In a significant move to combat climate change, several major economies are working towards finalizing a plan to end new private sector funding for coal projects ahead of this year’s U.N. climate summit. Sources with direct knowledge of the discussions reported that this initiative, led by the Organisation for Economic Co-operation and Development (OECD), could mark the first major step by a multilateral institution to restrict financing for coal, a major contributor to greenhouse gas emissions.
Coal remains one of the largest sources of carbon dioxide emissions, surpassing both oil and gas when burned for energy. The proposed draft plan aims to establish a “gold standard” policy for how financial institutions approach coal financing. It instructs investors, banks, and insurers to cease funding for both existing and planned coal projects and to halt financial support for companies developing coal infrastructure.
Instead of divesting from coal assets, the plan encourages financial institutions to fund the early retirement of coal plants. This shift aims to mitigate the carbon footprint while facilitating a transition to clean energy solutions. Under the proposal, the early closure of coal-fired facilities would be paired with financing for renewable energy sources to replace the capacity lost due to coal plant retirements.
According to a report by the NGO Urgewald, commercial banks lent and underwrote approximately $470 billion to the coal industry from January 2021 to December 2023. The OECD countries, which include 38 member nations comprising many of the world’s largest market-focused democracies, are currently preparing feedback on the proposal. It will undergo public consultation before formal adoption ahead of the U.N. COP29 climate summit in Azerbaijan in November.
Although the OECD policy would be non-binding, it seeks to establish an international standard that companies’ boards and shareholders could use to guide their decisions. Historical precedents show that previous OECD guidelines, such as those addressing child labor, have been adopted by various multinational corporations, influencing practices even in countries with lax regulations.
Key supporters of the proposal include France, the United States, Britain, Canada, and the European Union. This initiative is part of the “Coal Transition Accelerator,” conceived during the COP28 climate summit last year. Notably, the project also received backing from coal-reliant emerging economies, including Indonesia and Vietnam, which have entered multi-billion-dollar agreements with donor countries to reduce their dependence on coal.
However, resistance to the OECD proposal has emerged, particularly from Japan, which is the world’s third-largest coal importer and relies on coal for over a quarter of its energy needs. Discussions on the proposal are particularly delicate, as OECD members must approve new guidelines by consensus. Japan’s Ministry of Economy, Trade, and Industry has not yet responded to inquiries regarding its stance on the matter.
Some sources indicate that the proposal may undergo modifications, potentially focusing on project financing while exempting general corporate purpose lending or narrowing its scope to power plants rather than all coal infrastructure. The upcoming G7 summit in Italy, where leaders, including those from France, the U.S., and Japan, will debate their coal phase-out efforts, could also significantly influence the OECD negotiations.
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As governments, including G7 nations, have implemented bans or limitations on public funding for coal power to meet climate goals, private sector financing has increasingly become the primary source of coal funding. However, only a quarter of financial institutions currently have policies restricting their coal financing, according to S&P Global.
The global coal power capacity stands at more than 2,000 gigawatts, with an additional 500 gigawatts in development, most of which is located in China. For emerging economies with relatively new coal plants, such as India and Vietnam, the economics of early plant closure can be complex. The substantial upfront investments required to construct these plants typically necessitate a full lifespan of around 40 to 50 years to recoup costs.
As the world grapples with the urgent need to address climate change, the outcome of the OECD’s proposed plan to curb coal financing will be closely watched. The effectiveness of this initiative could shape global energy policies and determine the pace of the transition towards cleaner energy sources in the years to come.
