Innovative finance tools can help ensure workers aren’t left behind in shift away from coal: report

[SINGAPORE] Unclear cost scopes, difficulty funding non-revenue-generating activities and fiscal constraints are the main hurdles to shifting from coal, a report out on Wednesday (Oct 28) has said.

Because the scale of transition costs varies widely and often lacks clear revenue streams, public budgets are bearing the brunt of the financial burden, noted the report by the Coal Transition Commission, which is co-chaired by the French and Indonesian governments.

Still, Farah Heliantina, assistant deputy for the acceleration of energy transition in Indonesia’s Coordinating Ministry for Economic Affairs said in a statement: “Falling costs of renewables and storage create a real opportunity to accelerate the transition away from coal to more affordable, resilient and cleaner power systems.”

The commission noted that “a well-planned just transition is critical to ensuring that the shift away from coal power delivers sustained positive outcomes and mitigates the social and economic risks for communities and workers”, such as job losses in coal-related sectors.

Its report recommended that targeted funding instruments be matched to specific activities associated with the coal transition.

For instance, governments, multilateral development banks (MDBs) and philanthropic organisations can fund worker retraining, severance and transition governance through grants and public budgets.

Meanwhile, commercial capital and blended finance are better suited for revenue-generating community and regional economic transformation projects, said the report.

To bridge funding gaps, the commission proposed scaling up innovative financial solutions such as transition credits – or carbon credits issued for the emissions cuts from the early retirement of coal power plants – and transition bonds to fund repurposing, decommissioning or retiring coal plants.

Other options include sustainability-linked loans tied to social and climate targets, as well as “debt-for-climate swaps” that allow countries to reduce debt obligations in exchange for transition spending commitments. This could benefit heavily indebted economies that are dependent on coal.

“This mechanism is complex to structure, but its relatively nascent nature also allows for flexibility in what it can achieve and how the created fiscal space is used, which presents a real opportunity for governments to create sources of funding for just transition activities while alleviating debt burdens and meeting climate commitments,” the report noted.

These instruments could supplement traditional capital-raising and policy efforts such as carbon pricing instruments, environmental taxes, fossil fuel subsidy reforms and tariff restructuring, as well as concessional loans and direct funding from MDBs and climate funds.

Laying out key ways for governments and development partners to strengthen coal-to-clean transition financing, the commission said that governments could adopt a diversified financing strategy that embeds support for workers and communities in energy policies, and allocate proceeds from measures such as carbon pricing towards just transition costs.

Governments and financial institutions should also collaborate more deeply on accelerating the broader deployment of innovative finance mechanisms, the report said.

The commission further recommended that governments start transition planning and comprehensive cost assessments early, which would help prioritise interventions and integrate social objectives into broader energy plans. Development partners could provide technical assistance to help translate existing transition frameworks into targeted country-level plans.

On top of its report on financing mechanisms, the Coal Transition Commission released two other tools at the Singapore International Energy Week to help with the shift from coal to clean energy: a catalogue listing available programmes that have already allocated more than US$23 billion globally to funding the transition; as well as a toolkit for policymakers, asset owners and utilities to assess readiness and navigate transition projects.

Benoit Faraco, France’s ambassador for climate negotiations, decarbonised energy and climate risk prevention, said: “There is no single blueprint for the coal transition, but no country needs to start from scratch. Solutions exist, and finance is available.”