Response to GFANZ APAC on financing the early retirement of coal-fired power plants
NewClimate Institute and the Institute for Climate Economics (I4CE) submitted a response to a public consultation on the Glasgow Financial Alliance for Net Zero’s proposed set of voluntary guidance for financing the early retirement of coal-fired power plants in Asia-Pacific. This blog post highlights key points from our submission.
Preventing the worst impacts of the climate crisis, particularly for the most vulnerable, requires halting coal-fired power plants (CFPPs) in the pipeline and retiring a substantial portion of the existing global coal fleet before the end of their technical lifetime. While countries have committed to phase out unabated coal in the Glasgow Climate Pact, 350 GW of new capacity is proposed globally with an additional 192 GW under construction. Coal-fired power generation is anticipated to increase in the coming years in Southeast Asia, China, and India. As coal becomes increasingly uncompetitive with renewable alternatives in many regions of the world, existing and future investments are at high risk of stranding. Considering the situation, the Asia-Pacific (APAC) network of the Glasgow Financial Alliance for Net Zero (GFANZ), an initiative of private sector financial institutions working on climate, founded in 2021, has sought feedback on guidance on how financial institutions can and should engage in the managed phaseout of coal-fired power plants.
NewClimate Institute and I4CE responded to the GFANZ APAC public consultation in August 2023. Based on our current research, we recommend a stronger commitment against new coal – including through intermediaries, prioritizing high-impact retirement on a holistic basis, avoiding carbon credits for phaseout, and leveraging financial institutions’ existing client relationships through their historical coal financing role to meaningfully engage in an accelerated coal phaseout. We expand on these points below:
1. Commitment to no new coal
The GFANZ report grapples with the question of how to balance the realities of APAC countries’ coal policies today with the urgent need for phaseout. To ensure the credibility of phaseout plans, the report identifies three levels for consideration: country, entity, and asset level. While the description notes that the three levels are interdependent, we argued they are not equally important. Country-level considerations are the most crucial, followed by entity-level considerations, with asset-level considerations being the least important. Asset-level credibility of energy transition and coal retirement plans cannot replace or act as proxy for country-level commitments, nor can entity-level commitments be sufficient without country-level commitment to no new CFPPs and an overarching strategy to phase out coal.
To avoid moral hazard and minimize emission leakage, it is important to start with a credible high-level commitment to no new coal plants, and to replace retired CFPPs with renewables. This should be a prerequisite for financing early retirement. Without a credible commitment to no new coal, there is a high risk that retired coal plants are replaced with new CFPPs that lock in emissions and result in no or limited net emission reduction. Most countries with CFPPs in the pipeline have not established targets for phasing out coal.
In countries that have not yet banned new CFPPs and do not have coal phaseout plans, engagement with governments and CFPP stakeholders to adopt ambitious policies and support legislative reforms is essential. Limited climate funds should not flow towards initiatives without credible commitments to phase out coal. Instead, financing can and should aid in advancing renewable energy development and energy system reforms.
2. Concentrate on high-impact retirement
Focusing on transactions having a “sufficiently positive impact” without setting or giving guidance on “sufficient” additionality thresholds risks early phaseout of low-hanging fruit, which could waste limited resources. As the OECD Guidance on Transition Finance recommends, public funds to compensate owners and secure early retirements need to be scrutinized to ensure that funds target assets that are unlikely to be retired on their own. High-emitting plants which are not close to technical or economic retirement should be prioritized. Country-level phaseout plans considering socio-economic impact and energy system development are crucial in informing the sequencing of retirement, and necessary for long-term success.
3. Caution around carbon offsets
While the GFANZ report lists carbon credits for phaseout as a potential revenue stream, we stressed the need for much caution. Carbon credits for coal retirement have inherent conflicts of interest that incentivize CFPP owners to exaggerate potential emissions in a baseline scenario and the finance required to diverge from that baseline. Further, complex geopolitical and economic factors complicate estimating the additionality of emission reductions and attributing them to credits alone. Without additionality, carbon credit buyers offset their emissions without any environmental benefit. There is also a high risk of leakage where one plant is closed but emissions increase elsewhere, negating any climate benefit. As such, even if emission reductions are based on robust assumptions, pure offsetting leads to a zero-sum game not contributing to overall mitigation of greenhouse gases. Alternative revenue streams mentioned in the report should be sought instead, for example the development and sale of zero-emission electricity generation, and the repurposing of coal plant land and infrastructure.
4. Financial institutions’ historical involvement in coal-fired power projects
There is a need for increased emphasis on the historical involvement of financial institutions in financing coal assets and their responsibility to support phaseout. Globally, institutional investors hold over $1.2 trillion worth of shares and bond holdings in the coal industry, and commercial banks continue to channel significant finance to the industry through lending and underwriting.
Financial institutions are in a unique position to lead the way with ambitious coal exit policies and to utilize existing lending relationships with CFPPs to push for credible phaseout plans and real economy emission reductions. Recent research finds the coal industry is reliant on “relationship-based bank-intermediated borrowing”, which makes it difficult for companies to find replacement capital when historic lenders enact strict divestment policies. Financial institutions can seize opportunities within the prevailing interest rate environment and monetary policy phases and, when working with CFPPs looking to refinance, link access to lower capital costs to credible early phaseout commitments. Existing insights into technical and economic considerations from past transactions can also reduce the risk of information asymmetries on assumptions used to estimate how far phaseout plans bring forward retirement dates.
Financial institutions should address early phaseout financing in their lending guidance and move away from financed emissions targets and towards exclusion policies for fossil fuel expansion. Portfolio targets reflecting financed emissions are not a proxy for impact on greenhouse gas emissions in the real economy. Internal divestment strategies that target reduced portfolio emissions can lead banks to avoid financing phaseout. Instead, it would be more impactful for financial institutions to set separate policies and guidelines for early retirement financing that prioritize credibility, emission reduction, financial viability, and just transition.
When it comes to phasing out coal, it is paramount that limited transition finance is channeled to initiatives that have real mitigation impact. Financial institutions need to sufficiently assess the impact of engaging in managed phaseout transactions, to prioritize those with most impact and to safeguard against moral hazard, and emission leakage, ultimately bringing about a larger shift in global energy trajectories.
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