The OECD – or Organisation for Economic Co-operation and Development – is a group of 38 countries that collectively make up 62.2% of the world’s GDP. It was first established in 1948, as the OEEC (Organisation for European Economic Co-operation), to help administer the Marshall Plan, the US-led financing programme to rebuild Western Europe after the Second World War. Now, 75 years later, the OECD is no longer a financing body in itself, but its members continue to support many billions of dollars worth of infrastructure projects each year via Export Credit Agencies (ECAs) – including investments into fossil fuels.
ECAs finance companies’ international exports via direct lending or commercial bank intermediaries. They have been governed by the OECD through its Arrangement on Officially Supported Export Credits since the 1960s. Between 2009 and 2019, OECD ECAs lent $725bn of export credits, with around 14% going to the energy sector. The public financing arrangements that they offer tend to come at lower rates of return and with lower interest rates, while public finance involvement boosts investor confidence, even in riskier projects.
Between 2019 and 2021, OECD ECAs were the world’s largest public international financiers of energy projects. Although China is not subject to the OECD Arrangement guidelines, “a general trend has seen Chinese international public finance eventually follow the OECD guidelines, which also help shape G7 and G20 commitments”, says Nina Pušić, from the NGO Oil Change International (OCI). China’s international coal financing ban, for example, came into effect the same year that the OECD ECAs introduced a similar ban.
Export credit is not net zero-aligned
All 38 members of the OECD have pledged to reach net zero, with the US and EU in the middle of hugely significant domestic decarbonisation programmes. Yet export finance remains misaligned with the requirements of net zero, directing seven times more support to fossil fuels ($33.5bn per year) than renewables (just $4.7bn per year) on average from 2019 to 2021, according to the OCI.
OECD ECAs (most notably Japan, South Korea and Canada) were the world’s largest public international financiers of oil and gas between 2019 and 2021. Canada has since implemented a pledge made at COP26 to end export finance for oil and gas, but others, including Japan, the US and South Korea, have yet to either make such a pledge or fully follow on through on it.
The latest data from OCI suggests that tens of billions are still being invested by OECD ECAs around the world in oil and gas each year. The International Energy Agency meanwhile, has warned that limiting global warming to 1.5°C means no new oil and gas fields can be exploited and 40% of already-developed fields may need to be shut down early.
There is a campaign under way from 175 civil society groups from more than 45 countries – including the OCI, the Club of Rome and Friends of the Earth – for the OECD to phase out international public financing of fossil fuels.
“It is time for OECD countries to unite around the phase-out of fossil fuel extraction, use and subsidies,” said Sandrine Dixson-Dècleve from the Club of Rome when the civil society groups launched their campaign in February. “OECD leaders must end fossil energy extraction and infrastructure investments at home as well as abroad and establish the necessary partnerships and financial transfers to enhance an equitable clean energy revolution globally.”
OECD: a transformative impact on fossil fuels
The campaign to end international ECA finance for oil and gas is no pie in the sky: earlier grassroots pressure was instrumental in pushing the OECD to adopt its Coal Fired Power Sector Understanding in 2015, which was a significant building block to reducing public finance flows to coal. The Understanding ultimately led to a full block on ECA coal finance being adopted in 2021, and coming into effect in January 2022.
The Coal Fired Power Sector Understanding contributed to international coal public finance dropping by $4bn in 2021 compared with the annual average between 2013 and 2017, according to data from OCI.
“Given the impacts of the prohibition on coal-fired power, it is reasonable to conclude that a prohibition that included oil and fossil gas as well would be a turning point for drying up funds for the industry,” says Pušić.
The absence of public finance backers produces a ripple effect among private financiers and insurers, meaning that new fossil fuel projects struggle to get off the ground. This has already been seen in the coal sector. In 2020, Reuters reported that financing for coal projects was “drying up at ever increasing rates”, worrying delegates at Asia’s largest coal conference about the prospects for their industry. Similarly, Adani Enterprises’ plans to develop Australia’s controversial Carmichael mine collapsed in May 2021 after the project failed to obtain sufficient financial backing due to environmental concerns.
There has already also been a recorded impact from the 34 countries and five institutions that signed the Statement on International Public Support for the Clean Energy Transition to end international public finance for fossil fuels at COP26 in Glasgow.
The OCI estimates that what has come to be known as the Glasgow Statement has already shifted an estimated $5.7bn per year out of fossil fuels and into clean energy, with the potential for a further $13.7bn per year if all signatories fulfil their commitments.
As things stand, some 50% of OECD countries have signed the Glasgow Statement to end international public finance for fossil fuels. The Statement also makes a specific commitment to drive “multilateral negotiations in international bodies, in particular in the OECD, to review, update and strengthen their governance frameworks to align with the Paris Agreement goals”.
Nevertheless, for the time being, the OECD as a bloc has not committed to a fossil fuel phase-out. It is not that constructive conversations are not happening: “OECD negotiators that we have met with bilaterally have signalled they might now be willing to start a conversation on oil and gas restrictions this year,” says the OCI’s Pušić.
However, there are also signs that things could be moving in the opposite direction. Pušić suggests that a recently published OECD Participants’ Statement implies that technologies long pushed by the fossil fuel lobby – including carbon capture and storage, and blue hydrogen made from natural gas – may well qualify as “climate friendly” in OECD financial arrangements for new infrastructure projects. Pušić adds that the OECD has not been particularly transparent when the OCI has asked for more clarification as to what exactly some of the more vague terminology in the Statement refers to.
On 27–28 June 2023, the OECD will convene its annual Ministerial Council Meeting. Campaigners are pushing for a decisive policy outcome on oil and gas, which would help catalyse a global reduction in finance flows to fossil fuels, and accelerate renewables deployment in their place.