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Export credit agencies warned about their continued support for fossil fuel projects

11 May 2021 Amena Saiyid

The government-backed export credit agencies (ECA) of the UK, US, Japan, and other developed countries received a warning recently about the legal consequences of continuing to back fossil fuel projects elsewhere in the world.

A new legal opinion commissioned by the nonprofit Oil Change International (OCI) concludes these countries and their ECAs may find themselves in violation of international obligations as a result of signing onto the 2015 Paris Agreement on climate change and as members of the Organisation for Economic Co-operation and Development (OECD).

Crafted by University of Cambridge law professor Jorge Viñuales and UK barrister Kate Cook of Matrix Chambers, the 4 May opinion draws on customary international law, as well as international climate change law, international human rights law, and relevant parts of the OECD framework that oversee ECAs and their backing of power generation projects.

ECAs provide government-backed loans, credits, insurance, and guarantees, if needed, for the international operations of corporations from their home country.

According to the OCI opinion, countries that continue to finance fossil fuel projects that drive up CO2 emissions are in violation of "making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development," per Article 2(1)c of the Paris treaty.

Developed countries alerted

Citing this legal opinion, OCI, along with like-minded allies among civil society groups, such as various chapters of Friends of the Earth (FOE), cautioned Australia, Canada, Denmark, France, Japan, the Netherlands, South Africa, Sweden, the US and their ECAs.

"This legal opinion puts states and their export credit agencies on notice. They need to stop financing fossil fuel projects or face potential litigation risks. The opinion launched today puts serious legal muscle behind what was already a compelling moral and financial imperative: public money should not be used to prop up dirty projects and aggravate the dire climate crisis that is already affecting millions across the globe," Laurie van der Burg, senior campaigner with OCI, said in a 4 May statement accompanying the release.

Despite the Paris Agreement's explicit language, OCI data show ECAs from G20 countries provided $40.1 billion annually to support fossil fuel activities between 2016 and 2018, compared with only $2.9 billion for clean energy.

"Given the substantial contribution of ECAs to enable the emissions of greenhouse gases associated with existing and new fossil fuel-related projects/activities, in principle, states comply with their duty of due diligence only if they do their utmost to reduce their contribution to the problem, rather than extending it or increasing it," the opinion said.

Among the worst offenders were Canada, Japan, South Korea, and China, OCI said.

Although the US and the UK weren't listed among the top backers of fossil fuel projects, both countries have continued with support via the Export-Import Bank of the United States (EXIM) and the UK Export Finance (UKEF), respectively.

Using the OCI opinion as its armor, FOE England, Wales, and Northern Ireland (EWNI) has been successful in persuading the country's High Court to hear arguments against UKEF's ongoing support for the $20 billion Mozambique LNG project under development by TOTAL, despite a March policy blocking such financing activity.

"How can Boris Johnson expect the rest of the world to pull the plug on fossil fuels when his government is giving such enthusiastic support to a development that could have the same climate impact as the entire EU aviation sector," Will Rundle, head of legal at FOE EWNI, said in a 22 April statement after learning that the High Court in the UK had agreed to a judicial review of UKEF actions.

Across the pond so to speak, FOE United States warned EXIM in a 4 May letter about its $4.7 billion financing of the same LNG project, despite the security risks that caused Total to withdraw from the project and EXIM to reconsider its stance. The letter also criticized EXIM's financing of nearly $1 billion for the Sasan coal-fired power plant and mine in India.

"We are extremely concerned about EXIM's continued financing for fossil fuels and we urge you to take steps towards adopting a policy to exclude fossil fuels from EXIM's financing," Kate DeAngelis, international climate finance manager for FOE United States, wrote, citing the OCI legal opinion.

Bound by Biden's order?

DeAngelis reminded EXIM it was bound by President Joe Biden's 27 January executive order on tackling climate change at home and abroad, as well as the international climate finance plan that Biden released April 22 during the Leaders Summit on Climate.

The 27 January order directed Secretary of State Anthony Blinken, Secretary of the Treasury Janet Yellen, and Secretary of Energy Jennifer Granholm to work with EXIM, the CEO of International Development Finance Corporation, and heads of other agencies and partners to "identify steps through which the United States can promote ending international financing of carbon-intensive fossil fuel-based energy.

This same order was also responsible for the creation of a first-ever US international climate finance plan that called for steps to end financing of international fossil fuel projects. The plan, however, did not lay out a timeline for when EXIM would end fossil fuel project financing, and whether it would apply to projects already in the pipeline or just those backed in the future.

Rather, the 22 April plan said EXIM "will identify ways to significantly increase, as per its mandate, support for environmentally beneficial, renewable energy, energy efficiency, and energy storage exports from the United States," and that "agencies will seek to end international investments in and support for carbon-intensive fossil fuel-based energy projects. However, in limited circumstances, there may be a compelling development or national security reason for US support for a project to continue."

Not a mandate

Lawyers familiar with Biden's climate order said the language in Biden's climate financing plan cannot be read as a mandate to immediately end funding of fossil fuel projects. Rather these directives should be as read as "general aspirational goals," Virginia Harper Ho, a University of Kansas School of Law professor who specializes in climate finance from a comparative law perspective, wrote in a 10 May email to IHS Markit.

"Directing EXIM Bank to develop plans or climate finance strategies is very different from saying it has a binding legal obligation to do so by a certain time. Similarly, a general commitment to fund more 'climate-friendly' projects and end financing of fossil fuel projects does not appear to create an enforceable legal obligation," wrote Harper Ho, who also serves as the law school's associate dean for international and comparative law.

And even DeAngelis noted, the international climate financing plan did not single out EXIM for its continued financing of fossil fuel projects either.

EXIM confirmed receipt of FOE's letter in a 11 May email to IHS Markit, adding that it is taking the climate crisis seriously. The bank, however, did not comment on whether Biden's orders applied to ongoing or prospective projects, or that it was under any sort of international obligation.

Instead, EXIM said "we're already taking steps within our existing agency charter to strengthen support for clean and renewable energy projects around the world, and we will continue that work in the months ahead. We're also coordinating across the Biden-Harris Administration and working with external stakeholders to operationalize the international climate finance plan."

Set the right tone

One of the key issues in any climate finance plan EXIM develops in response to Biden's order is to decide "whether it will be limited to new projects, which is the most likely, or if it also has the ability to wind down EXIM Bank support for existing projects ahead of current contract commitments," Harper Ho said.

With the new commitment to end fossil fuel financing and possibly a new policy to be put in place to reflect the executive order and the international climate finance plan, "the US government should review existing project commitments, and take into consideration the immediate and long-term impact on society and community if funding were to be continued," IHS Markit Global Head of Strategic Governance Advisory and ESG Integration Christine Chow wrote in a 10 May email.

Chow noted that there are responsibilities attached to contracts that a sovereign state is expected to fulfill, and that negotiation of financing withdrawal remains in the best interest of the environment and the local population. "For new projects, a clear end to fossil fuel financing sets the right tone," she added.

Posted 11 May 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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