Climate, Coal, And India – Capital And Capitals Are Calling Time
The global retreat from fossil fuels and its implications for Indian coal-fired power projects.
As parts of the world slowly emerge from waves of the Covid-19 pandemic, greater attention is returning to the other major global problem of our times: climate change and the imperative to achieve net-zero global greenhouse gas emissions by 2050. After four years of Donald Trump-led climate denial, President Joe Biden brought the United States back into the Paris Climate Agreement earlier this year. This, and the appointment of John Kerry as his Special Presidential Envoy for Climate has buttressed ongoing international action on climate change.
Global momentum on climate issues has been building steadily since the Paris Climate Agreement was signed in 2015. What is interesting is that recent developments in this phase of global action on climate have both substance and sharp edges, with impending real-world consequences for several countries, including India.
Courts Are Holding Governments’ Feet To The Fire
European courts are telling governments to follow their own international and domestic climate-related commitments. Following similar rulings by the Supreme Courts of the Netherlands in December 2019 and Ireland in February 2021, the Administrative Court of Paris held in February 2021 that a liability action could be brought against the French state for ecological damage caused by its failure to reduce short-term greenhouse gas emissions in line with its own targets. And most recently, in April 2021, the German Federal Constitutional Court held that the German Climate Change Act was partly illegal and required Angela Merkel’s government to detail its climate change mitigation plans all the way to 2050, instead of only till 2030 as the government had previously done.
Unelected courts are forcing elected governments to take the difficult decisions that their own laws mandate them to take.
This trend will strengthen. And the stronger standards that national governments are having to follow, whether voluntary or court-imposed, have consequences for their foreign policy and economic engagement with the rest of the world.
Multilaterals Are Getting Serious
The United Nations Secretary-General recently said that all planned coal projects around the world should be cancelled. I had criticised his remarks for omitting to mention climate equity, but he qualified his views by reaffirming the principle of common but differentiated responsibility under the Paris Climate Agreement, with the move away from coal to be brought about through an effort of “solidarity of developed countries with developing countries in finance and technology”.
The Asian Development Bank released a draft energy policy in May 2021 stating that it would not finance any new coal-fired capacity for power and heat generation projects, or indeed any other facilities associated with new coal generation.
If this policy goes ahead, a key source of finance for such projects in the region would no longer be available.
The actions of multilateral lenders often have a knock-on effect on commercial banks’ lending policies, and we can expect additions to the number of private banks on the list of financial institutions, banks, and insurers that will not support coal-based power projects.
In May 2021, the International Energy Agency released a report titled ‘Net Zero by 2050: A Roadmap for the Global Energy Sector’. The IEA, established by OPEC members in the 1970s, has been a supporter of fossil fuel use and conservative on climate issues. In addition to recommending a massive increase in renewable energy, they suggest that a net-zero strategy will see fossil fuel use fall dramatically, with coal dropping to just 4% of global energy supply.
The European Union of course has been at the forefront of the battle against fossil fuels, with its Green Deal and more specifically what is being called a carbon border tax, which will act as an additional customs duty on goods produced using “dirty fuels” like coal. This will have serious consequences for India.
The President of South Korea recently announced an end to new coal financing overseas. This was followed by the G-7 stating last month that all international coal financing would be stopped by the end of the year. As pointed out in this article, Japan joining in is important: it was one of the last significant hold-outs on this issue. With Japan and Korea out of the picture, the focus will shift to exerting pressure on China to do the same, as it remains the only major economic power still open to financing coal projects overseas.
A recent article in the New York Times describes a wide range of actions being taken by courts, regulators, and investors, ramping up pressure on corporations such as Shell, ExxonMobil, and Chevron to take stronger and swifter action to move away from fossil fuels. Finally, more and more corporations are signing up for The Climate Pledge. Over time, this will require them to be transparent on their carbon emissions and take concrete steps towards decarbonising their businesses and/or offsetting the emissions they produce. This will impact where in the world they do business and who they are prepared to do business with.
India Needs To Take Notice
All these developments will have consequences for India’s plans to develop and continue to operate and finance coal-fired power plants in the short- and medium-term. For all the reasons described above, traditional sources of international debt and equity for such projects are drying up. The availability of private debt or equity for these projects in India is also limited. Indian banks seem to have a case of once bitten, twice shy: they have a number of non-performing assets on their books relating to past financings for failed coal-fired power projects. Finally, it is hard to see Indian promotors putting up any significant equity for a coal-fired power project in the future.
So, unless new projects are developed by public sector companies like NTPC and financed by public sector banks who might be arm-twisted by their shareholders in the Ministry of Finance to lend, it is difficult to see how most, if any, coal power projects will see the light of day.
Despite this scenario, and while no new plants have been built for a couple of years, India still plans to increase coal-fired capacity (by up to 90 Gigawatt), as most recently envisaged by the draft National Electricity Policy 2021. This is in the face of falling capacity utilisation rates of existing plants and falling prices of renewable energy, including wind and solar. Further, in certain scenarios, India’s commitments under the Paris Climate Agreement will require all coal-based projects to be phased out by 2040. It is, therefore, possible that both existing and future coal-fired power plants will become stranded assets.
Sensible advice to the Government of India would be for it to follow a more coherent and robust climate-based transition strategy for the power generation sector, keeping a close eye on global developments on climate change as well as India’s own obligations under the Paris Climate Agreement. This will require closer engagement with some of the main global players in the climate debate, in particular, the U.S. and the EU.
John Kerry was in New Delhi in April to meet with Prime Minister Narendra Modi and discussed the need for ambitious joint action on climate. Ursula von der Leyen, the President of the European Commission, in the context of the virtual EU-India Leaders meeting in May, indicated that there are plans to strengthen cooperation under the EU-India Clean Energy and Climate Partnership. These summits present interesting opportunities but there is a lot of hard work to be done before the good intentions of the top brass translate to green technology and investment moving to India on scale. This will require more focused joint attention to the details of policies, contracts, and risk allocation. More on this in my next column.
Akshay Jaitly is President, 262 Advisors; and co-founder of Trilegal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.