Biden Executive Order Can Help U.S. End Fossil Fuel Finance
President Biden’s Executive Order on Tackling the Climate Crisis at Home and Abroad has put the climate crisis front and center in US foreign policy and national security discussions. It has also put a spotlight on the need to end US support and financing for fossil fuels abroad. Here are key portions of the Executive Order related to finance and my thoughts on how the Biden-Harris Administration can move forward quickly to adopt an ambitious climate finance plan in terms of limiting fossil fuel financing.
Paris-Aligned Financial Flows: The Executive Order acknowledges that one of the three overarching goas of the Paris Agreement is having “financial flows aligned with a pathway toward low greenhouse gas emissions and climate resilient development.” This means that the U.S. commitment to Paris will also require Secretary Kerry to work with both public and private sector financial institutions at home and abroad to align global financial flows – since private banks are still providing hundreds of billions of dollars to fossil fuel projects and companies.
Major Economies Forum and Coal: President Biden also announced that the U.S. will reconvene the Major Economics Forum and pursue initiatives for “clean energy transition, sectoral decarbonization and alignment of financial flows with the objectives of the Paris Agreement, including with respect to coal financing.” The US helped drive some of the earliest restrictions on coal finance during the Obama-Biden Administration. This commitment to work with other major economics to restrict financing for coal could help eliminate several highly polluting coal plants that are planned in developing countries. Here are ideas on how to accelerate the global coal phaseout.
A Climate Finance Plan and Ending High-Carbon Investments: As part of the development of a new U.S. “climate finance plan,” the Secretary of State and Secretary of Treasury have been tasked with “promoting the flow of capital toward climate-aligned investments and away from high-carbon investments” and coming up with a plan within 90 days of the executive order. The Secretaries and Special Presidential Envoy for Climate John Kerry will be leading a process that will develop the more detailed plan for how to restrict fossil fuel financial flows -- in consultation with several US agencies, including the United States Agency for International Development (USAID), the United States International Development Finance Corporation (DFC), the Millennium Challenge Corporation, the United States Trade and Development Agency, and other agencies providing foreign assistance and development financing. We’ve listed some specific recommendations for these agencies on how to restrict financing for fossil fuels.
Climate-Related Financial Risk and Multilateral Institutions Furthermore, the Secretary of the Treasury is tasked with improving multilateral management of climate-related financial risks and making sure that multilateral financial institutions will be aligning financial flows with the Paris Agreement:
The Secretary of the Treasury shall:
(i) ensure that the United States is present and engaged in relevant international fora and institutions that are working on the management of climate-related financial risks;
(ii) develop a strategy for how the voice and vote of the United States can be used in international financial institutions, including the World Bank Group and the International Monetary Fund, to promote financing programs, economic stimulus packages, and debt relief initiatives that are aligned with and support the goals of the Paris Agreement.
We also have recommendations on the specific reforms that the US can promote within multilateral fora to achieve these goals.
Diplomatic Efforts to End Global Fossil Fuel Financing: Across several U.S. departments and agencies (State, Treasury, Energy, Exim, DFC, and others), the executive order calls for collaboration to identify steps to end international financing for fossil fuels – meaning that the U.S. will take a more proactive role with allies in ending fossil financing not only from the US government but from other global players. This is a much-needed reversal from the previous four years, when the U.S., Japan, and Australia partnered to promote fossil gas expansion in Asia and elsewhere.
The Secretary of State, the Secretary of the Treasury, and the Secretary of Energy shall work together and with the Export–Import Bank of the United States, the Chief Executive Officer of the DFC, and the heads of other agencies and partners, as appropriate, to identify steps through which the United States can promote ending international financing of carbon-intensive fossil fuel-based energy while simultaneously advancing sustainable development and a green recovery, in consultation with the Assistant to the President for National Security Affairs.
Scale Up Clean Energy Technologies: At the same time, the Executive Order makes clear that the US will continue to contribute to positive financial investments overseas, helping accelerate decarbonization worldwide by spurring innovation in clean energy technologies:
The Secretary of Energy, in cooperation with the Secretary of State and the heads of other agencies, as appropriate, shall identify steps through which the United States can intensify international collaborations to drive innovation and deployment of clean energy technologies, which are critical for climate protection.
Since a Climate Finance Plan shifting finance away from high-carbon investments must be delivered to the President within 90 days of the executive order, there’s no time to lose. The Treasury Department, Statement Department and Special Presidential Envoy for Climate and a host of agencies must put forward an ambitious set of recommendations. To make sure that the plan for ending fossil fuel finance is ambitious and fully aligned with the Paris Agreement, the plan must ensure that:
- Restrictions on financing for fossil fuels start immediately: the U.S. must demonstrate that we recognize the severity of the climate crisis and the need to limit financing for fossil fuel projects –immediately.
- Restrictions cover all forms of fossil fuels: While many restrictions during the Obama Administration focused on coal, the latest data on fossil gas (particular LNG and its high life-cycle emissions and methane leaks) makes clear that the US should not support gas projects. As Special Climate Envoy Kerry already indicated in a recent speech, gas projects will increase the risk of stranded assets. Worse, for developing economies, foreign debt for massive and unnecessary LNG projects could put huge strain on public debt in developing countries.
- The scope of restrictions must be comprehensive: As the EO already suggestions, ending financing for fossil fuels will be a whole-of-government effort. It must cover the role of not only agencies like EXIM and DFC (OPIC) providing hundreds of millions or billions of dollars in fossil fuel financing, but the role of USTDA in financing fossil fuel feasibility studies and trade missions, the role of embassies and trade offices in promoting fossil fuels, and even the practice of allowing fossil fuel companies like Chevron, ExxonMobil and BP to continue being some of the top contributors to USAID programs – which presents serious concerns about conflicts of interest.
- The scope of financing covered must be comprehensive: the restrictions should not only cover project loans, but also insurance and other forms of support. Within multilateral financial institutions such as World Bank or IMF, the plan must include a strategy to push for MDB restrictions on fossil fuel finance through financial intermediaries, broader aid packages, technical assistance packages, and other formats.
With this bold Executive Order and set of climate commitments announced just one week into the Biden-Harris Administration, it’s clear that they are ready to tackle the thorny issue of fossil finance and to help communities worldwide access truly clean and affordable energy. We look forward to seeing what comes next.