Sustainability investment think-tank the Universal Owner Initiative (UOI) has claimed that two proposed coal decommissioning funds would overshoot a global 1.5C climate target, “massively” overpay for coal assets and “abdicate” the Just Transition.

Coal is considered to be the largest contributor to global climate change and has been identified by the EU’s green taxonomy advisory body as having “no technological possibility” of improving its environmental performance. However, an immediate write-off of coal assets would be financially ruinous for their owners and deprive local communities of access to cheap power.

The publication of the report comes as the EU mulls whether to endorse the use of private capital to decommission coal or other environmentally harmful activities, after its taxonomy advisers suggested that the measure may be taxonomy-aligned in a report published on Tuesday.

UOI’s analysis addresses separate proposals that were recently floated by the Asian Development Bank (ADB), supported by HSBC and Prudential, and Citigroup to create a buyout fund for coal assets and running them down for profit with the aim of speeding up their closure.

ADB’s proposal is ongoing and a spokesperson for the bank said that UOI’s report does “not fully capture the current status of ETM as it continues to evolve”. Citi has abandoned its concept after failing to convince investors of the project’s green credentials, according to reporting by the Wall Street Journal confirmed by sources to RI, but “it serves as an essential point of reference for understanding the general challenges faced by any private decommissioning funds” said UOI.

Both ADB and Citi’s proposals aim to leverage private capital and generate market returns, but with different scopes. Under ADB’s Energy Transition Mechanism (ETM), concessionary capital would be used to de-risk buyouts of coal plants in Indonesia, Vietnam and the Philippines; while Citi’s Coal to Zero plan involved an entirely private investment fund targeting coal mines in Indonesia, South Africa, Australia and the US.

However, the focus of both proposals on securing market returns “creates a series of misaligned incentives” said UOI. It noted that ETM would crucially overshoot the IPCC’s 1.5C scenario for unabated coal power by 166 percent or two billion additional tonnes of carbon emissions, while planning documents for Citi’s scheme suggested that it would have retired coal assets even later than the ADB.

This is because the funds have no choice, said UOI, “these are the dates at which the value extracted from these assets will have accumulated to meet market-rate returns”.

The analysis also found a high risk that the ETM would significantly overcompensate coal plant owners at prices well above true market value. According to UOI, the buy-out price proposed by ADB is 3.5 times the price at which Southeast Asian coal plants have sold for on the open market, and 16 times more than Germany’s state auction for coal plants.

This is reinforced by the opacity of long-term power purchase agreements and overinflated book values in the region, which would make it difficult for buyout funds to assess the financial value of existing plants and give owners “every incentive to exploit this information asymmetry” to maximise their compensation, UOI said.

An ADB spokesperson told RI that the ETM’s proposed prices do not reflect the specificities of each of its three pilot country programmes, which would each have “a specific set of technical, regulatory, market and legal considerations”.

Lastly, UOI criticised both schemes for not spelling out exactly how much of the profits would be channelled to support the Just Transition, a framework that aims to protect the livelihood of vulnerable communities that will be impacted by the green transition. Consequently, “states will almost certainly have to step in to cover most of the cost”, it said.

A spokesperson for ADB responded to this, telling RI it would work with member countries to increase their climate ambition and is on course to announce “the scope and scale of support” for the Just Transition. This will include an advisory group on the topic and technical assistance for reskilling affected communities.

“Originally, ETM focused on an approach best suited to independent power producers, but is now also equally focused on public utilities where applicable. This is alongside other interventions that ADB is taking forward in these countries that involve policy development, support of renewables, and other enabling technologies, such as grids and energy storage,” said the spokesperson.

“ETM has the potential to be one of the biggest carbon reduction programmes in the world. Retiring 50 percent of the coal fleet in ETM’s three pilot countries – Indonesia, the Philippines, and Vietnam – could cut 200 million tons of CO2 annually, the equivalent of taking 61 million cars off the road.”

Alternative approach

The UOI has proposed an alternative model where the costs of writing-off coal assets are covered by an international public fund that would not need to generate a return on its financing and could offer interest rate payments proportional to the emissions reductions which are achieved.

The idea is not altogether novel. Developed countries have pledged some $100 billion in annual climate funding commitments to developing countries since 2009, but have not once delivered on the target in the intervening years. Poor countries have also faced longstanding hurdles to secure private investor capital to fund the transition – fund data shows that emerging markets strategies received less than 5 percent ($4.8 billion) of global inflows into ESG-labelled funds in Q3 2021.