The Scoop
Asia is now responsible for the majority of global greenhouse gas emissions, and decarbonizing the continent is critical for the world to keep temperature increases below 1.5°C. But one major loophole isn’t just holding back progress — it could doom global net zero goals.
Following the COP27 climate summit in 2022, G7 nations unveiled plans to help countries including Southeast Asia’s most coal-dependent nations, Indonesia and Vietnam, retire their coal plants earlier than scheduled, while a growing number of major Western banks and Asian countries announced they will no longer finance coal-fired energy.
But so-called captive coal — coal-fired power plants that are not connected to national electricity grids, but instead used for individual industrial facilities — is not subject to the raft of new pledges, even though its growth across Asia imperils international climate efforts.
And with climate finance back on the table at the upcoming COP29 summit in Baku, captive coal still seems unlikely to face the chopping block. A top Asian Development Bank (ADB) official told Semafor that while he and his peers would prefer to invest in clean energy, they may not always be able to avoid channeling finance to industrial projects that, for now at least, rely on coal power — especially when some, like in Indonesia’s nickel refining sector, are integral to the global clean energy supply chain.
“These are still developing economies, and they need to invest in these sectors of the economy that require energy. And we are sensitive as their partner to not tell them somehow some sectors would be off-limits,” said ADB Vice President Scott Morris. “The challenge is, how do you get a better, more sustainable energy source attached to them? It’s no small task to get that right.”
Know More
The growth of coal-fired power plants has been a key driver of both economic and emissions growth in South and Southeast Asia. These densely populated and fast-growing regions — with a greater population than Europe and the US combined — industrialized much later than their Western counterparts, meaning their younger coal plants can still be run profitably but require a financing model that incentivizes early retirements.
That is what Just Energy Transition Partnerships (JETP) seek to accomplish, pooling financial resources and technical support from G7 nations for select poorer countries to wean themselves off coal faster than they otherwise would, a major global priority given that coal is by far the dirtiest fossil fuel. Thus far, JETPs have been agreed with Indonesia, Senegal, South Africa, and Vietnam.
The JETPs — as well as no-coal pledges from Asian nations and major lenders — all have loopholes, however, with captive coal chief among them.
Captive coal is largely built to fuel industrial parks or energy-intensive factories, including smelters, nickel and lithium processing, and electric vehicle factories. Currently, according to Global Energy Monitor (GEM), captive coal plants are operating or planned in India, Indonesia, the Philippines, and Vietnam.
Closing or cutting off captive coal was not included in the latest set of JETPs, and three multilateral development banks — the World Bank, the ADB, and the Asian Infrastructure Investment Bank (AIIB) — all have loopholes in their coal policies that could allow them to continue financing captive coal, according to an investigation led by the nonprofit Recourse and their regional partner Trend Asia. In Indonesia, for example, they identified two captive coal investments linked to funding from the International Finance Corporation (IFC), the World Bank’s private-sector arm.
“They stopped funding coal due to its high CO2 emissions and social impacts on local communities,” said Daniel Willis, Recourse’s finance campaign manager. “But a captive coal plant will equally produce emissions and have damaging social impacts.”
The report found no evidence that ADB currently finances any captive coal plants, but warned that its policies don’t preclude future captive coal financing. In an interview, Morris said ADB is focused on finding ways to more quickly shut down grid-connected coal plants, including by raising funds to buy them out through the sale of carbon credits.
AIIB didn’t respond to Semafor’s request for comment. IFC defended its policies and stated via email that Recourse’s report was “misleading in the way that it describes the size of the issue,” and expressed confidence that the “vast majority of lending… excludes financing of coal-related projects up front.”
Willis noted, however, that IFC policies fell short due to their reliance on the World Bank’s Green Equity Approach, which specifically excludes captive coal.
“If the IFC is serious and doesn’t want to finance the many new captive coal power plants, it has a very simple solution,” he said: “Remove the financing loopholes that it has introduced.”
Willis voiced concern that IFC, AIIB, and ADB loopholes could mean that funding would continue flowing into planned or under-construction captive coals plants in Indonesia, as well as two plants in eastern India with overall capacity of about 2 gigawatts, an already-operational 1.5GW facility in Vietnam, and a 52-megawatt power station in the Philippines.
China’s pledge to stop financing coal power abroad also appears to have a captive-coal carveout: Indonesia, which is striving to become a major player in the processing of minerals necessary for the energy transition, has at least 10.8 GW of operational captive coal capacity, and 14.4 GW planned, many of which are to support joint-venture projects between Chinese and Indonesian companies.
Nithin’s view
Major multilateral development banks deserve criticism for allowing financing to flow to captive coal via loopholes. But the main culprit, at least in Southeast Asia, is China: The country and its companies have either built or financed at least 70% of Indonesia’s captive coal capacity alone.
“Captive coal does seem to be a caveat to China’s 2021 moratorium on overseas coal plant development,” GEM researcher Lucy Hummer said.
To be sure, the deals Beijing signs point to a symbiotic relationship: Captive coals plants, for example, help power the Morowali Industrial Park in Sulawesi, which encompasses 3,000 hectares with its own airport, seaport, coal plants, and at least 10 different factories and smelters, including Chinese-led nickel smelters and aluminum processing plants. The financing and operations of these plants lack transparency, partly due to their designation as national strategic projects, but also because of how Chinese companies operate, researchers said.
Room for Disagreement
One solution to the captive coal dilemma described by Morris would be to build better overall electricity grid capacity and, in archipelago nations such as Indonesia, improve inter-connectivity between islands’ power systems: Industrial facilities in nations such as Japan, the United States, and in Europe rely on the grid for the majority of their power. Singapore recently signed a deal to import electricity from Laos, via Thailand and Malaysia, and has an ambitious plan to bring power from Australia via undersea power transmission lines.
“We have to find a better way, or alternative power to supply industry,” said Novita Indri, a researcher with Trend Asia.
The View From Europe
The European Union is gradually implementing and expanding its Carbon Border Adjustment Mechanism (CBAM), which will impose penalties on imported products whose emissions are higher than those manufactured within the 27-nation bloc. The rules are intended to create a level playing field for European companies, so that they are not undercut by foreign rivals that may have looser emissions requirements. But the CBAM can also play a role in forcing countries using captive coal to stop doing so, offering the carrot of reduced tariffs on sales to the lucrative European market. Perhaps unsurprisingly, countries like India, Indonesia and China have all expressed opposition or concerns about the CBAM.
Notable
- Beyond captive coal, a lot more investment will be needed to transition Southeast Asia off fossil fuels: According to the International Energy Agency, the region needs at least $160 billion annually by 2030 just to meet existing 2050 net zero pledges.