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As the World Bank moves closer to launching the Clean Technology Fund (CTF), serious questions remain over how the money will be spent. The political headwinds in Washington have shifted since June, when the Congress began to consider contributing to the fund. While the result is still uncertain, it appears increasingly likely that the CTF will ultimately focus on truly clean technology while generally avoiding investments in coal and other high-carbon fossil fuels.

Although the global financial crisis has dominated policy discussions, and despite criticism from environmental groups (see YouTube video), international donors moved forward on the Climate Investment Funds during the World Bank-IMF Annual Meetings. Officials reiterated their support for the $6.1 billion in pledged contributions that would help poorer countries adopt less-polluting energy technologies (for more on the concept of the CTF, see World Bank Power Projects: Crossroads on Renewable Energy).

Environmental groups have countered that the bank has little if any credibility when it comes to clean energy investing, pointing out that the marginal increase in the bank’s renewable energy lending is far outweighed by a 94% surge in lending for fossil fuel projects, including, most notably, a 256% increase for coal projects. Many groups are speaking out against the CTF, arguing that the fund’s framework would allow the bank to funnel even more money to fossil fuel projects, as long as they could demonstrate marginal efficiency gains, rather than promoting transformational technological change as the original CTF proposal had suggested.

The real battle, however, is going on not in public but behind the scenes on Capitol Hill. U.S. Treasury Secretary Henry Paulson was one of three finance ministers who spearheaded the creation of the CTF in February, and most observers agree that U.S. participation is critical to the Fund’s success. But all four bills introduced so far by Congressional authorizers and appropriators would place strict limits on U.S. funds, requiring carbon accounting (including a shadow price for the damage caused by CO2 emissions) in project feasibility studies. Perhaps more importantly, the bills would require that the CTF focus on driving down the cost of renewable energy technologies -- much as CGD senior fellow David Wheeler and others recommended in Congressional testimony in June.

Most recently, Congresswoman Gwen Moore introduced an updated House authorization bill that would prohibit using U.S. money for coal projects unless they could incorporate carbon capture and sequestration ("CCS-ready") and use ultrasupercritical coal technology. This would make many coal projects ineligible for CTF support, though David noted in his Congressional testimony that any CTF support for coal over renewables would be a strategic mistake.

Publicly, the bank has resisted incorporating these conditions into the design of the CTF or bank investment criteria more generally. But as the reality of a Democratic Congress and the conditions already proposed sink in, officials in and outside the bank are beginning to express a willingness to limit coal investments as well as pursue carbon accounting. Investment guidelines excluding supercritical coal and projects not CCS-ready were promised at the Annual Meetings, but official framework documentation has yet to include any real limitations on coal-fired power eligibility.

And although Bank officials also announced that a methodology for greenhouse gas accounting for lending projects will be devised, the multilateral development banks would not be required to implement it. Inaction is defended on the grounds that the real impediment to a greener portfolio is resistance by the bank’s developing country members, who are said to worry that carbon accounting and preferences for low-carbon energy could become an unfair barrier to their growth, rather than a rich-country subsidy for the rapid development of low-cost, low-carbon energy.

India, meanwhile, has sent mixed signals on the fund, which in its current form allows for investments in coal projects (compare comments from the environment minister and the finance minister).

Against this confused background, the World Bank has said it will announce the first round of beneficiaries as early 2009, despite the fact that the CTF as currently designed does not include any of the major conditions Congress is considering for the U.S. contribution. Nonetheless, recent discussions with relevant stakeholders lead us to believe that the conditions placed on U.S. funds will be de facto conditions placed on the entire fund, given the leadership role undertaken by the United States.

Although legislative action on the CTF is unlikely before the next administration takes office, the next Congress will have substantial influence not only on the use of the U.S. portion of CTF funds but also the direction of the bank’s entire energy lending portfolio. Current bills from Congresswoman Moore and others will undoubtedly serve as the starting point for Congress in 2009. Here’s hoping that these can help to prod the World Bank into becoming part of the solution in sparking an urgently needed energy revolution.

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.