Dec 07, 2021
For the first time in history, G7 leaders recognize coal power generation as the single biggest cause of greenhouse gas emissions, and that left unbated, it is incompatible with achieving 1.5oC aligned decarbonization. In response, commitments were made to move the G7 countries swiftly and justly away from coal in line with their 2030 NDC agreements; while the UK, Germany, USA, and Canada also pledged up to $2b of funding to the Accelerating Coal Transition program (ACT) to support the global transition during 2021. This is a welcome commitment to a future that is safe and just.
Emissions from active coal plants represent 21% of carbon emissions globally. However, the transition away from coal is more complex than it looks. The call for simple divestment can leave many existing coal power stations and mines still in operation, just in less responsible hands. Furthermore, as developing economies, these regions are susceptible to a range of broader contextual dynamics that lock them into using existing coal resources and investments and significantly constrain their coal transition capabilities, relative to their OECD and G7 peers. Addressing these constraints to a sustainable energy transition represents one of the worlds’ greatest opportunities of achieving the Paris Agreement Goals.
Supporting these economies in their transitions is not astronomical, particularly when considered against the cost of inaction in the coal sector. In a recent RMI analysis, taking a group of developing economies with an aggregate coal capacity similar to the third largest coal powered producer in the world – the USA- replacement of the entire fleet of coal plants in these regions, would have cost $38b in 2020.
In the recent landmark report from the IEA, the research stated that achieving net zero was possible. However, to get there, no additional new financial investment decisions should be taken for unabated coal plants, the least efficient ones must be phased out by 2030 and the remaining plants should be phase out or retrofitted to carbon capture and storage facilities by 2040.
Leaders around the world stand before an unprecedented opportunity for leadership, to step up and support the world’s most needed, and one of the most cost-effective lifelines for keeping our world within 1.5oC. The Climate Investment Funds commend the UK, United States, Germany and Canada, for their recent commitments to international coal decarbonization. We look forward to working with those G7 countries and other developed countries and G20 to step up those commitments and Act Now.
The complex issue of coal
In the IPCCs latest global scientific assessment from working group I of the 2022 AR6, it is now proven that human activities have unequivocally caused the climate crisis. The climate impacts experienced at just 1.1oC warming this year are weighing heavy on our minds. However, it is back to the IPCC’s findings where even in the most aggressive climate action scenario, temperatures will only level out at 1.9oC by 2100 that lays bare the scale of the challenge ahead of us.
To reduce the impacts of catastrophic climate change, carbon emissions need to reduce by 45% from 2010 levels by 2030, and reach net zero by 2050. As of 2020, coal emissions represented 39% of global carbon emissions, and in order to keep the goals of the Paris Agreement in sight, no less than an 80% reduction of coal-fired power generation below 2010 levels is required, by 2030. As a result, coal marks the biggest impact potential from a single fuel source the world can make in this fight against climate change. However, progress is slow, why?
In a recent report from the Rocky Mountain Institute which draws data from 95% of the worlds’ coal capacity, it states that the cost of renewables have now fallen so far, that even building brand new onshore wind and utility-scale solar photovoltaics (PV) projects, including battery storage - is already cheaper than continuing operations of 39% of the world’s existing coal capacity. By 2025, that number will increase to 78%.
At the same time, the total cost of phasing out the global coal fleet is already surprisingly small and shrinking fast. To phase out and replace the remaining competitive coal plants, would require $161b in transition subsidies in 2020, $84b in 2022 and just $29b in 2025.
However, one of the important barriers to accelerating the phaseout of coal is lesser known. As of 2021, 93% of the global coal plants needing to be retired are artificially insulated from the true competition from renewables because they are tied into long term contracts and non-competitive tariffs for years, or even decades. Such agreements can span from long term power purchase agreements (PPAs), regulated rates of returns to asset owners, through to government mandates to state owned enterprises (SOE). All of which make it incredibly hard to break agreements, without facing significant financial, social, legal, and political implications for doing so. As a result, coal plants often continue operating long after they have lost their cost-competitive edge – even up to 30 years in the example of long term PPAs.
Elsewhere in the transition, coal subsidies remain an issue. In a recent report, it was identified that across the G20 governments in the 2016-2017 period, US$27.6 billion in domestic and international public finance, US$15.4 billion in fiscal support, and US$20.9 billion in state-owned enterprise (SOE) investments per year, were still being directed to coal. These subsidies enable an entire cohort of coal stakeholders to maintain the status quo and dangerously delay the worlds’ decarbonisation trajectory.
While the transition out of coal is inevitable, ensuring that this transition is a just transition will require careful attention being given to social inclusion and distributional impacts. Specific to developing economies, many countries are still on the path to the most basic universal energy access, let alone switching from fossils to renewables. For those that do have access, the rapid transition out of coal introduces social, economic and political challenges that are exacerbated in developing country contexts. This is because they often lack the financial capacity to support the sorts of planning processes, economic diversification, social protection, and skills development associated with a smooth transition. As an example, many coal dependent areas lack the vital opportunities for alternative employment and livelihoods. To resolve this requires the involvement of coal workers, adjacent communities, business leaders and government departments in dialogue and working together in planning processes. Through such planning, the impacts of new opportunities and potential harms and losses can be managed in ways that do not further marginalize already vulnerable communities, but it takes extra time and resources that many countries don’t have access to.
