Banking against warming.

At the Kyoto Climate Summit in December, the World Bank - the world's biggest funder of fossil-fuel projects - may ask for a leading role in reducing global carbon emissions. Some critics doubt that such a reversal is possible. Others believe it's crucial.

Soon after he took office as president of the World Bank in 1995, James Wolfensohn gathered 250 of his top managers for a meeting at the Bank's imposing white stone-and-glass headquarters in Washington, DC. In a fervent address, he told them that he was "troubled deeply." In his attempts to give the world's largest development institution a desperately needed revitalization, he said he felt he was up against a "glass wall." Instead of becoming infused with renewed enthusiasm for the challenge of alleviating poverty in the developing world, the Bank's bureaucracy had been reacting with "fear" and "cynicism," Wolfensohn asserted. He told them the time had come for far-reaching changes, and he wanted their support.

The audience of elite and well-paid economists gave the speech a cool, if polite, response. They were not accustomed to the passionate style of their new leader - a wealthy former investment banker, concert cellist, and confidante of world leaders who has been known to shed tears when discussing the plight of the world's poor. But they were even more uncomfortable with the prospect of refocusing the Bank's mission and introducing new performance incentives for the staff. In one of his first acts, Wolfensohn was requiring hundreds of senior managers to take courses on the process of corporate transformation, and then sending them to live for a week in the kind of Third World slum or village that the Bank's loans are supposed to assist.

Although most of Wolfensohn's reforms have been directed at improving its efficiency, consulting more closely with local citizens, and making the Bank "client friendly," he has also pushed for environmental reforms. During the past two decades, the World Bank has come under heavy criticism for its support of environmentally and socially damaging loans. The most controversial projects were large dams that displaced thousands of people, and road-building efforts in the Amazon that led to massive clearing of forests. For years, citizens' groups have fought to improve the Bank's environmental standards and assessment procedures. Despite the efforts of a newly created environment department, progress has been slow, and the world's largest development institution continues to be mired in environmental controversies.

By the mid-1990s, a growing number of World Bank critics were focusing on a new environmental problem - global climate change. Ever since the Framework Convention on Climate Change was signed in 1992, the role of developing countries in it has been controversial. Only the industrial countries, which contribute on average 10 times as much to global warming per person, were asked in the treaty to voluntarily hold their greenhouse gas emissions to the 1990 level in the year 2000. But developing countries' emissions have grown by nearly 75 percent since the beginning of the decade, as their economies have boomed, accompanied by a proliferation of motor vehicles, factories, power plants, and high rise buildings - most of them powered by fossil fuels. As a result, countries such as China, India, and Brazil are becoming increasingly important to the stability of the global climate.

During the past four decades, the World Bank has become the world's largest financier of oil wells, refineries, coal mines, power stations, road-building, and other projects that contribute heavily to the more than 6 billion tons of carbon being released to the atmosphere each year. Already, World Bank client countries (including those in central and eastern Europe) account for over half of global emissions of greenhouse gases. Consequently, the World Bank is now a major force in warming the planet - and potentially an important ally in slowing that warming.

In June 1997, Wolfensohn seemed to be trying to leapfrog critics of the Bank's support of fossil fuels when, on the occasion of the fifth anniversary of the Rio Earth Summit, he appeared at a Special Session of the United Nations General Assembly in New York. The occasion had been surrounded by a roiling debate over the shape of the global climate agreement to be signed in Kyoto, Japan this December. The European delegates were calling for strong new measures to limit emissions, while the U.S. delegation - facing heavy pressure from some powerful fossil fuel-using industries - had opposed such standards.

Wolfensohn surprised the assembled reporters by appearing to side with the Europeans. He said that though as Bank president he could not take a position on the talks, as a private citizen he favored a strong agreement. He also proposed that the Bank serve as manager of a new Carbon Investment Bank to finance alternatives to fossil fuels. The funds would come from accounts set up under the climate treaty, allowing industrial nations to offset their emissions by investing in presumably low-cost means of reducing emissions in developing countries.

Wolfensohn's announcement was alternatively seen as a sign of bold leadership or as a gambit to deflect criticism. Asking the World Bank to lead the world away from fossil fuels might seem to some environmental skeptics like asking the National Rifle Association to lead a campaign against guns. Still, Wolfensohn and his fellow reformers in the Bank's environment department seem determined to confound the critics. With the Cold War over and the private sector now providing much of the world's development financing, the World Bank, with its staff of 10,000 and roughly $20 billion in annual lending, is desperately seeking new missions. At a time when the U.S. Congress seems bent on slashing all support for developing countries that does not directly benefit the United States, helping to solve the world's greatest environmental problem might be a big enough job to help justify the Bank's continuation.

