All scenarios that meet climate goals feature a rapid decline in coal use. It is the most carbon-intensive fuel, predominantly used in a sector – electricity generation – where renewable energy options are the most cost-effective new sources in most markets. Global unabated coal use in the energy system falls by around 5% to 2030 in the STEPS, by 10% in the APS, and by 55% in the NZE. However, managing the move away from coal is not simple, especially when it proceeds at the speed required in the NZE where all unabated coal power generation stops by 2040.

There are two aspects to the phase-out of coal in the power sector: halting the construction of new plants and managing the decline in emissions from existing assets. The first is the easier to achieve. There are no new investment decisions for the construction of coal-fired power in the NZE, but as much as 200 GW receive the go-ahead and are completed by 2030 in the APS, mainly in China, India and Southeast Asia, and over 215 GW are approved and built by 2030 in the STEPS, and more go ahead after 2030 in both scenarios. There is a powerful economic and environmental case for countries to proceed instead with low emissions sources of electricity, as well as pressure to do so from financial markets and major international players: all G7 countries have committed to ending new support for unabated coal-fired power and China has pledged to end support for building new coal plants abroad. China’s announcement is potentially very significant: it could lead to the cancellation of up to 190 GW of coal projects that are built in the APS to 2050, saving about 20 Gt in cumulative emissions if they are replaced with low-emissions generation.

We estimate that an even larger amount of 350 GW of coal-fired capacity would not be needed in 2030 if policy makers establish the enabling conditions and all of the cost-effective deployment of low emissions sources of electricity is realised (see Chapter 3 - The ambition gap to 1.5 °C ). This would effectively halt all new investment decisions in the APS and facilitate the retirement of an extra 150 GW of coal-fired capacity by 2030.

Delivering emissions reductions from the existing fleet of coal-fired plants is an even more crucial component of climate action, but a much trickier challenge for public policy. Given the dependence of a number of countries and regions on coal, the closure or repurposing of coal mines and power plants could have significant economic and social consequences. Coal-dependent regions are often highly specialised “mono-industry” areas, where the economy and the local identity are closely tied to the coal value chain. Managing closures appropriately and successfully depends on planning for the impacts on affected workers and communities, and on the repurposing and reclamation of affected land. This is likely to entail long-term engagement by many different parts of government, as well as local businesses.

The NZE employs a three-pronged approach to tackle emissions cost-effectively while maintaining reliable electricity supply. In total, 2030 emissions from existing coal-fired power plants are three-quarters below the level in 2020, a reduction of over 7 Gt. Existing plants are either retrofitted with CCUS or co-fired with low emissions fuels such as biomass or ammonia; repurposed to focus on system adequacy or flexibility; or retired. The retrofit and repurpose options limit the impact on workers and local communities, but there is nonetheless a steep increase in plant retirements. Since 2010, coal power plant retirements have averaged around 25 GW each year, largely reflecting the closure of ageing plants in Europe and the United States. In the APS, annual closures more than double by 2030. Meeting the goals of the NZE requires annual retirements averaging over 90 GW over the next decade, removing around 40% of the existing coal power fleet by 2030.1

While the priority is to phase out the oldest and least efficient plants, more than USD 1 trillion of capital has yet to be recovered in younger plants in the existing coal fleet (mostly in Asia, which accounts for two-thirds of global capacity). A rapid phase out risks creating stranded assets. Existing coal-fired power plants in emerging market and developing economies are relatively young: for example, plants in Asia are on average 13 years old. In the APS, coal-fired plants in these countries are retired on average when they are 35 years old, and in the NZE they are retired when they are around 25 years old. In advanced economies, the average age of coal power plant fleet is already almost 35 years, and they are retired on average in eight years in the APS and in five years in the NZE.

Phasing out coal at the scale and speed needed in the NZE will require a comprehensive and sustained commitment by national and local governments and the international community to manage transitions for people, communities, assets, land and local environmental quality. Governments have an opportunity to initiate phase outs as part of a broad, coherent and ambitious climate strategy, but other factors – such as changing market fundamentals for coal and local air quality concerns – also provide strong impetus for change. As such, any use of public funds to compensate owners and secure early retirements on climate grounds needs to be carefully assessed so as to ensure that funding is focused on assets that are unlikely to be retired on their own.

