The World Needs a Cash-for-Coal-Clunkers Program

By Justin Guay. First published on Green Tech Media.

For just 5 percent of what the U.S. has spent on its COVID-19 recovery package, it could have bought out and retired every coal plant in the world.

Instead, the U.S. coal industry is benefiting from recovery programs while the world continues to subsidise old, uneconomic coal plants rather than retire them. As we debate a green recovery, now is the time to add an important approach to our tool kit, a cash-for-coal-clunkers program, to help buy the only thing we can’t make more of: time.

The long, long twilight of the coal sector

In the U.S. and Europe, we’ve grown far too accustomed to the coal industry deathwatch. Nearly every day, articles appear announcing new record lows in coal generation, coal retirements and the generalised economic train wreck that is the coal industry. It’s enough to make the average person think the job is done, the transition beyond coal over. Nothing could be further from the truth.

The reality is that for the world to be on track to meet the Paris Agreement goals, every coal unit across the 37 member countries of the Organisation for Economic Cooperation and Development (OECD) must be offline by 2030; the same must happen in Asia and the rest of the world by 2040. The problem is, despite hitting global peak coal several years ago, we are not heading toward a steep decline; instead, we seem to be on a long, flat plateau.

The situation is most worrying in Asia. There are more than 1,000 gigawatts of new or very young coal plants in China, nearly four times as much capacity as the entire U.S. coal fleet. All of them must come offline within 20 years, which for many is well before their economically useful lives. Meanwhile, China is still planning to build large numbers of new plants.

Even in the OECD, we’re not getting off coal fast enough. Only 52 percent of coal plants in the OECD and the EU are on track to retire by 2030, according to think tank E3G.

Germany just passed a law mandating a coal exit — by 2038. Japan just announced it will shut down 100 old coal units, but still leave 35 gigawatts of coal online in 2030. In the U.S., even the most optimistic estimates say we are on track to get coal offline as late as 2035 — five years too late.

In other words, we’re winning, but we’re just not winning fast enough. We can’t simply rely on market forces to kill off the world’s coal plants; we must force coal plants to retire early. And there’s an important option that’s not currently on the table: buying them out.

Why many coal plants continue to hang on

To many, the idea of buying out coal plants is almost more distasteful than enduring the climate impacts of letting them operate for a few more years. The plants are, after all, financial disasters that investors knowingly poured money into. Paying them off is not only a terrible idea, some might think, but a mistake because they’ll go bankrupt shortly anyway.

Except they won’t just retire because of deteriorating economics. A new study by Rocky Mountain Institute and Carbon Tracker found that 93 percent of plants worldwide are insulated from competition by long-term contracts and noncompetitive tariffs. They’re sheltered from the economic storm.

In the U.S., we currently pay coal plants a lot of money every year with a much different goal: keeping them alive. These cash infusions are called capacity payments, and their size and ubiquity are growing. According to estimates by Carbon Tracker, the U.S. paid $1.7 billion in 2020 in capacity payments, which will grow to $2.3 billion by 2022. In the EU, it’s worse, with capacity payments predicted to swell from $116 million in 2020 to $3.5 billion in 2022, Carbon Tracker says.

In essence, we’re paying the coal industry to continue to exist as a financial zombie. Instead, we should turn those into retirement payments — in essence, a cash-for-coal-clunkers program — and put an end to this industry once and for all.

It turns out the precedent for paying coal plants to retire has already been set. In the U.S., many utilities are using financial innovations to retire legacy coal plants and replace them with clean energy. In Europe, Germany’s new coal exit law includes many avenues to compensate legacy operators, including direct payments to help grease the retirement skids. And in South Africa, a club of international donors considered a debt-for-coal-closure swap.

Policymakers are starting to innovate around financial interventions that can accelerate coal closure.

Four principles for a coal clunkers program

None of these policies are perfect. Germany’s stands out as being particularly bad due to its lack of transparency and failure to incentivize early retirement. Instead, it acts as a handout to entrenched incumbents planning to retire anyway.

We need a set of principles for a fair and just cash-for-coal-clunkers program.

First, such a program needs clear eligibility requirements that ensure it only pays plants to retire that otherwise weren’t planning to or will retire earlier than previously planned.
Second, it should use reverse auctions to generate price discovery for those that are eligible in order to ensure the public does not overpay.
Third, it needs to set an absolute threshold for total dollars spent, with front-loaded payments that decline over a short period of time to incentivize a race for the exit.
Fourth, and most importantly, if we’re going to buy them out, we need to take care of workers and communities in the process.

Under such principles, the effort could be relatively cheap. RMI and Carbon Tracker estimate that for $116 billion we could buy and retire every coal plant around the world. That’s a quarter of the cost of a cash-for-clunkers car program Senate Minority Leader Chuck Schumer has floated in the U.S., except for that price we could retire every coal plant globally, drive significantly more emissions reductions, and eliminate the top source of carbon emissions globally.

The deal is even sweeter in the U.S., where for just $10 billion — about six years of our current capacity payments — we could ensure the U.S. coal fleet is entirely offline by 2030. And not every U.S. plant will require a payment to come offline, so the total is likely to be less. Joe Biden’s climate plan includes the creation of a new national green bank that could support such a program.

A cash-for-coal-clunkers program is not a silver bullet. No one is excited to buy incumbents out. But the hard truth is that we’re bailing them out each and every day regardless, with subsidies that would make other industries blush.

It’s time our money is put to better use than keeping these zombies alive. If we’ve got to pay, let’s pay them to go away.

Four principles for a coal clunkers program

The Sunrise Project

CONTACT

Annual Reports

Jobs