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Executive Summary

Thermal coal is the world’s most carbon-intensive fuel source, yet remains responsible for generating a third of the world’s electricity. South East Asia is home to a disproportionately large percentage of new coal plants, at the same time that many of these countries lack the financial capability to overhaul their – often ailing and indebted – energy systems. What is the solution?

One increasingly loud answer has emerged from the private financial sector: a ‘coal decommissioning fund’. The crux of the idea is simple. Private investors would put money into a joint investment fund to buy-up coal assets. With the benefit of the low cost of capital available to them, they would be able to make market rate returns from these assets as well as retiring them before the end of their technical lifetime. These funds thus promise to unite monetary advantage and climate mitigation: ‘to generate a positive, measurable and environmental impact, alongside a financial return for investors’.
We interrogate the challenges and limitations inherent in the idea of a private decommissioning fund, focusing on two high-profile examples. 

The Asian Development Bank (ADB) intends to leverage public finance to de-risk a private fund designed to buy out coal plants in South East Asia. It is launching a pilot in Indonesia, Vietnam and the Philippines, and has partnered with leading financial institutions such as Prudential and HSBC. 
In 2021, Citibank floated a different proposal under the name ‘Coal to Zero’ (C20). It envisaged an entirely private fund targeting coal mines, prioritizing four jurisdictions: Indonesia and South Africa, as well as two advanced economies, Australia and the United States. While the C20 has since run aground, it serves as an essential point of reference for understanding the general challenges faced by any private decommissioning fund.  

Key findings

We show that the ADB and C20 schemes suffer from two inherent contradictions:
One, their raison d’etre is to secure market rate returns, in this case around ~10-12%. This creates a series of misaligned incentives, including the need to operate ruinous coal assets for over two decades. 
Two, as private funds, investors cannot legislate to force owners to sell on their own terms, and cannot integrate their work into a national transition strategy. This means investors risk over-compensating coal owners, and that they cannot focus upon the key systemic ‘blockages’ to the transition.
We reveal what this means in practice, using the ADB and C20’s own plans:  

The ADB scheme risks massively over-paying for coal plants. The buy-out price described in the scheme’s founding paper describes a buy-out price that is, megawatt for megawatt, 3.5 times more than the price at which South East Asian coal plants have sold for on the open market. Compared to Germany’s state-engineered auction for coal plants, it is 16 times more expensive.

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The ADB and the C20 schemes defy a 1.5C pathway for unabated coal. If ADB scheme was applied to targetted countries Indonesia, the Philippines and Vietnam, it would generate 2bn tons more CO2 than is compatible with the IPCC’s net zero trajectory – surpassing the region’s carbon budget by 166%. The C20 intends to retire coal mines even later still.

These schemes are value destructive. If we put the social cost of a ton of carbon $100, the coal mines targeted by the C20 scheme would, on average, generate social costs of $865m every year. These costs are far greater than the economic value of the asset. Looking at the coal plants targeted by the ADB scheme, we estimate that they generate costs – via their emissions – that are 33 times greater than their economic value.

These schemes abdicate the just transition. Both the ADB and the C20 claim that they will channel a fraction of their revenues towards the just transition. But the ADB does not spell out exactly how much it will apportion to this end, and the C20 appears to relegate this to a last priority. States will almost certainly have to step in to cover most of the cost.

There is a better alternative. We argue that the South African proposal for ‘Just Transition Transaction’ offers a more viable solution:

In this model an international public fund grants a loan to South Africa to redress systemic blockages to the transition: to refinance its national utility so that it can bear the cost of writing-off coal assets, and to fund the just transition. The interest payments on this loan are offered at concessionary rates proportional to the emissions reductions the country achieves. The key here is that, as a public fund, it would accept the avoided social costs of emissions as remuneration, meaning that the loan itself does not need to generate a return. It can therefore be spent strategically as part of a coordinated national transition, on what is most helpful, not what is most profitable.