US Will Stop Supporting Overseas Fossil Fuel Projects

The Biden administration released new guidance that will eliminate U.S. government support for overseas gas, oil, and coal projects. The U.S. has been a major source of overseas gas and oil support so this new guidance will ensure that the administration drives a clean energy first agenda. This new U.S. guidance is an important, overdue step that must be followed with concrete action. It means all U.S. agencies must decisively stop financing gas, oil, and coal projects overseas and shift investments into clean, renewable energy projects around the world.

The U.S. Climate Finance Plan, directed agencies to “seek to end international investments in and support for carbon intensive fossil fuel-based energy projects.” The U.S. had previously restricted support for overseas coal projects. The Treasury Department, which overseas how the U.S. votes at the multilateral development banks (MDBs), had issued guidance earlier which signaled it would oppose fossil fuel projects at these institutions. This new guidance—Interim International Energy Engagement Guidance—from the Biden administration covers all U.S. finance, technical, political, and other support for gas and oil projects. It applies to all government agencies, departments, and affiliated organizations. It means that any type of support from any part of the U.S. government will now be required to shift out of fossil fuels and to renewable energy and energy efficiency.

Effective implementation of this guidance -- the International Energy Engagement Guidance -- will help ensure that U.S. overseas support is fully aligned with investments compatible with a 1.5°C (2.7°F) pathway.

Global gas expansion is incompatible with a climate-aligned investment strategy

According to the International Energy Agency’s (IEA) Net Zero Emissions scenario, unabated gas-fired generation should start to decline in the late-2020s, and gas fired power plant generation is 90 percent lower by 2040 compared to the 2020 levels. The picture is even starker for gas expansion under a scenario more compatible with a 1.5°C consistent trajectory.

In key regions the math is clear that an expansion of gas is incompatible with a safer climate future. For example, In Southeast Asia, 65 percent of existing and planned gas plants are incompatible with the 1.5°C temperature target, according to researchers at the University of Oxford.    

This Guidance Matters – US has been a major supporter of overseas gas and oil

From 2017-2019, gas projects received an average of $16 billion in international public finance per year – four times as much as wind or solar, according to a recent report. Projects that were a combination of oil and gas were given more than $3.5 billion per year and projects only for oil extraction added almost $6.5 billion per year in additional support (see figure). And this doesn’t include the indirect support that these projects receive from governments through diplomatic, technical, and political channels that help prop up the viability of these projects.

The US has been a major player in gas and oil financing, with almost $2.5 billion per year in direct support for overseas gas projects and an associated larger amount as the largest shareholder in most of the MDBs with significant gas support—around $3.4 billion per year for the MDBs where the US is a shareholder (see figure).

US Guidance will severely restrict U.S. support for overseas fossil fuel projects

The guidance centers strong climate action for U.S. overseas energy efforts, stating: “our international energy engagement will center on promoting clean energy, advancing innovative technologies, boosting U.S. cleantech competitiveness, and providing financing and technical assistance to support net-zero transitions around the world”. The guidance covers “investments in energy-related infrastructure, energy-related international technical assistance, energy technology collaboration, commercial engagement, and other modes of energy infrastructure support”. The guidance sets a very clear bar: any coal project will be excluded, and new gas and oil projects won’t be supported except in very rare circumstances. It does this by:

Covering all oil and gas projects across the value-chain stating that all projects are covered that “advance infrastructure directly related and dedicated to the production, transportation, or consumption of emissions-intensive fuels." This means that the guidance will cover upstream oil and gas projects (i.e., exploration and production), midstream projects (i.e., gas and oil import or export facilities), and downstream projects (i.e., oil and gas use in power plants, industrial applications, and other end-use areas). There are exceptions that allow a project to proceed if it is primarily for methane capture, enhanced monitoring of emissions, or entails less than $250,000 in support.

Stopping all projects that expand the use of coal including those that support coal-fired power plants, mining, and transport. The U.S. imposed a restriction on overseas coal-fired power plants beginning in 2013 for the MDBs and then in 2015 for other sources of financing. This guidance codifies the recent commitments from the G20 countries to end all financing of coal power plants this year and extends the restriction beyond only coal power plants. It states that: “engagements related to coal generation must be related to full abatement of emissions and/or accelerated phase out”. This means that only projects with 100 percent emissions sequestration or efforts to speed-up the phase-out of the current coal fleet are allowed.    

Setting an emissions threshold to exclude support for “carbon-intensive” international energy engagements that “advance infrastructure directly related and dedicated to the production, transportation, or consumption of emissions-intensive fuels that would lead to additional greenhouse gas emissions with an emissions intensity above a threshold life cycle value of 250 grams of CO₂ per kilowatt-hour (kWh). This threshold is set at a level that all gas, oil, and coal projects that emit greenhouse gas emissions would be excluded unless they receive an approved exception.

The guidance does allow fossil gas or oil projects to be supported in narrowly defined circumstances—“rare cases”. The guidance sets out a two-part criterion for these exceptions, stating “except in rare exceptions where there are”:

1. “compelling national security, geostrategic, or development/energy access benefits”; and
2. “no viable lower carbon alternatives accomplish the same goals”.

