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Coal: Divestment and the Just Transition

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Momentum towards a phase-out of coal has been building during the run-up to the Paris COP. With an increasing number of investors withdrawing their capital from fossil fuels we might be closer to the end game than ever. A courageous call for an accelerated coal phase-out in Germany by the Federal Environment Minister and a fundamental strategy shift towards renewables by RWE, Germany’s largest owner of coal assets, are sparking intense debate. However, what’s lacking in the emerging debate on the phase-out are clear propositions on how to manage the transition and how to make it fair on the affected workforce and regions.

The overall direction is clear. Investing in fossil fuels has become too risky to be a good business decision. Coal power plants and mines are increasingly considered to be potential stranded assets. When the world’s largest insurer, Allianz, announces to divest others are likely to follow suit. Although the insurer’s move might look half-hearted at first glance – it will only divest from mining companies and utilities that generate more than 30% of their sales or energy production from coal – the implications for the coal industry will be considerable. Even if they want to embark on a transition path to a cleaner future it will be hard for them to generate fresh capital from investors for such a move.

At the same time, we have reached a stage where governments will find it increasingly difficult to justify subsidies for fossil fuels when investors are rushing out of the sector. According to a new report by Oil Change International, leading industrialised nations – the G7 plus Australia – are still spending a combined $80 billion a year on public support for fossil fuel production. This is 40 times more than the $2 billion a year they give to the Green Climate Fund. The pressure on governments will be mounting significantly.

Friday’s statement by the German Environment Minister, Barbara Hendricks, is a sign that things are indeed changing: When addressing the German Parliament, Hendricks made it clear that “the era of fossil fuels, including lignite, is coming to an end.”The Minister calls for a transition roadmap over the next 20 to 25 years. Neither self-styled Climate Chancellor Angela Merkel nor the German Energy Minister, Sigmar Gabriel, have so far been willing to acknowledge this.

Hendricks’ statement is heartening from a climate campaigner’s point of view. But how will hundreds of thousands of workers in the coal industry deal with this? According to Hendricks, “we will have to tell people the truth because we are responsible for a well managed transition in the interest of workers and the affected regions.” A Just Transition is the necessary political answer to an accelerated phase-out of coal. A political decision to let an entire industry die requires compensation for those who have benefitted the least from fat profit margins in the past: namely, the affected workforce and regions.

In this context we must be clear that a just and orderly transition will mostly be about one thing: money. Bringing about profound change in the economic structure of regions that depend on hard coal and lignite mining will be expensive and require government support. And it won’t be painless. Some jobs will disappear in a low-carbon economy. Retraining is not an option for everyone given new job profiles in the labour market. This will be a painful truth for workers who have spent a lifetime acquiring a particular skill set that is now about to become obsolete. Some of them, and their families, will feel that they are the losers of the low-carbon transition. Therefore, making the low-carbon transition socially fair is not only the right thing to do – it is also essential to gain the support of workers, trade unions, and the affected regions.

The political and social challenges of an accelerated coal phase-out are well illustrated by the example of North Rhine-Westphalia, Germany’s industrial heartland and home to the largest lignite mining region in Europe. The region is already affected by a recent decision by the Federal Government to take 2.7 GW of lignite out of the market and put them in a reserve – albeit at a handsome compensation for the utilities, in particular RWE. It marks the first time ever that the German government has explicitly introduced legislation to reduce lignite power generation, and the reserve is seen by many as the beginning of end of lignite in Germany.

RWE responded by spinning off its renewables section in the hope to generate new investment and thereby secure its survival. But regional political leaders are slow to understand the momentum. Hendricks, herself from North Rhine-Westphalia, has sparked the anger from the Head of the Regional Government, Hannelore Kraft, from her own party for her progressive stance on coal. The lignite industry is seen as an integral part of the regional economy, contributing to supply security. Accordingly, the Regional Government wants to hold on to it until 2050, which is clearly out of synch with national plans and international commitments.

Political leaders whose fate depends on their ability to create and safeguard growth and jobs will not want to show leadership in a situation that will invariably lead to significant job losses. Yet their leadership is required more than ever to ensure that the transition is managed well and that it is fair on the affected workforce. We still have the chance to make the low-carbon transition into a Just Transition. But we cannot, nor do we want to, stop the momentum.

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