Comparative Analysis of Coal-firedPower Financing Policies of International Financial Institutions, Multilateral Initiatives and Chinese Financial Institutions
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In the context of tackling climate change, promoting energy transformation and low-carbon development, more and more government policymakers and investors are realizing the negative impacts of coal-fired power investments on public health, the environment and society, which leads to increasing financial and reputational risks. Therefore, policymakers and investors are gradually strengthening and promoting the policies and actions that direct public and private finance to divest from the coal industry and shift to green industries. The 2030 Agenda for Sustainable Development and the Paris Agreement, adopted in 2015, commit to promoting global greenhouse emissions reduction through implementable policies, technologies and means to jointly address the challenges posed by climate change. To achieve the Paris Agreement, most of the existing and new coal-fired power projects need to be phased out before their expiration date.In November, 2015, 29 member countries of the Organization for Economic Co-operation and Development (OECD) reached an agreement on restricting the financing of coal-fired power plants by adjusting policy of export credit agencies. Among the OECD members, the United Kingdom, Canada, France, Finland, the Netherlands and Spain have officially announced that they will phase out coal-fired power[1]. German government also expressed its intention to reduce fiscal support for the coal-fired power industry, and in January 2019 announced plans to gradually phase out coal as a source of electricity in order to close all coal-fired projects by 2038. Meanwhile, European and Japanese power industry giants have also expressed their willingness to withdraw from coal-fired power, such as the Spanish Power Group and Marubeni Corporation. In March 2019, China Development and Investment Group Co., Ltd., the largest investment holding company among Central Government-owned Enterprises, announced that it has completely exited from coal business and will mainly invest in new energy in the future.
In addition to the environmental and climate impacts, the investment and financing activities in the coal industry will also expose investors to financial risks such as stranded assets. Therefore, financial institutions also expressed that they should be cautious about or reject the investment and financing of coal-fired power projects. In 2013, the World Bank Group stated that it would stop lending to new coal-fired power plants and coal mining industries unless in rare circumstances, which would be to meet basic energy needs in countries with no alternatives to coal and a lack of financing for coal power. In addition to the World Bank, multilateral development banks such as the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), the European Investment Bank (EIB), the Asian Infrastructure Investment Bank (AIIB) and the Nordic Investment Bank (NIB) have also made commitments to limit financing for the coal-fired power and coal mining industries. Commercial Banks such as JPMorgan Chase Bank, Citibank and Barclays Bank of the U.K. also expressed their willingness to abandon financing services for coal-fired power projects. In February 2019, the Austrian Vienna Insurance Group also announced that it would no longer provide insurance for new coal-fired power plants and coal mining projects. According to the latest report released by the Institute of Energy Economics and Financial Analysis (IEEFA), more than 100 world’s major financial institutions made or are in the process of formulating restricting policies regarding coal-fired power investment. The report noted that since the beginning of 2018, 34 new or revised statements have been issued by financial institutions regarding the restriction of coal-fired power, which is one statement every two weeks on average.
With the increasing awareness among multilateral development finance institutions of the huge environmental cost of the coal-fired power industry and the rapid development of renewable energy, the financing for coal-fired power projects in developed countries and regions is facing increasing resistance. However, low-cost non-clean energy projects are still the main source of electricity in less developed countries and regions to meet the increasing demand for power in the process of the rapid urbanization, as environmental cost is not internalized and the costs of renewable energy technology as well as research and development are high. In Asia, for example, new electricity demand in Southeast Asia is expected to reach 88 gigawatts between 2016 and 2020, and will rise to 230 gigawatts by 2030. Electricity demand in South Asia is even higher, expected to exceed 380 gigawatts by 2030. At the same time, in regions including Southeast Asia, South Asia and East Asia, coal-fired power accounts for a major share in their energy structure and is still growing. What is worrying is that these countries and regions are quite vulnerable to climate change, with more negative impacts by the climate change and less capability to cope with it. According to statistics, six of the world's top ten countries with the highest climate risks are in Asia.
China has taken active measures to restrict investment and financing in the coal industry with high pollution and energy consumption, and has issued a series of policies to promote the transformation and upgrade of the coal-fired power industry and the reduction of overall coal consumption and pollution. First of all, from the aspect of coal consumption control, to achieve the goals of resource conservation, environmental protection, tackling climate change and sustainable development, by joining the forces of institutions including government think-tanks, research institutions and industry associations which conduct policy research to provide policy recommendations and operational measures for setting national coal use control goals as well as implementing roadmaps and action plans. With the joint efforts of those parties, China has incorporated the target of total coal consumption control into the “13th Five-Year Plan”, emphasizing the supply-side structural reform of the coal industry and accelerating the pace of its implementation and improvement by cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness. At present, the “13th Five-Year Plan” is entering the final period. Estimates indicate that China may over-achieve double control targets on the total energy consumption and intensity, and coal consumption may have reached its peak and the long-term decline will continue. Secondly, to vigorously develop green finance by collaborating with multilateral financial institutions. As the establishment of the green financial system is moving forward, the government and relevant sectors are increasingly aware that the capital allocation and investment decisions of the financial industry will affect the ecological environment, which is closely related to the realization of Sustainable Development Goals and green transformation of the financial industry. Internationally, the Equator Principles Organization and the United Nations Environment Program Finance Initiative have greatly promoted the development of green finance in the world. China has also responded positively and issued documents to prevent the risk of over-capacity credit and green credit policies, which has slowed down the banking industry’s massive investment in the coal mining industry. With the introduction and implementation of the “Belt and Road” Initiative, the implications of such policies are gradually shown in BRI projects. These policies, to some extent, promote Chinese investors (mainly financial institutions) to take the overall goal of the Paris Agreement and the construction of ecological civilization into consideration when making investment decisions. As a result, the ecological footprint could be reduced by promoting capital flows into green and low-carbon industries, as well as achieving sustainable and responsible investment. For example, the Adani Group in India plans on building a Carmichael coal mine project in the Galilee Basin in Queensland, Australia.Considering the huge environmental costs of the project, China's three major banks (China Construction Bank, the Industrial and Commercial Bank of China, and Bank of China) issued statements respectively saying that they will not provide financial support for the Carmichael coal mine project. This move is an example of Chinese financial institutions refusing to invest in high-polluting, high-risk coal projects. However, while promoting green, low-carbon development and energy transformation policies, Chinese financial institutions have also financed a number of coal-fired power projects. It’s reported that Chinese financial institutions have provided about $36 billion for coal-fired power projects overseas in total.
The report reviewed and analyzed the restrictive policies on investing and financing in coal-related industries among international multilateral financial institutions, multilateral initiatives, financial institutions in G20 countries (including the Developmental Financial Institution, and Export Credit Agencies), large commercial banks, as well as Chinese financial regulators and major banks. The report provides recommendations for Chinese financial institutions to refine low-carbon transformation policies and standards, formulate systematic and comprehensive environmental and social safeguards as well as sectoralinvestment strategies(especially those of energy and power sectors), and comprehensively integrate the national and global climate goals into the institutional operations and related businesses. The goal is to help Chinese financial institutions participate in global actions with regards to tackling climate change and achieving the goals of sustainable development.
[1]The UK decided to close all coal-fired power facilities by 2025; France plans to shut down all coal-fired power plants by 2021; Finland plans to completely ban coal by 2030; the Netherlands plans to ban coal-fired power generation by 2030; the Spanish Power Group plans to completely shut down all the coal-fired power plant by 2020.
