Report | 2022
Guidelines for Financing a Credible Coal Transition
A Framework for Assessing the Climate and Social Outcomes of Coal Transition Mechanisms
Today, more than 95 percent of coal consumptions occurs in countries that have pledged to phase out coal or achieve net zero emissions. Despite these positive commitments, coal emissions have plateaued at a high level, with existing coal plants expected to draw down two-thirds of our remaining 1.5°C carbon budget unless action is taken to transition the current coal fleet. Many of these coal plants operate in markets where regulation or contractual structures insulate them from competition, allowing them to remain profitable despite the rapidly declining cost of renewables.
In this context, coal transition mechanisms (CTMs), or financial mechanisms that support an accelerated, managed transition from coal to clean energy, can be critical tools for turning coal phaseout commitments into action. CTMs are gaining significant interest worldwide, from ratepayer-backed bond securitization in the United States to multilateral development bank programs, such as the Asian Development Bank’s Energy Transition Mechanism (ETM) and the Climate Investment Fund’s Accelerating Coal Transition (ACT) Investment Program. Yet these mechanisms also carry risks that could undermine their ability to deliver on their intended outcomes.
In this working paper, Guidelines for Financing a Credible Coal Transition, Climate Bonds Initiative, Climate Policy Initiative, and RMI introduce a framework to help funders and coal plant owners address these risks, including:
- Risks that the CTM transaction does not deliver positive climate outcomes
- Social, environmental, and economic risks to coal workers, communities, and regional governments
- Reputational risks attached to the optics of providing financing to coal plant owners
This framework is organized into four stage gates that assess coal plant eligibility, coal transition pathways, social protection, and accountability associated with a CTM and puts forward recommended guidelines within each gate (see below).
These guidelines were developed through a consultative process with experts and stakeholders from public, private, and civil society institutions. We expect them to further evolve with both CTM experience and stakeholder needs.
We look forward to hearing your feedback on the guidelines. Please feel free to reach out to the contacts listed in the report to provide any inputs.