UK Export Finance Contents

3Energy transition

83.Energy transition is the process of moving energy production and supply from fossil fuels (coal, oil and gas) to low-carbon alternatives.143

84.The Committee received conflicting evidence on whether UKEF’s activities are supporting or hindering energy transition. For example, the Aberdeen and Grampian Chamber of Commerce told us that:

It’s clear that firms are transitioning, but that this transition is still in relative infancy, which requires ongoing support. UKEF’s continued support of exports in their current primary energy market will ensure that firms can sustainably direct resources towards an all energy, low carbon economy, while helping to meet the world’s energy needs in the immediate term.144

85.This view is supported by UKEF and Oil and Gas UK.145

86.However, ClientEarth have argued that UKEF’s support is delaying the transition to low-carbon energy by supporting fossil fuel projects that would not go ahead without UKEF’s support:

By improving the overall economic conditions of the UK fossil fuel sector, UKEF support serves to undermine the UK’s own transition to a low-carbon economy at a rate that is in line with its obligations under the Paris Agreement.146

87.Similar views were given by Both ENDS, The Elders, E3G, CAFOD, Tearfund, Global Witness, Oil Change International, the Stockholm Environment Institute, Carbon Tracker Initiative, ODI, the Abibiman Foundation and the UK Student Climate Network.

88.This chapter will set out some of the global pathways to limiting global heating to 1.5°C, and examine UKEF’s energy support in the context of the current direction of energy transition, achieving a just and sustainable transition, the timing of transition, and an international comparison to the behaviours of other Export Credit Agencies (ECAs).

Global pathways to 1.5°C warming

89.The Intergovernmental Panel on Climate Change’s Special Report on global warming of 1.5°C estimated that human activities have already caused 1.0°C of warming above pre-industrial levels.147 It found that global heating was likely to reach 1.5°C between 2030 and 2052 if it continued to increase at the current rate.148 The report examined emission pathways and system transitions consistent with 1.5°C global heating, and found that:

In model pathways with no or limited overshoot of 1.5°C, global net anthropogenic [man-made] CO₂ emissions decline by about 45% from 2010 levels by 2030 … reaching net zero around 2050.149

90.The report noted that reducing CO₂ emissions to limit global heating to 1.5°C could be achieved through “different portfolios of mitigation measures, striking different balances between lowering energy and resource intensity, rate of decarbonization, and the reliance on carbon dioxide removal.”150 The figure below shows four of these potential scenarios.

Figure 4: IPCC’s breakdown of contributions to global net CO₂ emissions in four illustrative model pathways

Source: IPCC, Global Warming of 1.5°C: Summary for Policymakers. AFOLU = Agriculture, Forestry and Other Land Use. BECCS = Bioenergy with Carbon Capture and Storage.

91.The IPCC note that these approaches “face different implementation challenges and potential synergies and trade-offs with sustainable development.”151 Both Professor Jim Skea and Professor Kevin Anderson cautioned against relying on “ heroic assumptions” around the effectiveness of negative emissions technologies, particularly bioenergy with carbon capture and storage (BECCS), and which are built into pathways 2, 3 and 4 above.152 Professor Anderson told the Committee:

You have to hold the view that technologies that do not exist will work in the future at between one and four times the size of the current fossil fuel industry to remove the carbon dioxide from the atmosphere. The levels assumed in most of the models range from, not uncommonly, 300 billion tonnes—so very approximately 10 times current total global emissions—up to about a trillion tonnes [for pathway 4].153

92.The IPCC report also warned that:

Future climate-related risks depend on the rate, peak and duration of warming. In the aggregate, they are larger if global warming exceeds 1.5°C before returning to that level by 2100 than if global warming gradually stabilizes at 1.5°C, especially if the peak temperature is high (e.g., about 2°C) (high confidence). Some impacts may be long-lasting or irreversible, such as the loss of some ecosystems.154

93.The IPCC report found that limiting global warming to 1.5°C would require “rapid and far-reaching transitions” in energy systems (amongst others), that were “unprecedented in terms of scale but not necessarily in terms of speed, and imply deep emissions reductions in all sectors, a wide portfolio of mitigation options and a significant upscaling of investments in those options.”155 The pathways with no or limited overshoot of 1.5°C predict that renewables would need to supply 70–85% of electricity; gas with carbon capture and storage supply approximately 8%, and coal close to 0% by 2050.156