Singrauli

The scale of the challenge facing Wolfensohn and his fellow reformers can be seen half a world away from the World Bank's Washington offices. When India gained independence in 1947, the Singrauli region in the northern state of Bihar was one of the nation's most ecologically and culturally diverse areas. Located 140 kilometers south of the holy city of Varanasi, Singrauli was once home to a tropical forest that contained sizable populations of deer, wild boar, bears, and tigers, as well as to hundreds of thousands of indigenous subsistence farmers and villagers.

Today, Singrauli is one of the great monuments to the century's Faustian bargain with fossil fuels. The region contains 12 open pit coal mines and 11 coal-fired power plants that send electricity to distant industries. Twenty-four hours a day, 365 days a year, the sky above Singrauli is obscured by dark clouds of coal dust and smoke - carrying particulates, sulfur, and deadly mercury into surrounding forests and communities. In addition, the Singrauli complex now pumps over 10 million tons of carbon into the atmosphere each year, placing it among the leading global emitters of greenhouse gases.

Most of the trees and wildlife in the Singrauli region are now gone, and the once-proud villagers live in hovels on the edges of the various mines and power plant complexes. No longer working the soil (much of it now stripped away or contaminated), they have taken jobs as day laborers, and struggle with the respiratory and other health problems stemming from the pollution that surrounds them. Bruce Rich, an attorney and development expert at the Environmental Defense Fund, visited Singrauli in 1987 and described what he found there as "the inferno." A decade later, he says, there has been little improvement.

Over the past two decades, billions of dollars have been invested in the Singrauli complex, much of it from outside India. That capital has come from a range of public and private sources, but one of the chief sources of finance - and the one that many other lenders have looked to for leadership - has been the World Bank. Starting with an $850 million loan in the late 1970s, the Bank has been a regular contributor to the financing of Singrauli.

Even after protests began in India in the 1980s, and then spread abroad, the Bank continued to pour in the capital, further expanding the area's mines and building more power plants. In 1997, Indian police forcibly evicted local protesters to make way for yet another World Bank-financed addition to the Singrauli complex, leading local citizens to level charges of human rights abuses. Following a request from local citizens groups in September, the Bank's Board authorized an Inspection Panel to investigate charges that the latest Singrauli loan is in violation of the Bank's own policies and procedures.

Singrauli may constitute a particularly egregious case, but it is hardly an isolated one. The World Bank is heavily involved throughout India's coal industry, from its mines to its power plants, with over $300 million of additional loans now being prepared. Many other Bank-funded fossil fuel projects can be found from Mexico to South Africa. Even in Indonesia, which has an abundance of natural gas, a much cleaner fuel, the Bank is building coal plants. It is also helping Russia develop oil fields in Siberia, assisting China as it covers its rice paddies with highways, and providing financing for barge-mounted diesel generators in island nations.

Powering Development

It is difficult to comprehend how a development institution that professes alleviation of poverty to be its main goal, and environmental protection its new calling, could have found itself so deeply committed to Singrauli and scores of similar projects. It is even harder to grasp how such disregard for those goals could have continued in the past three years, despite the passionate desire of the Bank's president to reaffirm them, and the efforts of the Bank's environmental staff to support him. What accounts for this "glass wall" that has separated Wolfensohn's zeal from the actual practices of his institution?

One answer lies in the Bank's origin as a lender of last resort, created to help in the rebuilding of Europe after World War II. What Europe most needed at the time was to replace the infrastructure of dams, water systems, roads, bridges, and energy supplies that had been devastated by the war. Private banks were often eager to finance factories and commercial buildings, but they had little interest in large, government-owned projects that had little prospect of earning a profit in the near future. The Bank's success there, as part of the Marshall Plan, tended to reinforce the idea that if the physical requirements of a nation are properly taken care of, the well-being of the people will follow quickly.

Later, as the attention of the Bank was turned to meeting the development needs of Third World nations in the post-colonial era of the 1960s, the emphasis on large infrastructure projects continued. Even in the 1970s, despite Bank president Robert McNamara's directives to invest more heavily in health and education, the Bank continued to pour money into roads, hydroelectric power plants, and other large capital projects. And since at the time, many developing country governments owned not only the road and water systems but the power plants, oil wells, and refineries as well, energy came to be viewed mainly as an infrastructure investment that the World Bank should take the lead in developing.

By the 1980s, the World Bank was devoting roughly one-fifth of its lending to electric power and another 10 percent or so to oil and gas. Some of the funds went to expanding energy transmission lines, but the lion's share went into constructing hydroelectric and fossil fuel power plants. From the start, many of these were controversial. The Kariba Dam in Zimbabwe, for example, uprooted 56,000 people and created a reservoir that allowed populations of malaria-bearing mosquitos to explode, leading to an epidemic. On the other hand, the Bank took a stand against nuclear power, aligning itself with the views of many environmentalists. Despite repeated requests from client governments, the Bank has judged the technology too complex and expensive for developing countries - and has never issued a loan for a nuclear power plant.

