Power Banking

If the World Bank refuses to fund a controversial coal-fired power plant in South Africa, the most likely outcome isn't more clean energy -- but rather a financial arrangement that neglects it.

A major showdown is under way at the World Bank over a coal-fired power plant under construction in South Africa, which if approved would be the largest and dirtiest investment project the bank has ever financed. The fight pits big developing-world governments and economic development advocates, who argue that the plant is essential to growth and poverty reduction, against those worried about climate change, who contend that the bank should not support carbon-spewing power.

The bank's shareholders -- primarily developed-country governments -- are caught in between. Their vote on the $3.75 billion package, expected April 8, will not only determine the course of this one project, but will influence how global institutions balance their current core priorities with climate change going forward. The debate raging over this plant is a case-study in how multilateral organizations adapt (or don't) their central missions to the emerging focus on climate change. How will these global heavyweights balance their primary goals -- for the World Bank, enabling development -- against the trade-off of pumping more carbon into the atmosphere? In this case, the bank's shareholders should say yes now, but reinforce a cleaner future direction.

The fight over the Medupi plant, a 4.8-gigawatt behemoth -- equal to more than 10 percent of South Africa's current generating capacity, roughly equivalent to five nuclear plants -- is unfolding against the backdrop of two crises. The first is a crisis in South Africa's electricity sector. The country is plagued by chronic power shortages, which are only projected to get worse, crippling economic growth.

When plant construction started in 2007, Eskom, the South African utility that is building it, expected to pay for it through a mix of rate increases, government money, and private financing. But the 2008 financial crisis, combined with mismanagement and poor planning, has left the project unable to tap sufficient private capital. As a result, Eskom turned to the World Bank to keep construction on track.

If this were the entire picture, the case for approving the loan might be relatively straightforward (though mismanagement and corruption would still have to be taken into consideration).

Instead, the debate over Medupi's fate is unfolding against a second crisis in global climate-change policy. Governments are struggling with the task of shifting their economies onto a cleaner, less carbon-intensive trajectory, and the World Bank, with its dominant position in shaping developing-country economies, could be a critical tool in that effort.

Given that, backstopping Medupi would seem to be taking things on the wrong track. Indeed, many argue that the World Bank should instead fund a mix of renewable energy and energy-efficiency projects to close South Africa's power gap.

This is superficially appealing, but it is the wrong way to go. There are simply no alternatives that could provide power at anywhere close to the same cost as Medupi, particularly given that the plant is already partially built. Moreover, the relatively small scale of the renewable energy business (particularly in Africa) would make it impossible to deliver the same capacity as Medupi in the same amount of time.

Perhaps surprisingly, the World Bank loan would also deliver real if admittedly limited benefits for renewable energy. Eskom's original project was focused purely on coal. The new loan, in contrast, would include 100 megawatts of wind and 100 megawatts of solar energy (each equivalent to about a tenth of a nuclear plant).

Although a fraction of the generating capacity of the overall project, these numbers are big in the renewable-energy world. The proposed solar project, in particular, would be the biggest solar-power project connected to the grid in a developing country. Projects of this size would help build technical and regulatory capacity in South Africa, bringing down the cost and risk for future renewable-energy projects, thereby encouraging South Africa's clean-energy transition.

If the World Bank refuses to fund the Medupi plant, the most likely outcome isn't more clean energy, but rather a financial arrangement that neglects it. European export credit agencies might step in, but public opposition would probably be strong. China might come to the table, but most likely without any clean-energy benefits. Alternatively, South Africa could try to fund the project itself, but at the expense of other development efforts (and without the renewable-energy components). The bank, meanwhile, would damage its relationship with South Africa and much of the broader developing world, making it more difficult for it to engage developing countries in promoting climate-friendly growth.

The bank's shareholders should thus say yes. Yet in a world where climate is becoming increasingly important, it cannot let the Medupi situation be the template for future business. Shareholders should emphasize that this is an exceptional circumstance: To the extent that they are necessary, major coal-fired power projects in wealthier developing countries normally can, and should, be financed through private banks.

The World Bank should gradually transition to a model that supports expanded generation only in states that do not promote inefficient consumption -- something South Africa has failed to do by subsidizing a bloated industrial sector. Indeed the bank should consider further linking its support for energy projects to pro-clean-energy policy reforms in recipient countries, in order to boost its long-term impact.