UK Export Finance and energy transition

94.UKEF have emphasised that their support does have a role in the transition to a low carbon economy.157 Baroness Fairhead emphasised that the IPCC report says that “there will be a transition required and that for the foreseeable future there will need to be fossil fuels as part of the industry.”158 She argued that while UKEF would “love to offer more support to renewables, the reality is that we have a private sector market that is perfectly able to support a lot of that.”159 Guto Davies told the Committee that UKEF’s support for gas will continue to play a role in energy transition:

I do not think it is in any forecast today that gas will not play some kind of baseload capability within the generation mix moving forward.… It is a transition that cannot happen overnight and there are some economies that do not have the capability to run other fuels in order to generate power.160

95.However, Both ENDS have noted that the size of UKEF’s support for fossil fuels, particularly in developing countries, indicates that UKEF “appear[s] to be a principal impediment to the economic feasibility of an energy transition that effective climate policies are calling for.”161 The Overseas Development Institute has claimed that “prolonging the life of outdated infrastructure such as coal mines, coal- and gas-fired power stations, oil refineries and related energy transmission systems that ongoing support for fossil fuel infrastructure, increases the risk of higher transition costs in the future.”162 Ban Ki-moon, former UN Secretary-General, has argued that “if the UK takes these necessary steps, it can be at the forefront of the transition to a low-carbon economy,”163

Timing of transition

96.One confidential contribution from the energy sector acknowledged that the oil and gas industry is already in transition towards cleaner energy growth, but states that:

It takes time to transition fully, whether as an economy, an energy infrastructure, a commercially affordable technology, and in terms of skills and academia, so a reasonable time for transition is required. This will take decades, not single digit years.

“Meanwhile, the global demand for oil is forecast to grow for the next 15 years, not shrink.164

97.However, Professor Anderson argued that a business-as-usual approach is not an option:

[The future] will be radically different from where we are now if we are going to solve climate change, and, if not, it is going to be radically different because of climate change.165

98.Christian Aid argued that in support for exports the UK is “lagging behind” the Swedish ECA, SEK, and also the World Bank Group, which stopped investing in upstream oil or gas in 2019.166 Baroness Brown of Cambridge, Deputy Chair of the CCC, told the BEIS committee about the benefits of being a leader rather than a laggard in moving further and faster than other countries to reduce emissions:

There are also so many benefits for us. There are benefits for our industry. We are going to see the benefits of being early into offshore wind. We can see benefits that is already delivering and the benefits it is increasingly going to be delivering to jobs in our coastal communities. We are also hoping to build exports on the basis of that. We will be making again, as we were at the time of the industrial revolution, and developing again the technologies that the rest of the world wants to buy.167

A just and sustainable transition

Achieving a just and sustainable transition within the UK

99.Baroness Fairhead emphasised the number of UK jobs that are dependent on the oil and gas industry:

We have over 300,000 people whose jobs depend on this industry. That is already down because of the oil price and the recognition of the climate change agenda by 160,000 people.168

100.Oil & Gas UK,169 Aberdeen & Grampian Chamber of Commerce and another contributor to the inquiry have argued that the UK’s energy sector needs to continue to prosper in its fossil fuels activities to strengthen its ability to diversify into renewables and low carbon businesses as the energy transition impacts the UK and rest of the world.170 Aberdeen & Grampian Chamber of Commerce expressed concerns that:

Reducing [UKEF] support could damage the competitiveness of the supply chain in our region and across the UK. Failing to secure this supply chain won’t just have damaging impacts for our economy, it potentially risks the energy transition within the UK too.171

Notably, businesses supported by UKEF do not have to be UK-based companies. UKEF’s policy is that it will support projects that will procure a minimum of 20% of content from the UK supply chain.172

Witnesses and scientific evidence show that jobs and energy opportunities are opening up in the low-carbon and renewables sector. As highlighted above, these are most available to those countries whose industries are able to adapt quickly. UK Clean Growth Strategy notes that the UK’s low carbon economy already supports over 430,000 jobs directly and through supply chains, and attributes the growth in high value jobs, industries and companies to technological innovation and investment.173 The CCC report gives the example of the Government’s Offshore Wind Sector Deal, which is set to increase jobs in the offshore wind industry alone from 7,200 in 2019 to 27,000 in 2030, “much of this relating to growth in manufacturing and exports.”174

101.Research from Platform, Oil Change International and Friends of the Earth Scotland has found that “given the right policies”, job creation in clean energy industries “could exceed oil and gas jobs more than threefold”, between now and 2050.175