The Bank has never shown a similar reticence about fossil fuels, however. Following the pattern of the richer nations, the Bank and its technical consultants have encouraged developing countries to use fossil fuels - closely following the "western" model of energy development. The large capital investment required for dams and fossil fuel power plants seemed a good match for the institution, which has always prided itself on "efficiency," and likes big projects that minimize the staff time required for each dollar lent. The Bank financed many oil refineries and power plants in the 1960s and 1970s, and then turned more of its attention to coal and natural gas after oil prices skyrocketed. Providing energy for the rural poor, by contrast, has made up less than 10 percent of the Bank's energy loan portfolio. In transportation, the Bank became a heavy supporter of road building, helping its client governments to pursue an automobile- and truck-based transport model that is closer to that found in North America than to the more diversified transport systems of Europe or Japan. By comparison, bicycle paths and public transportation systems were neglected by the Bank's lenders - despite the fact that they are far more practical for the majority of the people.

Most poor nations, like their richer counterparts in Europe and North America, promoted even heavier reliance on fossil fuels by subsidizing their production and use. Some of these subsidies - in India, Indonesia, and Brazil, for example - covered as much as 25 to 50 percent of the cost. In Egypt, these subsidies used up more than 3 percent of the nation's total economic output in 1990. Imported kerosene, for example, is heavily subsidized in many countries in order to provide poor consumers with affordable cooking fuel. But the bulk of the subsidies have gone to electricity, most of which is consumed by industries and the small middle class. The Bank preached the gospel of subsidy reduction for decades, but with little effect.

Bank officials say that its support of fossil fuels has spurred economic growth and created numerous jobs in poor countries over the past three decades. But they also acknowledge that it has done so at a heavy price: it is the cities of the developing world, not Los Angeles or London, that now have the world's most poisonous air. One of the dirtiest is Mexico City, where only when it rains does the air meet U.S. federal standards - standards that the U.S. EPA now plans to tighten because they are not sufficient to protect public health. By the World Bank's own estimates, air pollution causes at least 4 million new cases of chronic bronchitis and contributes to a half million premature deaths each year. In many developing countries, air pollution costs run to as much as 2.5 percent of the annual GDP, and in China they are estimated to be 5 percent. In Shanghai alone, the health costs have reached an estimated $3.5 billion per year.

The Push for Reform

By the late 1980s, the World Bank's heavy involvement in the energy sector was stirring up concern among environmentalists and other reformers, though most of it was focused on large hydro projects. (Some of the most severe criticism came from an internal critic - Robert Goodland of the Bank's own environment department.) Outside energy experts, such as Howard Geller of the American Council for an Energy Efficient Economy, used insights gained in trying to reform their own countries' energy policies to show how developing nations could reduce the number of power plants they need by investing in more efficient appliances and industrial equipment.

At first, the economists who occupy many of the Bank's senior positions caustically dismissed these claims; in the world of economic theory where many of them were trained, any means of saving energy at less than the cost of producing it would have been exploited long ago. As long as energy prices were raised to the market level - which the Bank was urging developing countries to do - no investment in efficiency could be justified. Developing countries were growing, and energy use would grow with it, no matter what the Bank did, they argued - overlooking the fact that greater efficiency would allow a given level of energy investment to produce a greater amount of service. The arrogance with which Bank staff often made such arguments did not help their popularity in the environmental community.

As the 1992 Earth Summit approached, and concern about pollution in developing countries rose, pressure for reforms built. The Bank's industry and energy department prepared two new papers, and after much controversy they were approved in late 1992. According to these papers, new power loans were to be based on comprehensive energy strategies that included cost-effective opportunities to increase energy efficiency. The Bank also agreed to help developing countries improve their institutional capability to pursue energy efficiency, and to push them harder to reform energy prices and strengthen energy efficiency regulations.

The release of these papers was widely viewed by environmental organizations at the time as an important victory, with the potential to get developing country energy trends headed in a more positive direction. Few expected overnight success, but it did seem possible that some of the least efficient practices and most damaging projects would be stopped, and that developing countries could begin to catch up with the rapid gains in energy efficiency being made in industrial countries. Their hopes were soon dashed.

Among the modest successes that emerged from the Bank's 1992 reforms are policy changes recommended in its Energy Sector Management Assistance Program which has pushed for more effective regulation of energy companies, performance-based contracts, and cuts in subsidies. In China, for example, the Bank's influence has helped to reduce fossil fuel supports from $24 billion annually in the 1980s to $10 billion in 1995. Between 1991 and 1996, India cut its fossil fuel subsidies from $4.2 billion to $2.6 billion, while Brazil virtually eliminated subsidies.

The Bank also stepped up its support of natural gas, a less polluting fossil fuel that has been underdeveloped in most poor countries. And it has successfully encouraged many of its client countries to make their power plants, transmission lines, and refineries more efficient. It is in the uses of energy, however, that the greatest potential for improved efficiency lies, and there the advances have been slower. One exception is a loan to Thailand, in which some of the funds are being used by the national power authority to improve the efficiency of lighting and appliances. Similar loans have been made to Colombia, Russia, and other countries.

