The world’s largest economies are moving to halt new private sector financing of coal

Some of the world’s largest economies want to finalize a plan before this year’s U.N. climate summit to halt private sector financing of new coal projects, five sources with direct knowledge of the matter told Reuters.

If the draft proposal from the Organization for Economic Co-operation and Development is approved, it would be the first step by the multilateral institution to reduce financing for coal, which is one of the biggest causes of climate change and produces more carbon dioxide emissions than oil or gas when burned for energy.

The draft plan, which aims to set a “gold standard” for financial institutions’ policies on their approach to coal, instructs investors, banks and insurers to halt new financing for existing or planned coal projects and stop financing companies building coal infrastructure, sources said.

According to the plan, financial institutions, instead of selling these assets, would finance the early decommissioning of coal-fired power plants. Early closure of coal facilities should be accompanied by clean energy financing to replace lost coal capacity.

Last month, in a report, the NGO Urgewald said the total amount of loans and guarantees provided by commercial banks to the coal industry amounted to $470 billion in the period from January 2021 to December 2023.

OECD countries – whose 38 members include most of the world’s largest market-oriented democracies – are preparing opinions on the proposal, which is due for public consultation before formal adoption ahead of the UN COP29 climate summit in Azerbaijan in November.

The OECD policy would not be binding, but would aim to establish an international standard used by company boards and shareholders.

Previous OECD guidelines – for example on child labor – have been adopted by some multinational companies, setting standards for dealing with countries that do not have formal child labor laws.

France, the United States, Britain, Canada and the European Union are among supporters of the proposal, part of the “Coal Transition Accelerator” initiative developed by France at last year’s COP28 climate summit, sources said.

This project, which also focused on lowering the cost of capital for clean energy investments, was supported by emerging coal-dependent economies including Indonesia and Vietnam – which have entered into multi-billion dollar deals with donor countries to reduce their dependence on coal.

According to three sources, the biggest opposition to the OECD proposal came from Japan. Japan is the world’s third-largest coal importer and gets more than a quarter of its energy from coal.

OECD members approve the new guidelines by consensus.

Japan’s Ministry of Economy, Trade and Industry did not immediately respond to a Reuters request for comment.

Some sources say the proposal could be watered down further, potentially to halt project financing but not general purpose corporate lending, or it could focus on investment in power plants rather than all coal infrastructure.

Leaders of the G7 countries – among them France, the US and Japan – are expected to debate their efforts to phase out coal at a summit in Italy next week. Two sources said the outcome of the G7 summit could have an impact on the goals of any OECD agreement.

Governments, including the G7, have banned or restricted public financing of coal power in the pursuit of climate goals, so most coal funding now comes from the private sector.

According to S&P Global, only a quarter of financial institutions currently have policies restricting coal financing. Global coal-fired power generation capacity is over 2,000 gigawatts, with another 500 gigawatts under development, mainly in China.

Coal project owners face complex economics when seeking to shut down plants early.

For emerging economies with young coal-fired power plants, such as India and Vietnam, early retirement can be complicated if the initial investment needed to build the plant is only recouped over the life of the plant – typically around 40-50 years.

(Reporting by Kate Abnett in Brussels, Simon Jessop in London; additional reporting by Katya Golubkova in Tokyo; editing by Jane Merriman)