BP’s recent journey points to the need for instruments that influence profits specifically, and notably reconsideration of the controversial price control tool: a climate-driven price cap on oil.

Philippe

BP, the oil company that previously brought us “Beyond Petroleum” and more recently robust corporate climate goals, has announced a return in emphasis to its traditional business of producing oil. Drawn by the inescapable appeal of oil’s latest high profits, has BP rebranded itself as “Back to Petroleum?”
This type of shift highlights the importance of stronger market incentives for reducing emissions so that companies interested in decarbonizing see their financial interest align with that course. BP’s recent journey points to the need for instruments that influence profits specifically, and notably reconsideration of the controversial price control tool: a climate-driven price cap on oil.
BP has consistently been a forward-leaning company among its peers on climate. As early as 2002, then CEO Lord Browne <a href="https://www.forbes.com/sites/scottcarpenter/2020/08/04/bps-new-renewables-push-redolent-of-abandoned-beyond-petroleum-rebrand/?sh=4db8e9211ceb">rebranded BP as it sought “to reinvent the energy business: to go beyond petroleum</a>.” However, various financial pressures, including the <a href="https://www.britannica.com/event/Deepwater-Horizon-oil-spill">Deepwater Horizon</a> spill, subsequently <a href="https://www.forbes.com/sites/scottcarpenter/2020/08/04/bps-new-renewables-push-redolent-of-abandoned-beyond-petroleum-rebrand/?sh=4db8e9211ceb">moved the company away from its non-petroleum businesses</a>.
<blockquote>So long as there are big profits to be made from oil, these companies will continue to be drawn to their petroleum activities, notwithstanding any stated desire to shift to renewables.</blockquote>
But in August 2020, BP was back with a strengthened pivot to climate as the <a href="https://www.bp.com/en/global/corporate/news-and-insights/press-releases/from-international-oil-company-to-integrated-energy-company-bp-sets-out-strategy-for-decade-of-delivery-towards-net-zero-ambition.html">company announced a series of ambitious low-carbon targets</a>.” This included a 40% production decline and a 10-fold increase in low-carbon investment over the next decade. BP also announced<a href="https://www.bp.com/en/global/corporate/sustainability/getting-to-net-zero/five-aims-to-get-bp-to-net-zero.html"> a groundbreaking target for Scope 3 emissions</a> (namely, emissions from the consumption of its products by industry and other consumers).
Unfortunately, BP has now scaled back its climate ambition. Notably, rather than a 40% drop in production by 2030, <a href="https://www.ft.com/content/419f137c-3a83-4c9c-9957-34b6609bcdf7">BP now expects only a 25% decrease</a>. Significantly, this shift has been made at a time <a href="https://edition.cnn.com/2023/02/07/investing/bp-earnings-oil-intl-hnk/index.html">of $28 billion in record corporate profits for BP</a>, records also seen by other oil majors, such as <a href="https://www.pbs.org/newshour/economy/exxon-mobil-reached-record-profits-amid-high-gas-prices-war-in-ukraine">ExxonMobil</a> and <a href="https://www.cnbc.com/2023/02/02/shell-earnings-oil-giant-reports-record-annual-profits.html">Shell</a>.
These record profits — driven in part by high gas prices resulting from Russia’s invasion of Ukraine — also point to a major vulnerability for any market-driven climate effort. With the lure of these type of returns from the traditional petroleum business, it is difficult to see or sustain financial motivation to shift away.
Indeed, as BP made clear in announcing its ambitious 2022 climate targets: “<a href="https://www.bp.com/en/global/corporate/news-and-insights/press-releases/from-international-oil-company-to-integrated-energy-company-bp-sets-out-strategy-for-decade-of-delivery-towards-net-zero-ambition.html">bp is committed to delivering attractive returns to shareholders</a>” — and petroleum, with its upside, is uniquely placed to deliver the potential of a high return. So long as there are big profits to be made from oil, these companies will continue to be drawn to their petroleum activities, notwithstanding any stated desire to shift to renewables.
However, this also points to what needs to be a focus of an effective climate policy for oil: reducing its profitability. Over the years, think tanks, academics and others have put forward carbon pricing as the most efficient emissions reduction instrument, but this discourse has failed to deliver significant results in practice, especially when it comes to oil companies.
As emissions continue to rise and the carbon budget shrinks, the time has come to explore other solutions. One tool that merits consideration — more precisely, reconsideration — is a cap on oil prices.
This “climate oil price cap” would be designed to increase the relative profitability and so financial appeal of renewables by limiting the upside on oil activities specifically (something a <a href="https://edition.cnn.com/2022/11/17/economy/windfall-tax-nuclear-uk-budget/index.html">customary windfall profits tax set at the corporate level</a> wouldn’t accomplish). It would thereby support and encourage BP and other oil companies to transform themselves from a traditional petroleum company into an “integrated energy company” (<a href="https://www.bp.com/en/global/corporate/news-and-insights/press-releases/from-international-oil-company-to-integrated-energy-company-bp-sets-out-strategy-for-decade-of-delivery-towards-net-zero-ambition.html">BP’s own term</a>), one that can generate significant profits from renewables and other low-carbon products relative to its petroleum activities.
Oil price controls are, of course, not new and have a checkered history (e.g., <a href="https://www.nytimes.com/1973/08/11/archives/price-controls-are-kept-on-gas-and-oil-other-actions-listed-price.html">President Nixon’s effort in the US 50 years ago</a>). But the climate emergency presents a new threat that merits re-examining this instrument. Importantly, a price cap could also help <a href="https://www.cnbc.com/2022/10/26/iea-developing-nations-the-number-one-casualty-of-the-energy-crisis.html">energy-importing developing countries</a>, as well as vulnerable households there and <a href="https://www.theguardian.com/society/2022/aug/17/two-thirds-of-uk-families-could-be-in-fuel-poverty-by-january-research-finds">elsewhere</a>, avoid the harmful impact of the high oil prices experienced in 2022 (another potential advantage over a <a href="https://edition.cnn.com/2022/11/17/economy/windfall-tax-nuclear-uk-budget/index.html">windfall profits tax</a> ).
And there is now a precedent for this type of concerted purchaser action, namely <a href="https://www.ft.com/content/5b942b07-01cc-4e12-b803-7eb1507f6eec">the price cap on Russian oil</a> agreed by the EU and US. It is also a tool that has drawn renewed attention in other contexts, including <a href="https://www.washingtonpost.com/opinions/2022/03/23/protecting-americans-oil-price-spikes/">rethinking the framework governing gas prices</a> to <a href="https://www.nytimes.com/2022/01/13/business/economy/inflation-price-controls.html">insulate US consumers from the gasoline price surges</a> driven by Russia’s invasion of Ukraine.
Any effort needs to consider the lessons from the failed efforts of the past. For example, the cap should be set at a sufficient level to attract the desired supply – including to energy-importing developing countries — even as it precludes the type of record profits the oil industry saw last year. It should also build on the experience with the current Russian price cap.
While, admittedly today there isn’t sufficient support for aggressive climate policies, the prospect for strong action will likely increase over time as <a href="https://royalsociety.org/topics-policy/projects/climate-change-evidence-causes/question-13/">heat waves, flooding and other extreme weather events wreak havoc exacerbated by climate change</a>. This in turn can be expected to increase the willingness of politicians and policymakers to be more ambitious down the road in taking climate action.
In anticipation of this changing landscape, creative options beyond traditional carbon pricing mechanisms should be explored and put before these decision-makers by think tanks, academics and others.
In this regard, the combination of BP’s recent record profits and shift in corporate policy points to the appropriateness of considering a price cap on oil as a possible tool to fight climate change by improving the relative profitability of low-carbon investments.
This article is also published by the <a href="https://www.ipsnews.net/2023/03/bps-shift-back-petroleum-prods-consideration-climate-oil-price-cap/">Inter Press Service News Agency</a>. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

BP’s Shift ‘Back to Petroleum’ Prods Consideration of a Climate Oil Price Cap

Meeting our climate change goals will require massive investments in clean energy projects, in both advanced economies and across the Global South. But financing projects in the latter group of countries requires an increase in foreign capital inflows that will be constrained by currency exchange rate risk. Creating an innovative Exchange Rate Coverage Facility can help to overcome this constraint.