102.Similarly, Professor Skea emphasised the importance of ambitious investing in securing a green energy transformation:

The key point within the different pathways and different levels of ambition is the more ambitious you are, the less you invest in fossil fuel extraction and, say, coal-fired power stations, and the more you need to invest in renewable energy, especially wind and solar, and demand-side measures—so improving energy efficiency. That is a very robust conclusion from the modelling. All the models agree on that.176

Achieving a just and sustainable transition internationally

103.UK Export Finance claims to be supporting transition internationally, by facilitating gas energy projects, which have lower emissions profiles than other fossil fuels. Louis Taylor highlighted a UKEF-supported offshore oil and gas field, which he emphasised “will help reduce CO₂ emissions because the gas that is piped ashore and burned in power stations will obviate the needs for hundreds of diesel generators that will pollute far more than gas.”177

104.However, while this project did reduce emissions compared to diesel generators, it has still received criticism for locking Ghana into higher-emission energy generation than a renewable alternative. The Abibiman Foundation, an NGO dedicated to the promotion of sustainable livelihoods in Ghana, used the same support as an example of UKEF’s failure to invest in “renewable energy to promote a just energy transition” and called on UKEF to “stop supporting fossil fuel projects in Ghana.”178 The Overseas Development Institute claims that this type of investment by UKEF contributes to “carbon lock-in that commits countries to polluting energy systems and increases the risk of stranded assets.”179

105.As the UK continues to transition to low-carbon energy domestically, the Elders have expressed their concerns that the UK’s fossil fuel energy industry may exploit other markets with less stringent restrictions overseas, essentially “exporting their emissions”.

International comparison

106.Research by Friends of the Earth, Oil Change International and WWF suggests that UKEF has considerably less low carbon business in its energy portfolio than its G20 ECA peers.180 That analysis showed an average renewable share of 7% in those ECAs’ energy portfolios over 2013 to 2015, compared with 0.3–0.5% for UKEF.181182

107.UKEF explain it has identified the low carbon economy “as a priority in its 2017–2020 Business Plan.”183 It explains that “Notwithstanding the support available from the private sector, UKEF has taken steps to position itself to support a greater number of renewable energy exports. UKEF has recruited specialists in renewable energy across its business development, underwriting and ESHR teams. UKEF has also engaged with a wide range of trade associations which support the renewable sector in order to increase awareness of the availability of its support to the sector.”184

Notable emissions policies among other ECAs

108.Over 190 countries have signed the UN’s Agenda 2030 that contained a commitment to phase-out inefficient fossil fuel subsidies.185 No ECA has yet banned all fossil fuel support, but Sweden’s Export Credit Corporation (SEK) appears to have come closest. SEK’s Annual Report and Accounts 2018 report that:

Risk appetite

Lending for coal-fired power is not permitted. In exceptional cases, loans may be offered if they are aimed at environmental improvement measures. Gross lending to fossil fuel operations (coal, oil and gas) should be less than 5 percent of SEK’s total lending.

2018 Outcome

There was no new financing of coal-fired power. Total gross lending to fossil fuel operations is less than 1 percent.186

109.SEK also joined the government’s “Fossil Free Sweden” initiative to “promote the mobilisation of capital for environmental projects to make the country fossil free,” and collaborates with other public agencies to develop competitive financial offerings to the Swedish export industry with a particular focus on sustainable urban development.187 This includes for example, exports to the 100 smart cities that are planned to be constructed in India over a 20-year period.188

110.In January 2019, Canada’s ECA, Export Development Canada (EDC), introduced a new Climate Change Policy. The policy commits EDC to measuring, monitoring and disclosing climate-related risks and opportunities, integrating climate change considerations into business decisions, and encouraging partners to do the same.189 While this does allow for some continued investment in oil and gas (but not coal opportunities) it represents “a much more systematic and transparent approach to all sectors, including enhanced awareness and tracking of carbon intensity to factor climate change into EDC’s established risk assessment processes.”.190

Competition between ECAs

111.While some ECAs, such as Canada and Sweden, have taken more action than other ECAs, written evidence from the oil and gas industry warned against the risks of UKEF acting unilaterally. Oil and Gas UK highlight that UKEF’s support makes a significant contribution to the oil and gas supply chain value, which is “considered vital” by their members, and warn that there is competition to invest in overseas energy projects.191 For example, they claim that “around a third of African coal-fired plants built between 1996 and 2016 were constructed by Chinese contractors, the majority with Chinese funding,” and that “should UKEF choose not to finance such projects then the global investment market would likely back them regardless.”192

