Financing Coal Power Plants - YES or NO?

Review article from the Center for Global Development

Over the past few months, quite a bit of high-level rhetoric has surrounded World Bank funding of coal projects in developing countries.

On one side, Christiana Figueres, the executive secretary of the UN Framework Convention on Climate Change, stated that “it is no longer necessary [for the World Bank to invest in coal projects] because we have many other technologies that can come forward.”

On the other side, World Bank president Jim Kim stated that “we will look for everything we can possibly do to avoid [coal projects] but look, poor people should not pay the price with their lives of mistakes that people have been making in the developed world for a very long time.”

More recently, President Obama addressed the issue as part of a broad set of executive actions to combat climate change. His recent remarks call for an end to public financing for coal plants “unless they deploy carbon-capture technologies, or there is no other viable way for the poorest countries to generate electricity.” This position, consistent with guidelines developed and used by the US

Treasury since 2009 (we participated in the development of these guidelines while both serving as deputy assistant secretaries at Treasury), was lent considerably more weight by the president’s remarks.

Competing stances on coal will be put to the test in the months ahead as the World Bank attempts to launch a new energy strategy, with a board discussion of the draft strategy next week.

In our view, detailed in a forthcoming CGD essay, the approach taken by both Obama and Kim is broadly the right one. The bank should be ambitious in working toward clean energy approaches in its development strategies, but it would be a mistake to definitively rule out coal in all circumstances.

Such a decision would be bad for development and would also undermine the very goals that the bank’s coal critics espouse by further pitting developing and developed countries against each other in the climate debate occurring within the bank.

The World Bank does need to minimize lending for coal-fired generation, and the bank’s new energy strategy should articulate an approach to coal that makes bank financing extremely rare. There are a number of key elements that should guide the bank’s strategy so that a restrictive posture on coal is consistent with the institution’s development mission:

• Financing for coal should be limited almost exclusively to IDA-only countries. IDA-only countries generally lack alternative means of financing their energy needs. These countries should neither be hindered in their access to energy resources necessary for economic development, nor mistakenly led to invest in coal-fired capacity that is a less economical choice.
• Financing for coal should be limited to circumstances where no economically comparable alternatives exist. This will require a compelling economic analysis, including a clear examination of alternatives, as the basis for any approach to future World Bank coal investments in poorer countries. Such analysis should provide the basis for ruling out coal definitively (in cases where economically viable alternatives are identified) or pursuing it under appropriate conditions. An important question is how to provide that analysis in a way that both is, and is perceived to be, accurate.
• Environmental externalities, including climate change, should be considered by decision-makers. However, such costs do not determine the financial impact on end users, which is driven by actual outlays. When an alternative to coal has a lower cost inclusive of environmental externalities, but higher financial cost, the MDBs should assist borrowers in identifying funding to cover these incremental financial costs and avoid the use of coal.
• However, if incremental funding is unavailable, and alternatives to coal entail higher costs to end users, poor countries should not be compelled by MDB policies to put a higher burden on poor constituents.
• Outside of IDA-only countries, consideration of coal financing within the World Bank should be virtually nil. For IDA-only countries, the World Bank (along with the other MDBs) typically plays an irreplaceable role in financing energy projects, either directly or through guarantees. Absent bank engagement, IDA-only countries are unable to finance their projects. In contrast, the bank’s middle income clients mostly have some degree of access to private capital for energy projects. For these countries, any consideration of coal financing should come with significant strings attached—if at all. For political reasons, we believe it makes sense to think about where such an investment could arguably fit into a mitigation plan, highlighting opportunities for middle income countries to lead in this arena rather than solely implementing restrictions.

All of these elements are consistent with President Obama’s recent statements and guidelines developed and used by the US Treasury since 2009.

With appropriate policies and procedures in place, the World Bank and other multilateral development banks are in the best position to help poorer countries seek out alternatives to coal, to build and refurbish only the coal-fired generation that is needed, and to do so with the highest degree of environmental and social safeguards.

Beyond adoption of procedures to consider coal projects, the bank should pursue an ambitious agenda to assist countries in the pursuit of low and no carbon energy strategies. This could include substantial technical assistance, as well as the use of development policy loans aimed at addressing inefficiencies and distortions in the energy market that bias investment decisions against low and no carbon investments.

World Bank president Jim Yong Kim has forcefully defined a renewed development agenda for the bank, even as he has sought to position the institution at the center of the global climate agenda. Yet, his ambitions are threatened by the polarized debate around financing for coal. Both sides have sought to make the coal issue front and center: no institution that continues to fund coal can possibly be credible on the climate agenda; and no institution that rules out coal can be a credible partner in addressing the energy needs that are central to development.

But the issue need not be so polarizing. A carefully crafted approach to coal finance will ensure that the World Bank’s engagement is very limited but available when necessary. If both sides can accept this approach, then the bank will be well positioned to move aggressively on development and climate.

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Coal fired power plants in India