Jonathan

Justine

Meeting our climate change goals will require massive investments in clean energy projects, in both advanced economies and across the Global South. But financing projects in the latter group of countries requires an increase in foreign capital inflows that will be constrained by currency exchange rate risk. Creating an innovative Exchange Rate Coverage Facility can help to overcome this constraint.
Over the coming two decades, annual energy emissions across the Global South (not counting China) are currently projected <a href="https://www.iea.org/reports/financing-clean-energy-transitions-in-emerging-and-developing-economies/executive-summary">to grow by 5 Gt</a>. Analysis by the International Energy Agency, the World Economic Forum and the World Bank shows that reversing this dynamic so as to meet the climate goals of the Paris Agreement, while also supporting the development needs of these countries, will require <a href="https://www.iea.org/reports/financing-clean-energy-transitions-in-emerging-and-developing-economies">a four- to seven-fold increase in clean energy investments by 2030 from the current level of $150 billion</a>.
Significantly, most of the needed clean energy projects provide domestic-oriented services (such as power from solar or wind power plants, public transit systems, building efficiency retrofit campaigns, electric vehicle charging stations). These generate local currency revenues. Although much of the funding for these projects will come from domestic resources, the sheer magnitude of the required investment will necessitate <a href="https://www.iea.org/reports/financing-clean-energy-transitions-in-emerging-and-developing-economies/the-landscape-for-clean-energy-finance-in-emdes">significant amounts of foreign capital</a>, potentially $180 billion or more per year by 2030.
Exchange rate risk (i.e., the potential that the local currency devalues relative to the foreign currency loan or other investment) is a major impediment to mobilizing large foreign capital flows for these projects (albeit, not the only one). This risk translates into many problematic impacts. Notably, it increases the cost of capital, raises the financial liabilities of domestic stakeholders as their local currency depreciates, and, perhaps most significantly, constrains the level of foreign investment.
While currency hedging and other options exist (including <a href="http://www.tcx.com/">specialized programs for developing countries</a>), they can be expensive and are lacking for many Global South currencies, particularly at the long tenors, low cost and large scale required to support many clean energy investments.
If this currency risk cannot be overcome, it will be impossible to mobilize the level of foreign capital inflows that developing countries require to grow their energy systems with a low-emissions trajectory. This poses risks for both rich and poorer countries in the global effort to lower greenhouse gas emissions.
What to do to address this impediment? We propose an Exchange Rate Coverage Facility (ERCF), a blended-finance vehicle that would be funded by a combination of host country stakeholders, multilateral/bilateral development and climate agencies, and climate-engaged international capital.
The ERCF would be established as an offshore facility to absorb currency exchange risk on its balance sheet. It would issue guarantees protecting international lenders against this risk (see figure 1), while in parallel helping to insulate domestic sponsors from it. The Facility would pay any and all shortfalls between the value of contracted local currency (LC) payments and foreign currency (FC) debt repayments if the local currency (LC)depreciates relative to pre-defined exchange rate.
<img src="https://illuminem.b-cdn.net/articlebody/df4418175547ed76839d8d14b25bf584e54e290a.png" alt="Figure 1: Clean Energy Exchange Rate Coverage Facility Model">
Under our proposed financing structure, the Facility would be a “blended finance” vehicle funded by the following : (i) carbon credits generated by the clean energy project that are assigned to the Facility, which would cover “first loss”; (ii) multilateral development banks (including guarantees counter-guaranteed by host countries), development finance institutions and other development/climate agencies, providing funding for defined subsequent losses; and (iii) international capital, including philanthropies, sovereign wealth funds, and interested private institutions, covering “third loss”. A fuller description of this facility is set out in the report: “<a href="https://www.energypolicy.columbia.edu/research/commentary/policy-note-scaling-clean-energy-through-climate-finance-innovation">Scaling Clean Energy Through Climate Finance Innovation: Structure of an Exchange Rate Coverage Facility for Developing Countries</a>.”
<img src="https://illuminem.b-cdn.net/articlebody/548a2accfe35807ab2d5477f381f4436ecd6f8ff.png" alt="Figure 2: The “Ladder” of Coverage for Local Currency Depreciation in the ERCF">
The Facility could generate multiple benefits: (i) catalyzing additional foreign financing for clean energy projects in developing countries; (ii) lowering exposure of local project stakeholders to currency exchange rate shifts, thereby reducing prospect of tariff increases if the LC depreciates; (iii) reducing the cost of foreign financing to clean energy projects; (iv) facilitating scalability of coverage; (v) supporting the growth of carbon credits projects and markets; (vi) enabling funders to leverage financial impact through blended-finance structure; and (vii) flexibility to include specialized windows (e.g., country-specific programs, including under the Just Energy Transition Partnerships being discussed with South Africa, Indonesia, Vietnam and others).
To mobilize international capital flows in the magnitude required to achieve the dual objectives of sustained development and low emissions, there is a need for new financial tools. The proposed blended-finance ERCF is being incubated as a solution to address currency exchange risk as part of the initiative <a href="https://initiatives.weforum.org/micee/home">on Mobilizing Investments for Clean Energy in Emerging Economies</a>. Its proponents welcome interested organizations and individual experts to join forces on the implementation of a pilot Facility to facilitate increased funding for the global clean energy transition.
This article is also published by the <a href="https://www.weforum.org/agenda/2023/01/davos23-foreign-investment-clean-energy-risks">World Economic Forum</a>. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.
<h6>Cover photo by <a href="https://unsplash.com/@rashevsky?utm_source=unsplash&amp;utm_medium=referral&amp;utm_content=creditCopyText">Anastasia Palagutina</a> on <a href="https://unsplash.com/photos/Vfd1Ztak8aQ?utm_source=unsplash&amp;utm_medium=referral&amp;utm_content=creditCopyText">Unsplash</a>​ </h6>

Overcoming the Currency Mismatch to Finance Clean Energy in Developing Countries

A strong Africa working in partnership with the U.S. is an important and all too often overlooked element of a robust U.S. geopolitical strategy. But to achieve this strong partnership, the U.S. administration will need to demonstrate that it is interested in Africa because the continent itself matters, not merely to address other U.S. international objectives.