112.However, in the context of the UK’s professed global climate leadership, UKEF has been criticised for its support for fossil fuels. Both Ends said that “the scale of UKEF support for fossil fuel-related transactions does not match British leadership in international efforts to combat climate change.”193 WWF, reporting on ODI research, emphasise that France outperforms the UK on almost all criteria, including ending coal support for coal mining and support for oil and gas and fossil fuel-based power.194 Written evidence by Anna Markova from Platform highlighted that

UKEF provides proportionately more support to fossil fuel companies in its energy portfolio than its G20 peers (on average the proportion of renewables projects among energy portfolios of G20 export credit agencies was 7% between 2013–2015).195

113.UKEF figures from the same period (2013/14 to 2014/15) shows that renewables made up 0.3–0.5% of UKEF’s energy portfolio (approximately £3-£4 million support for renewables out of £858 million support for all energy projects).196

Opportunities for the UK’s global leadership

114.Navraj Ghaleigh, Senior Lecturer in Climate Law at the University of Edinburgh, claimed that “the need for new institutions and standards is growing.”197 In his written evidence for this inquiry, he said:

The trajectory of the phase out of export credits for fossil fuel-related transactions by ending the support for new fossil fuel extraction should be expanded to transportation and processing infrastructure projects. This would be a logical progression of the 2015 OECD rules limiting export credit support for new coal-fired power plants.198

115.Oil Change International has pointed out public finance institutions’ role as “thought leaders”:

They play a central role in supporting and de-risking large fossil fuel infrastructure projects via concessional finance (lending with more favourable terms than on the competitive market). They also send key signals to the broader financial community, making shifting public finance a crucial early step on the road to more broadly aligning financial flows with the Paris Agreement’s aims.199

116.UK Export Finance has already taken a leadership role in some areas that are not related to climate change. The Export Guarantees Advisory Council’s 2016–17 Annual Report “welcomed” UKEF’s work on gender, and “advised that UKEF could take a leadership role in this area amongst ECAs and project sponsors, by emphasising the positive benefits of gender equality and raising gender issues with project sponsors and exporters at early stages of the projects.”200

117.Most of UKEF’s support to UK businesses undermines the UK’s climate commitments. UKEF is a thought leader and plays a key role in de-risking projects, so aligning its support with national and global climate goals is a key step to aligning UK and international financial flows with the Paris agreement. UKEF should commit to only support British businesses in projects that support the UK’s climate goals. Where it is supporting a new energy project, UKEF should show how this supports transition to a low-carbon energy system and aligns with net zero emissions by 2050. Projects supported by UKEF should be able to demonstrate that they have considered a range of potential lower-carbon and renewable options, and that they have selected the option with the lowest feasible emissions. In so doing UKEF should state how its strategy will support a ‘just transition’ to workers in the UK who currently benefit from its support, and how this approach will support decent work in the areas affected.

118.We note that meeting the Paris goals requires most existing fossil fuel reserves to be left in the ground, including gas. We recognise that some fossil fuel use for will still be required, even in a net-zero emissions world with warming limited to 1.5°C. However, numerous scenarios show that 100% renewable energy is feasible and desirable. Fossil fuels are therefore not required and should be phased out as quickly as possible. Substitution between fossil fuels in the short term (for example, from coal to gas) can improve access to energy while reducing carbon emissions flow, but this is not enough to guarantee a limit of 1.5°C warming. Moreover, this approach risks future stranding of assets or locking low- and middle-income countries into dependency on high-carbon pathways at a time of growing energy demand and when renewable alternatives are feasible and inexpensive. In the period until UKEF ends support for new fossil fuels (end of 2021) it should always explain publicly on its website why it has chosen to support a fossil fuel project, why lower-carbon alternatives were not pursued, how the project is contributing to energy transition, and what mitigating actions have been taken.