Such steps are important not only in their own right, but because other international institutions will undoubtedly look to the bank for cues. Last December's U.N. climate negotiations in Copenhagen made clear that there will be no single answer to the climate challenge. A proliferation of initiatives and institutions is much more likely. And because new institutions are so difficult to establish, policymakers will likely turn to existing ones, such as the World Bank, for solutions.

We recently published a study that surveys existing institutional capacity to deal with climate change. Two findings stand out: There is an extraordinary amount of capacity out there waiting to be tapped -- but doing so will increasingly create tensions of the sort that the World Bank is addressing this week.

The World Trade Organization (WTO), for example, will need to balance an open trading system with carbon tariffs that might be part of national climate-change policies. The G-20 will decide how much time to devote to climate as it still struggles to get a grip on the global financial system. Development efforts by organizations like the U.N. Development Programme will need to incorporate climate risks into their activities, as will disaster relief agencies like the World Food Programme. The International Atomic Energy Agency will face pressure both to facilitate the spread of near-zero-emissions nuclear power and to clamp down on nuclear proliferation.

These institutions will need, in each case, not only to balance competing priorities, but also to maintain strong relations with the states they seek to influence. Just as the World Bank would have little leverage over South Africa if it alienated it through its decision on Medupi, the WTO will have little influence on states that decide that the WTO is out of touch with current reality. The G-20, meanwhile, would have little power if its developing-country participants decided that it was focusing too much on climate change and not enough on their own immediate economic priorities.

All of which reinforces the importance of this Thursday's vote on Medupi. The world will not succeed at tackling climate change if it attempts to make it its sole priority -- but it will also fail if its international institutions continue with business as usual. This Thursday's vote, and the World Bank's strategy going forward, will be an early indicator of how the world will handle this tension. But it will certainly not be the last time it will need to be addressed.



It's Not About the Treaty

What Prague means, and doesn't mean, for the future of nuclear weapons.

Arms control is not magic, even if it seems to have high priests and secret codes.

The lesson of the Cold War is that all those complex negotiations and treaties are not by themselves agents of change, but the result of much deeper, underlying forces and the actions of people. Sure, a treaty is vital to lock in decisions and prevent cheating. But of far greater importance are the reasons that brought the two sides to the table in the first place: economics, politics, technology, and military power, as well as the role of leaders such as U.S. President Ronald Reagan and Soviet leader Mikhail Gorbachev. The most effective nuclear arms-control measure of all time was not a treaty, but rather the demise of the Soviet Union and the superpower competition along with it. What caused it? A dysfunctional economic and political system imploded.

So let's hold off on the overheated hyperbole about the Prague treaty that U.S. President Barack Obama and Russian President Dmitry Medvedev are set to sign Thursday. As long as the weapons are still around and on alert, it is unquestionably worthwhile to limit them in a treaty with solid verification provisions. Obama promised last year in his speech in Prague to deliver a treaty that is "sufficiently bold." This one is sufficient, but it's modest, not bold.

High hopes for treaties have often not been realized. Two major treaties negotiated with difficulty, Salt II and Start II, never went into force. The Biological and Toxin Weapons Convention entered into force, but was so toothless the Soviet Union violated it immediately and seriously. The Anti-Ballistic Missile Treaty was abrogated by the United States.

Instead of celebrating this week and breathing a sigh of relief, what we should be doing is getting ready to seize the next big opportunity to reduce the nuclear danger. Russia still looms large. Together, Russia and the United States hold 95 percent of the world's nuclear weapons. It is vital to move on to the next phase: reducing tactical nuclear weapons, dealing with the large "hedge" of nuclear warheads in reserve, resolving conflict over missile defense, shoring up the weakening global nonproliferation regime, and combating terrorism, among other things.

Yet to do this we must see clearly the underlying forces shaping Russia. The Kremlin may not be eager to negotiate or concede anything soon, wary as it is of NATO at its doorstep and the weakness of its conventional forces. Whoever really governs Russia -- whether it's President Medvedev or Prime Minister Vladimir Putin -- may want to stand tall and not negotiate further reductions. Even so, we should try. We inherited a promising age after the Cold War, when the superpowers are no longer at the brink, so let's make good use of it. It can't be as hard as making a deal with the Soviets' long-serving General Secretary Leonid Brezhnev and steely Foreign Minister Andrei Gromyko.

