Energy security an extra hurdle for financing pledge

As well as threatening energy supplies, the Russia-Ukraine war is jeopardising a pledge to end financing of unabated fossil fuel projects, writes Georgia Gratton

The UN Cop 26 climate summit in Glasgow last year saw more than 20 countries and institutions pledge to end the international public financing of unabated coal, oil and gas projects by the end of 2022. That number has since reached 39, but Russia's war in Ukraine has added complexity to how the signatories will implement the commitment, with several countries yet to finalise policy.

There are concerns that the war and subsequent fears over energy security could overshadow the pledge and other decarbonisation plans. The commitment could be watered down by exemptions for gas, according to a report from civil society organisations (CSOs) Oil Change International, the International Institute for Sustainable Development and Tearfund.

G7 countries — including Japan, which provides about $11bn/yr in overseas fossil fuel funding and has not signed the Cop pledge — have added a caveat to their separate, although nearly identical, commitment to end new direct international public financing for unabated fossil fuels. The group says that "publicly supported investment in the gas sector can be appropriate" to reduce dependency on Russian gas. The UN and the IEA have said there must be no new upstream oil and gas projects if a global target of net zero emissions by 2050 is to be achieved. But Germany — heavily reliant on Russian gas — has said it is interested in working with Senegal to develop the latter's gas resources.

The UK, which led the commitment in Glasgow and is the outgoing holder of the Cop presidency, is clear that the pledge must retain its integrity. It intends to continue in this vein, even after Cop 27 when Egypt takes over the presidency. The G7 wording will not change UK policy, UK Cop 26 envoy John Murton says. He emphasised that actions to drive decarbonisation and energy security "are very well aligned".

Stretching flexibility

The wording in the Cop pledge has some flexibility. It calls for the end of "new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances that are consistent with a 1.5°C warming limit". But the challenge now is for the UK to prevent signatories stretching definitions to fit an energy agenda suddenly dominated by security of supply. Countries have differing energy priorities, but organisations including the IEA have emphasised the risk of stranded assets. The private sector is removing funding for fossil fuel projects, often leaving the state as the long-term bearer of risk. The projects are "becoming a sunset industry", Murton says.

Whether signatories meet the pledge will largely depend on their domestic climate agendas — and some continue to promote upstream oil and gas expansion at home, such as the UK and the Netherlands. Most countries and institutions are yet to publish policies aligned with the Glasgow pledge, according to the CSOs. Outstanding policies from signatories are expected to be updated by the autumn, Argus understands. Progress will be monitored at Cop 27, when more countries will be encouraged to sign the pledge.

A few existing policies — notably those of the Netherlands, Sweden, France, Denmark, the UK and the European Investment Bank — do align with the pledge's requirements, although export credit agencies, which support companies in international trade, are generally lagging, the CSOs found. And funding for renewable energy must fill the gap left by the withdrawal of fossil fuel financing. If the pledge's signatories redirected the $28bn/yr in public finance for oil and gas, they would more than double their clean energy financing, currently at $18bn/yr, the CSOs said.