The Fuse

Rich Countries Subsidizing “Dash for Gas” in Developing World

by Nick Cunningham | June 07, 2021

Wealthy countries are attempting to rein in carbon emissions, but continue to finance a natural gas expansion in developing countries, according to a new report.

The continued government-backed financing of fossil fuels in low- and middle-income countries puts climate goals at risk and threatens to lock in infrastructure for decades to come.

A surge of gas financing in Global South

Rich countries are using public financing to expand the construction of natural gas infrastructure in poorer countries around the world.

Rich countries are using public financing to expand the construction of natural gas infrastructure in poorer countries around the world. Public-financing of gas in the Global South exceeds that of renewable energy by a factor of four, according to a new report from the International Institute for Sustainable Development.

The investment “risks driving a new dash for gas that locks countries into a high-carbon pathway, imperiling their economies future and the global climate,” the authors warned in the report.

Funding for gas comes from an array of multilateral development banks and a constellation of bilateral financing at the government level from G20 nations, such as export credit agencies and development banks. This kind of financing is aimed at reducing project risk, crowding in private capital, and signaling investment priorities. Together, the financing helps give a greenlight to fossil fuel projects that might not otherwise go forward, and in effect, the public financing offers a big subsidy to the gas expansion.

Natural gas projects in the Global South received an average of $16 billion in international public financing between 2017 and 2019, four times higher than solar and wind.

According to the study and to data from Oil Change International, natural gas projects in the Global South received an average of $16 billion in international public financing between 2017 and 2019, four times higher than solar and wind. Of that total, 48 percent came from just three countries: Japan, China and the United States. Another 12 percent came from the World Bank. The report also said that financing for all types of fossil fuels was more than twice as high as for clean energy.

Most of that financing (46 percent) is funneled into power generation, a sector where there are cheap alternatives in solar, wind and energy storage. The second largest segment of financing went into residential and commercial uses, such as cooking and heating. Here too, there are clean alternatives. In fact, of the roughly 800 million people who have no access to electricity around the world, natural gas is actually a very “poor solution,” the report said. Connecting rural homes with gas lines is costly and makes little economic sense when distributed renewable energy is much cheaper.

There are sectors where clean alternatives are far behind, such as chemicals, steel and cement production. But rich governments actually provided very little public financing for gas projects in those sectors. The bulk of the financing went to sectors that have clean alternatives at the ready.

Gas more of a “wall”

For years, the natural gas industry and its proponents have positioned gas as a “bridge fuel,” a semi-clean source of energy that could tide the world over until renewable energy was ready to scale. That framing was always questionable, but has more recently fallen apart. Renewable energy is actually cheaper than gas in many parts of the world, and importantly, that equation will increasingly move in favor of renewables and electrification as time goes on.

In addition, the climate clock is in a worse place than it was a few years ago when the “bridge fuel” argument held more sway. The world needs to be reducing fossil fuel production at a rate of 6 percent per year over the next decade in order to hit climate targets, but governments are going in the opposite direction, expanding at a rate of 2 percent per year. Finally, the methane footprint associated with natural gas is increasingly larger than once thought, undercutting the climate rationale for expanding gas even further.

In short, gas is dirty, unneeded and increasingly not competitive. But while renewables often compete favorably relative to gas, there are upfront costs and political barriers to making the switch. IISD pointed to the case of Argentina, which finds itself subsidizing high-cost shale production in the Vaca Muerta, which reinforces dependency on gas. In the past, the U.S. government has provided support for the drilling campaign.

The financing helps to lock in and deepen the current path.

The financing helps to lock in and deepen the current path. The problem is that gas infrastructure – such as LNG export terminals and long-distance gas pipelines – is intended to stay online for a long time, usually several decades. That means that anything built today will likely carry an investment rationale that assumes it will be online through mid-century, a time when many governments say they will hope to achieve something like net-zero emissions.

“Gas starts to look more like a wall than a bridge, impeding rather than enabling the energy transition,” the authors of the IISD report said.

The report comes just a few weeks after the International Energy Agency (IEA) said that no new fossil fuel projects would be needed if the world achieved net-zero emissions by mid-century, as a growing number of countries – and even oil companies – aim to do.

“Countries are in danger of being left behind in the global energy transition, saddled with stranded assets, more expensive energy, dependence on imports, and trading disadvantages,” the authors warned.

The IISD report says that public-financing is an important tool for catalyzing investment, and should be reoriented to help low- and middle-income countries obtain access to and build renewable energy, energy efficiency, and electrification.

ADD A COMMENT