Paris-aligned or Paris-misaligned? Fossil fuel financing under the European Bank for Reconstruction and Development's Paris alignment methodology

More than 40 countries and public finance institutions have now committed to end international public finance for fossil fuels, via the Glasgow Statement on International Public Support for the Clean Energy Transition. The European Bank for Reconstruction and Development (EBRD), one of the nine major multilateral development banks, is not yet among those institutions. With the EBRD revising its Energy Sector Strategy this year, however, the Bank now faces a key opportunity to tighten its restrictions on fossil fuel financing to align with international best practice.

Already in July 2021, the EBRD committed to aligning all of its activities with the Paris Agreement by the end of 2022. As part of that commitment, the Bank noted it would further narrow and limit fossil fuel financing "to projects meeting a strong ambition to accelerate the low-carbon transition in specific country contexts." The EBRD has since published a new methodology, released in December 2022, that the Bank will use to determine whether new projects starting from January 1, 2023 onward are aligned with the Paris Agreement. The EBRD is the first multilateral development bank to release such a methodology.

From 2018 to 2021, the EBRD invested EUR 5.6 billion in clean energy, but EUR 2.9 billion still went into fossil fuel energy.  What will this new methodology mean for the EBRD’s future investments in fossil fuels and will it indeed ensure that new projects are in alignment with the Paris Agreement’s principles? This article explores what this methodology could mean in practice—and what it would mean for the EBRD to become one of the Glasgow statement’s signatories.

Extended Fossil Fuel Exclusions

The new Paris alignment methodology tightens the EBRD's approach to fossil fuel investing, while not ending completely the potential for the Bank to provide some financing to fossil fuels. 

The EBRD's new methodology now rules out financing to more types of fossil fuel projects than the current Energy Sector Strategy would allow. The Bank had already, in its 2019–2023 Energy Sector Strategy, excluded investment in thermal coal mining, coal-fired power plants, and upstream oil exploration and production. The Paris alignment methodology adds to this exclusion list, excluding upstream gas, as well as midstream and downstream oil except in rare and limited cases involving emissions reductions or environmental impact remediation.

The extension of the exclusion to upstream gas is an unequivocally positive step. IISD research has shown how all major 1.5°C pathways agree: no new oil or gas fields can be developed if global warming is to be limited to 1.5°C. It is clear that any bank that wishes to be Paris-aligned must not invest in expanding upstream oil and gas.

Criteria for Midstream and Downstream Gas

The EBRD’s exclusion does not extend to midstream or downstream gas, however. Instead, here the EBRD sets out a list of cumulative criteria that midstream and downstream gas infrastructure projects, like pipelines or power generation plants, must meet.

For instance, the project must be located in a country that has made a credible commitment to move toward decarbonization, including to meet the Paris Agreement goals. In addition, the project must be an essential part of a credible low-carbon strategy of the country or a pathway consistent with the Paris Agreement goals. The project must include a clear plan to control and/or reduce methane leakages from the relevant asset. In addition, the project must not be ruled out in the country’s nationally determined contribution (NDC) to the Paris Agreement. There must also be a low risk of carbon lock-in, which the Bank defines as the risk that the project will continue to operate when there are economically feasible, lower-carbon options that could replace it. Finally, the project should be economically viable when its greenhouse gas emissions are valued using a shadow carbon price—meaning that the project is assessed as if a carbon price were in effect.

These criteria go further than those already contained in the EBRD’s 2019–2023 Energy Sector Strategy. There, the project must not displace less carbon-intensive sources or lead to carbon lock-in or stranded assets. The project must account for flexibility in the design of energy solutions to facilitate the energy transition. In addition, the project must be subject to the Bank-wide approach to conducting economic assessments of projects. Finally, it must be consistent with the host country’s NDC and the Bank’s Environmental and Social Policy.

The criteria, put together, are exacting. It remains to be seen how the EBRD will use these criteria in practice. But if they are applied with integrity and with commitment to the spirit of the Paris Agreement, few gas projects will make it through. It is concerning, however, that the criteria do not exclude midstream gas outright. Gas pipelines carry high stranded asset and lock-in risks, and there are substantial feasibility and cost barriers to repurposing them for other uses, such as hydrogen transport. Moreover, economically competitive alternatives are available for the majority of gas uses.

There is one glaring exception to the application of these criteria. The EBRD’s methodology deems any investment that meets the criteria of the EU taxonomy for sustainable activities for a "substantial contribution" to climate change mitigation to be automatically aligned. In such cases, the above criteria do not apply. The EU taxonomy, however, labels midstream and downstream gas as sustainable under certain conditions. The EU taxonomy’s criteria are in some ways tighter than the EBRD's: for instance, it requires a switch to renewable and/or low-carbon gaseous fuels by the end of 2035 and for projects to result in emissions reductions of at least 55% per kilowatt hour (kWh) of output energy. Even so, this exception is concerning. All gas projects should be ruled out.

Where to Next? The 2023 Energy Sector Strategy review

The EBRD is currently in the process of developing its next Energy Sector Strategy (ESS), which will be out for public consultation in June–July 2023. To further increase its ambition in line with the 1.5°C warming limit, the Bank should extend its fossil fuel exclusion to cover midstream and downstream gas in the new ESS.

At the very least, the Bank should exclude midstream gas and further consolidate and tighten its screening criteria for downstream gas. It should exclude all gas projects, rather than deeming those compliant with the EU taxonomy as automatically aligned. 

The 1.5°C target and the widespread affordability of clean alternatives mean that there is no role for long-lived gas infrastructure, including for gas-fired power. Should any midstream or downstream gas project be funded in future, the EBRD should release all information about project emissions, including Scope 3—indirect emissions that occur in the value chain of the project—and require annual monitoring reports.

The need to stop financing long-lived gas infrastructure is further highlighted by the global energy crisis brought on by Russia’s full-scale invasion of Ukraine, which emphasizes the dangers of dependence on imported oil and gas: countries are exposed to high and fluctuating energy prices, which can severely impact a country’s ability to reach its development targets. Many of the EBRD’s countries of operation depend on fossil fuel imports. Accelerating the shift to renewable energy would carry both climate and development benefits.

Extending the fossil fuel exclusion would bring the Bank into line with leading public finance institutions such as the European Investment Bank and the Agence Française de Développement. It would also align the EBRD with the Glasgow Statement on International Public Support for the Clean Energy Transition, the leading commitment to end international public finance for fossil fuels and fully prioritize international public finance for a clean and just energy transition.

The Glasgow group is becoming a strong community of practice in which members share experiences and lessons learned in the clean energy transition. The EBRD, with its increasingly impressive record of renewable energy financing, would have much to contribute to this group.

Notably, the Glasgow group of signatories, in addition to moving their own financing, also pledged to encourage other public finance institutions, including multilateral development banks, to implement similar commitments. Glasgow signatories constitute 67% of the EBRD’s shareholding. Shareholders will thus be expected to push for stronger fossil fuel exclusions in the Energy Sector Strategy review.

Against this backdrop, all eyes will be on the EBRD in 2023. Now is the time for the EBRD to step up its efforts to align its activities with the 1.5°C goal.