Full Title: Metrics and Mechanisms to Finance a Managed Coal Phaseout
Author(s): Whitney Mann, Lila Holzman, Shravan Bhat, Eero Kekki, Alex Murray
Publisher(s): Rocky Mountain Institute
Publication Date: January 15, 2023
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High-emitting assets like coal power plants must retire early to accomplish the goals of the Paris Climate Agreement. Operating the world’s current fleet of coal plants until the end of their economic lifespans would almost singlehandedly exhaust the world’s dwindling carbon budget. Despite renewable energy alternatives being significantly more economically competitive than new or existing coal assets, asset owners are often shielded from competitive pressures and incentivized to continue operating coal plants. Solving this problem will require significant contributions from both public and private finance. Yet while private financial institutions (FIs) have signaled positive intent to contribute to the energy transition through climate commitments and sustainable finance targets, these same commitments can pose challenges for FIs seeking to finance the decarbonization of high-emitting assets.
First, FIs are being placed under increased pressure to divest or withdraw finance from high-emitting assets, which can impede their involvement with coal power assets outright, even where financial support is explicitly linked to managed phaseout. There is also uncertainty on what a responsible role for FIs looks like in these transactions that can accelerate just, equitable, and climate-aligned coal plant retirements while also securing risk-adjusted returns. To support FIs in adopting managed phaseout as a viable and effective net-zero financing strategy, RMI’s Center for Climate-Aligned Finance has created two working papers for private FI involvement in financing the managed phaseout of coal power. These papers are designed to offer a starting point for private FIs to play a key role in managed phaseout transactions today, and for other stakeholders, such as standard setters, to help support and collaborate with FIs in this area. Given the nascency of managed phaseout transactions, we expect that this guidance will continue to develop over time.