Need for rapid coal plant retirement
According to the IPCC, the climate problem is becoming more urgent. The 6th assessment of the IPCC posits that we will very likely cross the 1.5C warming target around 2030, ten years earlier than what the previous assessment predicted. Furthermore, we may hit the 2C warming by 2050 without substantial and sustained reductions of greenhouse gas emissions.
To a large extent, keeping warming to within 1.5C requires corresponding substantial and sustained reductions of greenhouse gas emissions from energy, given that energy generation and consumption contributes to approximately three-fourths of emissions. This would require cutting down energy related emissions to zero by 2050.
Let us begin with the good news. Getting down to zero emissions is possible in energy, according to various reports by the Energy Transition commission (ETC), in 2017, 2018, and 2020, with the following key takeaways.
First, within energy, some sectors would be easier to decarbonize, whereas some others are called hard to abate sectors. This distinction is largely based on commercial availability of low-carbon technologies. In the former category, the power sector is considered the lowest hanging fruit, followed by light duty transportation (e.g., cars) and building sectors. The latter category, on the other hand, includes heavy duty transportation (e.g., trucking) as well as industry (e.g., steel).
Second, key technologies include the following: renewable energy (e.g., solar), battery storage, green hydrogen, bioenergy, and carbon capture and sequestration (CCS). While some of these technologies are commercially ready now (e.g., renewable energy), some are likely to become ready over the next decade (e.g., green hydrogen). That is, given appropriate focus on developing these technologies, we have a technically feasible path to net-zero.
Third, building a zero-carbon economy by mid-century will require a dramatic acceleration in the pace of investment over the next 30 years. We would need to scale up renewable electricity, hydrogen production, and CCS capacity by six, fifteen, and eight times, respectively, of current levels. The macroeconomic cost of this huge investment is affordable, amounting to just 1% to 2% of global GDP.
Fourth, this deep decarbonization will not happen unless countries set clear targets for emissions reduction and deep electrification, with policies to support key technology developments, price carbon, drive energy efficiency, and ensure key infrastructure developments. International coordinated action is also required to mobilize the significant capital flows needed to finance rapid renewable electricity development in developing countries.
Now, on to some bad news. We are not even on target on the lowest hanging fruit, i.e., deep-decarbonization of the electricity sector. According to recent analysis by Climate Policy Initiative (CPI), we are not on target for reaching even the previous decarbonization targets set at the Paris COP in 2015. According to these targets set in Paris, we need to peak emissions about now, and reduce them rapidly to zero by 2050.
According to the CPI analysis, the issue is that we are not reducing the carbon intensity of electricity production fast enough. That is, we are moving too slow on both installing renewable energy capacity but also not decommissioning fossil power capacity. In fact, due to the locked in fossil power capacity, the overall carbon intensity is worsening, and the required carbon intensity of new finance will become negative by 2025.
This suggests that we need to redouble efforts on retiring fossil power capacity, in particular coal power. The good news on this front is that, in many cases, electricity generation from new renewable energy sources is cost-effective compared to existing coal power generation, which means we can retire these coal power plants earlier than scheduled and replace them with renewable energy plants. In fact, based on a recent analysis by the Rocky Mountain Institute (RMI), we can save $39 billion right away, with the savings increasing to $141 billion by 2025.
However, retiring existing coal plants is not easy, given various considerations around costs, system balancing requirements, jobs, and local taxes. In this context, the RMI report further discusses practical options for refinancing to fund the coal plant retirement, reinvesting in clean energy, and providing transition financing for workers and local communities. Furthermore, as a recent analysis at the World Bank shows, repurposing of coal plants as renewable energy assets can further address issues around early retirement of coal plants.
In this context, multiple developments show promise from a financing perspective. First, coalitions of private and public financiers are starting to create concrete plans, such as a recent one by the Asian Development Bank, Citibank, HSBC, and Prudential. Second, the Climate Investment Funds has announced an accelerating coal transition plan with the G7 pledging $2 billion. Third, transition bonds, which are likely to play a key role in raising the required finance, are starting to gain traction.
In summary, we need move fast on deploying renewable energy power plants and retiring coal power plants. The technology and economics are on our side — we need to make the politics work and ensure a just transition in the process.