Bayo

President Biden and leaders of 49 invited African countries and the <a href="https://au.int/">African Union</a> met in Washington last month for the <a href="https://www.state.gov/africasummit/">U.S.-Africa Leaders Summit</a> — a meeting that all parties hope will launch a strengthened partnership to deliver <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/12/15/vision-statement-for-the-u-s-africa-partnership/">benefits for the peoples of both the U.S. and Africa</a>.
A strong Africa working in partnership with the U.S. is an important and all too often overlooked element of a robust U.S. geopolitical strategy. But to achieve this strong partnership, the U.S. administration will need to demonstrate that it is interested in Africa because the continent itself matters, not merely to address other U.S. international objectives.
Unfortunately, there is skepticism within Africa, founded in historical precedent, as to U.S. intentions. For many years, as European powers withdrew from Africa following the decolonization of the continent, the U.S. and Soviet Union stepped in seeking to install “friendly” regimes. Africa was an area of interest more because of its importance to the U.S./Soviet Union <a href="https://www.jstor.org/stable/4186860">Cold War</a> than on its own merits. The result was often misguided policies focused on political alignment rather than promoting improvements on the continent. As the Cold War waned, arguably so did some of the U.S. interest in Africa.
2008 saw the election of an American president of African descent, Barack Obama, generating excitement across the continent. In 2014, President Obama convened the inaugural <a href="https://obamawhitehouse.archives.gov/us-africa-leaders-summit">U.S.-Africa Leaders Summit</a>, the largest gathering at that time of U.S. and African leaders. Unfortunately, there followed a general <a href="https://www.csis.org/analysis/minding-gap-us-africa-leaders-summit">sense of disappointment</a> as the summit failed to translate into strong action. Interestingly, the U.S. president at times most often praised for his support to Africa is President George W. Bush, who launched <a href="https://www.state.gov/pepfar/">PEPFAR</a>, the <a href="https://www.unaids.org/en/resources/presscentre/featurestories/2018/september/pepfar-the-first-15-years">large-scale effort to fight AIDS focused on Africa</a> that is also <a href="https://www.history.com/news/what-was-a-george-w-bushs-greatest-achievement">considered by some historians to be his greatest achievement</a>.
Last month’s summit took place on a complex international and geopolitical backdrop for the U.S., marked by the growing competition with an emerging China and, more recently, Russia’s invasion of Ukraine. <a href="https://www.cnn.com/2022/12/13/opinions/biden-us-africa-summit-g20-davis/index.html">For some American commentators</a>, the summit provided an opportunity to draw Africa closer to the U.S. in countering these challenges following a period of inactivity.
But Africa’s leaders have signaled that they don’t want to be viewed as mere tools for other geopolitical dynamics — including tensions with China and Russia — they want their concerns addressed on their merits. And the Biden administration was careful to not present last month’s summit as China/Russia-oriented. <a href="https://www.cnn.com/2022/12/14/politics/biden-us-africa-leaders-summit/index.html">As explained by</a> a CNN commentator: “In previewing this … [U.S./Africa] summit, American officials have been careful to avoid framing Africa as a pawn in a larger geopolitical strategy.”
This represents a wise strategy, especially as Africa has grown substantially both economically and politically over the last several decades and is poised for further growth. The GDP of Sub-Saharan Africa has grown five-fold from <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=ZG">$400 billion 20 years ago to nearly $2 trillion today</a>, and Africa’s total GDP now reaches <a href="https://data.worldbank.org/">nearly $3 trillion when North Africa is included</a>. Similarly, a Brookings report estimates that the <a href="https://www.brookings.edu/research/the-unprecedented-expansion-of-the-global-middle-class-2/">middle class of Sub-Saharan Africa will grow from 114 million in 2015 to 212 million in 2030</a>. It is also the region where the largest growth in population is expected going forward: <a href="https://www.theguardian.com/global-development/2022/jan/20/by-2050-a-quarter-of-the-worlds-people-will-be-african-this-will-shape-our-future">by 2050, an estimated quarter of the world’s people will be African</a>.
African leaders themselves are not oblivious to the growing strategic importance of their own countries. Rich in agriculture, mineral and energy resources, and with a growing diaspora that funneled over <a href="https://www.afdb.org/sites/default/files/2022/05/25/aeo22_chapter1_eng.pdf">$83 billion in remittances back to Africa in 2020</a> (far more than the <a href="https://www.afdb.org/sites/default/files/2022/05/25/aeo22_chapter1_eng.pdf">$65 billion</a> the continent received in official development assistance that same year), Africa has become an attractive destination for the astute investor.
Newly empowered by the growth potential of their countries, many African leaders are demanding a stronger voice and greater respect internationally — and they’re getting it from China whose presence in Africa is ubiquitous. Similarly, <a href="https://japannews.yomiuri.co.jp/editorial/insights-world/20220805-49486/">Japan is re-asserting its engagement with Africa</a>.
Last month’s U.S.-Africa Leaders Summit is a welcome effort in this context and there is much room for strengthening ties. For example, <a href="https://www.bbc.com/news/world-africa-63984968">Africa accounts for only 1 percent of U.S. foreign trade, most of which is in petroleum imports from two countries</a>. But African governments, for their part, will need to demonstrate their openness to advancing inclusive growth and political rights domestically.
Just as Asia has dominated the growth story of the last 50 years, will Africa be the emerging engine of growth for the next 50? This is something that analysts are contemplating. The recent analysis of the continent by the International Energy Agency posits a possible high growth <a href="https://www.iea.org/reports/africa-energy-outlook-2019">“Africa Case” scenario</a> in which the continent is able to exploit effectively its potential.
Arguably, the U.S. and other advanced economies were caught off-guard by the rapid economic growth that took place in Asia. They were slow to anticipate it, recognize it and integrate its implications into their strategies. This is not to predict when it comes to Africa that it will inevitably replicate what Asia has done; however, the reality is: “maybe, who knows?” That’s a potential outcome that the U.S. should prepare for, and even nurture.
What might Africa look like 20 years from now? A real possibility is a 2.4 billion-person continent with significantly diminished poverty and a large and growing middle class that can provide a vibrant economic partner for the U.S. To achieve this, a strong partnership between the U.S. and Africa is key and in the interest of both their peoples.
This article is also published in <a href="https://thehill.com/opinion/international/3783808-why-us-africa-relations-and-africa-matter-now-more-than-ever/">The Hill</a> and has been updated to reflect changes in time. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Why U.S.-Africa relations — and Africa — matter now more than ever for Washington

Climate change is a global challenge affected by GHG emissions from anywhere. We need to reduce emissions from coal power generation and that requires some program to encourage and entice owners to shutter their plants. A global auction, conducted by the United Nations or a similar international organization, would help to identify opportunities where willing plant owners and interested funders can make a deal.