But even with such loans, the Bank has not become a real leader on energy efficiency. Brazil, for example, has developed a strong network of energy service companies and is a leading manufacturer of energy-efficient equipment - but with very little Bank support. A 1994 review by two U.S.-based NGOs, the Environmental Defense Fund and the Natural Resources Defense Council, found that of 46 power loans worth $7 billion then under preparation, only two complied with the Bank's new policy. A later assessment by the Worldwide Fund for Nature in early 1996 found that only three of 56 loans complied with the 1992 policy papers. Overall, end-use energy efficiency still represents less than 5 percent of the Bank's total energy lending. According to Jim Barnes, a counselor with Friends of the Earth International, "the World Bank's spending on energy efficiency is still far below the levels that are justified on economic grounds alone."

Solar Initiatives

Although the World Bank has generously projects since financed large hydroelectric its earliest days, its technological conservatism and preoccupation with large-scale projects has made it slow to support the plethora of more decentralized renewable energy technologies. But as the cost of some of these new energy sources fell dramatically in the 1990s, pressure built on the Bank to fund them. As carbon-free energy sources, solar, wind, geothermal, and biomass energy are essential to helping the world slow global warming - and they would allow many developing countries to reduce their dependence on imported fuels.

In the early 1990s, Dennis Anderson, an economist on temporary assignment to the World Bank, wrote a path-breaking paper suggesting that the renewable energy potential of developing countries was huge, and that it could help them reduce their financially burdensome oil imports. He went on to argue that if funds were provided to scale up manufacturing of the needed devices, their costs would fall and markets would soar. Anderson and his colleagues were particularly enamored of the more centralized renewable energy technologies - such as large solar thermal power plants - that fit the big-project thinking to which the Bank's engineers are accustomed. Anderson recommended that the Bank consider taking on the role of a venture capitalist - providing seed capital to get the new renewable energy technologies off the ground.

After extensive internal debates and several false starts, a somewhat fragmented Solar Initiative was launched in 1994. In its initial phase, it is intended to assist developing countries in the "preparation and finance of commercial and near-commercial applications" of renewable energy, "facilitation of international research, development, and demonstration," and removal of market barriers. In practice, it has served as an umbrella that links various modest programs. As such, it has begun to educate Bank staff, and led to a number of "experimental" renewable energy projects in developing countries, including geothermal power plants in the Philippines, wind farms in India and a credit program for off-the-grid solar home systems in Indonesia.

On a larger scale, the private sector lending arm of the World Bank, the International Finance Corporation (IFC), last spring approved a $100 to $200 million fund for small, commercial renewable energy projects in developing countries. This could turn out to be a real breakthrough, with the potential to jumpstart renewables in developing countries. The IFC is also working on a Photovoltaic Market Transformation Initiative that is to provide $30 million in low-interest financing to manufacturers and dealers of small solar systems in developing countries, allowing them to get new businesses going.

Dennis Anderson has since left the Bank, and skepticism about the potential of these new small-scale technologies - and a resistance to financing them - remains strong, both in the Bank's energy department and in the country departments where loans are prepared. A draft of a new Bank energy strategy produced in 1997 sounded particularly out of touch when it concluded: "By the end of the 30- year technological change horizon, renewable energy is expected to be cost competitive." The authors showed little awareness that in Europe, renewable energy markets are already booming at double digit growth rates as a result of recent policy changes, and attracting multi-billion dollar corporate investments.

Fossil Fueling

The Bank's glossy publications now point in glowing terms to the institution's "environmental leadership" and its support of "clean energy technologies" - a seeming vindication for those who have pushed for reforms. Unless one scans the fine-print appendices in the backs of those reports, one would never know that the Bank funds any fossil fuel projects at all. In reality, however, those projects continue to dominate the energy loan portfolio. In the power sector, for example, the Bank is still heavily committed to coal-fired power plants - from central Europe to Indonesia. China and India, in particular, are in the midst of Bank-supported oil and coal bonanzas as they seek to provide power to booming economies.

In fact, fossil fuel projects may be flowing through the Bank's loan pipeline faster than ever. Over $1 billion is now on the way to China, India, and Russia for "restructuring" their state-owned coal industries. The goal is to shut down inefficient mines and improve the better ones, thereby preserving jobs. However, the practical result may be to preserve industries that would better be allowed to die gradually, replaced by less polluting energy sources. In an indication of the kind of "black hole" these projects have become, Business Week reported in 1997 that $100 million out of a $500 million World Bank loan for the Russian coal industry has "disappeared," apparently into the pockets of government officials and industrialists.

A June 1997 study by the Washington, DC-based Institute for Policy Studies found that the fossil fuel projects the Bank has financed since the Rio Earth Summit will put nearly 10 billion tons of carbon into the atmosphere over the next few decades - compared to current global annual emissions of 6 billion tons. It also found that the Bank is spending 100 times as much money on fossil fuel projects as it is on ones that reduce emissions. Bank officials believe that the IPS figures are overstated, and that the fossil fuel projects outweigh the greener ones by only six-to-one.

