7—Memorandum
submitted by Plan B
SUMMARY
Domestic and international energy policies are
undergoing profound reviews in response to climate change and
energy security issues. The public will look to government for
a strong lead in the coming years in developing a low-carbon economy.
DFID support for the oil industry developed
beforethe current scientific consensus on climate change and subsequent
targets for reduced carbon dioxide emissions. It developed in
a time when oil supplies seemed mote secure than they do now.
Historically, aid for oil companies has most often undermined
economic and social conditions in developing countries with oil
reserves.
This memorandum highlights the incoherence of
DFID support for the oil industry with the following three aspects
of government policy. Aid for the oil industry works against:
1. national and international policies to
reduce carbon emissions;
2. DFID's progress on the Millennium Development
Goals;
3. developing energy security through locally-produced
renewable energy.
1. DFID support for the Oil Industry works
on three levels:
1.1 Providing Financial Contributions:
This includes direct funding to oil corporations, through
bilateral and multilateral grants, loans and credit guarantees;
forgoing government revenue, due from oil corporations; providing
goods and services to oil corporations.
For example, from 2000-03, DFID provided a grant
of £0.6 million for a project entitled "Assistance with
Oil Taxation Reform"[13].
The report recommended to the Russian government that it slash
its taxes on oil extraction, which, if accepted, would mean that
the Russian government would lose considerable potential for revenue[14].
1.2 Providing General Infrastructure:
Infrastructure investment to service oil corporation activity;
for example in roads or power supply.
1.3 Providing a free ride (externalities)
Communities and societies in developing countries absorb the
cost when oil corporations generate impacts from climate change,
local pollution and adverse socio-economic impacts.
- DFID aid for oil corporations is incompatible
with efforts to reduce CO2 emissions
-
| Box 1. Once in full production, the Baku-Tbilisi-Ceyhan pipeline will transport 365 million barrels of oil. When burnt this will produce 160 million tonnes of CO2 each year. This is equal to the pollution from every power station in the UK (163 million tonnes CO2). Some Common Concerns, Platform Research March 2005.
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2.1 The impacts of climate change resulting from oil
and gas development are already being felt by the poorest and
most vulnerable people worldwide, and are likely to undermine
decades of development. DFID told the Stern Review that the "mitigation
of greenhouse gases poses a fundamental equity problem."
2.2 While the UK Energy Review and the World Bank's Clean
Energy Investment Framework refer to incentives for clean renewable
energy alternatives, DFID has yet to develop a policy framework
to promote sustainable energy supply.
2.3 DFID rejected the recommendation of the World Bank's
"Extractive Industries Review" to phase out funding
for fossil fuels by 2008 and increase funding for renewable energy
by 20% annually.
2.4 Continued support for expansion in the oil industry
undermines efforts in developing countries to develop or sustain
low carbon economies. "Subsidies for fossil fuels remain
a serious constraint to improving the financial viability of renewables".
(World Bank Clean Energy Investment Framework 2006) DFID is well
placed to improve support decentralised, small scale renewable
energy technologies in low-middle income countries.
Box 2. Fossil fuel technologies are often only "cheaper" than renewables and more readily available because they have for years, been supported by the financial feather-bedding of massive government subsidies. A shift of investment towards clean renewables will both improve and save millions of lives in the majority world. NEF, 2004 The price of power; poverty, climate change, the coming energy crisis and the renewable revolution.
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3. Extractive Industries and the Natural Resource Curse
While development aid for oil is often justified in terms
of host countries' energy needs, in reality oil is extracted primarily
for export to industrialised countries rather than bringing energy
to those in poor and remote areas who need it most. Indeed, the
energy needs of the poor can better be met through renewable energy
technologies, which are smaller-scale, less subject to price swings
and do not pollute.
3.1 The resource curse; this describes the fact
that the more dependent an economy is on natural resource exports,
the worse its economic performance will be over the long term[15].
The Extractive Industries Review (EIR) of the World Bank, noted
that between 1970 and 2000 the number of petroleum-rich states
with disappointing outcomes in terms of economic growth and poverty
alleviation far outweighed the number of successful outcomes.[16]
3.2 The Chad-Cameroon pipeline was meant to be a model
for how oil projects can be effectively developed, with the World
Bank claiming that the project "is designed to carry oil
wealth not to a few, but directly to the poor".[17]
Despite high levels of corruption, weak institutions and recent
conflict, the WB believed that the project could go ahead by introducing
governance measures in parallel with the oil development. The
Bank has recently admitted that this approach has not worked.[18]
3.3 The Extractive Industries Review of the World Bank
recommended the principle of "sequencing" governance
and investment. Good governance is a necessary precondition for
the achievement of positive outcomes in both private and public
sector development. The recommendation of the EIR stated that
the WBG should focus first on supporting the development of such
governance mechanisms, and only support extractive industries
once those structures are in place.