In all cases, early planning and social dialogue with affected stakeholders is critical. The multiplicity of government actors involved in local economic development, energy and environmental management makes planning challenging, especially in emerging market and developing economies, and the establishment of special purpose entities might be necessary to pool various funding sources and manage disbursements on the ground. There is an important role for blended finance, along with carbon pricing, in accelerating the closure of coal power plants and increasing investment in clean energy. The early involvement of banks and other investors is critical to deal with potential external financial exposures. Managing social and environmental impacts calls for dedicated and long-term local focus and financing, especially in the most challenging instances where whole towns and communities have been heavily reliant on the coal industry for employment and income.

There is no single blueprint for managing the phase-out of coal-fired generation because a great deal inevitably depends on local circumstances and priorities. Transitions require a range of financial mechanisms that are tailored to coal plants of different types and age, as well as to the varied market structures within which they operate.

The 21 markets that have committed to phase out coal-fired power – nearly all are advanced economies in Europe – represent less than 5% of the global coal generation fleet, and only seven have domestic mining industries that supply coal for power generation. They tend to have well-developed financial systems and market structures characterised by high degrees of private participation. Advanced economies also tend to have slow electricity demand growth, which enables even modest increases in low emissions sources to displace coal. Their focus has been on system planning, tailored support, regulatory incentives and capital markets.

As part of its Just Transition Mechanism, the European Union has capitalised a fund with over USD 20 billion to support economic diversification and assist affected areas and workers. Germany designed a similar regional support programme offering compensation for losses faced by workers and companies, and also has a mechanism that provides tenders that compensate plant owners in exchange for retiring coal capacity.2 In the United States, regulators have allowed accelerated depreciation schedules, backed by ratepayers, to support faster cost recovery for some assets; some utilities are now looking to refinance coal plants through asset-backed bond issuance and reinvest the proceeds in renewables. The development of sustainability-linked and transition finance instruments could open additional ways to fund emissions reductions through capital markets, leveraging the appetite of private investors for sustainability.

In emerging market and developing economies, where the bulk of existing coal assets are located, circumstances are often quite different. Rapid growth in low-carbon generation is required just to keep up with rising electricity demand, and this limits the scope to displace existing coal-fired power. Investment frameworks are often characterised by lower levels of financial development and higher levels of state ownership. Coal plants are often shielded from competition via long-term off-take agreements. In some markets there are concerns over the potential exposure of the banking system to stranded assets, which adds another layer of complexity.

There are fewer examples of targeted financial innovation in these economies. In China, 20 GW of coal power was retired over the past decade through administrative orders as authorities sought to improve local air quality and curb inefficient plants, but recent closures have been modest in scale. While China’s reliance on state-owned generators complicates the political economy of transition, the lower cost of capital of these companies also creates an opportunity to manage the economic burden of closures. In India, where the presence of over 50 GW of financially stressed coal assets has created strains in the banking system, the government is exploring strategies to manage a transition to clean electricity which include the introduction of market-based economic dispatch and the accelerated closure of the least efficient plants.

Efforts to manage transitions from coal in other emerging market and developing economies are largely being facilitated by DFIs, which are designing targeted packages. For example, Chile has a phase-out strategy that is supported by blended finance. Chile established a phase-out schedule and introduced a carbon tax together with a carbon price floor, supported by a concessional loan from the Inter-American Development Bank; this was instrumental in bringing about the early retirement of two coal-fired units.

International efforts are focusing on ways to separate out coal assets into new financing and ownership structures, while creating economic opportunities for workers and communities. The Asian Development Bank is carrying out a feasibility study with potential host countries in Southeast Asia (initially Indonesia, Philippines and Viet Nam) on the Energy Transition Mechanism, a platform to accelerate the retirement of coal power using blended finance and to support investment in renewables, all in an equitable, scalable and market-based manner. The World Bank is supporting long-term transitions for coal regions through institutional governance reforms, assistance to communities and repurposing of land and assets. The Climate Investment Fund’s Accelerating Coal Transition programme aims to support the closure and repurposing of coal plants through blended finance of USD 2.5 billion for each target country, including USD 300 million for regional economic development and retraining.

Efforts of this kind will play a particularly vital role in supporting transitions in markets where a strong relationship exists between the energy sector and the government or in those with challenging political economies. In South Africa, for example, domestic and international stakeholders are considering a multi-faceted strategic and financial approach to help Eskom, the state-owned utility, to shift to renewables, reduce its debt load and ensure a just transition for coal miners and plant workers. In Indonesia, PLN, the state-owned utility, has announced it that it aims to retire all (50 GW) coal plants by 2055.