Even by that estimate, the Bank's energy loan portfolio is in no present danger of being labeled environmentally friendly. Critics argue that the power plant emission standards that it proudly describes in its public reports are still far too low. And in a 1996 internal report that was leaked to the press, the Bank admitted that its environmental assessments were being conducted too late in the loan process, allowing some environmentally damaging projects to be approved. To add insult to pollution, records show that the environmental assessments for recent fossil fuel loans do not even follow the Bank's recent, simple mandate to include estimates of the greenhouse gas emissions that will flow from them.

Bank officials do not deny many of the specific charges, but they place much of the responsibility on developing countries, which, they say, request the loans. Seemingly oblivious to the mountain of policy papers they put out, Bank officials say that they are in the end just bankers, and cannot finance projects they are never presented with. This argument contains more than a touch of disingenuousness. The World Bank's board has never been reluctant to force developing countries to accept conditions that it felt important - including politically difficult reforms of fiscal and social policy, such as reducing subsidized food prices. Moreover, money is often shoveled hastily out the door when political expediency demands it. Nancy Alexander of Bread for the World notes that some of the worst loans have been approved because the U.S. Treasury called the Bank and ordered loans to be processed "before the sun rises," demanding, "if they [the recipient countries] can't find projects, you find them."

A second line of defense sometimes used by Bank officials is to point out that with the massive flows of private capital now going to the developing world, the Bank only accounts for about 3 percent of the global total, and so has little leverage. Bank official Hiroaki Suzuki claimed earlier this year, "If the Bank didn't finance these coal-fired power projects, someone else would, but with lower environmental standards than ours." However, this claim sidesteps the fact that many projects involve packages of public and private loans, and that if such co-financing is included, the Bank's share of total energy lending is higher. Moreover, commercial banks often look to the World Bank to anchor such loans, and thereby minimize their own risk. As Wolfensohn told The New York Times earlier this year, "It stands to reason that if our money is limited and there is great potential for the private sector, we must think in terms not just of what we do but how we can leverage what we do with the private sector." Moreover, the World Bank now provides loan guarantees for commercial loans in developing countries, and its sister institution, the Multilateral Investment Guarantee Agency, provides political risk insurance for many commercial loans. Without these supports, many fossil fuel projects would not be able to get any international financing at all.

Environmental organizations have been pushing the Bank's lenders to enforce the same environmental standards for commercial loans they support as those they require for public projects, but with limited success. More surprisingly, a close review of the Bank's recent energy loans suggests that they may be weighted toward technologies and fuels that are actually less efficient and dirtier than the average project funded by the private sector. Whereas private lenders are devoting 23 percent of their loans to coal plants and 40 percent to gas, the proportions appear to be reversed at the World Bank.

There may be a simple explanation for this discrepancy. Although commercial banks do not have environmental standards per se, they are by nature risk-averse, and do not want to fund projects that may run aground. As a result, they usually commission detailed analyses of the risks of loans they are considering - a process lenders call "due diligence." A Singrauli-style project might well fail such a test - partly because of the danger that it would be stopped by local protests prior to completion, and partly because of the risk of an accident that could kill or injure a large number of people and result in expensive lawsuits.

Reforming the Reforms

For environmentalists, frustration with the Bank's reform efforts turned to anger in 1996 when, amid mounting criticism of the Bank's apparent failure to make the reforms outlined in its 1992 policy papers, its legal department issued an opinion that those papers were not formal Bank policies, but simply "good practices" guidelines. As such, the papers are not binding on Bank staff and cannot be appealed to its inspection panel. The situation was [TABULAR DATA OMITTED] not improved when, in response to strong letters from environmental organizations, a senior vice president asserted that this new ruling was simply a reaffirmation of longstanding Bank policy.

The controversy over the 1992 Papers gets to the heart of the exasperation reformers experience in their attempts to change the World Bank's energy strategies. Papers such as these are written by Washington-based policy analysts. However, the core of the Bank's operations lies with its task managers and country directors, who process loans and work directly with officials in developing country governments. These managers and their clients view new directives from the policy staff as impediments to their main task - processing loans. (When Robert McNamara was president of the World Bank in the 1970s, he used to say that he had to repeat his policy speeches at least a dozen times just to get the attention of his own loan officers.) And indeed, operations staff and client governments have strongly resisted the new energy policy papers. Moreover, some reformers now fear that this resistance may be stiffened by President Wolfensohn's simultaneous efforts to streamline operations and cut red tape. These efforts, which include plans to eliminate up to 700 of the 10,000 staff positions, could work to the detriment of innovative and small-scale projects. The Bank's own figures show that on average, small renewable energy and energy efficiency projects take more staff time, and cost 65 percent more to process. Wolfensohn is also pushing his managers to make the Bank more "client-friendly," but many of those clients are not friends of his energy reforms.

