SPI Journal, Winter 2023
Carbonomics: the path to net zero

Financing the fossil fuel phase out

Alex Michie, lead of the central secretariat for the Glasgow Financial Alliance for Net Zero, spoke with Emma McGarthy, head of OMFIF’s Sustainable Policy Institute, on scaling up renewable finance.

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This is a transcribed and edited part of their conversation on COP27, the state of climate finance and driving co-operation, convergence and forging the path to COP28. The full conversation is available here.

Emma McGarthy: COP27 was criticised for a lack of fossil fuel progress. Why do you think this has happened and how do you think developed nations can push this forward going into COP28 and future pledges and agreements?

Alex Michie: You can’t really have fossil fuel progress without renewable energy progress, so I think they’re often discussed too much in isolation. If you just reduce the fossil fuel supply, you’ll get energy crunches. The International Energy Agency and the Inter-governmental Panel on Climate Change produce models about what a 1.5-degree°Celsius world might look like. We work with Bloomberg NEF who have done a lot of analysis on all these scenarios and they found that this decade for every dollar spent on fossil fuels you need $4 spent on renewable energy. At the moment we’re about one to one, so we need to quadruple that ratio in the next few years.

A pretty central part of that is making the financial industry focused on it. But you also need government action and that’s really crucial, like planning restrictions, licencing laws and government financing subsidies. Are we subsidising clean energy? Are we subsidising fossil fuels? How quickly can we licence a new onshore wind farm or a new offshore wind fund? These are the things that really matter, and GFANZ has been working with governments, financial institutions and energy companies on these issues.

Although there wasn’t so much progress on fossil fuels and fossil fuel supply and powering past coal at COP27 as there was at COP26, we did see a really strong focus on mobilising capital to renewable energy, to clean projects, to emerging markets and developing economies. And I think this positive part of the story is as important as restricting finance or restricting the production of fossil fuels.

EM: What can you say about the state of climate finance and the role that it can play in providing solutions to climate mitigation and adaptation? And how can we drive better collaboration between the private and public sector and scale up that private finance?

AM: We need massively more investment in renewables and the transition. But I think we’re seeing really positive developments and I think one really interesting new development is something that GFANZ advocated for at COP26: these new country platforms (such as the Just Energy Transition Partnerships) which are a way to bring governments, private finance, multilateral development banks, development finance institutions and philanthropies together to focus on how to finance the climate strategies of countries.

Every year at COP, countries have to come up with their nationally determined contributions which say: this is what we’re committing to reduce our emissions. But then coming out of that you have a domestic climate strategy. At the most granular level this comes down to projects and projects need finance. So these country platforms are a way to bring together all the actors involved in developing and financing projects. And this year some of those country platform ideas have been taken forward.

EM: A really important part of this is transition planning. GFANZ published a framework on this. Can you talk me through your transition plan, your approach to phasing out higher-emitting assets and aligning portfolios and your pathways towards that?

AM: All of the alliances within GFANZ, whether it’s banks or asset managers or asset owners, agreed to be net zero by 2050 and set targets for 2030 or 2025 that are consistent with that. But transition planning is not necessarily about setting a target. It’s about a business-wide, strategic, board-level activity. If we’re going to decarbonise our energy portfolios by 60% in the next 7-8 years, that requires the bankers and the whole energy department of these big global organisations to really understand what that means and think about how they’re going to achieve that. We’re seeing high levels of integration and implementation across entire massive organisations with hundreds of thousands of employees.

What we try to do at GFANZ is provide the tools and the frameworks needed to reduce those transaction costs. Because if there are clear, impactful guidance and tools, our members can implement those commitments more quickly. Also, not every organisation has 200,000 people. Some have 50 people and some have one person working on this, so we need to be an inclusive organisation for different sizes, different sectors and different geographies.

What we’ve tried to do is put out a transition plan guidance framework that works, that is understandable. It is quite similar to the Task Force on Climate-related Financial Disclosures’ recommendations. It’s about governance, it’s about targets and metrics, it’s about strategy. But crucially, for us, it’s focused on real economy emissions reductions because sometimes there’s a confusion between financed emissions versus actual emissions reductions.

We have four buckets of finance in our transition plan: financing private solutions; financing companies or activities that are already on a 1.5-degree pathway (so maybe a big renewable energy supplier or electric vehicle maker); financing companies that are committed to aligning to 1.5; and managing the phase out of stranded assets or high-emitting assets. If you look at the work of the Carbon Tracker, IEA and others, it’s clear that there are a lot of assets in the world, such as coal mines, that just can’t operate through their natural economic life. If we’re going to limit global heating to 1.5 or even well below 2 degrees, there needs to be a way to manage the phase out of those assets in a responsible way, that’s fair to their employees, that’s fair to their customers, people who need the energy. And that requires finance as well.

So we’re developing frameworks around that: what are the guardrails? What does it look like? How do you make it economically viable? We hope our framework will be used by people around the world, not just institutions, but also that governments think about making this mandatory.

EM: What do you think a managed phase-out of a high-emitting asset should look like? What should the time frame be and what should it involve?

AM: There’s been huge progress in North America and Europe on closing assets, particularly coal, that are not consistent with net zero. Co-chair of GFANZ Michael Bloomberg has been instrumental in closing down a lot of coal plants while supporting the retraining and re-employment of the workforce.

But the average age of a coal plant in the US is approximately 30-40 years, while the average age of a plant in Asia Pacific is much younger, 10 to 20 years, so the economics involved in closing them down early is very different. Today we’re launching an expression of interest for firms to partner with us in the Asia Pacific region to think about developing guidance for how to close down whole plants in a responsible, just, but accelerated way.

But what does an ideal one look like? Take a thermal coal plant that’s projected to run for 20-40 years and say this is no longer going to produce thermal coal past 2030. This is what it’s going to do instead. It might be used to store batteries or build solar plants. It will have a specific programme or strategy of what to do with the employees, and a specific narrative about how we’re going to supply clean, affordable energy for the local population. But it’ll also have a clear narrative about why it’s good for net zero-committed financial institutions to finance that transaction even if it brings an existing coal plant onto their books.

Listen to the full conversation here.