Retire Early! The Great Carbon Arbitrage: Shorting Coal and Going Long Renewables

The great carbon arbitrage, going short (retiring) on coal and going long (investing) on renewables (also known as an "asset for fuel swap") is positive NPV. The present value of the social benefits of avoided emissions is higher than the sum of the present value of the foregone cash flows of phasing out coal and the PV of the costs of replacing coal by renewable generation. The arbitrage is illustrated using a generic coal power plant in the U.S. energy market, retired 20 years before the end of its engineering life. The early retirement raises the issue of the financing of a stranded asset. The case shows how a green bond can facilitate the arbitrage by reducing the phase-out costs for the different parties involved (investors and ratepayers).