Meanwhile, the Bank's Board - to which everyone, including the president, formally reports - appears reluctant to push too hard for energy reforms. Although the Board is dominated by representatives of the industrial country governments that provide the bulk of the Bank's capital, it also includes officials from developing country governments who wish to follow the energy model of rich western countries - including heavy use of fossil fuels. They are skittish about being asked to make reforms that many industrial countries have not yet adopted And even industrial country governments have mixed motivations. Some of their largest companies are eager to land contracts to build the fossil fuel projects the Bank is financing.

The Bank's strong rhetorical support for private industry involvement in the energy sector is also open to question. Though it lauds the move to "privatization" of energy industries in developing countries, the Bank's operations staff appears to have cozy relationships with many of the state-owned mining, petroleum, and power companies that are most resisting those reforms. Many of these government monopolies are now bankrupt in all but name, and World Bank loans appear to be delaying their conversion into more efficient private companies. This failure has clear environmental costs: many of the most polluting energy projects underway today are being carried out by these poorly regulated - often corrupt - state-owned companies.

At the same time, the Bank's support for energy efficiency is half-hearted, even today. A generous $100 million World Bank/GEF loan package for Brazil's National Electricity Conservation Program was crawling through the Bank's operations bureaucracy in 1997, apparently delayed by internal resistance to the "market-interference" that it represents.

Although the Bank continues to defend its energy record publicly, the awkwardness of its position is becoming apparent. At an international environmental meeting in Rio de Janeiro earlier this year, Wolfensohn was questioned about the Bank's continuing support for fossil fuel projects. He replied that most of the projects were products of an earlier era that had not yet cleared the pipeline, but then he [TABULAR DATA OMITTED] went on to argue that developing countries could not be expected to do entirely without fossil fuels. In fact, no one had suggested going to that extreme.

A psychiatrist might conclude that the World Bank has developed a severe case of schizophrenia. While its policy staff is motivated to churn out an endless series of new policy papers and initiatives, its operations staff argues strenuously against any additional red tape that would slow down their ability to process loans for "desperately needed" fossil fuel plants. Rhetorically, the president and at least a portion of the Board are allied with the policy staff, but on the ground their priorities are less clear.

Confronting the Greenhouse

During the past few years, the global climate problem has dramatically raised the stakes for energy reformers at the World Bank. Climate change presents a real threat to the development prospects of the Bank's client countries. Recent scientific studies suggest that rising seas could displace hundreds of millions of people, while shifting weather patterns begin to cut food production and spread infectious diseases (see the article beginning on page 10).

As the single largest financier of fossil fuel projects in developing countries, the World Bank has been struggling with its appropriate role under the climate treaty. The Bank is prohibited from making loans in violation of any legally binding international agreement, but its fossil fuel lenders get around this by arguing that most client countries are not yet obligated to reduce their emissions. Meanwhile, their colleagues in other lending institutions are seeking new ways to edge developing countries toward limiting their greenhouse gas emissions.

One such funding vehicle is the Global Environment Facility (GEF), which was set up by the international community in 1991 as a new funding mechanism to provide developing countries with assistance in addressing "global" environmental problems such as the destruction of wildlife and climate change. The intent was to provide grants (not loans) for projects that might not be financially viable based on local economic considerations, but that could be justified in global environmental terms. The GEF is an independent fund, with its own governance structure, and has been designated as the interim funding arm of the Framework Convention on Climate Change. Still, the World Bank heavily influences the GEF, in part because the Bank, along with the U.N. Development Programme and the U.N. Environment Programme, is an implementing agency for the GEF. Many GEF projects are attached to larger World Bank loans, and the GEF is located just a block from the World Bank, where it has recruited some of its key staff.

Since it was founded, the GEF has provided roughly $700 million for addressing climate change funding a number of innovative carbon-free energy projects. Some of the money has gone to improved energy efficiency, including a project to install 1.7 million high-efficiency light bulbs in the Mexican cities of Monterrey and Guadalajara. Additional funds have gone for renewable energy. India, for example, has received grants for solar and wind energy projects, supporting the booming renewables industry there. Another innovative project funded by the GEF is an effort to adapt jet engine technology to sugar cane waste in Brazil. Unlike a natural gas-fired generator, this one would add no additional carbon dioxide to the atmosphere. So far, $8 million has been spent on a system that gasifies the cane residues, which then fuel a small gas turbine to produce electricity. Studies suggest that countries with large sugar industries could provide much of their power this way - at a cost that is comparable to that of fossil fuel plants.

