UK Export Finance Contents

Conclusions and recommendations

UK Export Finance’s support for the energy industry

1.Although UK Export Finance’s (UKEF’s) support to UK businesses in the energy sector is demand-led and makes up just 0.02% of global oil and gas investment, UKEF’s support “de-risks investments” and “sends a clear signal” to the wider investment market, attracting further finance to the projects which it chooses to support. Changes to UKEF’s climate-related practices would have significant symbolic and real-world value as evidence of the UK’s leadership on tackling climate change. UKEF have already shown some willingness to address climate concerns by phasing out coal support (through the Powering Past Coal Alliance), following consultation, after the 2015 Paris Agreement. (Paragraph 76)

2.UKEF’s support for fossil fuel energy projects is unacceptably high, particularly in low- and middle-income countries. UKEF gave £2.6 billion to support the energy sector between 2013/14 and 2017/18. Of this, 90% (£2.4 billion) went to fossil fuel projects in low- and middle-income countries. While there has been an increase in the proportion of support given to renewables projects in high-income countries, this is not reflected in support to low- and middle-income countries. In 2017/18, renewables made up 96% of UKEF’s energy support to high income countries, compared to just 0.6% of energy support to low- and middle-income countries. Low- and middle-income countries are due to see the greatest increase in energy demand over the coming years. Supporting fossil fuel energy infrastructure in these areas risks stranded assets or “locking in” reliance on fossil fuel energy production for decades to come. (Paragraph 77)

3.A small number of UKEF’s projects help the transition from high-emission fossil fuels to lower-emission fossil fuels, such as oil and gas. However, the scale of UKEF’s contributions to fossil fuel projects, particularly in low- and middle-income countries, provides an adverse incentive to the energy industry, expanding an international fossil fuel market at a time when Parliament has announced a climate emergency and when innovation should be focused on low-carbon energy and energy transition. (Paragraph 78)

4.In line with recommendations by the IPCC and the CCC, and in keeping with the UK’s commitments under the Paris Agreement, the UK Government should set out how UKEF will work towards net-zero emissions by 2050. Making this commitment would show climate leadership and a willingness to align the UK’s domestic and international approaches to job creation and climate change. (Paragraph 79)

5.The UK should leverage its position among other OECD Export Credit Agencies to encourage them to follow UKEF’s example in aligning its work with net zero emissions by 2050, revisiting their energy support strategy in light of the IPCC’s report, and introducing a strategy to end support to new fossil fuel energy projects by 2021. UKEF should seek multilateral agreement amongst OECD ECAs to join UKEF in making finance flows consistent with a pathway consistent with the Paris Agreement and net zero emissions by 2050. (Paragraph 80)

6.UKEF prioritise a “price gap” approach to measuring subsidies and argue that UKEF do not provide fossil fuel subsidies because they operate at no net cost to the taxpayer. However, critics have argued that this ignores the “inventory method” of support which captures production subsidies. The OECD’s 2018 Companion to the Inventory of Support Measures for Fossil Fuels provides a methodology for quantifying the support element of government credit assistance, to increase the transparency of the “substantial benefits” of government credit assistance to carbon-intensive infrastructure. (Paragraph 81)

7.In addition to considering whether UKEF subsidises fossil fuels under the “price gap” method, UKEF should publish a measure of its inventory support for fossil fuels using the OECD method. UKEF should volunteer to peer-review its fossil fuel support mechanisms, which has been effective in identifying opportunities for increased efficiency in China, Germany, Mexico and the United States. (Paragraph 82)

Energy transition

8.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. (Paragraph 117)

9.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. (Paragraph 118)

10.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. (Paragraph 119)

11.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. (Paragraph 120)

Policy, measurement and transparency

12.UKEF generally does not act beyond the minimum policy requirements to which it considers itself subject. It is unlikely to change to take more environmental factors into account unless there is a change in the policy or legal frameworks governing its mandate. Government should legislate to ensure compliance with the UK’s obligations under the Paris climate agreement and other national and international climate and environmental commitments, including the SDGs. (Paragraph 146)

13.UKEF already calculates projected emissions for projects that it supports, which it publishes in individual Environmental and Social Impact Assessment documents. However, it does not report on its emissions at a portfolio level, or on each project in a single location. For full transparency, UKEF should report on the forecast and actual emissions of all projects it supports, as well as the portfolio totals, in a single document, so that it is easy to access and compare projects. UKEF should also report the total emissions of its portfolio annually in its Annual Report and Accounts. This should not be challenging, as UKEF already collects this data. (Paragraph 147)

14.Scope 3 emissions are essential for calculating the full emissions impact of a product, asset or portfolio. Scope 3 emissions are particularly high for fossil fuel-related projects. UKEF claim that there is no universally accepted measure for Scope 3 emissions. However, Scope 3 emissions are already being used in many private sector companies using the GHG Protocol, and the Canadian Export Credit Agency has already expressed its ambition to work towards the G20 Taskforce on Climate-related Financial Disclosure (TCFD) standards (which would include Scope 3 emissions). (Paragraph 148)

15.UKEF should report the Scope 3 emissions of all projects, and in particular of all fossil fuel-related projects where Scope 3 emissions are particularly high. The GHG Protocol provides a methodology for calculating Scope 3 emissions, and the TCFD recommendations provide a readily-available source of guidance for this work. If Government considers that existing methodologies for modelling Scope 3 emissions are inadequate, it should support research to develop an agreed model, and should promote this model amongst its ECA peers. (Paragraph 149)

16.UKEF should commit to follow recommendations by the Task Force on Climate-related Financial Disclosures (TFCD), including to quantify and report its exposure to stranded assets due to climate change and actions to support energy transition. (Paragraph 150)

17.UKEF claims that its activities are supporting transition to lower-carbon energy generation by reducing global GHG flow in comparison to other energy options. UKEF would be able to demonstrate that it is supporting a transition to net zero if it reported fully on the GHG emissions profile of its energy projects, as indicated above, alongside the difference between emissions for alternative energy generation methods. This would allow UKEF to show when fossil fuel substitution had led to a less carbon-intensive option and compare the substituted choice to any feasible renewable energy alternatives, whilst still acknowledging the project’s overall contribution to climate change based on GHG stock. (Paragraph 151)

18.UKEF should report on the GHG emissions profile of each of its energy projects, including its net emissions and the difference between modelled emissions for alternative energy generation methods. The alternative energy generation methods should include the incumbent generation method (when the UKEF-supported project is substituting a more emissions-intensive energy production method) as well as any feasible renewable energy alternatives. UKEF should also calculate and report the net difference that it makes to emissions in export countries across its portfolio. (Paragraph 152)

19.The remit of the Export Guarantees Advisory Council (EGAC) should be expanded to include assessing how UKEF’s activities contribute to the UK’s climate commitments and greenhouse gas net zero targets. The EGAC should report regularly on this progress to the Secretary of State for International Trade. (Paragraph 153)

Published: 10 June 2019