Bilateral finance organizations and stranded asset risk in coal: the case of Japan

ABSTRACT

We evaluate the treatment of climate-related financial risk by bilateral finance organizations and related policymaking bodies involved in the design and implementation of thermal coal power generation technology financing. Our empirical focus is Japanese bilateral financing of thermal coal power generation in the Asia-Pacific. We differentiate between three approaches that organizations can adopt to assess climate change risk. In the first, the organization assesses climate risk and includes consideration of stranded asset risk. In the second, the organization assesses climate risk but does not take into account stranded asset risk. In the third, an organization does not explicitly consider climate risk although it may use alternative criteria for deciding whether to support an investment, such as the broader environmental implications of a proposed project. We review publicly available documents from nine organizations, supplemented by interviews, and find that while some Japanese lending and policy-setting bodies take climate risk into account, none are required to consider the risk that infrastructure investments may become stranded. Our paper contributes to the study of stranded asset risk in two ways. First, while export finance plays a crucial role in thermal coal power plant investments in the Asia-Pacific region, lending by bilateral finance institutions has not been a focus of such research to date. Second, we extend research into stranded asset risk to bilateral finance organizations and related policy bodies. Our approach can be adopted to understand how finance decision-making bodies in other geographic contexts and technology-types assess the risk that assets may become stranded.

Key policy insights

• Bilateral finance organizations are important in infrastructure exports for thermal coal power plant technologies.

• Japanese bilateral finance organizations and policy bodies take climate risk into account when making lending decisions for thermal coal power plant technologies, but until recently have not explicitly addressed stranded asset risk.

• Impairments to the asset value may be incurred by the asset holders or the government. This risk should be taken into consideration in investment decisions.

KEYWORDS:

• Coal generation
• export finance
• Japan
• stranded asset risk

Acknowledgements

The authors thank Timothy Buckley and Johannes Urpelainen for comments, and Kay Dancey for support producing Figure 1. They also thank Donny Pasaribu and Alexis Farr for research support.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Calculated using public sector, public-private partnerships, and private sector institutions for 2010–2019 for Bhutan, Myanmar, Sri Lanka, India, Maldives, Nepal, Pakistan, Bangladesh, Brunei Darussalam, Cambodia, China, Taiwan, Hong Kong, Indonesia, North Korea, South Korea, Macau, Malaysia, Mongolia, the Philippines, Singapore, Thailand, Timor-Leste, and Vietnam.

2 Data on plants, included rated capacity, from End Coal Finance Tracker. For methodological notes see: https://endcoal.org/finance-tracker/. Technology type and location from Global Energy monitor. Data cross-checked using Global Energy Monitor, and organisation press releases where available. Figure created by Australian National University CartoGIS.

Additional information

Funding

This work was supported by Australian National University: [Asia-Pacific Innovation Program].