The scale of these projects pales in comparison to the Bank's own energy lending, but rebels inside and outside the Bank see the the GEF as a Trojan horse that might gradually infiltrate the Bank and then transform its energy loan portfolio. In practice, GEF projects have often been tacked onto much larger energy loans (in part to avoid the need to prepare entirely new projects along with their accompanying paper work), that may actually be adding to carbon emissions. In describing their energy loan portfolio, Bank officials sometimes airbrush the picture by blurring the line between Bank and GEF funds - leading some critics to fear that the GEF is becoming an excuse for not using more Bank funds for the innovative technologies. Bank environmental officials respond to these arguments by noting that combining Bank and GEF funds can sometimes provide additional "leverage" for the GEF. Moreover, they say, the presence of the GEF has encouraged the Bank's operations staff to work with the new energy technologies. Whether the Trojan horse effect will ultimately be realized remains to be seen.

In addition to working with the GEF, the World Bank's environmental staff is looking for other ways to address climate change. One initiative is the "global overlays" program, an analytical effort to build global environmental factors into the project development and energy planning efforts of developing countries. For example, a recent carbon "backcasting" study conducted by consultants to the Bank found that if even a modest "price tag" of $20 per ton of carbon emissions - reflecting the many potential costs of climate change - were placed on World Bank energy projects at the time the cost-benefit ratios are calculated, some 41 percent of them would no longer be deemed financially viable. If such criteria were used to evaluate the Bank's prospective energy loans, many of the fossil fuel projects now in the pipeline would have to be canceled. But Bank officials have not yet agreed to implement this reform.

Taking a new tack in 1997, the Bank's environment department began to explore the possibility of its managing a dedicated fund to reduce greenhouse gas emissions. Seizing on the growing interest of countries such as Norway, Costa Rica, and the United States in the possibility of a global emissions trading system that might be adopted in Kyoto, Bank environmental officials suggested that the World Bank's lending expertise makes it an appropriate home for the proposed Carbon Investment Bank. This proposal caught Wolfensohn's attention, leading to his announcement at the U.N. in June. Reports in late 1997 indicated that governments and companies have informally committed an initial $100 million to this new fund.

This latest greenhouse fund proposal reflects the continuing search of the Bank's policy departments for new projects and services that respond to Wolfensohn's pleas for innovation, and reflect their own openness to change. But many observers, including some in the Bank's own environment department, doubt whether this new fund is an appropriate role for the World Bank. Others wonder whether, like the GEF, the new fund could become an excuse for not altering the Bank's core lending priorities. Already, the new fund is absorbing policy staff time, while the operations staff keeps the fossil-fuel lending in high gear. Within the Bank, the struggle continues.

To Kyoto and Beyond

The stakes of this struggle were raised in 1997 when powerful U.S. industrial interests decided that they would base their opposition to a strengthening of the climate treaty in Kyoto on the fact that developing countries are not included in the proposed limits. Reflecting this concern, the U.S. Senate adopted a nearly unanimous resolution in July suggesting that it would not ratify a climate protocol limiting U.S. emissions unless it "mandates new specific scheduled commitments to limit or reduce greenhouse gas emissions for developing country parties."

Developing country officials have expressed outrage at this resolution, believing that it unfairly places too much of the burden of dealing with climate change on countries with per capita emissions levels that are less than one-tenth those found in industrial countries. The challenge now is to come up with a formula that works for everyone - economically empowering climate policies in industrial and developing countries alike, with the industrial countries helping to fund new energy technologies for the poorer nations. Wolfensohn would like the World Bank to play a key role in that effort.

In late 1997, another round of reform was underway with the preparation of a new "energy and environment strategy," involving extensive consultation with non-governmental organizations. For the first time, the issue of climate change was being seriously considered in the new plan - which is due to be approved by the Bank's Board in time for presentation at the climate negotiations in Kyoto in December. Lending weight to the effort was a midyear decision by Wolfensohn to replace the head of the Bank's environment department with one of the world's top climate scientists, Robert Watson. Described by The New Scientist as "a shaggy, outspoken English chemist who looks more like a biblical than a scientific prophet," Watson is an odd fit for the Bank's blue-suited culture. Even more distinctive is his background: he has been credited with singlehandedly marshalling the scientific consensus that helped forge the historic Montreal Protocol on ozone depletion in the 1980s.

Today, Watson leads not only the Bank's environment department but the International Panel on Climate Change (IPCC), the scientific body that is responsible for advising the climate negotiators who will gather in Kyoto in December. Indeed, Watson knows many of those negotiators on a first-name basis. In an indication of the kind of conflicts now raging along the Bank's carpeted halls, Watson told the news daily Greenwire in September that "we should analyze the climate consequences of all of our projects, and then we should look to see if there is a more climate-friendly alternative."

Given his views, Watson must have been discouraged by the early draft of the Bank's 1997 energy strategy paper, which appeared in August. It was academic in tone, lacked a substantive analysis of the Bank's energy lending record, and contained only a few weak policy proposals. If this was a "blueprint for reform," it seemed questionable whether the edifice would ever be completed. The forces at work in the draft could be seen in a press release that appeared on the Bank's website earlier in the summer. Apparently written by the Bank's office in India, it was an unapologetic defense of the Bank's heavy support for India's government-owned coal company - proclaiming coal as "the backbone of India's energy economy" and the "least-cost option for the bulk of India's energy needs for the foreseeable future." The paper goes on to dismiss renewables and natural gas as energy options that are viable only in the long run.

