastructure is scrapped before the end of its economic lifespan.

This article is from Issue 52 of our quarterly newsletter Bankwatch Mail

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It is likely that the IEA study underestimates the existing capital stock lock-in, not taking into account lifetime extensions to capital stock beyond planned lifetimes as has been happening in a number of countries where the EIB and the EBRD operate. For example in some new member states like Poland, coal power plants that were built in the 1940s and 1950s and initially planned for 40 years of operation are still spewing smoke into the air. Such investments limit the already short time for action and leave no space for misplaced investments in fossil fuels. According to the IPPC in its Fourth Assessment Report: Climate Change 2007, “delayed emission reductions lead to investments that lock in more emission-intensive infrastructure and development pathways”. This significantly constrains the opportunities to achieve lower stabilisation levels and increases the risk of more severe climate change impacts.

Keeping the Earth's mean temperature rise below 2°C is extremely challenging. If we discard geo-engineering there is no other way than to limit the overall level of greenhouse gas emissions globally by 50 to 70 percent by 2050 and then to gradually decrease the level of their concentration in the atmosphere. The level of CO2 in the atmosphere accepted by the EU authorities and the scientific community as a level that allows for an acceptable degree of certainty for humanity not to face the most dire consequences of climate change is 450 PPM (with a 350 PPM concentration being even safer, especially for developing countries in the Global South).

Within this very tight climate context, when the EBRD or the EIB consider investing in a power plant project to produce energy efficiency gains by lowering the energy required per unit of output, but in effect producing an increase in the overall lifetime emissions of the project, two different approaches may feature: the first is refurbishment or renovation of an existing industrial or power generation facility, and the second is the replacement of the obsolete generation power unit with the latest best available technology version.

In the first scenario, it should be acknowledged that a refurbishment/renovation will seriously limit the emissions of various types of organic and toxic particles and thus lead to an overall improvement of air quality in the area or region where the generation facility is located. When, though, it leads to an increase in the absolute lifetime GHG emissions, an alternative view is that it prolongs the time before that generation or production technology is replaced by a more environmentally friendly and less polluting one. It also means that the owner of the facility is extracting profits from passing the external costs on to society at large (at least this is the case in countries not covered by the EU's Emissions Trading Scheme).

Even in the EU, though, the costs of additional emissions other than CO2 are not fully accounted for and the uncertainty of the future CO2 price makes this a difficult task. One way to tackle this would be for major public investors such as the EBRD and the EIB to elaborate a quota of GHG emissions available to each country of operation both within and outside of the EU according to their historic share of GHG emissions and the necessary reductions up to 2050 for that country; the permitted emissions could then be distributed between different sectors of the economy in that country including the renovation/refurbishments that lead to lifetime extension. This would require close cooperation with each country of operation (as well as with UNFCCC) and would also necessitate taking account of and updating the development of each of the sectors of the economy rather than just concentrating on any given investment separately.

The replacement or life-extension scenario can be considered as a two-phase process: 1) the old obsolete technology is coming to the end of its economic or technological life, and thus it needs to be scrapped or closed; 2) a new investment is undertaken that will perform the same functions as the technology/facility that has been scrapped or closed. What tends to be missing here, though, is a thorough assessment of all the alternatives. Most often the choice is narrowed down to a zero-alternative scenario or the proposed replacement.

Thus the EIB or the EBRD will oftentimes be faced with a request backed by an approval by the environment and state authorities in the country of the project planned that at first seems like a simple choice: either the plant/facility will close or the investor will replace it with a newer version of the same kind of technology, using the same fossil fuel. The key question that tends to get overlooked by the banks, however, is what regional or local alternatives they are choking by providing a subsidy to the large scale fossil fuel facility.

Given the rapidly closing emissions window, public banks like the EBRD and the EIB need to be compelled to make climate considerations their ultimate bottom line – they are not supposed to crowd out private investors but still too often, especially in central and eastern Europe, we are seeing their fossil fuel lending crowding out clean energy alternatives.