The world is increasingly moving away from coal production

Climate "bad banks": the key to sustainable energy transformation?

photo_camera AFP/PEDRO PARDO - El Limón-Guajes mining complex in Cocula, Guerrero State, Mexico

Amid an increased focus on environmental sustainability, the idea of fossil fuel "bad banks" is gaining ground globally. The concept refers to special companies specifically dedicated to acquiring and liquidating fossil fuel assets.

As renewable energy becomes cheaper, more investors around the world are turning their backs on fossil fuels, and coal in particular, which is increasingly seen as high risk compared to other energy projects.

Citibank, for example, recently announced that it will stop financing thermal coal mining, with a view to eliminating its credit exposure entirely by 2030; elsewhere, Deutsche Bank has pledged to cut ties with companies that derive more than half of their revenues from coal mining by 2025.

A report published this year by Oxford University found that coal mining lending volumes declined by 90% in Europe and 57 % in ASEAN over the past decade, though they fell by only 11 % and 23 %, respectively, in North America and Australia and remained stable in China.

PHOTO/AP - Vista de la mina Dolores, una operación de oro y plata a cargo de la empresa canadiense Pan American Silver, en Madera, Chihuahua

In this sense, with the rapid decarbonisation of the global energy sector, coal could be the canary in the mine. "If these observed trends continue and we see the cost of capital for oil and gas following the same path as coal, this could have very significant implications for the economics of oil and gas projects around the world. This could result in stranded assets and introduce substantial refinancing risks," the report said.

For now, companies are mainly looking to divest their coal projects. This has led to calls to ensure that such assets are properly managed and not simply taken off the balance sheet.

Bad banks to the rescue?

The term bad bank first emerged in the wake of the 2008 financial crisis, when large banks created smaller, independent entities to absorb their high-risk toxic assets, cleaning up their balance sheets and liquidating these assets.

Earlier this year, BlackRock CEO Larry Fink proposed that a similar model could even be used to help companies divest fossil fuel assets.

AP/MICHEL EULER  -   Sede de petrolera francesa Total SA, en el distrito de negocios de La Defense en las afueras de París

Fink rehearsed his ideas at the G20 meetings in July, where Mark Carney, the UN's special climate envoy, announced that Fink was working with Jane Fraser, CEO of Citibank, and Oliver Bäte, CEO of Allianz, on the issue.

For Fink, wholesale divestment of dirty assets could lead to "greenwashing", as there is no guarantee that the private entity buying them will manage them properly.

Indeed, energy consultancy Wood Mackenzie estimates that since 2018 oil majors such as ExxonMobil and Total have sold nearly $30bn of such assets to private companies, with another $140bn currently for sale.

While these transactions help companies meet their climate change targets, there is no guarantee that they will help reduce emissions. There is widespread concern that acquiring entities aim to extract as much value as possible from assets, with little concern for environmental consequences, and face far less scrutiny than prominent multinationals.

In contrast, a bank with poor climate conditions would remove the fossil fuel aspects of a given company's portfolio, leaving it free to concentrate on other, cleaner lines of business while ensuring that the asset is decommissioned responsibly.

PHOTO/AFP  -   Vagones cargados de carbón en una vía lateral de la estación de Towarowy, en la ciudad minera del sur de Polonia, Rybnik

For now, the idea has gained most traction in relation to coal. But if oil and gas really go the way of coal, then this model could be extended to cover all fossil fuels, as Fink proposed.

Another function of bad banks is to bear the clean-up costs once the asset has been closed.
These clean-ups often involve significant outlays. For example, Australia-based mining company South32 is in the process of transferring its South Africa Energy Coal unit to mining group Seriti Resources. As part of the deal, South32 will pay $200 million over a decade to help fund environmental clean-up and another $50 million to restructure some loss-making sites.

Notably, when the deal was first launched in 2019, Seriti Resources was scheduled to pay $6.7m, plus deferred payments based on future cash flow, capped at $101.5m per year. Since then, however, the deferred payment plan has been abandoned and South32 has agreed to accept a nominal fee for the sites.

Pie de foto: Trabajadores de Exxon en el yacimiento West Qurna-1, operado por ExxonMobil, son vistos cerca de Basora, Irak, el 17 de junio de 2019. REUTERS/ESSAM al-SUDANI
First steps

A big step towards a new era of coal-related bad banks came in May, when Citigroup and Trafigura, a commodities trading firm, proposed the creation of a fund that would operate on the model of a bad bank.

The vehicle, called Coal to Zero, will buy mines and operate them for a profit until 2045; the project is presented as an "energy transition vehicle focused on global decarbonisation through the acquisition, responsible operation and retirement of coal assets significantly before the end of their useful life".

According to Citigroup, Coal to Zero "aims to deploy private capital to support an orderly exit from coal in a way that is fair to affected people and communities. In doing so, it aims to generate a positive and measurable environmental and social impact along with a financial return for investors".

AFP/AFP - Mapa que muestra los 66 países, incluidas las pequeñas naciones insulares del Pacífico y el Caribe

While these proposals are seen as a step in the right direction, some doubts have also been expressed. The most important of these is that the end year of 2045 is beyond the date by which emissions must be significantly reduced to avoid substantial climate change.

While the concept of a safe and timely phase-out of coal mining is front and centre, there are still several steps to be taken before that vision becomes a reality and, more importantly, one that is not vulnerable to accusations of greenwashing.

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