Reuters and The Guardian have revealed discussions regarding a new scheme purportedly aiming to shut down coal plants in Asia. This initiative, led by the Asian Development Bank (ADB) and British insurance firm Prudential, aims to bring together various players in private finance. Is this just a case of greenwashing or a real step towards decarbonization of the global energy mix? Reclaim Finance takes a closer look.

If the details of the scheme are to be defined in advance of the UN Climate Change Conference (COP26), the limited information available raises numerous questions which must be answered to guarantee the effectiveness and credibility of such a process.

Perhaps the biggest flaw in this initiative is the profile of the financial institutions reported as potential stakeholders, the banks Citi and HSBC and asset manager BlackRock, through its subsidiary BlackRock Real Assets. These are some of the biggest financial supporters of fossil fuel companies, including those which are active in the coal market.

Citi is the fourth largest lender in the world to companies developing new coal-fired plants, and BlackRock is their second largest investor. Alongside Prudential, who are leading this project, and HSBC, they are amongst the financial institutions with the worst policies in the coal sector. If these companies genuinely wish to contribute to the fight against climate change, they must do a lot better than simply painting themselves as firefighters on hand to put out the fire over the next fifteen years. They should focus first and foremost on no longer lighting fires themselves by refusing to fund the companies who are building new coal plants.

To limit global warming below 1.5°C, all coal plants must close by 2030 in European and OECD Member countries, and by 2040 for the rest of the world. On paper, this project seems to match up to climate science, as it aims to close plants over the next 15 years, i.e. before 2040. However, on closer inspection, the IEA’s recent scenario highlights the importance of fast-tracking the closure of the least energy efficient plants before 2030. In 2020, across all Asian countries, the majority of plants made use of the most polluting technology, termed ‘subcritical’. Is this initiative going to prioritise the closure of subcritical plants and if so, will they be closed by 2030?

The alternative is that this project will actually offer a lifeline to these highly polluting plants by allowing them to remain profitable for longer. It is important to remember that operating coal plants is no longer profitable in the majority of the world due to the rapid development of renewable energy sources. While the evolution of this market could push the companies running coal plants to close them in the face of cheaper competitors, these plants are currently set to continue running for the next 15 years. This is therefore more of a delay than a planned closure.

What controls are in place to ensure that this project is really going to reduce the quantity of CO2 emissions produced? There is a risk that plant operators will make up for the shortened timeframe available for exploitation by running the plants more intensively over the next 15 years – essentially nullifying any perceived reduction in CO2 levels.

There is also the question of the earnings to be gained by the coal assets’ current owners upon resale. Will this income support the energy transition or in fact slow it? There is a risk that these companies, often big players in the energy market, will use this resale money to keep investing in fossil fuels – in gas plants or even, potentially, other coal-fired plants with an eye to benefiting once again from the resale mechanism. The ADB must therefore put controls in place to prevent this kind of perverse result.

According to Prudential, this project would open up more space for renewable energy, though it is too early to confirm this. The initiative, in principle, looks to allocate funds raised by the financial players to an investment fund for renewable energy. Although this is a good idea on paper, it will only be good news if the renewable energy projects benefitting would not have already secured capital in the market without the scheme.

State intervention would be appropriate if this attracted private actors to projects whose social and environmental nature brings with it an additional cost or risk. With the lack of clarity surrounding the quality of financed projects, this initiative could end up paying private operators to develop assets in the renewable market which they would have developed in any case to make a profit.

Reuters’ article accurately outlines the main beneficiaries of this project. The lion’s share of financial risks associated with the project would be taken on by the development banks, while private companies and investors will be attracted to participate in the scheme, as they will likely benefit from it economically and financially.

What of the employees and the employment market surrounding these plants? Nothing has been stated regarding the support which will be necessary for the conversion, nor regarding who will take on this responsibility. For the moment, there has also been no detail on the state of play of the resale, nor who will pay the bill for the pollution caused by the operation of the plants.

In conclusion, it is too early to ascertain the effectiveness of this process, though one thing is certain: the financial players involved have not had a Damascene conversion to the cause of protecting the climate. Their communications using their involvement in the scheme to cast a favourable light on their climate commitments can only be interpreted as a vast greenwashing exercise, as long as they continue to financially support the expansion of the coal market.