The climate and environmental crisis is overwhelmingly caused by the burning of fossil fuels, which globally account for 86% of carbon emissions. Public finance – loans, guarantees, insurance and grants by governments (or government-backed agencies) – plays an outsized role in fossil fuel lock-in. Since finance like this is often given on preferential terms or below-market rates, it lowers risk for private sector investors. It also sends a conflicting signal that governments are encouraging fossil fuels, even if their climate policies say the opposite, creating uncertainty for investors.
Phasing out public financial flows for fossil fuels is a necessary step in combating climate change. A major step in this direction came at COP26 in 2021, when 39 governments and public finance institutions launched the Clean Energy Transition Partnership (CETP). They pledged to end their international public finance for coal, oil and gas by the end of 2022, and instead “prioritise” their support for clean energy. This commitment is significant because it was the first international agreement to end cross-border public finance for oil and gas, not just coal. It applies to projects along the entire fossil fuel value chain, from exploration and production through transportation and distribution to power generation.
Our recent study, ‘Out With the Old, Slow With the New’, looked at how the CETP members have progressed against their commitments, one year past the implementation deadline. In 2023, CETP members internationally financed USD 5 billion in the fossil fuel sector, a USD10-15 billion drop from the pre-CETP baseline. This drop is due to the majority of CETP high-income countries passing robust and ambitious policies that end or heavily restrict international public finance for fossil fuels. For instance, Belgium, Canada, Denmark, the European Investment Bank, Finland, France, the Netherlands, New Zealand, Spain, Sweden, and the United Kingdom have all passed policies that prohibit fossil fuel international public finance with very few exceptions, such as for humanitarian assistance and LPG for cooking.
However, the CETP is not yet delivering a corresponding increase in clean energy finance. We found that in 2023, CETP members’ international finance for clean energy reached USD 21.3 billion, versus a pre-CETP average of USD 18.4 billion per year – an increase of only 16%. Few CETP members have adopted policies or strategies to scale up international financing in clean energy: only a few have quantitative targets for increasing their clean energy support abroad. If this element of the CETP commitment is not delivered on, it leaves the CETP open to accusations of being “anti-development”.
Finally, the largest international destinations for CETP signatories’ clean energy finance were predominantly high- and middle-income countries. Of the top 20 countries receiving international public finance for clean energy in 2023, the only lower-middle-income countries were India, Angola, and Bangladesh, and no low-income countries were represented. One reason for this is that export credit agencies, which represent about half of the international public finance from CETP members, do not have a development mandate. Only development finance institutions, which represent the other half of CETP signatories’ international public finance, have such a mandate. As countries are repurposing international public finance, they should give more consideration to providing this through development finance.
The CETP shows the clear power of first-mover coalitions in harnessing momentum. It leveraged previous fossil fuel restriction policies passed by the UK and the European Investment Bank, among others, into an international coalition. The CETP has also led to progress in other multilateral fora. In 2023, the UK, EU and Canada launched proposals at the OECD to extend the existing coal export finance restriction to oil and gas. This is significant because members of the OECD Arrangement on Officially Supported Export Credits, which governs export credit agencies, include Japan and Korea, two of the largest non-CETP financiers of fossil fuels.
In conclusion, the CETP is an example of a largely successful international coalition to cut public finance for fossil fuels. It has more work to do, to scale up clean energy finance and to direct that finance to the places where it is most needed. But it could provide a model for future work on addressing other types of public financial flows, such as domestic public finance. As the impacts of climate change fall ever more intensely upon the world, the time is now to address these barriers to the energy transition once and for all.
About the author
Natalie Jones
Policy adviser at the International Institute for Sustainable Development, where she works on a managed phase-out of oil and gas production.
