By Rishikesh Ram Bhandary and Kevin P. Gallagher
Coal-fired power plants will have to be rapidly phased down to meet the Paris Agreement targets and avoid the catastrophic costs of inaction on climate change.
At the 2023 United Nations Climate Change Conference (COP28) in Dubai, countries agreed to accelerate the phase-down in a manner that is “just, orderly, and equitable.” The legacy multilateral development banks have made similar commitments by placing coal plants on exclusion lists. Additionally, in his 2021 address to the UN General Assembly, Chinese leader Xi Jinping announced that China would no longer finance new overseas coal-fired power plants and instead would seek to ramp up support for renewable energy in developing countries. The discussions at COP29 will be an important opportunity to make concrete steps towards the energy package that was agreed upon in Dubai.
While the consensus on the need to phase down is clear, policymakers need more analytical tools to understand the costs and benefits of phasing down so that they can phase plants down in an efficient and orderly way.
Climate-harming pollution from coal plants is often not discouraged by government policy. Even if there is a price on carbon, it may be too low to make a meaningful difference, or its coverage may not be extensive enough to include power sector emissions. What is more, coal-fired power plants are important not only from a climate mitigation perspective but also from a public health perspective, as they also spew emissions that damage human health, cause water pollution, and impact agriculture. On the benefits side, energy systems are the lifeblood of local economies, and shutting down coal plants would have broader economic ramifications in terms of job losses, energy security, and beyond if not properly managed.
In a new working paper published by the Boston University Global Development Policy Center, we present and apply a broader framework for assessing the costs and benefits of phasing out coal-fired power plants with a test case in Indonesia. We find that phasing down coal-fired power plants and shifting to renewable energy has the greatest benefits—relative to running the coal plants to retirement age or simply retiring a coal plant seven years early.
These findings have several policy implications. First, there will have to be a concerted effort to scale up renewable energy alongside phaseouts. In other words, focusing on shutting down coal plants will not be enough; there must be a proactive effort on the renewables side as well. The COP29 decision reflects this need, as the coal phase-down commitment comes alongside a pledge to triple solar and wind power globally.
Second, industrial activity is often reliant on fossil fuel-intensive sources. Total economic losses are the highest when the plant is retired early without substitution. In our study, the coal plant in Tenayan Riau in Indonesia would no longer be able to supply power to the nearby industrial zone if power is not substituted. For coal plant retirement to reflect the “just, orderly, and equitable” transition agreed upon in Dubai, it will be vital to ensure that there are alternative sources of power to support industrial activity.
Third, when the coal plant is switched to solar for early retirement, one of the largest benefits of the substitution comes from not having to provide electric coal subsidies. This is particularly important when the energy transition is placed in the broader macroeconomic picture, and the economic health of energy utilities is considered. The political economy of power generation will be vital to pay attention to and will require real leadership from host governments to switch from subsidies and contracts that pay out simply for built capacity, as is the norm in many countries.
Given the costs and benefits of shuttering coal plants, development finance institutions (DFIs) have an important role to play in supporting an orderly transition. Limiting the economic impact of coal retirement hinges on easily switching to renewables and supporting just transition costs. The World Bank’s own analysis has shown the ‘optimal’ decision would be to run a plant like South Africa’s Komati plan several years longer in the absence of a price on carbon and concessional finance to support the transition. Applying a holistic cost-benefit analysis methodology, as we propose, could also help Chinese DFIs like the China Development Bank and Export-Import Bank of China and borrowers alike to identify the conditions under which early retirement would be economically feasible.
To make the commitment to phase down coal plants concrete, one of the first places to begin is to analyze the costs and benefits of coal plant retirement. Clarity on those costs and benefits will help policymakers identify where and how DFIs can best support their clients in achieving a just and green transition.
Rishikesh Ram Bhandary is the Assistant Director of the Global Economic Governance Initiative at the Boston University Global Development Policy Center. Follow him on X: @RishiRBhandary.
Kevin P. Gallagher is the Director of the Boston University Global Development Policy Center and a Professor of Global Development Policy at the Frederick S. Pardee School of Global Studies at Boston University. He serves as the Lead Expert on Multilateral Development Bank Reform to the Brazilian Presidency of the G20. Follow him on X: @KevinPGallagher.