Chandra Shekhar

<a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.iea.org%2Freports%2Fnet-zero-by-2050&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=uM2NB5QFvhQVsc8uEFWvwcGnlzJItGGA8RA8lnM3D1w%3D&amp;reserved=0">Report</a> after report highlights that we can only achieve the greenhouse gas (GHG) emission reductions required by the climate goals of the <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Funfccc.int%2Fsites%2Fdefault%2Ffiles%2Fenglish_paris_agreement.pdf&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=pHmtYmCVQQH4KcNQJpMhk0ikCokxhZYwRsuu7FFw3gc%3D&amp;reserved=0">Paris Agreement</a> if much of the existing coal power generation capacity is retired early. To this end, one concept that deserves greater consideration is conducting an auction for early retirement of coal power plants worldwide: a global coal retirement auction. This article sets out the broad outlines of how this global auction might operate.
The International Energy Agency (IEA) has estimated that there are <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.iea.org%2Fcommentaries%2Fit-s-critical-to-tackle-coal-emissions&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=GheNpCbwHMXZt2upkMlkRjerpHZMCgvDNPKuuKHKjEk%3D&amp;reserved=0">over 8,500 coal power plants in the world</a>, with over 2,100 GWs of capacity. Although these plants are concentrated in a limited number of countries (notably <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.statista.com%2Fstatistics%2F859266%2Fnumber-of-coal-power-plants-by-country%2F&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=jIe5ehLBm37fs41%2BjRjW60heLIrsDkkINl6EZERanGI%3D&amp;reserved=0">China, followed by India and the U.S.</a>), there are coal plants running in <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fglobalenergymonitor.org%2Fprojects%2Fglobal-coal-plant-tracker%2F&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=PxcEFYZRkVguMAU3KzzZvG%2FTH3Z8iMFVPsJX38BqxAs%3D&amp;reserved=0">over 100 countries with over 2,000 owners</a>.
These plants generate about <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.iea.org%2Freports%2Fworld-energy-outlook-2022&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=cu7NUOsZc2j52R3%2FLh2%2Fwskiju7ZZ%2BEENUK45u73e7Y%3D&amp;reserved=0">10 gigatons of CO2</a> <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.iea.org%2Freports%2Fworld-energy-outlook-2022&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=cu7NUOsZc2j52R3%2FLh2%2Fwskiju7ZZ%2BEENUK45u73e7Y%3D&amp;reserved=0">emissions</a> per year, <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.climatewatchdata.org%2Fghg-emissions%3FchartType%3Darea%26end_year%3D2019%26gases%3Dco2%26start_year%3D1990&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887694720%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=QRje%2F%2B8%2FvIwLihAbFGJYN1LdF7bDWS%2Frt%2BGVUJ7pZTk%3D&amp;reserved=0">nearly 30% of the global total</a>. This <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.carbonbrief.org%2Fanalysis-why-coal-use-must-plummet-this-decade-to-keep-global-warming-below-1-5c%2F&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=5AXL13cJI4IU05TROjf55hn6%2FeLqnLaRdIaya2W0kpQ%3D&amp;reserved=0">level of emissions from coal is incompatible</a> with either the <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Funfccc.int%2Fsites%2Fdefault%2Ffiles%2Fenglish_paris_agreement.pdf&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=OLjhhrRHmiXryAzVC6WyqCAYHs5TCuKzHAYoxbVv8yU%3D&amp;reserved=0">“well below 2oC” or the more ambitious ”1.5oC”</a> temperature targets set out in the Paris Agreement.
Accordingly, climate/development organizations, like the <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.adb.org%2Fnews%2Fadb-indonesia-philippines-launch-partnership-set-energy-transition-mechanism&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=89JZ%2Bl3XZYp44TWWeHwMCGn4tvr375Fu5soLs0dgJ9Q%3D&amp;reserved=0">Asian Development Bank</a> (ADB), the <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.esmap.org%2Fesmap_coal_plant_repurposing_ageing_coal_fleets_in_developi&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=3Dw4Xu%2FV%2FJeekzfpWCCkzfwQ69xEL9Rxp%2Bgqm56K1UU%3D&amp;reserved=0">World Bank</a>, the IEA and <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Frmi.org%2Finsight%2Ffinancing-the-coal-transition%2F&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=jdF3FFFjBM1QbkjJSkxbATwv6DujL5lLMScbLT5gKXo%3D&amp;reserved=0">RMI</a>, are exploring programs to effect the early retirement of these coal plants. But closing these plants presents two important challenges. First, retiring these plants removes electricity production that many countries rely upon for their economic development … production that would need to be replaced with preferably low-carbon sources. Second, owners are generally unwilling to shutter revenue-generating plants and want financial compensation for the returns they would forego from the premature retirement of their asset. This article addresses this second constraint.
There are various regulatory mechanisms that can be used to push early retirement, such as mandating closure of plants or imposing a carbon tax or other cost that makes operating the plant uneconomic.
A completely different tack is to entice closures by paying the owners to do so. This is the premise of, for example, the <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.thkforum.org%2Fwp-content%2Fuploads%2F2022%2F04%2FEnergy-Transition-Mechanism-Introduction-ADB.pdf&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=3NShzvcxP1PyWL0bGf%2BRpbmMcO69dON052qgR7Ntzs0%3D&amp;reserved=0">ADB’s innovative Energy Transition Mechanism</a>.
But what’s a fair price? Perhaps, however, that’s not the right question. Rather, at what price are the owners willing to shutter their plants? Given that there are more than 8,500 coal power plants operating with different technical and revenue characteristics, and over 2,000 plant owners in diverse financial situations following distinctive corporate strategies (including numerous state-owned enterprises), the answer will vary.
A technique that has been used in this type of context of multiple actors is an “auction”. While in the traditional context, a seller looks to get the highest price from multiple possible buyers through an auction, in this case, we have a buyer that is interested in paying the lowest price to different plant owners (i.e., the sellers) for the retirement of their coal plants.
This is referred to as a “<a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.investopedia.com%2Fterms%2Fr%2Freverse-auction.asp&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=k4%2F8xMVdADspcjtealNjYbfDJO8S4jzRwnoR6Ec1lfo%3D&amp;reserved=0">reverse auction</a>”. This tool has been used to <a href="https://openknowledge.worldbank.org/handle/10986/2346">acquire new power production</a>, including <a href="https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.seia.org%2Finitiatives%2Freverse-auction-mechanism&amp;data=05%7C01%7Ccsinha%40worldbank.org%7C1e2b6a25606140a39f3508dabc1aff46%7C31a2fec0266b4c67b56e2796d8f59c36%7C0%7C0%7C638029122887850931%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&amp;sdata=zJmMqVHqsG%2FAZvbp2tEPeZXwxnkRL7zTjpTBeCL6MpU%3D&amp;reserved=0">renewables</a>, at low prices, and specifically in the climate context <a href="https://www.worldbank.org/en/news/press-release/2020/03/04/pilot-auction-to-help-reduce-42-tons-of-emissions-in-2020">to attract cost-effective investments that reduce methane emissions</a>.
The reverse auction mechanism could be used to solicit proposals from coal power plant owners as <a href="https://openknowledge.worldbank.org/handle/10986/38213">to the price at which they would be willing to close their plant</a>. Conceptually, this could be done on the basis of MWs of installed power generation capacity. Under the auction, an interested coal plant owner would offer to sell — more specifically, to shutter — their MWs of plant capacity by a fixed time at a proposed price.
Importantly, the climate benefit sought by the auction is not from the decommissioning of MWs of capacity itself, but rather from the GHG emissions that would be avoided by retiring that capacity. Accordingly, for any coal retirement tender, it will be necessary to estimate the level of emissions that would be avoided.
This determination will be based on several factors, including the particular plant’s efficiency, remaining operational life and other technical characteristics, the type of coal used, and the amount of electricity production projected to be foregone through early retirement given the power system’s expected demand for electricity from that plant.
Tenders should include sufficient information to evaluate these items and, by extension, the level of avoided emissions and related climate benefit to be produced from the proposed retirement. This, in turn, will drive how much the auction buyer should be willing to pay for the tender.
Moreover, because it would be largely counter-productive from a climate perspective to pay to retire existing coal plants to see that money used directly (or indirectly) to build new fossil fuel generation, the tender by the plant owner would need to be accompanied by an undertaking not to reinvest in new fossil fuel generation.
As has been repeatedly explained, CO2 emissions have a global impact that is essentially unaffected by the geographic location of the emitting plant. Given this global nature of emissions, the auction would likewise be conducted at a worldwide level as a global auction. From India to Indonesia, from South Africa to South Korea, from Poland to Australia, any plant anywhere would be eligible to participate in the global auction.
Given this scope, an international organization like the United Nations or a multilateral development bank would be well positioned to provide the platform for this auction. One could imagine a system where the auction bidding process sets out eligibility criteria for projects, the methodology for estimating GHG emission reductions, and other key bid-submission parameters.
Significantly, while the bidding process would be managed on an integrated basis, the funding and selection of winners need not be. Rather, a system that allows for the matching of interested coal retirement buyers with individual plant owners could be used.
For example, buyers and their funding could be mobilized on a plant-by-plant basis based on information submitted by the plant owner through the auction process. Indeed, many potential funders have areas of focus that could lead them to be attracted to retiring coal assets only in certain countries (e.g., funders interested in a targeted set of developing countries). The proposed auction structure could accommodate these preferences. Moreover, the global auction could also operate <a href="https://openknowledge.worldbank.org/handle/10986/38213">in association with country-specific approaches</a>.
One potential source of funding for coal retirements tendered under the auction is the potentially large amounts of capital to be mobilized through expanded carbon credit mechanisms under development. Tapping into these mechanisms might require establishing defined project eligibility criteria, frameworks for calculating GHG emissions reductions, and associated monitoring and verification systems to enable payments for emission reductions at the time of decommissioning based on a price for emission reduction (“carbon”) credits.
It is also important to recall the first constraint noted earlier, namely that countries, and particularly developing countries, will need more electricity to power further economic and social development. Accordingly, any global auction to retire coal plants needs to be coupled with a program to fund new renewables electricity generation.
Climate change is a global challenge affected by GHG emissions from anywhere. We need to reduce emissions from coal power generation and that requires some program to encourage and entice owners to shutter their plants. A global auction, conducted by the United Nations or a similar international organization, would help to identify opportunities where willing plant owners and interested funders can make a deal.
This article is also published by <a href="https://www.ipsnews.net/2022/11/early-coal-retirement-global-auction/">Inter Press Service</a>. Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Early Coal Retirement: How about a Global Auction

With COP 27 approaching, pressure is mounting on wealthy countries to increase their support to poorer ones in the face of climate change. The recent floods in Pakistan have amplified this issue. China, as the world’s second largest economy, will similarly face increasing pressure to help other developing countries on climate. 

