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The EU has tabled a comprehensive proposal to members of the OECD Arrangement on export credits that would halt billions of dollars in oil and gas financing annually, yet climate groups warn of likely opposition from the US and Asia.

The EU proposal, submitted at a meeting of OECD Arrangement on Officially Supported Export Credits in mid-March, would prohibit member export credit agencies (ECAs) from backing fossil fuels except in limited circumstances.

Antonio Fernández-Martos, a head of unit within the European Commission’s Directorate-General for Trade, told European lawmakers last month that the proposal covers “exploration of fossil fuel projects, production, transportation, storage, refining, distribution… for power generation; basically we cover all the areas that are relevant”.

The move would extend an existing ban on coal-fired power projects, agreed by OECD Arrangement participants in 2021, to also cover oil and gas. Much to the ire of climate activists, some ECAs have continued to plough tens of billions of dollars into heavy-emitting industries annually.

Under the EU’s latest proposal, the activities of OECD Arrangement agencies would be limited to circumstances that are consistent with a 1.5 degrees Celsius rise in global temperatures, and would therefore be aligned with the goals of the 2015 Paris Climate Agreement.

“Otherwise support for fossil fuel projects is banned,” Fernández-Martos told European lawmakers.

The European bloc is now set to negotiate with the OECD Arrangement participants to find an agreement “as soon as possible”, Fernández-Martos told the trade committee on March 20. “Hopefully this year.”

The EU, UK and Canada tabled a similar fossil fuel ban during OECD Arrangement negotiations in November, yet according to experts, the latest proposal contains stronger wording and commitments.

A source briefed on the EU’s proposal, says the “main difference” is the EU has removed “language on abatement”.

“Theoretically, it’s stronger because it [the new proposal] covers the whole oil and gas value chain as well as coal mining, which is not a huge part of what ECAs finance, but still, would clarify that any support for the coal value chain is not appropriate.”

According to the source, the EU’s proposal would allow each member state also to define their own exceptions to the 1.5 degrees Celsius rule, due to the current lack of clarity on how to align public financing with the temperature target.

“In effect, every single OECD participant would have to write their policy [into a pre-agreed] template, share it with other OECD participants, and then have to prove why their policy is aligned with the Paris Climate Agreement ,” they tell GTR. “If they do this with integrity, it will mean a very strict implementation.”

Nina Pušić, a strategist at campaign group Oil Change International (OCI), warns such flexibility may be exploited by OECD ECAs that are reluctant to immediately cut off financing for oil and gas.

“Unfortunately, we’ve seen some policy implementations within the EU, like with Italy, for example, who put giant loopholes into the different sections of their policies, citing reasons such as energy security that allow their ECAs to continue to finance fossil fuels,” Pušić tells GTR.

The International Energy Agency (IEA) said in a landmark 2021 report that no new oil and gas fields could be approved if the world is to reach net-zero greenhouse gas emissions by 2050.

“If countries wanted to be 1.5 degrees-aligned, they should have stopped funding oil and gas now, with very limited exceptions,” Pušić says. “For instance, a diesel generator for a hospital in a war zone [could be approved], but no major infrastructure projects.”

 

“Hard to imagine”

The EU’s proposed ban within the OECD Arrangement will likely face opposition from US, Japan and South Korea, countries that have been “laggards” on oil and gas financing, climate groups warn.

“Working on getting Korea and Japan will be the big obstacle in getting the EU proposal forward,” Pusic says, with both countries accounting for “over a third of the oil and gas financing under the OECD Arrangement”.

According to OCI, Japan and Korea together provide on average more than US$16bn in oil and gas financing, based on 2018-2020 levels, while OECD ECAs provided an average of US$41bn per year in export support to fossil fuels between 2018 and 2020.

Meanwhile, Korea has made no public commitment on ending public insurance or financing of fossil fuels.

“Japan, at the very least, has something to be held accountable against,” Pušić says, with the country vowing alongside other G7 nations in 2022 to nix public support for fossil fuels by the end of that year.

The Export-Import Bank of the United States (US Exim) has also been heavily criticised by climate groups.

The New York Times reported in February that two of US Exim’s own advisors quit the agency’s climate committee in anticipation of a guarantee being approved for an oil and gas field expansion in Bahrain.

In March, US Exim announced it signed a US$500mn loan guarantee backing US goods and services exports to the project. According to a US Exim environmental impact report, the financing will enable Bahrain’s state-owned Bapco Energies to develop more than 400 new oil wells and over 30 gas wells.

Bapco is required to comply with the agency’s ESG guidelines throughout the lifetime of the project, and the expansion is “not expected to result in a meaningful increase in oil and gas production”, US Exim added.

Given such support and “the way US Exim is currently operating”, Pušić says “it is hard to imagine US Exim agreeing to an ambitious proposal and then implementing it”.

 

“Second track”

Separately, outside of the OECD Arrangement negotiations, Brussels is lobbying for EU-based agencies to end oil and gas financing and is pushing for greater transparency in their fossil fuel policies.

The Commission is due to hold a high-level meeting in Brussels in late April, where EU and export credit officials will discuss the progress made by European ECAs in developing their phase-out plans, which had been due at the end of last year.

Two years ago, all 27-member states agreed that by the close of 2023 they would publish policies containing their own “science-based deadlines” for ending export credit backing for fossil fuels, in compliance with a 1.5°C warming limit.

Yet according to a report due to be published later this week by a group of NGOs, Croatia, Latvia, Romania, Greece and the Czech Republic are yet to publish policies.

Activists and policymakers have slammed some ECA phase-out plans as being wholly unaligned with the Paris Climate Agreement’s goals.

Italy’s approach, published in March 2023, has been labelled “effectively useless” as Sace can still back oil and gas deals for years to come under a wide range of exceptions including for “national energy security” purposes.

Kathleen Van Brempt, a member of the European Parliament, queried the lack of action by ECAs to date during a meeting of the Committee on International Trade (INTA) in March.

Referring to research by NGOs, she noted that while eight ECAs have a fossil fuel phase out plans, up to 10 member states have no policy or “have one that allows continued investment in fossil fuels”.

“Let me doubt a little bit there has been a fundamental change [to the export credit landscape] in the past couple of years,” she said.