Such papers lead one to despair about whether the World Bank can ever be reformed. Some might argue that at this juncture it should get out of energy entirely - and concentrate on health, education, and other social priorities. Perhaps so, but James Wolfensohn, for one, seems ready to give it one more try. As a result, the World Bank bureaucrats who are most resisting change seem to be on a collision course with the new head of the Bank's environmental department - and perhaps with Wolfensohn himself. As Kyoto approaches, the results of that confrontation are still uncertain, but the outcome could help determine whether that landmark agreement marks a serious and successful effort to stabilize the earth's climate.

The essential elements of a new climate-sensitive energy strategy for the World Bank are fairly easy to identify. The first step is for the Bank's Board to announce that from now on in the energy sector, the staff's record will be judged by the emissions reduced - not the amount of paper produced or dollars of loans processed. And what might the details of that strategy look like? Models can be found at the European Bank for Reconstruction and Development and the Asian Development Bank, each of which has already implemented important reforms. The Asian Bank has substantially increased its support of energy efficiency in the past two years, and now requires that potential climate impacts be included in all energy loan proposals. Meanwhile, the European Bank has established a special energy efficiency unit with expertise in locating and shepherding productive energy efficiency investments.

For the World Bank, an effective energy reform strategy would also include a requirement that client governments develop independently audited energy strategics that identify the least-cost mix of technologies, accounting fully for local and national environmental costs. The Bank would then work in tandem with private lenders to finance that mix - while carrying a special responsibility for financing the newer alternatives. The Bank might also insist that these energy plans contain specific policy changes - including commitments to phase out subsidies for fossil fuels, provide incentives for new technologies, and implement efficiency standards for all new automobiles, appliances, commercial buildings, and industrial equipment.

The Bank also needs broader goals to aim for in its energy lending, including a gradual re-balancing of its fossil fuel loans - reducing support for coal, and increasing that for natural gas. Another promising proposal can be found in a "background paper" issued by the Bank's environment department when Wolfensohn addressed the U.N. in New York. It proposed that the Bank commit $600 million per year over five years (20 percent of its total energy lending) for renewable energy, with the GEF providing another $150 million. This would be a large enough capital infusion to get renewable energy markets off the ground in several developing countries, but for this hope to become reality, the Bank will still have to find ways to effectively target the funds to smaller scale projects.

It is also important, in the current period of massive private capital flows, that the Bank devise new means of using its own loans for leveraging private investments. Important steps in this direction could include expanded IFC support for private energy efficiency and renewable energy projects, as well as Bank-sponsored performance guarantees for innovative, commercially-financed energy projects.

Describing these reforms is easy; navigating the political currents within the World Bank's bureaucracy and Board is far more difficult, as Wolfensohn himself has begun to discover. But helping developing countries join an energy revolution, and stabilizing the world's climate, are essential goals that are well matched to the World Bank's historic legacy, as well as to the forward-looking concerns of its present chief. If these goals are not met, the Bank's central mission - reducing poverty - will eventually be undermined as well.

RELATED ARTICLE: ASIA ALTERNATIVE ENERGY UNIT

The World Bank is learning about climate-friendly energy lending from a pilot program launched with outside aid in 1992: the Asia Alternative Energy Unit (ASTAE). This small band of energy analysts has a big job: to help client countries and Bank operations staff pursue renewable energy and energy efficiency investments in Asia, where two-thirds of the world's new power capacity will be installed in the next decade.

ASTAE is focusing on markets where new energy technologies are commercially and economically viable. Its largest endeavor to date is $141 million in loans and grants to India, where the government is commissioning seven small wind farms with a combined capacity of 26 MW; 15 mini-hydro plants with a collective output of 68 MW; and various solar applications, from lanterns and water pumps to grid-connected power.

Since financing alone will not develop new energy technologies, ASTAE gives equal weight to building local capacity, creating technical standards, and telling potential customers about financial options. Moreover, ASTAE knows sustainable markets rely on the private sector. Thus, part of a $30 million package to Sri Lanka will go to a credit line for companies and NGOs that install mini-hydro and solar systems. And ASTAE was quick to point out that if Sri Lanka wanted to promote solar businesses, then import tariffs on solar panels would have to go. Such policy advice is one of the Bank's biggest contributions, according to ASTAE's Loretta Schaeffer.

ASTAE's pioneers are already seeing results. In 1992, the sole renewable energy effort of the World Bank and the Global Environment Facility in Asia was a $2 million solar-power component of a telecommunications project in Nepal. Five years later, 33 projects worth $1.3 billion are at some stage of planning or implementation in 12 Asian countries.

- Molly O'Meara

Christopher Flavin is Senior Vice President at the Worldwatch Institute.