With COP 27 approaching, pressure is mounting on wealthy countries to increase their support to poorer ones in the face of climate change. The <a href="https://www.cnbc.com/2022/09/06/pakistan-finmin-on-floods-country-is-bearing-brunt-of-climate-change.html">recent floods in Pakistan have amplified this issue</a>. China, as the world’s second largest economy, will similarly face increasing pressure to help other developing countries on climate.
At last year’s COP, the Asian Development Bank (ADB) unveiled an innovative program to fund the <a href="https://www.adb.org/news/adb-indonesia-philippines-launch-partnership-set-energy-transition-mechanism">early retirement of coal power plants</a> by mobilizing <a href="https://www.thkforum.org/wp-content/uploads/2022/04/Energy-Transition-Mechanism-Introduction-ADB.pdf">capital to buy-out the investors in these plants</a>. This approach has an interesting, and potentially even easier, application to the coal plants financed by China in Pakistan and elsewhere overseas under its <a href="https://www.oecd.org/finance/Chinas-Belt-and-Road-Initiative-in-the-global-trade-investment-and-finance-landscape.pdf">Belt and Road Initiative</a> (“BRI”). The key to unlocking this, somewhat surprisingly, lies in the dominance of China’s state-owned companies in BRI transactions. In 2015, Beijing and Islamabad launched a program under the BRI to build a series of new power plants in Pakistan. Over the next five years, five coal plants were commissioned and there are currently an additional four plants under construction. These plants are largely being developed by Chinese energy firms with loans from Chinese banks and financiers … companies that are all mostly owned by the Chinese Government.
Beijing has repeatedly been <a href="https://e360.yale.edu/features/how-chinas-big-overseas-initiative-threatens-climate-progress">criticized for the BRI’s funding of new coal power plants</a> considered to exacerbate the climate vulnerabilities of the countries where these projects are being built, like Pakistan. Even as President Xi <a href="http://www.news.cn/english/2021-09/22/c_1310201218.htm">pledged last year to stop building new coal-fired power plants abroad</a>, there has been an increasing understanding that achieving the temperature goals of the Paris Agreement — and reducing the type of <a href="https://www.ipsnews.net/2022/09/pakistan-flooding-shows-adapting-climate-change-can-dangerous-illusion/">climate devastation experienced by Pakistan</a> – requires not only slowing new construction, but also <a href="https://www.iea.org/commentaries/it-s-critical-to-tackle-coal-emissions">retiring existing coal power plants early</a>, worldwide.
In response to this challenge, the ADB announced the <a href="https://www.adb.org/news/adb-indonesia-philippines-launch-partnership-set-energy-transition-mechanism">Energy Transition Mechanism</a> which includes an initiative to <a href="https://rmi.org/insight/financing-the-coal-transition/">buy out existing coal investors to shutter their plants early</a> and thereby avoid the attendant future emissions. Typically, this would involve mobilizing international financing from multilateral development banks, climate funds, etc. to compensate the private sector investors in these plants.
Interestingly, the dominance in the BRI’s overseas projects of China’s state-owned companies creates the opportunity for the Chinese Government to apply the ADB mechanism in a streamlined manner — under what could be called the “BRI Clean Energy Transition Mechanism”. How might this work? Some initial ideas follow.
As noted above, Chinese state-owned financial institutions are the major lenders to the BRI coal power projects in Pakistan. Similarly, Chinese government-owned energy firms are the dominant coal plant owners. It is the financial interests of these various Chinese state-owned lenders and other enterprises (SOEs) that would be affected adversely by any early retirement.
Consequently, under the proposed mechanism, China would be compensating its own SOEs for the revenues they would lose in the future from the early plant retirements in Pakistan. In essence, China would pay itself. This is a unique feature of this BRI coal retirement program that flows from China’s reliance on its own SOEs … and it presents several operational and financial advantages.
<ol><li>The financial arrangements for early retirement should be easier to negotiate and execute since the parties are all affiliated — i.e., the Chinese government, its state-owned banks and other SOEs. This should also reduce transaction costs.</li></ol>
<ol><li>In the ADB’s early retirement context, private sector investors would typically insist on some compensation being paid today for the loss of projected future revenues. In contrast, because the BRI context would involve compensation from the Chinese Government to its own SOEs, the Government could reasonably delay payments till the point at which the SOEs would actually be foregoing revenues. So, for example, if we assume early retirement in 2030 — an interval that would give Pakistan the time to replace the retired coal electricity generation with renewables in an orderly manner (see discussion below) – then the payments by the Chinese Government to its SOE lenders and energy firms could similarly be deferred till that time.</li></ol>
<ol><li>The Government would also, as a practical matter, enjoy significant discretion regarding the level of compensation to be paid to its SOE lenders and energy firms in 2030 and beyond. Notably, the Government could impose a discount on these future payments — especially if it has implemented by that time financial disincentives targeting coal generation (e.g., a carbon price) to <a href="https://www.bbc.com/news/science-environment-54256826">support its own carbon peaking and neutrality goals</a>.</li></ol>
<ol><li>The proposed BRI mechanism would resemble in various ways a debt-for-nature swap, notably from the perspective of China as a creditor/donor country. In this BRI “debt-for-coal” swap, China would forego the payments due its SOEs in the future from the operation of these Pakistan coal plants in exchange for the reduced emissions generated by their early retirement. Significantly, this mechanism would produce emissions avoidance benefits without China providing any new overseas funding.</li></ol>
<h1>What are some possible motivations for Beijing to launch this type of initiative?</h1>
First, it provides a mechanism for China to respond to <a href="https://www.bloomberg.com/opinion/articles/2022-09-07/pakistan-s-floods-may-reveal-china-as-a-fair-weather-friend">the increasing pressure it is facing as the world’s second largest economy to help poorer developing countries</a> meet their climate and sustainability challenges. China’s status as the world’s largest emitter of greenhouse gases amplifies this pressure.
Second, the ability to launch an international climate program that does not require China to disburse funds for the next several years — and, when it does so, to pay its own SOEs — may appeal to the Government, particularly given the current <a href="https://www.worldbank.org/en/country/china/publication/china-economic-update-june-2022">domestic economic stress</a>. This is consistent with other <a href="https://dialogochino.net/en/trade-investment/47862-explainer-what-is-debt-for-nature-swap/">debt-for-nature swap programs</a> advanced by other donor countries where the financial cost to the donor is from foregone revenues, not new funding.
Moreover, the loss in revenues for China and its SOEs from the early BRI coal plant retirements would only take place in 2030 when China’s economy should be markedly larger and more capable of absorbing the expense.
Finally, there is an argument that to the extent the ADB and BRI approaches retire the same type of coal capacity with the same climate benefits, China’s inducements to its SOEs to retire BRI coal assets early should be counted as international climate financial support (e.g., a type of “synthetic carbon credit”) just as actual <a href="https://rmi.org/insight/financing-the-coal-transition/">monetary transfers to private sector investors would be recognized with respect to an ADB coal retirement transaction</a>.
Importantly, Pakistan and other BRI developing countries will <a href="http://www.ipsnews.net/2021/10/less-overseas-coal-is-good-but-developing-countries-still-need-more-electricity/">need even more electricity to power their economic development</a>. Consequently, the BRI Clean Energy Transition Mechanism needs to include additional funding for new renewables power generation capacity (as is the case under the ADB’s approach).
Helping BRI-recipient countries to transition from coal to renewables would also support international efforts to reduce emissions — efforts whose <a href="https://www.npr.org/2022/09/19/1123798981/climate-change-likely-helped-cause-deadly-pakistan-floods-scientists-find">importance for Pakistan and various other developing countries has been made abundantly evident</a> by the devastating weather they have been experiencing.
The extreme climate events of 2022 have increased awareness regarding the vulnerability of poorer countries to climate change and the <a href="https://www.ipsnews.net/2022/09/pakistan-flooding-shows-adapting-climate-change-can-dangerous-illusion/">consequent importance of reducing future emissions</a>. This article sets out a proposal for how China could retire BRI coal plants early in Pakistan and elsewhere that capitalizes on its use of state-owned companies, while supporting more renewables in these countries to reduce the climate change threat and promote sustainable economic growth.
This article is also published by <a href="https://www.ipsnews.net/2022/10/china-can-retire-coal-early-pakistan-elsewhere-bri/">Inter Press Service</a>. Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

How China Can Retire Coal Early in Pakistan and Elsewhere Through the BRI

Transitioning to a low-carbon energy future consistent with the goals of the Paris Agreement requires trillions of dollars of additional investment in the Global South. Most of this investment will need to be in domestic-oriented projects, generating local currencies and creating domestic development opportunities. However, local capital alone will not be enough, and significant amounts of foreign investments in the form of debt or equity will play a critical role.

Leonardo

Espen

Olivier

Policy Note | Scaling Clean Energy through Climate Finance Innovation

 One third of Pakistan is now under water. The scope of the destruction is difficult to fathom, not just the enormity of the devastation its people are facing today, but also the damage to its infrastructure, its buildings, and its economy that will weigh heavily on the country for months and even years to come.

<a href="https://www.bbc.com/news/world-europe-62712301">One third of Pakistan is now under water</a>. The scope of the destruction is difficult to fathom, not just the enormity of the devastation its people are facing today, but also the damage to its infrastructure, its buildings, and its economy that will weigh heavily on the country for months and even years to come.
While experts may debate the extent to which <a href="https://www.bbc.com/news/world-asia-62722117">greenhouse gas emissions impacting Pakistan’s weather patterns may be to blame</a>, the scale of this devastation shows the shortcomings of invoking notions of “adaptation” as a meaningful strategy to respond to climate change’s destructive force.
Pakistan is facing the type of large-scale destruction that is seen in wars — and not just any war, but total warfare that consumes entire regions and countries. This is what many countries suffered in World War II and others in more recent conflicts. In Pakistan, the cause isn’t an army, but a changing climate fueled at least in part by the greenhouse gas (GHG) emissions clogging our atmosphere. A core strategic element of the international effort to address climate change is “adaptation,” namely action “to respond to the impacts of climate change that are already happening, as well as prepare for future impacts.” This operates in tandem with “mitigation” which focuses on reducing GHG emissions.
Because our historical and future GHG emissions will produce some degree of climate change, we indeed do need to fund measures to respond to the inescapable changes in weather patterns and climate more broadly – even as, through mitigation action, we seek to lower our GHG emissions to limit how much our climate will change.
Yet, the recent events in Pakistan illustrate the shortcomings of an adaptation strategy in the face of widespread devastation. Any notion of “adapting” to these events is tragically misplaced. We cannot, just as countries cannot adapt to the destruction of war. They can resist, fight, look to recover, but the tragedy they suffer cannot be undone.
And while the number of lives lost because of climate change arguably may presently be smaller than that wrought by war, the capacity of both to destroy property, livelihoods and economies is similar.
The goals and elements proposed by the experts within the “adaptation” effort are the right ones. We must look to limit the losses generated by changes in our climate, to accelerate the recovery from extreme climate events, and <a href="https://unfccc.int/topics/adaptation-and-resilience/the-big-picture/what-do-adaptation-to-climate-change-and-climate-resilience-mean">even seek potential opportunities</a>.
We must invest in climate resilient infrastructure, drought-resistant crops and other strengthened agricultural practices, better weather forecasting capacity, tools to reconnect power supply more quickly, and in a multitude of other measures. And these efforts need to be adapted to the changes in our climate. Moreover, as climate specialists and others advocate, many more resources need to go into this area.
But while technocrats and politicians of the past landed on this terminology of “adaptation”, what today’s events in Pakistan show is that you cannot truly adapt to climate change and its potential for widespread devastation — especially developing countries that do not have the financial resources to counter extreme weather events.
Even at a smaller scale across both developing and wealthier advanced economies, the rising number and severity of localized wildfires, heatwaves and floods are causing irreparable damage. People suffer loss. Although they might recover and rebuild their homes or businesses, there has still been harm and too often tragedy. People die because of climate change. Too much is lost forever.
There has been growing discussion in the international climate arena around payments for <a href="https://www.wri.org/insights/loss-damage-climate-change">“loss and damage”</a> caused by climate change. This type of funding, including for additional adaptation measures, can help — but it will not remedy the problem, especially given <a href="https://www.project-syndicate.org/commentary/pakistan-flooding-climate-justice-rich-countries-should-bear-cost-by-jeffrey-d-sachs-2022-09">the potentially massive magnitude of the destruction</a>.
Pakistan cannot be expected to adapt to having one third of its country under water. Families should not be expected to adapt to the tragedy climate change can inflict.
Let’s find another term that better conveys what is truly within our reach in responding to climate change so that we can have a clearer appreciation of the climate threats we face. The global community can indeed work to reduce the loss people will suffer and do a better job at helping them to recover and rebuild. But truly “adapting” to the devastation that climate change can cause is a dangerously misleading notion.
Yes, there must be additional funding for adaptation and to help poorer countries respond to climate disasters. But what the events in Pakistan show is that so much more needs to be done to reduce GHG emissions and thereby limit the degree of climate change and accompanying destructive forces people will need to face.
This article is also published in <a href="https://www.ipsnews.net/2022/09/pakistan-flooding-shows-adapting-climate-change-can-dangerous-illusion/">Inter Press Service</a>. Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.
Cover Image Credit: UNICEF/Asad Zaidi

