Coal investments set to rise 10% this year as nations fret over energy security.

Indonesia’s move to categorize coal-fired power plants for industry as sustainable has sparked criticism from energy and finance observers, who say it goes against the scientific evidence. The country’s financial regulator, the OJK, is in the process of revising the country’s Green Taxonomy, a framework defining what kinds of investments may be considered environment-friendly, and thus eligible for various incentives. Among the proposed revisions is giving a green label to new coal-fired power plants that exclusively serve the metal-processing industry.

Such a label, the cleanest on the Green Taxonomy’s green-yellow-red scale, would effectively define these so-called captive coal plants as projects that “protect or improve the environment,” the same as renewable energy projects. “It is extremely concerning that now, new coal-powered generation could be seen as protecting or improving the environment,” Christina Ng and Putra Adhiguna, researchers at the U.S.-based Institute for Energy Economics and Financial Analysis (IEEFA), wrote in a commentary. “This simply goes against scientific evidence.” They warned this will relegate Indonesia to the bottom of the pack of global green or sustainable finance taxonomies.

There are at least 10 green or sustainable finance taxonomies that have been published globally. None recognize coal power as green, including markets like China and Russia, where, like in Indonesia, coal still has a heavy presence and new coal-fired power plants are in the pipeline.

“If the country goes ahead with the latest idea, of using the aim of energy transition to justify new plants’ eligibility for green finance, its taxonomy would be the first to recognize coal as green,” the IEEFA researchers said. “Not only would national credibility be hurt, but the move might also border on state-sanctioned greenwashing.”

Binbin Mariana, Southeast Asia energy finance campaigner at climate group Market Forces, said the green labeling of coal might encourage banks to provide so-called green finance to bankroll coal companies, thus making it less likely for these firms to pivot their business models away from fossil fuels.

“The practice of ‘transition-washing’ is very worrying because green financing is being used to fund carbon-intensive companies that don’t have credible plans to transition their businesses from burning fossil fuels,” she said.

Yet even with a green label, foreign investors are likely to steer clear of investing in Indonesia’s coal sector, as most would view it as unjustified, the IEEFA researchers said. As such, the OJK’s labeling proposal could backfire on Indonesia’s efforts to attract green financing, they said. Last year, financial firms with more than 50 trillion euros ($54 trillion) in assets under management criticized the European Union’s decision to label gas-fired power plants, which the EU touted as less dirty than coal, as sustainable. The financial firms said the labeling was meant to accommodate the interests of some member states and the gas industry.

The green labeling of coal will also oblige foreign investors to carry out more due diligence, in turn raising transaction costs, the IEEFA researchers said. “[The] OJK should realize that it does not need to call coal-fired power plants ‘green’ in order to obtain financing,” they said. “Withholding the green label does not deprive them of conventional capital funding.”

The Indonesian government has vowed to undergo an ambitious energy transition to wean the country off its heavy reliance on coal, which makes up 64% of its energy mix. The country is also the world’s biggest coal exporter. Its energy transition is estimated to cost 4 trillion rupiah ($262 billion) through 2030. To attract financing, the OJK plans to label energy transition projects as green in the revised Green Taxonomy.

OJK chairman Mahendra Siregar said foreign financial institutions are reluctant to fund any fossil fuel projects, including energy transition projects that involve coal, such as the early retirement of existing coal plants, which may include compensating the owners, or building new coal plants to power the smelters making the metals used in lithium-ion batteries. To convince investors otherwise, the OJK aims to roll out the green label, which Mahendra said follows in the footsteps of the Association of Southeast Asian Nations (ASEAN), which recently labeled the early retirement of coal plants as green.

But unlike ASEAN, the OJK is also extending the label to the construction of coal plants that supply power exclusively to smelters, as they’re considered as part of Indonesia’s energy transition plan. Known as captive plants, they differ from other coal-fired power plants only in that they don’t feed electricity into the grid and are instead “captive” to a single industrial user.

The green labeling isn’t a done deal yet, however, with Mahendra saying a study is underway to quantify the emissions along the entire supply chain of industries powered by captive coal plants, such as electric vehicles (EV). Should the study find a net positive climate benefit, even if the supply chain is powered by captive coal, then the OJK might consider captive coal plant projects as a green investment, Mahendra said.