On 4 February, Citigroup, JPMorgan and Morgan Stanley announced the creation of the Carbon Principles, a new framework for banks to address the risks from carbon emissions associated with coal-fired plants. The guidelines echo – probably consciously – the Equator Principles, to which most banks financing environmentally risky projects in emerging markets adhere.

The two sets of principles share a common origin, in that the initiative also follows the efforts of a broad group of non-governmental organisations (NGOs), including Rainforest Action Network of the US, to target financial institutions because of their financing activity. Citigroup, with a broad presence in retail banking, experienced numerous protests at its branches.

The Equator Principles enjoy a broadly positive press in the banking community, since they offer a readily understood benchmark – the International Finance Corporation's performance standards – and a useful addition to their corporate and social responsibility literature. While NGOs have complained that banks' disclosures have been patchy and inconsistent, there is evidence that the due diligence mandated by Equator has been embedded in banks' operating procedures.

The Carbon Principles' key divergence from Equator is that they cover every financing connected to the construction of coal plants in the US, and not just project finance. The three founding members have not been present on the three project financings that have closed for US coal projects to date. But two of them – Morgan Stanley and Citi – were mandated to arrange an $11 billion umbrella financing for a fleet of 11 new coal plants that TXU proposed in late 2006.

That financing, as well as the majority of the coal projects, was eventually abandoned, but not before NGO attention coalesced around the issue of coal. A permitting hearing anywhere in the US for a coal-fired project will now attract a sizeable contingent of demonstrators. As a result, several market consultants canvassed by Project Finance suggested that additions of coal capacity in the US would be severely limited by local permitting pressures.

According to Pamela Flaherty, senior vice-president for global community relations at Citigroup, the three banks started work on the principles in April 2007, and had to cope with the fact that there were no existing guidelines for incorporating carbon dioxide emissions into due diligence processes. According to Flaherty, who has also been responsible for Citi's Equator implementation, "We didn't have the equivalent of the IFC's standards readily available, and had to start from scratch. That's why putting the Carbon Principles together took ten months."

The Principles encourage banks to talk with their utility and independent power producer clients about their plans for energy efficiency, renewable generation and distributed generation. But more significant for plant developers is the enhanced environmental diligence process. The process applies to banks' financing for any private power entity that plans to construct a coal-fired unit of greater than 200MW. They cover corporate bank loans, bond financings or similar facilities for such entities where the proceeds go towards construction of a qualifying plant.

What isn't covered: refinancings, letters of credit, commodity hedging transactions or financial advisory work. But the Principles do recognise that project finance, at least in its classic form, will not be the vehicle for the majority, or even a substantial chunk, of new capacity additions.

The Principles have attracted a variety of criticisms, including the familiar complaint, from banks, that the Principles replicate their existing due diligence processes. According to Flaherty, such a complaint misunderstands the purpose of the Principles, which is not designed to replace banks' processes but provide them with a standardised benchmark, much as Equator did.

According to Rainforest Action Network, which opposes all new plant construction, the Principles should have incorporated carbon emission reduction targets, and represent a very limited step in the right direction. According to Rebecca Tarbotton, global finance campaign director at RAN, "there's nothing binding in the Principles. We'd also like to see an immediate moratorium on coal financing activity, and for the Principles to cover coal mining."

While coverage of the Principles has suggested that they represent a substantial curb on bank lending to coal projects, the banks are adamant that they will not stop financing coal completely. Or as Hal Clark, Citi's head of power investment banking puts it "coal has to be a part of the conversation about where the US meets its energy security and independence goals."

Public power projects, those for municipally or customer-owned utilities, are also not covered. This is a significant exception, since these entities have been responsible for as many financings as IPPs. The three founders, however, argue that the planning processes for such entities, which are often self-regulated, are hugely different to investor-owned utilities. They have promised to re-examine the issue in future, and as Flaherty stressed, including them would have added to the time taken to complete the Principles.

The enhanced diligence process requires the banks to ask their clients if they have considered alternatives to coal projects, and whether the projects have explored adequately the future costs of carbon compliance, whether a cap-and-trade regime or the costs of sequestering carbon. The banks should also suggest, but need not demand, that utilities consider the overall emissions levels of their portfolio.

The initial signers have brought in some high-level corporate backers: utilities AEP, CMS Energy, DTE Energy, PSEG, Sempra and Southern Company, and independent power producer NRG Energy. The list includes entities with large coal fleets and plans for more. Environmental Defense and the Natural Resources Defense Council, two US environmental groups, were consulted on the document. Mark Brownstein, managing director of business partnerships in the climate and air programme of Environmental Defense, sees the principles as a valuable start, and a bridge to a future Federal approach to regulating carbon.

The Principles are designed from the start to be rendered obsolete by a future carbon regime in the US, one that might be much more lenient than NGOs want. The Equator Principles assumed that projects in OECD countries would be exempt because their environmental regulations were up to scratch. The Carbon Principles signal that banks will need to move ahead of government in dealing with climate change issues, and this may well embolden NGOs to take on banks on a broader number of fronts.

The three founders want all banks that finance coal projects, and utilities that are building coal projects, in the US to sign up. Sustainable Finance, a for-profit consulting firm focusing on environmental matters, co-ordinated the Principles, and is likely to have a role in their development and implementation. It may serve as a clearing house for institutions wishing to sign up and implement the Principles.