The important role of public finance institutions
As the IEA report importantly stated, rapid coal transition is possible, but it must start in earnest today – To achieve that public finance institutions, like Multi-Lateral Development Banks (MDBs) and Development Finance Institutions (DFIs) have an important role to play.
For over a decade now, the climate action community have steered away from engaging an investing into the coal transition. Perhaps this was an adequate strategy in the 2010s. However, with renewables now cost competitive and the global political agenda more aligned on accelerated climate action than ever before, there is now an urgent need for the essential support programs to be put in place, to kick start global developing economies on their journey to decommissioning their coal fleets, before it is too late.
The intelligent placement of the limited available global financial resources into tried and tested programmatic approaches will be critical. Such approaches have seen record successes through renewable energy programs for over a decade now, and similar approaches must now urgently be applied to coal transition, in the countries around the world that need it most.
Furthermore, as recognized by Bloomberg New Energy Finance (BNEF), the use of concessional finance has been recognized as a “secret sauce” for accelerating development of low-carbon technologies in emerging economies for years. The pairing of clean energy with affordable, flexible financing has been instrumental in making infrastructure like wind or solar power more cost-competitive, than fossil-fuels.
Concessional funds are unique as they can unlock problems in a system that no other type of finance can achieve. It can act as a catalyst to crowd in further private sector capital, it can lend in non-OECD countries at interest rates well below industry standard and it can invest into deeper, systems-level change, that is often considered un-investible or too risky for more mainstream capital.
These funds also play an important role in protecting the interests of the tax-paying citizens who ultimately fund these projects. The somewhat bitter-sweet and little -known truth behind this transition is that due to the runaway success of renewable cost competitiveness over the last decade, it has recently been identified that if the world were to replace uncompetitive coal today with clean energy, tax paying electricity customers could already be saving $33b in 2020, $73b in 2022, and a staggering $136b by 2025.
How the Climate Investment Funds is enabling world leaders to ACT now
While the developed world has recognized the importance of transitioning towards cleaner, greener, and better sources of energy and allocated large pools of funding to match this commitment, until now there has been no such initiative that supports similar ambitions of developing economies.
At the same time, while many roadmaps and technical advisories for the coal transition exist, the situations and resultant funding requirements will very often country specific. This calls for a well-structured, but flexible source of capital that can enable local stakeholders to choose from a number of models and approaches to be tested and ultimately deployed at scale in their regions.
Building on over a decade of experience in kick-starting renewable industries in emerging economies, CIFs Accelerating Coal Transition (ACT) investment program answers these needs by offering a holistic toolkit to tackle three critical and deeply inter-linked challenges associated with a transition away from coal: governance, people and infrastructure.
The program is set to support both public and private sector entities, coupling potential investments with a financial toolkit and targeted technical assistance. Concessional funding in this context, will be used to tackle three critical challenges associated with the coal transition – governance, a just transition and existing infrastructure. Governance will include consulting with key stakeholders to build technical and institutional capacities, at the same time as developing transformation strategies and plans. The just transition activities will look to support socio-economic measures to minimize the impacts on people and communities most affected by the transition, and finally, the infrastructure work will prioritize demonstrations in reclaiming and repurposing of existing infrastructure, in order to identify the most effective transition models that can be replicated elsewhere.
Unique to the business model of CIF, the funds of this program are deployed to and supported by MDBs who have direct and long-earned experience in supporting their regions with the coal transition. Furthermore, all concessional capital deployed is developed with the self-same programmatic approach to finance that CIF has delivered with all its strategic programs for over a decade. Critically, these programs are developed with and alongside country government leaders working collaboratively to plug the gap in current energy and coal transition strategies. They are informed by multi-stakeholder consultation, and combine a suite of market readiness activities with a series of strategically linked investments - all unified by a single, transformative vision.
An important commitment with this program is using limited public finance to mobilize additional, less tapped sources of funding. CIF sees this as both a responsibility and an opportunity to do more with less, during this critical decade for climate action. In response to the $2b pledged at G7, CIF is expecting to leverage $8-10b of private sector capital and channel into the transition based on preliminary estimates.
The phase out of the single biggest source of carbon emissions has proven to be possible, with a net cost to society ($116b) that’s about 0.001% of global GDP or about a 1/10th of the total value of Amazon.Without timely and dedicated action, multiple generations will be gravely affected.
This is not an economic policy decision, it is a moral imperative. Together with the MDBs and our sovereign donors, we at CIF, urge you to act now, ahead of G20 and COP26 and invest into our common goal of an accelerated coal transition.
