The World Bank and Paris Alignment: An Analysis of Energy Financing in the Global South
Introduction
As the world grapples with the urgent need to combat climate change, international financial institutions like the World Bank are under increasing scrutiny regarding their role in financing energy projects. The World Bank’s recent commitment to align its projects with the goals of the Paris Agreement marks a significant shift in its approach to energy financing. However, a new briefing from the Bretton Woods Project (BWP) raises critical questions about the implications of this alignment, particularly for countries in the Global South. This article delves into the findings of the BWP’s analysis, exploring the concept of Paris alignment, the nature of energy financing in fiscal year 2024, and the potential consequences for borrowing countries.
Understanding Paris Alignment
On June 30, 2024, the World Bank celebrated one year of aligning its projects approved by the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD) with the Paris Agreement’s climate goals. This alignment is intended to ensure that the Bank’s financing supports efforts to limit global warming and transition to sustainable energy sources. However, the BWP’s briefing suggests that this alignment may come with significant strings attached, particularly in the form of "green conditionalities" imposed on borrowing countries.
Key Findings from the BWP Briefing
The BWP’s analysis reviewed all 71 energy and extractives projects financed by IDA and IBRD in fiscal year 2024. The findings reveal a notable shift in the Bank’s energy financing strategy. Development Policy Financing (DPF), which provides budget support contingent on policy reforms, has emerged as the dominant financing instrument, overtaking Investment Policy Financing (IPF), which funds specific projects. In fact, 38 of the 71 energy projects approved during this period were DPFs, accounting for approximately $13 billion of the total $19 billion committed to energy sector lending.
Green Conditionalities and Their Implications
The briefing highlights that the Bank’s approach to Paris alignment is being utilized to impose green conditionalities on borrowing countries, particularly in the Global South. These conditionalities often involve restructuring energy sectors to facilitate private sector-led transitions, which may include privatization, liberalization, and modifications to regulatory frameworks aimed at de-risking private investments. While these measures are intended to promote renewable energy, the reality is that only $2.34 billion—just 12.3% of total energy financing—was allocated to renewable energy projects across nine direct investment projects.
This raises significant concerns about the effectiveness of the Bank’s private sector-led approach. In many countries where the Bank operates, private investments in renewable energy have not materialized at the scale necessary to meet global climate goals. Furthermore, the shift towards privatization and liberalization often places financial burdens on citizens and governments in low- and middle-income countries, undermining the prospects for a just transition.
The Need for a Transformative Approach
Given the challenges highlighted in the BWP briefing, it is clear that the World Bank must reevaluate its approach to align more effectively with the Paris Agreement. The briefing outlines several recommendations for achieving this transformation:
-
External Review of the Private Sector Approach: An independent, expert-led review should be conducted to assess the Bank’s private sector-led strategy for the energy transition. This review should focus on creating the necessary fiscal and policy space for genuine green transformation in the Global South.
-
Increased Civil Society Participation: It is crucial to involve national trade unions and civil society organizations in discussions about green transition policies. Their engagement in the World Bank’s Country Climate and Development Reports (CCDRs) can help build support for sustainable energy initiatives.
- Enhanced Transparency: The World Bank should publicly disclose proposed policy changes aimed at decarbonizing energy sectors via DPF well in advance of board discussions. This transparency would allow for greater public and parliamentary scrutiny of the Bank’s green conditionalities.
Conclusion
The World Bank’s alignment with the Paris Agreement represents a pivotal moment in the global effort to combat climate change. However, as the BWP’s analysis reveals, the implementation of this alignment raises significant concerns about the imposition of green conditionalities on borrowing countries, particularly in the Global South. To ensure that the transition to sustainable energy is equitable and effective, the World Bank must adopt a more inclusive and transparent approach that prioritizes genuine green transformation over private sector interests. Only then can we hope to achieve the ambitious climate goals set forth in the Paris Agreement and foster a just transition for all.
For further insights and detailed analysis, access the full briefing from the Bretton Woods Project here. For inquiries regarding this research, please contact Jon Sward, Environment Project Manager at jsward@brettonwoodsproject.org.