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The World Needs a Cash-for-Coal-Clunkers Program

Justin Guay is director for global climate strategy at the Sunrise Project.


For just 5 percent of what the U.S. has spent on its COVID-19 recovery package, it could have bought out and retired every coal plant in the world.

Instead, the U.S. coal industry is benefiting from recovery programs while the world continues to subsidize old uneconomic coal plants rather than retire them. As we debate a green recovery, now is the time to add an important approach to our tool kit: a cash-for-coal-clunkers program, to help buy the only thing we can’t make more of — time.

The long, long twilight of the coal sector

In the U.S. and Europe, we’ve grown far too accustomed to the coal industry death watch. Nearly every day, we see articles announcing new record lows in coal generation, coal retirements and the generalized economic trainwreck that is the coal industry. It’s enough to make the average person think the job is done, the transition beyond coal over. Nothing could be further from the truth.

The reality is that for the world to be on track to meet our Paris goals, every coal unit in the OECD must be offline by 2030, and in Asia and the rest of the world by 2040. The problem is, despite hitting global peak coal several years ago, we are not heading towards a steep decline; instead we seem to be on a long flat plateau.

The situation is most worrying in parts of Asia. There are more than 1,000 gigawatts of very young coal plants in China, nearly four times as much capacity as the entire U.S. coal fleet. All of them must come offline within 20 years, which for many is well before their economically useful lives. Meanwhile, China is still planning to build large numbers of brand new plants.

Even in the OECD, we’re not getting off coal fast enough. Only 52 percent of coal plants in the OECD and the EU are on track to retire by 2030, according to think tank E3G.

Germany just passed a law mandating a coal exit — in 2038. Japan just announced it will shut down 100 old coal units, but still leave 35 gigawatts of coal online in 2030. In the U.S., even the most optimistic estimates say we are on track to get coal off line as late as 2035 — five years too late.

In other words, we’re winning, we’re just not winning fast enough. We can’t simply rely on market forces to kill off the world’s coal plants; we must force coal plants to retire early. And there’s an important option that’s not currently on the table: buying them out.

Why many coal plants continue to hang on

To many, the idea of buying out coal plants is almost more distasteful than enduring the climate impacts of letting them operate a few more years. The plants are, after all, financial disasters that investors knowingly poured money into. Paying them off is not only a terrible idea, some might think, but a mistake because they’ll go bankrupt shortly anyway.

Except they won’t just retire because of deteriorating economics. A new study by Rocky Mountain Institute and Carbon Tracker found that 93 percent of plants worldwide are insulated from competition by long-term contracts and non-competitive tariffs. They’re sheltered from the economic storm.

In the U.S., we currently pay coal plants a lot of money every year with a much different goal — keeping them alive. They’re called capacity payments and their size and their use is growing. According to estimates by Carbon Tracker, the U.S. paid $1.7 billion in 2020 in capacity payments which will grow to $2.3 billion by 2022. In the EU it’s worse, with capacity payments predicted to swell from $116 million in 2020 to $3.5 billion in 2022, Carbon Tracker says.

In essence we’re paying the coal industry to be a financial zombie. Instead we should turn those into retirement payments — a cash-for-coal-clunkers program — and put an end to this industry once and for all. 

It turns out the precedent for paying coal plants to retire has already been set. In the U.S., many utilities are using financial innovations to retire legacy coal plants and replace them with clean energy. In Europe, Germany’s new coal exit law includes many avenues to compensate legacy operators including direct payments to help grease the retirement skids. And in South Africa a club of international donors considered a debt-for-coal-closure swap. Policymakers are starting to innovate around financial interventions that can accelerate coal closure. 

4 principles for a coal clunkers program

None of these policies are perfect. Germany’s stands out as being particularly bad due to its lack of transparency and failure to incentivize early retirement. Instead it acts as a handout to entrenched incumbents planning to retire anyway.

We need a set of principles for a fair and just cash-for-coal-clunkers program. 

  • First, such a program needs clear eligibility requirements that ensure it only pays plants to retire that otherwise weren’t planning to or will retire earlier than previously planned.
  • Second, it should utilize reverse auctions to generate price discovery for those that are eligible to ensure the public does not overpay.
  • Third, it needs to set an absolute threshold for total dollars spent with front-loaded payments that decline over a short period of time to incentivize a race for the exit.
  • Fourth, and most importantly, if we’re going to buy them out, we need to take care of workers and communities in the process.

Under such principles, the effort could be relatively cheap. RMI and Carbon Tracker estimate for $116 billion we could buy and retire every coal plant around the world. That’s a quarter of the cost of a cash for clunkers car program Senate Minority Leader Charles Schumer has floated in the U.S., except for that price we could retire every coal plant globally, drive significantly more emissions reductions, and eliminate the number one source of carbon emissions globally.

The deal is even sweeter in the U.S., where for just $10 billion dollars — about six years of our current capacity payments — we could ensure the U.S. coal fleet was offline by 2030. And not every U.S. plant will require a payment to come offline, so the total is likely to be less. Joe Biden’s climate plan includes the creation of a new national green bank which could stand up such a program.

A cash-for-coal-clunkers program is not a silver bullet. No one is excited to buy incumbents out. But the hard truth is we’re bailing them out each and every day regardless, with subsidies that would make other industries blush.

It’s time our money was put to better use than keeping these zombies alive. If we’ve got to pay, let’s pay them to go away. 

Source: Greentech Media