Getting the Gas Exception Criteria Right – Effective Implementation Matters

Each agency will have to implement these guidelines correctly to ensure that this is a climate-centered policy (similar to the effective implementation of the Treasury Guidance). We’re confident that the U.S. can do this in a manner that protects the climate, poor and vulnerable communities, and the financial viability of scarce investments. For this to occur there are several key elements that will need to be effectively implemented and enforced.

• A credible “lower carbon alternatives” analysis. Alternative analysis is already common practice; however, they aren’t always credibly done. Too often, they are self-serving exercises in justifying the dirty project that the sponsor wants to build. A defensible alternative assessment should include credible and independent assessments on key factors such as the true energy needs, proof that the fossil fuel project is more economically viable than renewable energy or energy efficiency, and inclusion of cost of externalities such as a social cost of carbon and air pollution impacts (as detailed here).
• Solid assessment that the project will have a “significant positive impact on energy access or development”. Project proponents over the years have justified projects based on dubious development and energy access rationale that have failed to deliver for communities on the ground. The IEA has consistently shown that meeting the energy access needs of the poorest people is best served by supporting a renewable energy project. As they stated: “In our Energy for All Case, most of the additional investment in power plants goes to renewables’. Projects will only be allowed in “International Development Association (IDA) eligible or IDA-blend countries, fragile and conflicted states, or small island developing states and have a significant positive impact on energy access”. Proponents will have to prove that the project addresses those development needs and that lower carbon alternatives can’t meet the same needs. They will also have to show how the project is aligned with climate goals.
• Clear assessment and documentation of “will this project advance U.S. national security interests in a concrete, demonstrable and significant manner”. Project proponents of energy projects often say “national security” without having to show how moving forward with this project addresses an explicit national security issue and how implementing the project won’t unduly exacerbate other national security issues. National security or geostrategic concerns are put at significant risk if the U.S. doesn’t help to drive the kind of climate ambition we need. The guidance will require proof from the project proponents that it is essential to meet U.S. national security objectives and that a lower carbon alternative isn’t a better way to meet national security concerns.
• Incorporating equity considerations. Equity and environmental justice implications of the international project need to be considered just as the Biden administration demands for domestic projects. As the U.S. “Executive Order on Tackling the Climate Crisis at Home and Abroad” states: “Agencies shall make achieving environmental justice part of their missions…to address the disproportionately high and adverse human health, environmental, climate-related and other cumulative impacts on disadvantaged communities, as well as the accompanying economic challenges of such impacts.”
• Detailing alignment with U.S. climate goals. U.S. policy (as spelled out in the U.S. 2030 climate target) is to keep “within reach a 1.5 degree Celsius limit on global average temperature increase”. Projects need to show alignment with the kind of declines for oil and gas in credible 1.5°C trajectories since “national security, geostrategic, or development” is significantly impacted by the impacts that will occur if temperatures aren’t held below this threshold. The guidance requires documentation that the fossil fuel project: “not delay the transition to clean energy or otherwise inhibit achievement of net-zero global emissions by 2050, the country’s decarbonization goals, or objectives of the country’s Paris Agreement commitments”.  

US guidance sends a powerful signal to other countries that support these projects

While the U.S. has been a major source of support for overseas oil and gas, it hasn’t been alone. Other countries need to move forward with similar restrictions. At the Glasgow climate summit, 34 countries and 5 financial institutions committed to “end 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 and the goals of the Paris Agreement”.

This U.S. guidance sends a clear signal of how to implement that commitment in a manner that protects the climate and vulnerable communities around the world. Other countries should rapidly join this effort to ensure that their finance is fully aligned with the kind of deep emissions cuts necessary this decade to keep 1.5°C alive.

Creating a surge towards renewable energy and energy efficiency

This new guidance will free up much needed resources to help spur renewable energy and frontload energy efficiency measures. Now all the U.S. support can be focused on driving the deployment of renewable energy and energy efficiency. No longer will one part of the U.S. international toolbox be pushing for stronger climate action while the other parts are pulling in the opposite direction.

There are abundant, economic, and shovel-ready renewable energy, energy efficiency, and storage projects. The IEA renewables outlook for 2026 shows the renewable energy opportunities around the world. It expects new renewables installed capacity to reach a record breaking 290 GW this year. Under its Main Case forecast annual additions to global renewable electricity capacity are expected to average around 305 GW per year between 2021 and 2026 (see figure)

This renewable energy opportunity exists around the globe. One study found that there are 13,000 renewable energy projects in 40 countries that could be deployed in the next 24-36 months. These are real projects that are ready to be built now, would create 10 million jobs, and could make a significant dent in helping countries meet their 2030 climate targets.

For the world to deliver on this potential, affordable finance, long-term policy stability and strong political mandates are critical. This guidance creates a new opportunity for the entire U.S. government to help deliver on the zero-carbon energy future around the world we need to help tackle the climate crisis.