Looking to the Horizon: Retrofit Lending and the World Bank

Sustainable Development

Last week, World Bank President Jim Kim issued another urgent call to action on balancing climate change and poverty reduction: “We can’t end poverty unless we take serious steps to protect our planet.” This statement came at the opening of the World Bank Group’s spring meetings, and on the heels of the latest IPCC report.

Since President Kim took the helm in 2012, the World Bank Group has taken important strides on climate policy. Last summer, the Bank released new guidance for its energy lending in a so-called directions paper. In this paper, World Bank staff agreed to limit lending for new coal-fired power plants, with exceptions for instances where no feasible alternatives exist and where private capital is unavailable. Essentially, this decision amounted to an end of support for new coal-fired power in middle-income countries. These countries can readily attract affordable private capital to finance coal plants.1

Despite these important advances, the World Bank faces a number of challenges going forward. It must help countries stimulate growth and alleviate poverty in ways that prove resilient in the face of a changing climate. And, it must ensure its projects minimally contribute to greenhouse gas emissions. These considerations span the Bank’s energy lending portfolio—from solar and hydropower to natural gas and coal (via high-profile projects and Development Policy Loans).

One key challenge looming on the horizon is whether and under what conditions to support retrofit projects in middle-income countries.

Retrofits are installed on coal-fired power plants to reduce common air pollutants (like SO2, PM, and NOx). These pollutants can be harmful to human health, agriculture and the environment. The World Health Organization estimates that air pollution (including soot and other fine particulate matter) causes some 3 million premature deaths each year. For agriculture, air pollutants can cause regional “dimming,” a reduction in the amount of sunlight that reaches the Earth’s surface. Dimming has detrimental effects on crop yields, farm incomes and food security. Air pollutants can also create haze, increase the acidity of lakes and streams, deplete nutrients in soil, and affect the biodiversity of ecosystems.

Retrofits do not, however, directly cut greenhouse gas emissions that drive climate change.2 Nevertheless, some air pollution retrofits do have efficiency co-benefits that can help reduce greenhouse gas emissions. Low NOx burners, for example, improve combustion efficiency through conserving heat energy. This means that retrofitted coal plants, besides reducing air pollutants, can produce the same amount of energy with less fuel. Still, many worry that continued World Bank financing of retrofit projects might extend the productive life of a coal-fired power plant. Retrofits could also provide political cover for simultaneously increasing the generation capacity (and climate pollution) of existing coal plants. According to the International Energy Agency, large investments in retrofits can be cost-effective because they do in fact extend the life of a coal-fired power plant—and the associated emissions.

In a forthcoming analysis with our colleague Nigel Purvis, we offer a number of recommendations to reconcile these tensions around retrofits in ways that expand energy access, promote growth, and protect the climate. In the next few decades, around 70% of coal plants in middle-income countries could need retrofits. Now is the time to forge a sensible way forward to help meet these pressing challenges and make good on President Kim’s call to reconcile climate action and poverty reduction.

1. Since July, governments, including the United States, Denmark, Finland, Iceland, Norway, Sweden, and the United Kingdom, as well as the European Bank for Reconstruction and Development and the European Investment Bank have adopted similar policies to limit coal lending for new plants in various shapes and forms.

2. Carbon capture and sequestration (CCS) retrofits, which directly reduce greenhouse gas emissions, are not included in this discussion, as CCS retrofits are extremely expensive and have not yet been deployed at a significant scale. Fuel switching (i.e., from subcritical to supercritical coal), which is sometimes referred to as a retrofit, is also not included.

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On April 15, 2014

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