Explainer: how the OECD agreement deals another blow to coal worldwide

The Organisation for Economic Co-operation and Development (OECD) countries have agreed to limit subsidies for the export of inefficient coal-fired power plant technologies.

Export credit funding will be limited to coal-fired power generators using only the most efficient, and least polluting, “ultra-supercritical” technologies. The deal will come into force in January 2017 and be reviewed in 2019. This will limit the public financing of coal-fired power generation worldwide.

Australia unfortunately continued its role as a climate laggard by negotiating for the inclusion of a clause allowing for exceptions.

Due to the clause tabled by Australia and South Korea, developing countries can receive funding for the construction of smaller (500 megawatts or less) less efficient “supercritical” coal-fired power plants. Regardless, the deal will encourage movement away from inefficient coal-fired power generation towards the most efficient technologies and substitutes such as renewable energy.

The timing of the deal two weeks before the Paris climate summit was probably an intentional move to help further build international momentum towards an ambitious deal.

While Australia does not finance coal plants through these schemes, other major economies such as Japan devote billions to them. In the past five years OECD export credit agency funding has provided around US$11 billion for coal power plants.

How will the deal affect coal production worldwide?

This agreement is likely to add to several existing trends to undermine coal demand and investor and government confidence in coal production. Early estimates suggest that the agreement could cut OECD export credit financing to coal plants by around 80%.

Exceptions and the allowance of funding for efficient technologies undermine the impact of the deal. This is not the end to OECD coal subsidies that many were calling for. But in any case, it is a significant step in the right direction. Ultra-supercritical plants are both more expensive in up-front costs and more efficient in their coal usage, meaning that the agreement is likely to result in reduced demand for thermal coal.

The deal could undermine up to 850 coal plant projects that were previously eligible for subsidies.

This adds to a number of other factors, including the plummeting price of renewable energy sources such as solar PV, which will work to constrain worldwide coal demand and production in the coming years.

Could it affect coal production in Australia?

This agreement will add to other structural changes that are undermining the feasibility of new coal mine construction and expansion in Australia. Australia is already likely going to need to prematurely retire some thermal coalmining assets due to overinvestment during the mining boom.

Two of Australia’s largest export markets, India and China, have plans in place to limit thermal coal imports and prioritise domestic coal use over the coming years.

A successful Paris agreement would likely further compound this restriction in coal export demand and strengthen the case for limiting coal mine construction and expansion in Australia.

This agreement contributes to a number of growing forces which all have one clear signal: the future of coal production in Australia is bleak.

Luke Kemp has previously received funding from the Australian government through an Australian Postgraduate Award, and the German government via a DAAD Research Grant. He is currently acting as a consultant for the ACT Climate Change Council.