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The Asian Development Bank (ADB) released a draft energy policy paper that
proposes to end its financing for coal mining, oil and natural gas
exploration or extraction, and new and existing coal-fired
generation.
The draft represents a significant step forward for the bank's
support of the energy transition in Asia's developing countries,
potentially far beyond ADB's current policy. It has not approved
direct financing of a coal power project since 2013.
The bank is also proposing not to finance nuclear energy
projects, but it left open the door for gas-fired power
generation.
ADB's announcement goes beyond the promise made by the president
of the China-led Asian Infrastructure Investment Bank (AIIB), Jin
Linqun, in October 2020 that it, too, is permanently getting out of
the coal business.
The proposed policy, announced during ADB's 54th annual meeting
earlier this month, will be voted on in the fourth quarter of 2021,
and would take effect upon passage. It would affect $80 billion in
energy investments that ADB plans through 2030.
Those investments would nearly double the $42.5 billion in energy
financing the ADB said it provided to developing member countries
between 2008 and 2018.
At the meeting, ADB President Masatsugu Asakawa said Asian and
Pacific nations are responsible for about 50% of global GHG
emissions and 80% of projected growth in coal demand. "Without
decarbonizing energy systems, the goals of the Paris Agreement will
be beyond reach," he said, and the same countries that seek ADB
investment are especially vulnerable to climate change.
The bank invested about $5.3 billion in climate finance in 2020,
of which around $4.7 billion was for mitigation (renewables,
lower-emissions power, efficiency, etc.), and approximately $700
million for adaptation (natural barriers, flood control). Of the
$4.7 billion, gas-fired power received 44% of the support, and gas
exploration and production received 21%.
Going forward, investments will be rated according to "three key
quantitative and timebound targets," which are decreasing CO2
emission intensity, peaking of CO2 emissions, and achieving carbon
neutrality.
As part of its risk assessment of each investment, ADB will use
an internal carbon price of $36.30/mt of CO2 (in 2016 dollars),
which will increase by 2% per year above inflation. "This unit
value can be used to estimate the value of avoided GHG emissions
for projects that reduce emissions and the cost in damage created
for projects that increase emissions," it said.
ADB noted a few exceptions to the planned restrictions.
For coal-fired power, it will consider projects that retrofit
plants to run on cleaner fuels, including natural gas. For natural
gas projects, including LNG import terminals and pipelines, ADB
will consider financing a project if it replaces a higher-emitting
resource, uses best-available technology, aligns with a 2050
net-zero target, and is able to demonstrate that no other resource
can provide comparable reliability for the same cost (including the
social cost of carbon).
Coal and gas
Phasing out coal use will be the biggest challenge for Asia's
generators, wrote ADB Energy Sector Group Chief Yongping Zhai in an explanation
posted on the bank's website on 2 May.
"In 2018, coal generated almost 60% of electricity in Asia, and
it plays an outsized role in larger countries. For example, coal
generated around 73.5% of all energy produced in India, 66.5% in
the People's Republic of China, 56.4% in Indonesia, 52.1% in the
Philippines, and 44.6% in Malaysia," he wrote. "Coal-fired power
stations often have a lifespan of more than 30 years, while the
average age of Asia's coal plants is about 12 years. This means
that phasing out coal will be a complex and enduring process."
In addition to its new financing standards, the bank will
support governments in setting tougher emissions and energy
efficiency rules on coal-fired plants, and it will also consider
funding carbon capture and storage projects, Zhai wrote.
For gas, Zhai explained that ADB has to walk a fine line. "ADB
has supported natural gas projects that are aimed at providing
energy access to clean cooking and heating, and replacing coal
power with more efficient and low emission combined-cycle gas-fired
power," he said. But at the same time, he added: "We have to ensure
that gas projects avoid long-term lock-in effects, and the risk of
creating stranded assets."
As a result, the bank will consider a country's nationally
determined contribution of emissions reductions by 2030 under the
Paris Agreement and whether gas projects will contribute to the
country meeting those goals. This would come into play, for
example, on an LNG import terminal and gas transmission pipeline
that increases gas supply to a country seeking to move away from
coal-fired power or use of biomass for cooking and heating.
Impact
ADB's decision, especially its harder line on coal power,
supports the stance that private investors are taking, especially
in the region. In the private sector, Australian investment bank
Macquarie announced earlier in May it is
phasing out all coal lending, and it expects the last tranche of
funding to run out in 2024. Malaysia's largest bank, Maybank, also
said this month it will not finance new coal power or mining
projects.
National commitments also are moving in the same direction.
China has committed to peak coal consumption by 2025 and a gradual
phasedown thereafter. South Korea has pledged to end overseas
financing for coal-fired power plants.
But the draft energy policy drew skepticism from environmental
finance advocates, who said that it doesn't go far enough and that
both ADB and AIIB have financed too many fossil fuel projects in
the past.
A report published in 2020 by the Center for Energy, Ecology, and
Development (CEED) reviewed ADB's investment portfolio from
2009 through 2018. It found that the bank provided financial
backing for nearly 29 GW of power generation projects. "At first
glance, the mix of its energy generation projects in the past
decade is impressive, with only 19% of the total relying on fossil
fuels. Looking at the installed capacity of these projects,
however, we see that at least half or 14.2 GW of the power produced
is from coal, fossil gas, and oil," CEED wrote. "The ADB is
instrumental in Asia's reality of a continued reliance on coal and
other fossil fuels, which exposes it to issues of energy security
and affordability as what happened during the [COVID-19]
pandemic."
Among its recommendations, CEED said ADB should set a carbon
price of $80/mt in its risk analysis now and raise it to $100/mt by
2030, or approximately twice the level that ADB has pledged in its
draft energy policy.
On the gas side, ADB's pledge was insufficient for a coalition
of 20 NGOs that sent an open letter to the bank,
coinciding with the start of the 3-5 May annual meeting.
"Gas expansion poses one of the greatest threats to meeting the
goals of the Paris Agreement and averting the very worst impacts of
the climate crisis. According to Carbon Brief, gas played a larger
role in increasing global emissions than coal in every year between
2013 and 2019," the NGOs said.
The organizations said that from 2016 to 2020, ADB approved
$11.1 million in technical assistance grants, which typically fund
studies to analyze the need for new energy infrastructure — and
those studies often wound up justifying new fossil fuel
investments. The environmental groups said the loans had helped
governments "prepare to build out gas pipelines, power plants and
LNG terminals across Asia. These grants have had an outsized impact
per-dollar relative to loans and guarantees."