Pakistan Flooding Shows ‘Adapting’ to Climate Change Can Be a Dangerous Illusion

Much of the proposed energy response to Russia’s invasion of Ukraine has focused on increasing domestic oil and gas production. While this will help, another powerful tool that has not received sufficient attention is increasing U.S. energy efficiency.
Not only would greater domestic energy efficiency reduce the influence of Russian oil and gas on the U.S. it also would provide other important benefits to American consumers and the economy. Any strategy to counter Russian-induced energy chaos should give greater weight to promoting energy efficiency domestically.

Much of the proposed energy response to Russia’s invasion of Ukraine has focused on increasing domestic oil and gas production. While this will help, another powerful tool that has not received sufficient attention is increasing U.S. energy efficiency.
Not only would greater domestic energy efficiency reduce the influence of Russian oil and gas on the U.S. it also would provide other important benefits to American consumers and the economy. Any strategy to counter Russian-induced energy chaos should give greater weight to promoting energy efficiency domestically.
Some have <a href="https://www.washingtonpost.com/opinions/2022/04/14/cutting-off-russian-oil-and-gas-from-europe/">described how increased domestic oil and natural gas production is essential to protecting U.S. strategic interests</a>. While true, the impact can be overestimated. Even as the U.S. has become a leading petroleum producer and <a href="https://www.eia.gov/tools/faqs/faq.php?id=727&amp;t=6">net petroleum exporter</a>, a <a href="https://thehill.com/policy/international/597389-heres-where-us-gas-supplies-come-from/amp/">meaningful portion of the oil purchased by Americans at the pump and elsewhere continues to be produced abroad</a>. Last year, for example, the U.S. <a href="https://www.eia.gov/tools/faqs/faq.php?id=727&amp;t=6">imported 8.47 million barrels per day of petroleum</a>, equivalent to <a href="https://www.eia.gov/tools/faqs/faq.php?id=33&amp;t=6#:~:text=EIA%20uses%20product%20supplied%20to,day%20over%20consumption%20in%202020.">43 percent of the nation’s consumption</a>. Looking ahead, imports are expected to continue even as domestic production grows because of <a href="https://www.api.org/news-policy-and-issues/blog/2018/06/14/why-the-us-must-import-and-export-oil">various factors, including mismatches between the type of crude oil produced domestically and U.S. refinery capacity</a>. Increasing domestic production can help to shift the share, but it won’t remove the significant presence of imported oil in U.S. markets.
Greater energy efficiency, however, provides an important strategic complement to domestic production by helping to lower how much oil and natural gas Americans need to consume. Whether through better insulation in homes and commercial buildings, improved industrial processes, efficient HVAC systems or more fuel-efficient vehicles — as well as more mundane actions such as engine tune-ups and maintaining proper <a href="https://www.fueleconomy.gov/feg/pdfs/811681.pdf">tire pressure</a> — energy efficiency saves energy with various attendant benefits.
Of particular note in today’s high-price environment, energy efficiency helps to reduce the exposure of American consumers to price volatility from international energy markets. When you need less energy to commute to work or to heat your home, surges in international oil prices will have a smaller impact on household expenses. Dampening U.S. demand for energy through efficiency also helps to diminish upward pressures on prices, benefiting all consumers. It reduces how much money American consumers send abroad to foreign energy suppliers, thereby improving the U.S. trade balance through lowered imports while improving household energy budgets.
Importantly, energy efficiency generally involves investments in domestic businesses, from American manufacturers to more local service providers. The contractor who installs efficient windows or heat pumps is typically from nearby. Spending locally to create jobs rather than spending on energy imports that fund foreign governments should resonate politically. Moreover, because Europe and other countries will need to invest more in their own energy efficiency for security and climate reasons, the global market for energy efficiency products and know-how should grow. Promoting energy efficiency domestically can help the U.S. industry become a leader in these technologies, creating business opportunities worldwide.
Domestic energy production is indeed a strategic asset for the U.S., and domestic energy efficiency generates many similar gains. Additionally, it can help to support Europe and other allies by increasing the amount of energy the <a href="https://www.scientificamerican.com/article/the-u-s-will-increase-natural-gas-exports-to-europe-to-replace-russian-fuel/">U.S. has available to export</a> under any level of domestic production. And by selling a greater share of domestic production abroad, not only do strategic partners benefit, but once again the U.S. trade balance will improve.
For some, the most important attributes of energy efficiency are the climate benefits. The International Energy Agency’s model (IEA) consistently ranks energy efficiency as the leading clean energy technology. For example, it drives <a href="https://www.iea.org/reports/world-energy-outlook-2019">37 percent of the emissions reductions</a> needed to achieve the “well below 2 degrees Celsius” temperature goal of the <a href="https://unfccc.int/sites/default/files/english_paris_agreement.pdf">Paris Agreement</a> — more than renewables, which weigh in at 32 percent. Greater U.S. energy efficiency provides a way to insulate wallets from price surges while protecting people from the increased fires, droughts and other damage that unchecked climate change could wreak. <a href="https://www.iea.org/reports/multiple-benefits-of-energy-efficiency/air-quality">It would also improve air quality</a> by reducing pollutants through less energy use.
Government programs within the <a href="https://www.energy.gov/eere/energy-efficiency">Department of Energy</a> and <a href="https://www.dsireusa.org/">state-level agencies</a>, as well as private-sector <a href="https://www.nationaldefensemagazine.org/articles/2015/1/31/2015february-defense-should-follow-private-sectors-energy-efficiency-lead">businesses</a>, have been implemented to promote energy efficiency. Many provide <a href="https://thehill.com/opinion/energy-environment/563849-the-poor-pay-more-for-energy-the-us-can-correct-the-imbalance/">financial support to households</a> and <a href="https://www.energy.gov/funding-financing-energy-businesses">industries</a> to purchase energy-efficient equipment, with <a href="https://archive.nytimes.com/opinionator.blogs.nytimes.com/2015/02/06/investing-in-energy-efficiency-pays-off/">returns to consumers and society far outweighing costs</a>.
Yet, a much greater effort is needed to spur the substantially greater amounts of investment required to combat climate change. As set out in the IEA’s modeling, <a href="https://www.iea.org/reports/world-energy-outlook-2019">a four-fold increase in energy efficiency investments in the U.S.</a> is needed by the 2030s, and a similar <a href="https://www.iea.org/reports/world-energy-investment-2021">increase is required globally</a>.
<a href="https://thehill.com/opinion/healthcare/3561222-988-is-officially-live-heres-what-people-should-know/">988 is officially live — here’s what people should know</a> <a href="https://thehill.com/opinion/campaign/3565636-trump-shouldnt-run-again-here-are-4-reasons-why/">Trump shouldn’t run again — here are 4 reasons why</a>​ 
Given all these advantages, why isn’t there more investment in energy efficiency? The reasons are numerous and <a href="https://www.energy.gov/sites/prod/files/2015/06/f23/EXEC-2014-005846_6%20Report_signed_0.pdf">well-known</a> within the energy efficiency community. They include an industry that lacks financial and political weight, especially compared to petroleum companies and other energy suppliers. Energy efficiency also, unfortunately, lacks appeal. While the geopolitics of “Big Oil” have captured imaginations for decades, installing insulation and other <a href="https://energyeconomicgrowth.org/index.php/publication/energy-efficiency-more-goods-and-services-developing-countries">stories about saving energy</a> are less compelling. While energy efficiency may lack appeal, its benefits, however, are too big to ignore, especially in today’s volatile world.
The U.S. needs greater energy efficiency to protect its consumers from energy chaos driven from abroad, whether that’s Russia’s invasion of Ukraine or future unforeseeable or even predictable events.
This article is also published on <a href="https://thehill.com/opinion/energy-environment/3553213-how-greater-us-efficiency-can-counter-global-energy-chaos/amp/">The Hill</a>. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Greater US efficiency can counter global energy chaos

