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Economists at Oxford University have contributed to a new Environmental Audit Committee report, which concludes that the UK’s financing of fossil fuel projects in developing countries is undermining its climate commitments and should end by 2021.
UK Export Finance (UKEF), the UK’s export credit agency, offered £2.6 billion to support the energy sector around the world between 2013 and 2018. Of this, 96% went to fossil fuel projects, with only 4% supporting projects in renewable energy. The vast majority of this funding (£2.4 billion) went to low and middle-income countries to be used for fossil fuels.
Environmental AuditCommittee Chair Mary Creagh called the findings ‘unacceptable’ and at odds with the UK’s declared measures to tackle climate change.
Witnesses called by the Committee, including Dr Ben Caldecott, Director of the Oxford Sustainable Finance Programme, expressed deep concern that UKEF activity risks ‘stranded assets’ and locking in of reliance on fossil fuel energy production in the developing world.
Oxford’s Smith School of Enterprise and the Environment defines stranded assets as investments that have suffered from early or unanticipated devaluation, often due to environmental-related risks. In the context of limiting warming to 1.5°C–2°C, fossil fuel projects such as those funded by UKEF are in danger of becoming ‘stranded’ – for example, decommissioned, underutilised or subject to costly retrofitting.
Researchers at the Smith School have found that even if the entire current pipeline of all power generation plants was cancelled, about 20% of current in-use global capacity would need to be stranded to achieve the 1.5°C–2°C warming goals (Pfeiffer et al, 2018).
Dr Ben Caldecott said, "UK Export Finance is exposed to the risk of stranded assets through the loans and guarantees it provides to incumbent fossil fuel industries. It is also having a negative impact on the local and global environment through these loans and guarantees.”
"The UK is a world-leader in aligning finance with sustainability, so there is no excuse for UK Export Finance to not adopt best practice and integrate these innovations into what it does on an ongoing basis. The UK should have an export credit agency that is world-leading in terms of sustainability and failing to do so would perpetuate a glaring example of UK hypocrisy on climate change."
Dr Caldecott added, "UK Export Finance should commit itself to aligning its activities with the Paris Agreement on Climate Change and the Sustainable Development Goals, as well as with climate-related risk management frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD). It should develop and publish accountable plans to do so in 2020.”
Evidence from an independent group of global leaders (The Elders) further described the gap between domestic and international policy as a form of exploitation, with the UK “effectively exporting their emissions to poorer foreign countries and leaving them to pay the price socially and environmentally.”
MP’s concluded that the Government must change UKEF’s mandate to ensure that support is aligned with the UK’s national and international commitments and in line with the IPCC and Committee on Climate Change’s recommendations. The UK should then leverage its position among other OECD export credit agencies to encourage them to follow UKEF’s example in aligning its work with net zero emissions.
They further recommended that UKEF follow the lead of other export credit agencies, such as Sweden, by introducing a cap on lending to fossil fuel projects and that UKEF should end support to new fossil fuel projects by 2021.