Tackling Climate Change: The Bank’s Poisoned Chalice?

After much wrangling at periodic gatherings in Rio, Copenhagen and Paris, governments have agreed to reduce emissions that cause global warming. Many emissions deplete the stratosphere’s protective ozone layer affecting climate: methane, CFCs but carbon dioxide lingers for decades and gets most attention. Rich countries’ past pollution has caused much damage, and to prevent more, their governments are promising to pay poor countries that meet agreed emission targets. The Bank wanted to be involved: new initiatives are more invigorating than earlier elusive goals like the MDGs but tackling climate change is a poisoned chalice that risks undermining the institution.

Emissions result from myriad decisions that everyone independently makes. No matter what is said or agreed to, a government cannot lower emissions unless people choose differently. Whether emissions rise or fall if aluminum replaces steel in cars depends on where and how the metals are made. Prices, not slogans or edicts, guide choices; they also spur the adoption of, and advances in, technology. A government influences prices through taxes and subsidies.

Rich countries have set a poor example. Few countries – not the major ones – tax carbon. Rather than narrow the fiscal deficit with an emissions tax, many governments subsidize whatever seems green. Appearances can be deceptive. “Green” electric cars and solar panels use lithium, molybdenum and silicon whose extraction guzzles power and spews pollution.

Single issue advocates (e.g. “greens”) see the direct effects but invariably overlook the indirect effects that may be more important. The U.S. repeatedly refused to permit petroleum pipelines – cleaner, cheaper and safer than transport by trucks and trains – from the Alberta and Bakken shales to existing refineries. Germany imports and burns wood pellets in thermal power plants – despite CO2 emissions – because pellets are from “renewable” trees. Germany also shuttered nuclear plants generating reliable electricity cheaply and subsidizes windmills and solar plants producing power sporadically.

Poor countries cannot afford such folly: they can and should avoid rich countries’ mistakes and learn from them. Daunting estimates of needed investments and the Bank’s financial prowess may have caused it to get involved, but it is a mistake to think that existing capital stock should be scrapped as polluting. Their replacement is an economic decision. Existing technology and better policies can reduce and mitigate – but not entirely eliminate – greenhouse emissions. The U.S. proportion of energy to GDP is now a third of its 2010 level¹, and the decline began long before greens became vocal.

Implications for the Bank
The Bank can help poor countries take a less polluting path to prosperity. But this path may include policies and actions that offend green advocates with disproportionate influence on the Bank’s controlling shareholders. Needless green hurdles they erect would inevitably affect what the Bank does and how its staff respond.

The Bank is a malleable institution – which is why it survived after the Marshall Plan took over Europe’s reconstruction. It turned to alleviate poverty and its staff has since developed considerable expertise in development. But would roads with high economic rates of return pass muster when they appear to encourage petroleum use (like the U.S. pipeline)? As the patterns of agriculture, industry and trade change with climate, more worthwhile projects will emerge – not all glaringly green. If these are not approved, the Bank’s internal incentives would drive staff to fudge. The divergence between what staff consider sensible and what donors want is greater for Bank administered Trust Funds, including the new Loss and Damage Fund² with its own Executive Director.

These are well warranted fears. When a past Bank President embraced slogans, phrases like “civil society participation” displaced cost benefit analysis (that Bank staff had pioneered) in loan documents. When Europe disliked nuclear energy, even research examining their safety and economic viability were pulled from publication. Already some – even Bank retirees – want the Bank to stop funding any thermal power plants. In countries with unreliable power, many firms and homes have back-up generators that pollute; so more efficient thermal power could reduce emissions. Careful analysis is needed, not a blanket ban; but if vetted projects are unlikely to be approved, rigorous vetting becomes pointless and falls by the wayside. There are now calls for using a “social” discount rate – which many rigorous economists question – that would enable green projects of dubious merit pass muster.

When agreeing to tackle climate change, the Bank’s management wisely retained its earlier mission statement to reduce poverty, adding the phrase “in a livable planet.” Such clever phrasing does not by itself offer much protection. Dealing with climate change is part of development, but the Bank risks letting the tail wag the dog.

¹ US Department of Energy data https://www.eia.gov/todayinenergy/detail.php?id=53620
Some of this reduction is because polluting industries have migrated abroad, mainly to China.

² https://odi.org/en/insights/will-the-world-bank-make-good-on-the-loss-and-damage-fund/

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