EU and UK ban foreign fossil fuel project subsidies

According to sources familiar with the issue, the UK and EU are pushing the richest countries in the world to stop subsidizing foreign oil and gas production and coal mining. This will happen at a closed door OECD meeting scheduled for next month.

At the , OECD headquarters in Paris, the proposal to cut the largest foreign source of funding for fossil fuels will likely spark heated discussions.

This move is based on a commitment made by some OECD member countries to align their public finance institutions to the Paris Agreement goals of limiting global warming to 2C or less, and ideally to 1.5C over preindustrial levels.

The effort to stop subsidies for foreign projects is likely to draw attention to domestic subsidies in the oil and gas industry, even though a global agreement that would end fossil fuel production with no emissions being captured at the upcoming UN COP28 summit seems increasingly unlikely.

Nina Pusic is an export finance climate specialist at Oil Change International, a US environmental campaign group. She said that ending the provision of loans and guarantee by export credit agencies for fossil fuel projects was “an essential step in keeping our international climate targets within reach”.

According to OCI, the export credit agencies of OECD countries spent an estimated 411bn per annum to support coal, oil, and gas projects from 2018 to 2020. This is nearly five times more than their support for renewable energy.

The biggest beneficiaries of aid during this period, besides Mozambique and the UAE, were developed countries such as Canada, Russia, and the UAE.

In 2021, rich countries will stop subsidizing coal-fired power generation in other countries. This type of OECD agreement can “have a catalyst effect on the clean energy transformation”, Pusic said.

This move is also a result of a commitment made by several member states, including the UK and Canada.

The Paris Agreement and other agreements that are “consistent with” the Paris Agreement will be considered in cases where emissions are captured or projects can be supported.

At Glasgow, the governments also agreed to encourage bodies like the OECD and Multilateral Development Banks to update their governance structures to align them with Paris Agreement goals.

Changes to the OECD arrangement on export credit would be voluntary. The agreement would also need the consent of a group that included major fossil fuel financiers who did not support the Glasgow pledge such as Japan and South Korea.

The signatories would be urged to limit the financing of fossil fuels by their export credit agencies abroad.

In May, directors of the US Export Credit Agency Exim voted to provide almost $100mn for fuel efficiency and safety improvements, as well expansions at an Indonesian oil refining plant. In July, they voted to approve credit for commodity trader Trafigura to purchase US liquefied gas to export to Europe.

Exim stated that these decisions would support over 12,000 jobs in America, by increasing sales of oil and gas. It did not reply to a comment request.

Louise Burrows who is responsible for climate and energy diplomacy at the Beyond Oil and Gas Alliance, a group of governments that includes France and Denmark, stated the OECD discussion would be a useful “forcing mechanism” to begin having conversations with laggards.

According to people close to UK Export Finance (Britain’s credit agency), Canada has committed to supporting the UK’s proposed proposal to the OECD before the meeting next month. Canada’s Finance Department said that it was looking forward to working with like-minded partners in the OECD, and other international forums, to promote and grow the clean economy throughout the world.

According to a person with knowledge of the issue, the EU has made its own proposal after member states had agreed on a proposal draft last month. The EU did not comment.

The bloc has made a concerted effort to stop supporting oil, coal and gas.

The EU’s negotiating mandate, which was agreed on by the bloc’s climate ministers in this month, states that it will “call for a phase-out as soon as possible” of fossil fuel subsidies, as they do not address either energy poverty or transition.

Wopke Hekstra, the new EU climate chief, has called fossil fuel subsidies “outdated and unproductive”.

In a report released last week, however, the European Commission stated that the total amount of fossil fuel subsidies within the EU had “surging” during the 2022 energy crisis to reach €122bn after being roughly stable at €56bn in the previous year. It said that “Member states must accelerate their efforts to eliminate fossil fuel subsidies.”