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US Treasury urges multilateral development banks to back carbon capture, methane abatement projects

18 August 2021 Amena Saiyid

The US Department of the Treasury released guidance urging multilateral development banks to finance methane reduction as well as carbon capture, use and storage (CCUS) at existing fossil fuel projects and to end support for expanding or building new ones.

"We are open to supporting CCUS and methane abatement solutions as standalone investments for existing fossil fuel projects assuming they do not expand the capacity of the existing project or a significantly extend its operational life," the Treasury guidance said.

Issued 16 August, the Treasury guidance responds to President Joe Biden's international climate financing plan, which was released during the Leaders Summit on Climate in late April to bolster support for clean energy technologies and to essentially end support for fossil fuel energy projects.

The plan directed the Treasury to develop guidance to end multilateral development bank financing for fossil fuel energy activities so the agency could use it as part of criteria when casting US votes on specific projects. Treasury did not announce when the guidance would take effect.

The US is the largest shareholder in the development bank system, which includes the World Bank, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, and the European Bank for Reconstruction and Development.

The guidance builds on G7 leaders' June call for an end to investment in new "unabated international coal generation," but not domestic generation, by the end of 2021, to eliminate inefficient fossil fuel subsidies, and to phase out carbon-intensive fossil fuel generation "as soon as possible" except under limited circumstances.

"We will work with [multilateral development bank (MDB)] management and shareholders to prioritize clean energy, innovation, and energy efficiency. When considering projects, we will advocate for MDB staff to assess these options first, and only consider fossil fuels if they are unfeasible," the guidance said.

Methane abatement technologies available

Reducing methane emissions is critical for reducing the rapid rate of global warming in the near term, as methane, though a short-lived GHG, has a global warming potential that is 84-86 times that of CO2 over a 20-year span.

A UN study released in May said readily available technologies to capture methane from the fossil fuel sector, along with some additional measures such as fuel shifting to renewables, would avoid nearly 0.3 degrees Celsius of global warming by 2045 and would be consistent with keeping the Paris Climate Agreement's goal within reach.

According to this study, a majority of methane abatement potential can be achieved at low cost, less than $600/mt of methane, especially in the waste sector and the coal subsector in most regions of the world, and for the oil and gas subsector in North America.

More carbon capture needed

The Global Carbon Capture and Storage Institute (GCCSI), an international think tank, was pleased that the guidance recognized CCS.

"We want to see the deployment of more CCS and unlocking finance is a really important part of that. So, we're glad to see that CCS projects are allowed in this guidance," Matt Bright, GCCSI senior advocacy and communications adviser, told Net-Zero Business Daily.

According to GCCSI, multilateral development banks have a key role to play in promoting CCS through issuing term debt in low-income member countries.

In its "Unlocking Private Finance to Support CCS Development" report, the GCCSI said the objectives of multilateral development banks, their experience and diplomatic leverage "often enable them to provide cover for risks in countries and projects that would otherwise struggle to access funding."

According to the think tank, there are 66 CCS projects around the globe at the moment: 26 in operation (actively capturing CO2); two with suspended operations (meaning that the facility can capture CO2 but currently is not); four under construction (investment decision made to construct); and 34 under development (conducting feasibility studies).

Approximately 2,000 commercial CCS facilities constructed between now and 2050 will be required to meet the International Energy Agency Sustainable Development Scenario to meet net-zero goals, which the GCCSI said would require capital investment of about $655 billion and $1.280 trillion.

The financing would come from a mix of private investment, multilateral banks, and other sources.

Gas generation financing remains intact

While the Treasury's guidance was welcomed by groups for its support for CCUS and methane abatement, it also was criticized because it will allow continued—and possibly expanded—use of natural gas in power generation and transportation.

Although this guidance puts an end to financing for gas exploration and drilling, it allows multilateral development banks to support gas-fired generation and pipelines in small island nation states, such as those found in the Caribbean; countries the World Bank has identified as conflict-ridden and fragile; and countries eligible for the World Bank's International Development Association (IDA) credit lines with gross national incomes per capita below a poverty threshold, which is $1,205 for fiscal year 2022.

Multilateral development banks under this guidance also would be allowed to support gas projects when "there is no economically and technically feasible clean energy alternative" or "when the project has a significant positive impact on energy security, energy access, or development."

It does end direct financing—as well as through policy-based operations and financial intermediaries—for coal-fired generation unless the funds are used to decommission plants, and it ends oil-fired generation financing unless used for backup power in emergencies or for home heating and cooking.

The American Petroleum Institute (API) said addressing the risks climate change pose while ensuring access to affordable, reliable energy remains one of the greatest challenges.

"As countries grow and economies expand, the world will need more energy and US natural gas will play a critical role in providing that supply while helping to reduce GHG emissions by both replacing more carbon intensive fuels, like coal, and aiding the deployment of renewable energy in developing nations," Dustin Meyer, API vice president of natural gas markets, said in a statement.

Good start or lip service

Tom Sanzillo, financial analysis director for the nonprofit Institute for Energy Economics and Financial Analysis, called the guidance a "good start."

"This policy statement is sound and comprehensive. It has important safeguards to protect against unintended consequences, but it will require ongoing monitoring, transparency, and debate to move this from a good policy statement to an effective tool to combat climate change," Sanzillo told Net-Zero Business Daily.

For instance, the guidance would not apply to the $20 million the World Bank has already promised under its IDA program "to strengthen institutions, laws, and regulations to promote good governance and prudent management of Guyana's oil and gas sector." It also would not affect Mozambique's $20 billion LNG project, which has been beset with delays, most recently violence in the country, and is now projected for completion in 2024.

However, the nonprofit Friends of the Earth lambasted the guidance, saying "it pays a lot of lip service but has little teeth."

"Continued support for fossil fuel expansion in developing countries will subject the world's most vulnerable communities to displacement, illness, and livelihood loss, and developing economies to the risks and injustice of a delayed transition to clean energy," Luisa Galvao, the group's international policy campaigner, said in a 16 August statement.

Posted 18 August 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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