At the COP 26 climate meetings in Glasgow, a consortium of philanthropies, led by The Rockefeller Foundation, announced a massive program to fund renewable electricity projects for impoverished people in developing countries. The establishment of the Global Energy Alliance for People and Planet (GEAPP) is welcome news. But when it comes to generating the strongest benefit for the impoverished, funding for clean electricity should be complemented by a substantial investment in the people themselves.

At the COP 26 climate meetings in Glasgow, a consortium of philanthropies, led by <a href="https://www.rockefellerfoundation.org/">The Rockefeller Foundation</a>, announced <a href="https://www.rockefellerfoundation.org/initiative/global-energy-alliance-for-people-and-planet-geapp/">a massive program to fund renewable electricity projects</a> for impoverished people in developing countries. 
The establishment of the <a href="https://www.globalenergyalliance.org/">Global Energy Alliance for People and Planet</a> (GEAPP) is welcome news. But when it comes to generating the strongest benefit for the impoverished, funding for clean electricity should be complemented by a substantial investment in the people themselves - one that is designed to enable them to best use these clean electrons to increase their family&#x27;s income and rise out of poverty. This is a thrust already embedded in GEAPP&#x27;s proposed approach that needs continued emphasis during implementation.
GEAPP is a multi-billion dollar program to help transition the energy system to renewables, with a focus on developing countries. It &quot;<a href="https://www.rockefellerfoundation.org/initiative/global-energy-alliance-for-people-and-planet-geapp/">aims to extend clean, productive-use energy to 1 billion underserved people, create tens of millions of green jobs, and avoid and avert over 4 billion tons of emissions</a>.&quot; A key component is investments to build distributed renewable energy systems that can be set up rapidly and located near consumers in impoverished, often rural, communities. Improving the lives of citizens is a key objective.
We can, however, easily be distracted by the magnitude of the money being proposed to build out clean power systems and forget that electricity, in and of itself, will not overcome poverty. Appropriately, the GEAPP points to the new jobs in renewables and other clean energy businesses its investments will generate. More significantly, it also emphasizes the even larger number of jobs it will create or improve in other sectors (such as agriculture and manufacturing) by providing electricity access to small businesses and other end-users quickly from nearby distributed generation systems. Giving more electricity to the energy-deprived <a href="https://www.globalenergyalliance.org/wp-content/uploads/2021/11/Transforming-a-Billion-Lives-The-Job-Creation-Potential-from-a-Green-Power-Transition-in-the-Energy-Poor-World.pdf">will also produce health, education, safety and other benefits</a>. For all these reasons, the GEAPP is an important anti-poverty initiative in addition to a climate one, and its multibillion-dollar mass is not only impressive but also what is needed.
The world&#x27;s most impoverished, unfortunately, often lack the tools to transform electrons into incomes. The barriers they face include a lack of technical skills to select, operate and maintain the most suitable equipment; lack of know-how about setting up micro-enterprises; lack of exposure as to how to grow these enterprises into small and medium-sized businesses that can employ more people; and importantly, lack of access to credit to purchase new equipment and other assets to grow their businesses.
Impoverished entrepreneurs looking, with the benefit of newly supplied clean electricity, to set up a business or expand an existing one will need support in answering a variety of possible questions. Is there a potential market for a new tire repair store? Which equipment makes the most sense to buy, and is it available and affordable? With new access to locally provided, more reliable and cheaper electricity, does it make sense to expand a home-based business? Where can small or even micro-household entrepreneurs get the money to exploit that new distributed renewable electricity they now receive? Are there credit centers nearby and how do you apply for a loan? Does stable access to the internet powered through a reliable renewable electricity supply open up opportunities? To answer these and a myriad of other possible questions, many disadvantaged entrepreneurs need help.
To aid them to overcome these challenges, the entrepreneurs would benefit from targeted capacity building and other assistance programs. This support will often need to cover soft skills, in addition to assistance with hardware and money. Just as there have been agriculture extension programs to help farmers, we need electricity extension programs to help under-resourced entrepreneurs. Vocational, technical and similar training programs, as well as mentorships, partnerships and twinning arrangements with more established businesses, are useful. Moreover, it is important to bring these services to the end-users, rather than requiring them to travel long distances, often to reach difficult urban centers. Distributed renewables generation needs to be mirrored by distributed training programs, together with local credit and equipment centers that bring support to the users in their communities.
These initiatives will not overcome all the barriers impeding poverty alleviation (such as the limited markets that can constrain business opportunities in many impoverished rural communities), but they can help.
GEAPP has the breadth and the ambition to implement the necessary expansive capacity support programs at scale. The billions to be invested in building new distributed renewables and other clean energy systems need to be accompanied by a massive investment in strengthening the capacity of the impoverished end-users themselves. Experience, however, has demonstrated that it is often more difficult to bolster soft skills and successfully empower disadvantaged families than it is to build out electrical systems. Success will require not only substantial amounts of funding but also a large number of people on the ground in the communities and establishing complementary policies and programs for the impoverished.
GEAPP&#x27;s plans to <a href="https://ikeafoundation.org/press-release/historic-alliance-launches-at-cop26-to-accelerate-renewable-energy-climate-solutions-and-jobs/">work with local partners in each market</a> and engage development banks and other delivery partners can help establish the necessary foundation for advancing on these fronts. Maintaining focus and commitment on the softer capacity and programmatic areas for those in poverty will be important even as GEAPP funds its large-scale investments reshaping the electricity system itself.
Strengthening the capacity of impoverished people to transform electrons from renewables into incomes and other economic and social advancements can help these families produce their own better future. GEAPP provides a strong potential platform to advance this effort. Actual implementation will be key and empowering those experiencing poverty needs to remain a focus.
This article is also published on <a href="https://thehill.com/opinion/energy-environment/581817-clean-energy-alone-wont-uplift-poor-nations-we-must-invest-in?amp">the Hill</a>. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Clean energy alone won't uplift impoverished nations — we must invest in people

Recently there's been a lot of attention focused on the inequities in our taxation system that allow some of America's wealthiest to pay very little in taxes. Energy costs are another area that can raise similar concerns because poor households sometimes pay more for energy - certainly as a percentage of their income but also even on a per-unit basis - than higher-income consumers. The Biden administration can take a small but important step to address this problem by establishing a task force to identify where this happens and what can be done about it.

