Why should the G7+EU pay for coal phase out in their emerging counterparts?

The European Union’s greenhouse-gas emissions have been on a downward trend for about 15 years now, though the decline is happening too slowly. In contrast, emissions in emerging market and developing economies (EMDEs) continue to rise. Unless these countries significantly accelerate decarbonisation, global temperature rises will be impossible to contain within 1.5 to 2 degrees Celsius above pre-industrial levels. A critical step is replacement of coal with renewable energy as fast as possible. It has already been shown that this would serve the economic interests of advanced countries, even if they had to pay for it in full.

In a policy brief published this week, Patrick Bolton, Alissa Kleinnijenhuis and I extend this analysis in three ways.

First, we show that without financial support, EMDEs will generally not have an incentive to exit coal, as they will obtain only a small share of the economic benefits of the associated emissions reductions. Advanced country support is thus necessary for EMDE coal exit.

Second, the net benefits of financing the coal exit of EMDEs (except China) are positive, even for the G7 (or G7 plus EU) alone.

Finally, the fiscal costs of financing the coal exit in EMDEs (without China) are modest as a share of G7+EU GDP: about 0.3 percent of GDP per year, assuming public-sector participation of around 25% in renewable energy investment costs through blended finance.

These findings create a strong case for much greater financial support for the energy transition in developing countries than is currently promised in the Just Energy Transition Partnerships (JETPs) rich countries have established with South Africa, Indonesia and Vietnam. JETPs should be scaled up, with enough money to pay for coal closures and the social transition of coal communities, with funding conditional on EMDEs taking specific steps to phase out coal.

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