119.While the UK claims to be a climate leader, other ECAs have taken a stronger stance on phasing out support for fossil fuels, for example, Sweden’s Export Credit Corporation (SEK). The SEK have set a cap of no more than 5% of their lending to go to fossil fuels and in 2018 less than 1% of their support was for fossil fuels. UKEF’s support for fossil fuels is closer to 20%. Moreover, UKEF’s G20 ECA peers gave an average of 7% of support from their energy portfolios to renewables over 2013 to 2015, compared to 0.3–0.5% by UKEF over a similar period. UKEF should review its energy policy, as it did after the 2015 Paris Agreement, to ensure that it demonstrates climate leadership in responding to current knowledge of climate risks. We recommend that UKEF’s fossil fuel investment should finish by the end of 2021. At the very least, UKEF should follow Sweden’s Export Credit Corporation (SEK) in introducing a 5% cap on gross lending to fossil fuel operations (coal oil and gas) as a proportion of total support. As with the UK’s domestic carbon budgets, this cap should progressively reduce in size, and should align with supporting net-zero emissions by 2050.

120.There are huge benefits to being early movers in the transition to the low-carbon energy. By focusing on transition-related technologies, the UK has the potential to make and develop the technologies that the rest of the world wants to buy. UKEF returned £500m to the Treasury in the last 5 years. Noting that key technologies to achieve net-zero emissions are still to be developed fully, we recommend that Treasury ringfences at least 20% of money returned by UKEF from all historic category A (highest risk to environment) projects as well as all projects with forecast emissions of more than 25,000 tonnes of CO₂ equivalent per year, for at least the next ten years. This money should be invested into renewable energy and low-carbon transition research and development.

143 Carbon Tracker Initiative (EXF0010)

144 Aberdeen and Grampian Chamber of Commerce (EXF0025)

145 UK Export Finance (EXF0009), Oil & Gas UK (EXF0013)

146 ClientEarth (EXF0030)

147 IPCC, Global Warming of 1.5°C: Summary for Policymakers, (2018), p.6

148 Ibidem.

149 Ibid., p.14

150 Ibidem.

151 Professor Jim Skea, Q7 and Q11; and Professor Kevin Anderson, Q10

152 Professor Jim Skea, Q7 and Q11; and Professor Kevin Anderson, Q10

153 Professor Kevin Anderson, Q10

154 IPCC, Global Warming of 1.5°C: Summary for Policymakers, p.7

155 IPCC, Global Warming of 1.5°C: Summary for Policymakers, p.17

156 Ibidem.

157 UK Export Finance (EXF0009)

158 Baroness Fairhead, Q238

159 Ibidem.

160 Guto Davies, Q174

161 Both ENDS (EXF0005)

162 Overseas Development Institute (EXF0004)

163 Ban Ki-moon, “UK must stop investing in fossil fuels in developing countries”, The Guardian, (2019), [date accessed: 13/05/2019]

164 Confidential written evidence

165 Professor Anderson, oral evidence, Q37

166 Christian Aid (EXF0016)

167 Baroness Brown of Cambridge, Oral evidence to the Business, Energy and Industrial Strategy Committee, Clean Growth Strategy and International Climate Change Targets, Q220

168 Baroness Fairhead, Q239

169 Oil & Gas UK (EXF0013) 4

170 Oil & Gas UK (EXF0013), Aberdeen and Grampian Chamber of Commerce (EXF0025), and confidential written evidence

171 Aberdeen and Grampian Chamber of Commerce (EXF0025)

172 Louis Taylor, Qq216–217

173 HM Government, The Clean Growth Strategy: Leading the way to a low carbon future, (October 2017, amended April 2018), p.25

175 Platform, Oil Change International and Friends of the Earth Scotland., “Sea Change: Climate Emergency, Jobs and Managing the Phase-out of UK Oil and Gas Extraction”, (2019)

176 Professor Jim Skea, Q8

177 Louis Taylor, Q235

178 Abibiman Foundation (EXF0035)

179 Overseas Development Institute (EXF0004)

180 Friends of the Earth, Oil Change International and WWF, Financing the Climate Disaster: How Export Credit Agencies are a Boon for Oil and Gas (October 2017)

181 Ibid.

183 UK Export Finance (EXF0009)

184 Ibid.

185 United Nations, Paris Agreement, (2015), SDG 12.c

186 Swedish Export Credit Corporation (SEK), Annual Report 2018, (2018), p.41

188 Ibidem.

189 Export Development Canada (EDC), Export Development Canada releases new Climate Change Policy, January 2019

191 Oil & Gas UK (EXF0013)

192 Ibid.

193 Both ENDS (EXF0005)

194 WWF (EXF0007)

195 Platform London (EXF0006)

196 Calculated from written evidence by UK Export Finance (EXF0028)

197 Navraj Ghaleigh (EXF0019)

198 Ibid.

199 Oil Change International (EXF0017)

200 Export Guarantees Advisory Council (EXF0023)

Published: 10 June 2019