EnergyPhasing out coal: Announcing CO2-pricing triggers divestment

Putting the Paris climate agreement into practice will trigger opposed reactions by investors on the one hand and fossil fuel owners on the other hand. It has been feared that the anticipation of strong CO2 reduction policies might – a “green paradox” – drive up these emissions: before the regulations kick in, fossil fuel owners might accelerate their resource extraction to maximize profits. Yet at the same time, investors might stop putting their money into coal power plants as they can expect their assets to become stranded. Now for the first time a study investigates both effects that to date have been discussed only separately. On balance, divestment beats the green paradox if substantial carbon pricing is credibly announced, a team of energy economists finds. Consequently, overall CO2 emissions would be effectively reduced.

“Strong future climate policies can reduce emissions even before they come into effect if they are credibly announced,” says lead-author Nico Bauer from the Potsdam Institute for Climate Impact Research (PIK). While the Paris agreement is weak in short-term policy ambition, with close to 200 countries committing themselves to limit temperature increase to well below 2 degrees Celsius compared to pre-industrial levels, it will require strong climate policies in the future to reduce emissions over the longer term. “We find that ten years before carbon pricing policies are actually introduced, investors start pulling their money out of the coal power sector,” says Bauer. “They shy away from investing in fossil fueled power plants as they realise that the lifetime during which these plants will make money will be curtailed by the future climate policy. We find this divestment reduces emissions by between 5 to 20 percent, depending on the strength of the climate policy, already in the time before the climate policy gets implemented.”