US Cuts Funding for Fossil Fuel Projects in Developing Countries

By Emel Akan
Emel Akan
Emel Akan
reporter
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.
August 24, 2021 Updated: August 25, 2021

News Analysis

WASHINGTON—Tackling climate change is “no longer business as usual” and requires significant defunding of the fossil fuel industry, according to the U.S. Treasury Department. To that end, the United States and other Group of Seven (G-7) countries have agreed to cut funding for fossil fuel energy projects both domestically and in developing countries.

The Biden administration recently took another step and extended this policy to multilateral development banks (MDB), such as the World Bank. The Treasury Department on Aug. 16 issued new guidance for MDBs to “promote ending international financing of carbon-intensive fossil fuel-based energy.”

The United States will oppose all new coal-based and oil-based energy projects and will narrow support for natural gas in emerging countries, according to the new guidelines. But there may be limited exceptions to these rules, especially if cleaner options are unfeasible.

This initiative, however, could make competition with China’s controversial Belt and Road Initiative (BRI) more difficult. Chinese development banks currently finance large infrastructure and energy projects in emerging countries with no strings attached, especially when it comes to protecting human rights or the environment.

The new U.S. guidance is in line with the goals of the Paris Agreement on climate change and prioritizes “clean energy, innovation, and energy efficiency,” the Treasury Department stated.

The new rules will impact MDB operations, as many European countries share U.S. concerns on climate, according to Stephanie Segal, senior fellow at the Center for Strategic and International Studies (CSIS).

The United States is the largest shareholder at some of the biggest international and regional development banks, including the Inter-American Development Bank (30 percent), World Bank (15.8 percent), and European Bank for Reconstruction and Development (10 percent).

“While ‘guidance’ does not constitute a mandate, the United States’ large shareholding in the institutions translates into voting power and an outsize role in setting the institutions’ agendas and lending programs,” Segal wrote in a recent report.

She noted, however, the U.S. initiative would have no effect on large Chinese development banks such as the Asian Infrastructure Investment Bank and New Development Bank, as the United States isn’t a member.

China finances energy projects overseas, which are heavily concentrated in fossil fuel operations.

Beijing “remains the world’s largest source of public funding for coal projects through the Export-Import Bank of China and China Development Bank,” Segal wrote, adding that this contrasts with the G-7 countries’ commitment to end the funding of new coal generation in developing countries.

China seeks to bolster its image as a leader in fighting climate change and hence some scholars believe Chinese development banks could easily shift toward cleaner energy finance for projects abroad. Beijing, however, hasn’t made any commitment in that regard.

China has become the world’s biggest creditor, surpassing traditional lenders such as the World Bank, the IMF, or all OECD creditor governments combined. Since its launch in 2013, China’s BRI has poured billions of dollars into emerging countries to help build massive infrastructure and energy projects.

Beijing, however, has been accused of deliberately setting debt traps for poorer nations because of unsustainable loans and opaque lending contracts. The Chinese Communist Party has made the initiative a centerpiece of its plans to grow its geopolitical influence.

In June, G-7 leaders agreed to counter Beijing’s debt-trap diplomacy and growing influence around the world. The leaders pledged to provide a “democratic alternative” to China’s ambitious program to address the infrastructure gap in poor countries, which has been exacerbated by the pandemic.

The G-7’s plan is to fund development projects in four key areas—climate, health, digital technology, and gender equity.

Emel Akan
Emel Akan
reporter
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.