Various strategies are on the table to cut global warming pollutants. Installing long-lasting light bulbs and planting trees are two. But a potentially more aggressive step is now underway -- the tightening of lending rules to coal-fired powered plants.

Some investment banks and environmental interests have developed the "Carbon Principles." Now, those participating banks must examine both the economic and environmental costs that come with financing coal facilities that are blamed for a third of all carbon dioxide releases that contribute to global warming.

There's a growing recognition that carbon constraints are coming sooner rather than later. The premise behind previous proposals is to put a price tag on carbon dioxide emissions that would make the continued use of coal-fired power plants expensive when compared to alternatives. Under such a regime, utilities would pay more to operate coal facilities. Quite simply, the banks do not want to get saddled with those potential liabilities.

The added costs would either come in the form of a cap-and-trade program that would require utilities to purchase "allowances" or "credits" if they would exceed set limits in carbon emissions. Or, it would come in the form of a carbon tax linked to their total emissions. Either way, the cost is now unknown and it is in the banks' interest to quantify the risks and to develop environmental lending standards.

Citigroup, JPMorgan Chase and Morgan Stanley spent nine months working with Environmental Defense and the Natural Resources Defense Council to write the standards. They consulted with American Electric Power, CMS Energy, DTE Energy, NRG Energy, Public Service Enterprise Group, Sempra, and Southern Co. Meanwhile, separate investor-led initiatives have pushed companies to disclose their carbon footprints, all in an attempt to allow shareholders to assess possible future risks.

"There was full and frank dialogue around the table," says Matt Arnold, co-founder of consulting firm Sustainable Finance, which helped coordinate the discussions. "The dialogue resulted in a rigorous analysis of the carbon risks in power investments."

To be clear, the new standards adopted by three investment banks do not mean the death of coal. They do not even force the participating institutions to stop funding coal projects.

But they are a noble effort in the overall fight to combat climate change and to encourage the development of clean energy technologies. Since 2000, about half of all proposed coal plants in the United States have been canceled, largely because of the increasing focus on carbon emissions and the expected future costs that will come with that. In recent months, conventional coal plants have been scrapped in about 20 states.

While it will be harder to do, more coal plants will still get built. Coal is cheap and plentiful when compared to other fuel sources. For those utilities that want to keep their generation portfolios diversified, the banks will require them to offset carbon emissions from their coal plants by investing in renewable energy and efficiency technologies. They will also have to account for the added cost of regulatory compliance.

The position of the environmental groups that participated in setting the lending standards is that both banks and utilities should avoid "whenever possible" the construction of new fossil power plants and instead focus on efficiency and green energy. Coal plants, they add, are not only long-lived new sources of carbon emissions but are also lingering financial hazards that could hurt investors and lenders.

"If the institutions apply their announced principles appropriately the result should be to expose the significant financial risks of such large new sources of carbon pollution to financiers and investors and to encourage alternate strategies for meeting generation needs or the use of carbon mitigation technology by any coal plants that do receive financing," says Dale Bryk, senior attorney at the Natural Resources Defense Council.

It's not the first time the three investment banks have advised utilities against increasing their coal exposure. CitiGroup, JPMorgan and Morgan Stanley also told TXU's new owners, Energy Future Holdings, to scale back the decision to build 11 new coal plants in Texas. In its place, the group will roll out renewable energy projects, although it will still go ahead with three of the scheduled coal plants that have already secured loans.

NRG Energy, which consulted with the banks that developed the new lending principles, is taking a similar tack. It says that its proposed coal-fired power plant in Central Texas is part of a bigger company mission -- creating a portfolio of fuel sources that includes carbon-friendly investments such as nuclear and wind facilities.

Without a doubt, companies with coal fleets understand the pressures at hand. Coal-fired generation will need to be offset with energy efficiency, renewable energy and new coal gasification technologies that include carbon capture and storage. Those goals, however, will increase the cost of electricity production. Utilities will ask regulators to embed such costs in their rates, which the banks said they would support.

"Given the capital intensive nature of this challenge, we welcome these carbon principles as a sign that America's leading financial institutions are ready to support a massive increase of investment in clean energy solutions," says David Crane, CEO of NRG Energy. "With the support of both Wall Street and public policymakers in Washington, the American power industry can lead the way in achieving the dramatic greenhouse gas reductions that are critical to the health of both our economy and our planet."

American enterprise senses that carbon constraints are inevitable. The new environmental lending standards set by some lenders are the latest indication. It's about getting a holistic view of building and maintaining coal-fired power plants. It's not a heavy-handed approach. But it will facilitate new sustainable energy sources.

Copyright © 1996-2006 by CyberTech, Inc. All rights reserved.