In Germany’s financial centre of Frankfurt, the staff of German development bank Kreditanstalt für Wiederaufbau (KfW) work in an eco-friendly glass tower. Ranked among the world’s most efficient tall buildings, KfW’s headquarters is meant to be a case study in sustainability, which the self-declared “bank of responsibility” claims is part of its identity.
The bank is known to be one of the world’s largest financiers of energy efficiency and clean-energy technologies. In 2012, it spent around 10 billion euros (US$13.6 billion) on renewable energy, 20% of which went to projects abroad. A large portionof KfW’s total loans goes to environment and climate-change projects.
Its green profile matches the low-carbon leadership that Germany itself likes to project. For example, renewable energy recently emerged as the single most important source in the German energy mix, replacing lignite, or brown coal.
There is, however, another side to Germany and KfW’s profile.
While boosting clean energy at home, the state-owned bank is still financing fossil-fuel power projects abroad. Between 2006 and 2013, KfW granted roughly 2.8 billion euros (US$3.8 billion) in loans to coal-plant manufacturers in Serbia, India and other developing countries, mainly through its subsidiary KfW IPEX. With the bank’s recent hand in construction of a coal port close to Australia’s Great Barrier Reef – a UNESCO world heritage site – its lending practices have started to attract controversy.
So why is the bank sticking to this contentious path? Its key argument is that doing so helps provide low-cost power to poor communities. “Coal-fired plants are an important means to enhance energy access in poor countries”, reads a statement by the bank. “They help fight poverty”.
Not everyone accepts this argument. A studypublished in July by two major German development organisations, MISEREOR and Brot für die Welt, finds it is not the poor who benefit from coal power, but industry. Communities living in rural areas usually lack access to a grid feeding them with electricity sourced from coal-power plants, say the authors. Distributed renewables work much better, since they can be implemented locally and do not require access to an electricity network. “Only energy from sustainable and green sources contributes to poverty reduction,” they conclude.
Globally, such voices are starting to have an impact. As public discontent over state support for fossil-fuel energy has grown, development banks around the world have implemented lending guidelines limiting their coal activities and binding them to tight environmental standards.
Last year, the World Bank announced it would no longer finance coal plants except in rare and duly justified cases, and many of its peers, including the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), have followed suit. Last month, a US-led coalition of OECD member states proposed plans to require national export credit agencies (ECAs) to stop financing high-carbon projects.
If adopted, new principles like this would send a strong message not only to other development banks, such as KfW, but also to global markets, which are still betting against the ability of governments to place binding restrictions on greenhouse-gas emissions. WWF has pointed out that OECD coal support abroad is mainly provided by national export credit agencies and other public entities. By implementing measures to stop coal financing overseas, governments can close off a vital money channel for carbon-intensive industry.
Risks to investors
With governments starting to turn their backs on the coal industry, investors face tough questions about the impact of political action on their fossil-fuel based ventures.
The London-based Carbon Tracker Initiative warns that future restrictions on fossil-fuel burning could create a “carbon bubble”, where investors with assets in companies which continue to pour large amounts of money into fossil-fuel exploitation would see their wealth shrink to a fraction of its current value. Those non-performing assets, or “stranded assets”, could force down stock prices of portfolio companies in the oil, gas and coal sector and expose investors to billions of dollars in liabilities, potentially triggering another financial crisis.
A prominent example is China, the largest consumer of coal in the world and one of the most coal-dependent countries with a coal share of around 65% in overall national energy consumption. As policymakers take action to address environment-related risks, such as severe air pollution and water scarcity, points out a Carbon Tracker report on the country, economic dynamics in China are changing.
China, which accounted for 87% of global coal consumption growth in 2011, according to the US Energy Information Administration, is looking at ambitious targets to reduce carbon and energy intensity and use. This will have financial implications for its thermal coal sector, including slowing total power demand, says Carbon Tracker. Eventually, demand-side pressure could affect China’s main coal suppliers, such as Australia, and asset holders “through asset stranding”, it concludes.
Such risks have traditionally been poorly managed by the industry. Only recently have asset managers started addressing environment-related risks and tracking the carbon footprints of the portfolios they manage or aligning them with fossil-free benchmarks.
The KfW bank is in a very good position to address the financial and environmental implications and risks of carbon investment. The bank is running successful programmes to accelerate the energy transition in Germany, targeting energy efficiency, renewable energy deployment and green buildings. Yet, at the same time, it continues to finance international coal projects.
Giving loans to coal projects not only undermines the positive effects of KfW’s domestic and international low-carbon investments but sends an absurd signal to the rest of the world. It is hard to encourage emerging and coal dependent countries like China to phase out coal while the German development bank provides public funds for coal overseas.
The revamp of the German energy system is a key testing ground for the necessary transition to an economic development model that is compatible with the climate. If Germany can go down a low-carbon path at the same time as pursuing economic wellbeing, that will be hugely relevant to the rest of the world. Until it abandons fossil-fuel investment overseas, however, it will lack credibility as a low-carbon leader.