Is the US Announcement on Coal a Major Policy Shift? Not So Much

Is the US taking a more restrictive stance toward coal projects in the multilateral development banks (MDBs)? Certainly, this press release from the US Treasury and subsequent press coverage would suggest a major policy shift. Technically, the Treasury’s announcement does point pretty clearly to more restrictiveness. But practically speaking? Well, not so much, particularly when it comes to the poorest countries.

As Billy Pizer and I noted in July in our CGD essay on MDB financing for coal (ok, admittedly you have to look hard for it in a footnote on page 13), President Obama’s new climate strategy included a position on MDB financing for coal that was largely a reflection of the existing US position, with one additional restrictive element when it comes to middle income countries -- a requirement for the use of carbon capture and storage (CCS).

This week’s announcement simply clarifies that CCS will be incorporated into the Treasury guidelines, in addition to the existing requirements for middle income countries, including that projects in these countries must include offsetting actions.  So, by adding CCS to the existing hurdles, the US position is technically more restrictive for the middle income countries.

But practically speaking, the US had already staked out a highly restrictive position when it comes to these countries. And with added pressure from European countries, coal projects in these countries have all but disappeared from the MDB pipelines.

Importantly, the US position toward coal financing in low income countries, reiterated in the Treasury announcement, remains significantly less restrictive. Which likely answers the question of whether US support for Kosovo’s coal project at the World Bank is waivering. Kosovo is a low income country and falls in the less restrictive category. The US has long been careful in stating its support for development of the Kosovo project at the bank (versus definitive support for ultimate project itself), and nothing in this week’s announcement suggests that support has shifted.

One interesting possibility following President Obama’s new strategy, the US Treasury’s clarification, and the World Bank’s own new energy strategy: more coal projects at the MDBs, particularly at the World Bank.  World Bank management and the bank’s borrowers have a much clearer sense of the rules of the road today than they did a year or two ago when the bank had effectively halted coal finance with no stated policy for doing so. With an articulated approach from the bank and its largest shareholder (the US), it’s conceivable that countries like China may express renewed interested in engaging with the bank under the new conditions.

As Pizer and I said in July, the Obama Administration has struck a good balance. They have not declared the end of coal overseas. Rather they’ve set a high bar for MDB financing in low income countries (essentially preserving the option when there’s a clear development need) and a higher bar for credit worthy middle income countries, who have other financing options if they aren’t willing to accept the conditions that come with MDB financing.