I assume you’ve all heard the good news that three huge investment banks are planning to impose stricter standards on investments in coal-fired power plants. See WSJ’s Jeffrey Ball here and here.

I’d like to think this was the sheer power of green groups or the moral sensitivities of bank executives finally acting up, but the fact is, the writing is on the wall. Carbon legislation is inevitable. And make no mistake: any carbon legislation is going to make new dirty coal plants, which are already too expensive to attract much private capital, even more expensive.

Here’s Ball:

We’ve talked before about how uncertainty about U.S. global-warming policy is forcing changes within industry. Now the banks are mobilizing. Under their new "Carbon Principles," the banks will require companies applying for coal-fired power-plant financing in the U.S. to show they’ve first looked at energy-efficiency and renewable-energy options and found them insufficient. As for proposed coal-plants themselves, the banks want to see evidence either that the plants are being designed to be able to capture and store underground their carbon-dioxide emissions down the road, or that the plants will be able to charge high enough electricity rates to pay for the extra emission allowances they’d need to keep coughing out CO2 under an emissions cap.

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Wall Street’s new carbon screen clearly will make it tougher to finance conventional coal-fired plants in the U.S. How hard is, well, up in the air. The banks’ bid for investment certainty rests on two big uncertainties: when the technology to capture and "sequester" power-plant CO2 emissions will be ready for prime time, and whether the power industry will have to pay for its emission allowances under a U.S. cap or will get them handed out for free.

Admittedly I know less about large financial institutions than, er, lots of people, but I’m guessing that a lot of financing for dirty coal plants was not based on rigorous analysis of the alternatives or broader financial circumstances. A lot of it was just habit and custom; doing what’s been done before. Now, if nothing else, banks will have to stop and think and look anew a the lay of the land. That alone will have huge effects.

Again: there’s a reason the coal industry is pulling out all the stops lobbying the government for handouts and favors. They have no faith in their ability to compete fairly in a carbon-constrained market.

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