Recently there&#x27;s been a lot of attention focused on the inequities in our taxation system that allow <a href="https://www.nbcnews.com/business/taxes/richest-americans-pay-almost-no-income-taxes-report-finds-n1270069">some of America&#x27;s wealthiest to pay very little in taxes</a>. Energy costs are another area that can raise similar concerns because poor households sometimes pay more for energy - certainly as a percentage of their income but also even on a per-unit basis - than higher-income consumers. The Biden administration can take a small but important step to address this problem by establishing a task force to identify where this happens and what can be done about it.
Many studies show that lower-income households <a href="https://gizmodo.com/poor-households-spend-nearly-four-times-as-much-on-util-1845010294">spend a bigger share of their income on energy than higher-income households</a>. In part, this is just math: if a grocery store worker making $25,000 a year and an investment banker making $1 million a year pay the same price for a gallon of gasoline or a kilowatt-hour of electricity, the grocery worker is paying a much higher percentage of their income for this energy. Moreover, many low-income consumers live in housing with substandard insulation or older appliances, <a href="https://www.usnews.com/news/healthiest-communities/articles/2020-09-30/poor-households-pay-more-for-energy-but-efficiency-can-help">which can mean they have a higher energy cost burden than wealthier families</a>. This is a problem that adversely affects particularly <a href="https://www.aceee.org/energy-burden">low-income Black, Hispanic and Native American households</a>.
What is perhaps more surprising is that poor consumers also sometimes pay a higher price per unit of energy than higher-income ones, and in other cases are actually subsidising wealthier consumers. So just as the <a href="https://www.forbes.com/sites/ebauer/2020/11/16/yes-poor-retirees-pay-more-effective-marginal-taxes-than-the-rich-what-can-we-do-about-it/?sh=2e3ca9a83b1d">poor can face a higher tax rate than the rich</a>, the same can happen with energy prices.
For example, as recently described by the <a href="https://haas.berkeley.edu/energy-institute/">University of California-Berkeley&#x27;s Energy Institute at Haas</a>, &quot;<a href="https://www.seia.org/initiatives/net-metering">net metering</a>&quot; programs - which provide financial benefits to encourage installation of home solar systems - result in <a href="https://energyathaas.wordpress.com/2021/06/01/rooftop-solar-inequity/">energy costs being shifted from higher-income consumers to lower-income</a> ones <a href="https://iopscience.iop.org/article/10.1088/2516-1083/abb954/pdf">who can&#x27;t access these benefits</a> (e.g., because they do not own houses with large roofs). Simply put, poorer people pay higher rates because of benefits flowing to those with higher incomes. 
Another example are the efforts by utilities and regulators to use fixed charges rather than volumetric rates to recover revenue from electricity customers. Because poor people use less energy, <a href="https://www.synapse-energy.com/sites/default/files/Caught-in-a-Fix.pdf">higher fixed charges can mean the poor pay more for their electricity on a per kilowatt-hour of use basis</a> than higher-income consumers.
What may seem like small amounts to some are often significant for poorer households or when the aggregate impact on all these households is considered. For example, <a href="https://www.npr.org/2018/09/19/649633468/31-percent-of-u-s-households-have-trouble-paying-energy-bills">25 million American households sacrificed food and medicine purchases to pay energy bills</a>. Once again, <a href="https://www.eia.gov/todayinenergy/detail.php?id=37072">Hispanic and racial minorities were hit hardest</a>.
To address this problem, here&#x27;s what needs to happen.
The critical first step is to identify those instances where the poor are in fact paying more for their energy or where costs are being shifted from rich to poor. Cataloguing these will be difficult, in large part because of the complex calculations required, but also because there are vested interests who benefit from the current system and will resist efforts to change it.
But cataloguing prices and cost shifts is not enough. People pay for electricity not for its own sake, but because they want a cool house in the summer, a warm home in the winter, cold beverages in the refrigerator, etc. Poorer families living in homes with inadequate insulation, or with older and more inefficient HVAC systems and appliances, use more electricity to get the actual energy-supplied services they want and need, as many <a href="https://www.aceee.org/energy-burden">reports have shown</a>. This issue is already being addressed under <a href="https://www.hud.gov/sites/documents/21647_LOWINCOME.PDF">certain governmental programs</a>, but <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4819257/">more needs to be done</a> to remedy the disproportionate energy burdens faced by poorer families.
The second is to answer the question &quot;why is this happening?&quot; In some cases, the driver is government regulation. Often, the regulation may have a laudable purpose such <a href="https://www.eia.gov/energyexplained/renewable-sources/incentives.php">as incentivising renewables</a>, but it can end up shifting costs to low-income consumers or making them pay higher per-unit costs than wealthier consumers. In other cases, the <a href="https://www.motherjones.com/environment/2019/11/heres-why-neighborhoods-with-more-people-of-color-pay-higher-energy-bills/">cause may not be regulation</a>, but the government is well placed to address the issue (e.g., <a href="https://www.hud.gov/sites/documents/21647_LOWINCOME.PDF">energy efficiency investment programs for low-income families</a>).
The third step is to identify pragmatic and implementable solutions. Sometimes this may be a technical exercise (e.g., revising <a href="https://www.synapse-energy.com/sites/default/files/Ratemaking-Fundamentals-FactSheet.pdf">regulatory cost methodologies</a>). In other cases, the best solution may not involve undoing the burden, but rather compensating poor families in other ways. These distributional efforts should be complemented by initiatives to reduce energy costs overall to alleviate the expenses borne by the poor.
So, what can be done? President Biden should establish a task force, led by the <a href="https://www.energy.gov/leadership">Secretary of Energy</a>, to address this energy burden faced by low-income families. The task force should produce within one year a report making recommendations for consideration by the administration, Congress and the states.
Identifying the problems and devising solutions will require deep technical skills, <a href="https://www.motherjones.com/environment/2019/11/heres-why-neighborhoods-with-more-people-of-color-pay-higher-energy-bills/">cross-disciplinary efforts</a> and the engagement of a diverse group of stakeholders. In addition to the Department of Energy, the Department of Housing and Urban Development, the Department of Health and Human Services, the <a href="https://www.ferc.gov/">Federal Energy Regulatory Commission</a>, <a href="https://www.epa.gov/sites/default/files/2016-03/documents/background_paper.pdf">state public utility commissions</a> and others should contribute. Non-governmental stakeholders, including civil society organizations, affected communities and poor families themselves, have important roles to play and should be represented on the task force. 
Now is an opportune time to address this issue given the <a href="https://mitsloan.mit.edu/ideas-made-to-matter/why-energy-justice-a-rising-priority-policymakers">rising interest</a> in <a href="https://iejusa.org/section-1-defining-energy-justice/">energy justice</a> and the <a href="https://www.energy.gov/eere/slsc/low-income-community-energy-solutions#:~:text=Low%2Dincome%20households%20face%20disproportionately%20higher%20energy%20burden.&amp;text=According%20to%20DOE%27s%20Low%2DIncome,which%20is%20estimated%20at%203%25.">disproportionate burdens faced by disadvantaged American families</a>. Moreover, the extensive <a href="https://www.energy.gov/eere/articles/department-energy-launches-national-initiative-clean-heating-and-cooling-systems">review and restructuring of energy-related policies and programs</a> being undertaken to meet the challenge of climate change also provides an opening to tackle the energy system&#x27;s adverse impact on poorer families.
Ultimately, more than rectifying inequities in the energy cost structure, this effort is about trying to find ways to empower poor people to spend more of their own resources on adequate housing, transport, leisure and more, without overpaying for energy. The Biden administration should launch this effort now, so America&#x27;s poor can benefit as quickly as possible.
This article was co-authored by David R. Hill. This article first appeared on <a href="https://thehill.com/opinion/energy-environment/563849-the-poor-pay-more-for-energy-the-us-can-correct-the-imbalance?amp">the Hill</a>. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

The poor pay more for energy — the US can correct the imbalance

What may seem “uneconomic” under a traditional plant-level analysis is potentially attractive from the country-level economic perspective that is arguably more relevant for China, particularly given the prevalence of state-owned enterprises.

The FT reports China’s new coal power plants are uneconomic (Report, <a href="https://www.ft.com/content/cf4399bb-bb6b-4465-95e6-6777bc0ab070">FT.com</a>, June 30). However, what may seem “uneconomic” under a traditional plant-level analysis is potentially attractive from the country-level economic perspective that is arguably more relevant for China, particularly given the prevalence of state-owned enterprises.
China’s power producers, as well as construction companies, coal suppliers and utilities, are generally affiliated SOEs within what can be described as “China Inc”. Prices for inputs and outputs faced by producers are principally determined through government regulations and “non-arms-length” transactions between two SOEs. And it is largely this government-driven pricing scheme which creates the FT-referenced “stranded assets” risk for SOEs on their new plants.

<img src="https://illuminem.b-cdn.net/articlebody/cc5a16b9f1787165a60faf9b151c4885ba1f4d46.png" alt="undefined">
But, at its core, power generation is one activity within the broader effort of China Inc to grow the country’s economy and maintain government control over strategic assets. A preliminary analysis I co-authored (under a programme studying SOEs and climate action) indicates new coal plants can indeed generate an economic benefit for China given the value of electricity to consumers and assuming local environmental impacts are managed. However, the analysis also indicates that incorporating a moderate carbon price on plant emissions would eliminate this benefit, thereby rendering the project uneconomic from China’s perspective. Investing in renewables potentially provides a stronger economic return.
China may be overinvesting in new coal generation, but the key marker is less that these plants are unprofitable for the SOE owner, but rather that China Inc has better alternative power investments to make to advance the country’s economic interests.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

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Philippe Benoit

Philippe Benoit

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