The Russia challenge is far from the only nuclear dilemma Obama faces. In Iran and North Korea, two of the most-pressing nuclear-proliferation cases of our day, there are clear signs of internal tumult. Iran's leadership struggle and North Korea's faltering economic experiments are relevant to the nuclear question -- hugely -- perhaps even more than the episodic P5+1 or six-party talks the international community convenes to bring them to the negotiating table. Trouble on the streets or desperation among the elites, might drive these leaders to pursue nuclear weapons despite sanctions and pressure from outside. Perhaps, too, pressure might trigger a sudden change that would end their nuclear ambitions. Here, also, history suggests a negotiated solution is unlikely.

Flash back to the long-forgotten Mutual and Balanced Force Reduction (MBFR) talks on conventional forces in Europe, which began in 1973 and dragged on and on between NATO and the Warsaw Pact. The negotiations, which were aimed at reducing the huge armies in Europe, never went anywhere. Then, suddenly, on Dec. 7, 1988, in a speech at the United Nations, Gorbachev announced unilateral reductions in the Soviet armed forces of 500,000 men, including six tank divisions in Eastern Europe. In one day, Gorbachev accomplished more than MBFR had in 15 years. He did it for his own reasons, which were rooted in those underlying forces that were shaking the Soviet Union to its foundations.

The 1987 Intermediate-range Nuclear Forces (INF) treaty, which eliminated an entire class of nuclear missiles with stringent verification, was perhaps the most-successful arms-control deal of the last quarter-century. Yet it could not have happened but for the fact that Gorbachev acted so radically different from his predecessors. He believed the arms race was an albatross, sapping the resources he would need at home to make socialism work. He did something about it, even if the Soviet system could not in the end be salvaged.

Gorbachev had the courage to reverse a decision of his predecessor. In the late 1970s, with Brezhnev ailing, the Soviet Union blundered in deploying the Pioneer, a new generation of medium-range missile, in Europe, apparently not expecting that this would lead to apprehension in the United States and among its allies. As a counterweight, in 1979 NATO decided to station 108 single-warhead Pershing II and 464 ground-launched cruise missiles in Europe, while seeking to negotiate. Reagan proposed in 1981 to eliminate this entire class of medium-range missiles, but the Soviets refused and negotiations went nowhere. The first U.S. missiles were deployed in late 1983.

The Pershing II was feared for its accuracy and speed -- the missile could fly at nearly Mach 8, greater than 6,000 miles per hour, and carried high-precision guidance systems. These were missiles that the Soviet leaders worried could lead to decapitation -- wiping them out while they sat in the Kremlin.

When Gorbachev took office in March 1985, he and some others had already figured out, privately, that the Pioneer deployments had backfired. "I would even go so far as to characterize it as an unforgivable adventure," he later wrote, "embarked on by the previous Soviet leadership under pressure from the military-industrial complex."

When it was signed in 1987, the INF Treaty eliminated 1,846 Soviet Pioneers and 846 U.S. Pershing II missiles. Score one for those big, underlying forces, and individual leadership.

No doubt, in the coming weeks and months, the White House will be tempted to wrap the Prague treaty in all kinds of high-flying rhetoric. But past experience suggests it would be wise to avoid hype and exaggeration. In 1960, John F. Kennedy warned that the United States was falling behind the Soviet Union in a "missile gap" that he later found didn't exist. Nor did the "window of vulnerability" Reagan warned about in 1980. President Bill Clinton signed an agreement with Russian President Boris Yeltsin in 1994 to retarget intercontinental ballistic missiles, which would not prevent them from being retargeted in a matter of minutes. Nonetheless, Clinton boasted in campaign speeches he had "led the world back from the brink of nuclear disaster. There's not a single nuclear missile pointed at an American citizen today for the first time since the dawn of the nuclear age." It was a huge overstatement of what he had accomplished.

For Obama, who has voiced the dream of a world without nuclear weapons, Prague is just the very first step. Arms control is a tool, but no secret codes or counting rules will make the coming tasks easier. They require heavy lifting.

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