Governments around the world have agreed that coal power must be phased out by 2040 if we are to meet the 1.5°C target (1). But thousands of coal power plants remain in operation, and the pace of retirements of coal power assets must accelerate by a factor of five to reach the 2040 target (2). To achieve this, both public and private sources of finance must stop the continued financing of new coal, and pour funds into sustainable energies and coal phaseouts. Despite net zero commitments, the private financial sector still remains hesitant about investing in the early retirement of coal due to perceived financial risks, a lack of actual and replicable projects, and supposed barriers from banks’ and investors’ own policies and targets. Improved regulations and involvement from the public sector, including finance and guarantees from development finance institutions, are needed to help to break the logjam.
Commercial banks provided
to the coal industry between 2021 and 2023.
A rapid phaseout of coal is the single most important step that we must take to curb climate change (3). Even without any expansion in coal capacity, existing assets will exhaust two-thirds of the world’s remaining carbon budget. However, last year saw the highest net increase in global coal capacity since 2016 with close to 70 GW of coal power coming online and a slowdown in the rate of coal plant retirement (4). Despite net zero pledges, the financial sector continues to pour billions of dollars into coal’s expansion. Commercial banks provided staggering US$470 billion to the coal industry between 2021 and 2023 via loans and the facilitation of capital markets issuances (5).
Coal policies are no excuse for inaction
Hundreds of financial institutions have adopted some form of policy restrictions on financing for coal. These coal policies have been shown to play an important role in decreasing the volume of finance available to the coal sector and so reducing emissions from coal power (6).
However, some voices from the finance sector, most notably from the Glasgow Financial Alliance on Net Zero (GFANZ) are stressing that these internal policies along with financed emission targets have the unintended consequence of preventing financial institutions from any new investments in coal, even if it is for the early decommissioning of a coal asset (7).
But this line of reasoning is weak. Such policies are internal rules that institutions can update to allow for precise language permitting investments in the decommissioning of coal assets, while still restricting finance for the coal sector more broadly. A small number of banks including HSBC and Standard Chartered have already added exceptions within their coal policies that allow them to provide financing for the “early retirement of thermal coal assets” (8). The Net-Zero Asset Owner Alliance proposes that its members create carve-outs in its financed emission targets for high-emitting assets with transparent and well-defined decarbonization strategies (9).
To provide clarity that there should be no conflict between robust coal policies and investing in coal retirements (provided these have strong safeguards), we are reviewing our methodology for ranking projects and phaseout policies in the Coal Policy Tracker.
“Phaseout emissions” as a new category
The argument that financing coal phaseouts will seriously impact financed emissions targets is not clear-cut. While Reclaim Finance is not aware of any financial institutions that currently have coal power financed emissions targets (10), coal power emissions are counted by banks under their power sector financed emission targets, and by investors under their overall portfolio financed emissions (for institutions that have these targets). Given that most, if not all, financial institutions already finance numerous utilities, it is unlikely that adding investments in coal retirement would significantly impact a large investors’ overall portfolio emissions (11).
Regardless, if financial institutions are indeed being dissuaded from financing coal phaseouts because of their purportedly strict commitment to their financed emissions targets, the logical solution would be to record these emissions within a discrete category of “phaseout emissions”. This would show the extent of support over time from a bank or investor for genuine coal phaseouts, and would keep these financed emissions out of power generation or broader portfolio targets and disclosures. The Coal Transition Accelerator initiative announced by the French government at COP28 with participation from many other governments, international agencies and organizations, could be a suitable body to codify such “phaseout emissions” (12).
Public sector must step in to facilitate phaseouts
The science is clear: coal power must be phased out immediately, But this cannot be done without accompanying regulatory frameworks that facilitate the managed phaseout of coal. To turn the tide on coal expansion, we need a global push for strong public policy and international government leadership.
The priority must be to slam the brakes on coal expansion through the implementation of strict regulations and standards to financing coal’s expansion. At the same time, concessional financing and incentives such as guarantees for de-risking deals must be provided for the development of sustainable alternatives to coal, and investments in grid improvements and energy efficiency.
This can only be achieved if the public sector leads pilot projects that demonstrate the financial viability and replicability of early coal phaseouts, and that these transactions are completed in a way that is environmentally and socially just, with coherent standards and guardrails that prevent the potential abuse of coal phaseout transactions (13).
