Ambition to Action: Finance Is Critical to Accelerating the Coal Transition
New RMI report provides financial solutions to global coal transition.
Glasgow, UK – November 3, 2021
A growing number of countries are committing to phase out coal—an action that the U.N. Secretary General has cited as “the single most important step to get in line with the 1.5°C goal.” While this ambition is exciting, policymakers and utilities now need solutions to turn commitments into action—and finance is a critical tool to enable a rapid, smooth and equitable transition, a new RMI report released today finds.
The report, Financing the Coal Transition, is coming at a time when the coal transition—and financial solutions to support it—are proving to be an important topic at COP26, the global climate change conference sponsored by the United Nations in Glasgow.
Despite the falling economics of coal compared with clean energy, 93% of coal plants are shielded from competitive pressure—through long-term contracts, regulated electricity tariffs, or subsidies—allowing them to continue operating long after they cease to be economic. As a result, coal’s costs largely fall on local communities, both through their direct costs on electricity bills and their unpriced impacts on local health, the climate and the environment, the report notes.
Financial mechanisms provide a way to address these contractual and structural barriers to the coal transition, while mitigating the impacts of coal phaseout on the most vulnerable. By shifting the costs, benefits, and risks of the coal transition across stakeholders, financial mechanisms can align incentives across governments and commercial, environmental, and community groups.
“Though not a silver bullet, the ability of financial mechanisms to generate consensus can enable progress on the coal transition today, which will be critical as we move into this decisive decade for climate action,” said Koben Calhoun, principal for RMI’s Carbon-Free Electricity program.
Financial mechanisms studied in the report include private-sector instruments, such as ratepayer-backed bond securitization; public or blended finance vehicles, such as the Asian Development Bank’s Energy Transition Mechanism; and more innovative approaches, such as monetizing the benefits of reduced emissions to compensate coal plant owners for the early closure of their plants. The report also presents a first-of-its-kind analysis evaluating the impact of using different types of financial mechanisms to retire and replace an existing coal asset, finding that while the financial mechanisms result in net benefits, they vary in how benefits are distributed across stakeholders.
Although financial mechanisms hold enormous potential, the report warns that they also carry risks. These mechanisms must provide sufficient incentives for coal plant owners to close assets.
“Determining what is ‘sufficient’ can be gamed, however, by owners who have access to inside information and often wield outsized political and economic clout, making it easier for them to extract excess profits in a transition,” said Tyeler Matsuo, senior associate for RMI’s Carbon-free Electricity program.
To ensure that financial mechanisms are crafted to deliver on their climate and social objectives, the report proposes five guidelines:
- The mechanisms should distribute fairly the costs and benefits of a coal-to-clean transition, ensuring just and equitable outcomes for all stakeholders—particularly the most vulnerable, including those whose jobs are threatened by coal shutdowns.
- The mechanisms should be employed only to support the retirement of coal plants that otherwise would continue operating to the detriment of electricity customers and the climate.
- The mechanisms should support a managed phaseout that minimizes economic and social disruptions.
- The mechanisms should foster transformational change that promotes a move to clean energy and avoids locking in another fossil fuel, such as natural gas.
- The mechanisms should be scalable and replicable.
The full report can be accessed at: https://rmi.org/insight/financing-the-coal-transition
Dina Cappiello, at COP26,
RMI is an independent nonprofit founded in 1982 that transforms global energy systems through market-driven solutions to align with a 1.5°C future and secure a clean, prosperous, zero-carbon future for all. We work in the world’s most critical geographies and engage businesses, policymakers, communities, and NGOs to identify and scale energy system interventions that will cut greenhouse gas emissions at least 50 percent by 2030. RMI has offices in Basalt and Boulder, Colorado; New York City; Oakland, California; Washington, D.C.; and Beijing.