Chile has become a proving ground for climate finance innovation, launching the first transaction to use monetized emissions reductions from early coal plant closure to lower the cost of capital for renewable energy. This landmark pilot, led by IDB Invest and energy utility Engie Energía Chile (EECL), demonstrates how a pay-for-success blended finance model can align corporate, national, and climate goals in emerging markets.

• Two coal plants (U14 & U15, 268MW) were decommissioned 21–23 months early, replaced by a 151MW wind farm in Calama.
• The project avoided 466,000 tCO₂e over 2022–2023 alone.
• Engie received a carbon mitigation credit, applied as an interest rate discount on a $15M concessional loan from the Clean Technology Fund (CTF).
• The $152.9M wind project was financed with a blend of commercial, concessional, and sponsor equity, including $74M from IDB Invest and $36M from a co-financing fund.

Blended Finance Reimagined: Linking Impact to Incentives

The core innovation lies in linking emissions outcomes to financing costs:

• The carbon mitigation credit is calculated by comparing actual emissions reductions from early coal retirement with a baseline “business-as-usual” (BAU) scenario.
• This credit is then discounted from the interest due on the concessional CTF loan at maturity.
• If a carbon market aligned with Article 6 of the Paris Agreement emerges during the loan period, Engie may sell the credits instead, monetizing impact via market instruments rather than subsidy.

This is a first-of-its-kind mechanism, neither a carbon offset scheme nor a simple subsidy, but a decarbonization-linked financial product that could become a new asset class: the coal transition credit.

Enabling Environment: Why Chile Was the Ideal Pilot Country

The success of the pilot hinged on a convergence of political, financial, and institutional conditions:

• A 2018 energy roadmap committed Chile to fully phase out coal by 2040 and increase renewables to 70% by 2050.
• The government convened a multistakeholder roundtable with private generators (including Engie, AES Gener, Enel, and Colbún), creating asset-level closure schedules.
• Engie had a pre-existing global coal exit strategy, targeting 2025 in Chile, and committed over $1B to decarbonization through its Chilean subsidiary EECL.

These elements created legal clarity, corporate alignment, and financial viability, allowing IDB Invest to focus on designing a replicable model rather than subsidizing fundamental risk.

Financial Structure: Pay-for-Success Meets Market Discipline

The financing was structured to ensure both climate impact and market discipline:

The CTF loan had a dual-rate structure:

• Fixed floor interest of 1%
• A variable “additional interest” repaid at maturity, reduced based on the carbon mitigation credit value
  This approach introduces performance-based concessionality, incentives are not given upfront, but earned through verified emissions impact.

Social Transition: Just Transition Planning Built In

Alongside emissions reductions, the project embedded a just transition strategy for the workforce and community:

• 267 workers participated in retraining (∼1/3 of the coal plant workforce).
• 14,000+ hours of training delivered in wind energy, water treatment, and entrepreneurship.
• Others received early retirement or opted for voluntary resignation.
• $300M in regional investment pledged; funds allocated to fisheries, port workers, and local development initiatives in Tocopilla.

The plan aligned with Chile’s national Just Transition framework, ensuring plant closures did not trigger local economic collapse.

Scalability: Toward a Regional Carbon Market

The pilot’s broader aim is to catalyze a new asset class, carbon mitigation credits for coal phase-outs, that can be replicated in:

• Dominican Republic, where IDB Invest is now replicating the model.
• Other LAC countries with private coal ownership (e.g., Mexico, Brazil), where decarbonization incentives remain limited.

However, challenges remain:

• Carbon markets in Latin America are underdeveloped.
• Corporate cultures differ, not all utilities have pre-existing decarbonization plans.
• Concessional finance is scarce, and cannot subsidize every transition.

Still, the methodology developed in this pilot is open source, enabling future governments, MDBs, and private sector players to replicate the model with minimal redesign.

Key Takeaways

Chile’s decarbonization pilot sets a new benchmark for emerging markets:

1. Outcome-based finance can align climate goals with private sector incentives.
2. A carbon mitigation credit tied to emissions reductions from coal retirement is now a viable transition asset.
3. Blended finance is most effective when paired with strong policy and corporate alignment, subsidy alone isn’t enough.
4. Embedding a just transition plan from the outset is essential for social legitimacy and long-term success.
5. The model can scale across the region, if regulatory and financial ecosystems mature in step.