- Providing development aid support for oil and gas projects,
without a coherent policy structure for measuring the impact of
such developments against agreed development baselines such as
the Millennium Development Goals[19],
has undermined the goal of working for long-term sustainable development.
-
Box 3. The world's oil, gas and mining industries account for nearly two-thirds of all violations of human rights, environmental laws and international labour standards. The extractive industries also account for most allegations of the worst abuses, up to and including complicity in crimes against humanity.
Interim report of the Special Representative of the UN Secretary-General on the issue of human rights and transnational corporations and other business enterprises, February 2006.
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4. Energy Security: improving energy security through
clean, locally produced renewable energy
4.1 In parallel with limits to carbon emissions, the
political and practical limits to oil supply are being debated
in public and scientific spheres. Peak oil (the point at which
oil production rises to its highest point before declining) at
the global level is a real possibility within our lifetimes. Almost
all expert opinion agrees that it is possibly within five to 15
years. The government uses International Energy Agency estimates
of 30-40 years, but these are predicated on a stable geo-political
environment.
4.2 Whatever scenario one uses, oil is set to become
an ever more volatile commodity. International development policy
should help improve energy security for the poor while mitigating
its effects on climate change. In this context, continued DFID
support for the oil industry is untenable.
RECOMMENDATIONS FOR
DFID
4.3 In recognition of the negative impacts of oil extraction
on poverty alleviation, DFID should phase out, over a limited
timeframe, all bilateral development aid for the oil industry.
4.4 Whilst this phase out is implemented, DFID should
rigorously assess the poverty alleviation and sustainable development
impacts of overseas development aid for the oil industry. DFID
should evaluate existing bilateral grants, and where possible
use its influence to improve their poverty alleviation impact.
4.5 In order to assist the Government's goals of reducing
greenhouse gas emissions worldwide, DFID should formulate a strategy
to address the causes of climate change to augment its strategy
for adaptation. This must involve proactive promotion of a low-carbon
development model, delivered through a coherent strategy of support
for sustainable renewable energy provision in developing countries,
including timings and targets.
4.6 DFID should use its vote on specific projects and
policies in line with those recommendations—specifically,
denying investment approval in the absence of adequate institutional
and governance capacity or of free prior informed consent of indigenous
peoples, voting against financing of oil projects after 2008,
and using its influence to argue for a phaseout strategy.
| Box 4. Global subsidies to the power sector have been estimated to exceed $200 billion per year prior to the increase in energy prices since 2003. In many countries subsidies are broad-based, rather than targeting the poor who may need the income support. As a result, price signals for energy use induce sub-optimal decisions regarding technology, further exacerbating the problem. Low consumer prices also undermine the financial viability of power companies, leading to high loss levels in their networks (typically in the 20-40% range compared to about 7% in OECD countries), poor maintenance of existing assets, and compromises in technology selections for new investments.
World Bank Clean Energy Investment Framework 2006.
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5. Recommendations for the International Development Select
Committee
5.1 The International Development Select Committee should
carry out an investigation into the positive and negative impacts
of DFID's support for oil development on poverty, climate change
and energy security, including its participation in the Foreign
and Commonwealth Office's "energy security" strategy
and the US-UK Energy Dialogue.
July 2006
13
National Economic Research Associates, AUPEC Ltd, Independent
Fuel and Energy Institute/Vanguard, 2002, Russia: Oil Tax Reform-Phase
2 Extension Final Report, Summary. Back
14
For further information, see page 7 of Pumping Poverty, Britain's
Department for International Development and the oil industry.
2005 Platform Research. Back
15
Sachs, J and Warner, A. (1997) Natural Resources and Economic
Growth. Revised version. Harvard Institute for International Development
Discussion Paper. Back
16
The World Bank (2003) Extractive Industries and Sustainable Development:
An Evaluation of World Bank Experience. Washington DC. Back
17
World Bank press release, 10 October 2003, "Chad-Cameroon
Pipeline Represents New Approach" an interview with Country
Director All Khadr on the start of oil production in Chad. Back
18
Further information on the Chad-Cameroon Pipeline project is available
on p 10 and 25 of Pumping Poverty. Back
19
For an analysis, see Table 3: The local impacts of oil production
on achievement of the Millennium Development Goals, p 27, Pumping
Poverty. Back
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