Singapore central bank unveils first coal phase-out project to be funded by carbon credits

 The pilot project will provide proof of concept for a new carbon credit scheme from Verra.

An Asian utility has signed a letter of intent to retire a coal plant in the Philippines and replace it with renewable power sources in exchange for funds generated from carbon credits.

The pilot project was announced today at COP by the Monetary Authority of Singapore (MAS) in collaboration with ACEN, a Philippines-based energy firm with operations across Southeast Asia, and a consortium of philanthropic organisations.

The partners said they would “explore the viability” of closing down the South Luzon Thermal Energy Corporation (SLTEC) coal plant as early as 2030, a decade ahead of its current retirement date, and are currently seeking “to secure interest and engagement” from buyers of carbon credits.

If successful, the first-of-its-kind project could position carbon-crediting schemes as a viable means to raise private capital to accelerate the closure of coal-fired plants, or achieve a “managed phase-out” of coal.

Singapore has already announced its intention to buy such credits at COP28 over the weekend, subject to the credits meeting “standards for high environmental integrity”.

JETP concerns

It comes amid tensions between the wealthy donor countries and beneficiaries of the Just Energy Transition Partnerships (JETPs), a high-profile financing initiative that also aims to wean emerging market economies off coal through a combination of loans offered on commercial and concessional terms, and a small number of grants.

So far, JETP investment plans unveiled by Indonesia and Vietnam have come up short on their original phase-out ambitions after officials complained that donor countries had backtracked on their promises or refused to offer financing on more attractive terms than what is currently available.

At the same time, coal producers have seen their cost of capital rise in recent years following strong public pressure on banks and investors to divest from the commodity, further limiting the availability of financing for early retirement.

In September, MAS warned that net-zero commitments made by financial institutions “may not be aligned” to coal phase-outs and that concerns over rising financed emissions that would result from increased exposure to coal, as well as potential reputational risk, could further discourage participation.

The need to end coal dependency is acute in APAC, where coal plants are relatively young – 14 years old on average, compared with around 45 years in the US and Europe – and insulated from market forces due to different forms of state ownership, long-term energy contracts and subsidies.

The topic has emerged as a focus area for MAS. In June, the supervisor pushed back the completion of Singapore’s green taxonomy at the last minute in order to accommodate new provisions for coal phase-out.

It has also supported the development of upcoming guidance by GFANZ, which is expected to show how financial institutions can rewrite their coal exclusion policies and adopt other safeguards to allow them to reinvest in coal, while continuing to align with their broader institutional climate goals.

Both are due to be published this week at COP.

MAS had earlier set out its thinking on how carbon credits could be structured to finance phase-outs, in addition to a checklist of conditions needed to develop a high-quality market for such credits, in a joint working paper with McKinsey.

The supervisor also today announced a separate coal phase-out pilot project in the Mindanao region of the Philippines, in conjunction with the Asian Development Bank (ADB). The project will be funded by the ADB’s Energy Transition Mechanism, a blended finance initiative that aims to deliver coal plant closures over an accelerated 10 to 15-year timeline.

Coal to Clean Credits

The pilot project with ACEN will be the first to road-test “transition credits”, a new carbon finance standard that will determine which coal projects qualify for phase-outs, and how the emission reductions are calculated and translated into credits.

The rules have been developed over the past two years by a group of philanthropic funds and carbon market specialists under the Coal to Clean Credit Initiative (CCCI). Members include US-based groups such as the Rockefeller Foundation, the Climate Policy Initiative (CPI), RMI and carbon offset developer South Pole.

Buyers of transition credits will be able to count them towards their climate goals, much like traditional carbon credits, but the longer lead time associated with closing down coal plants poses a set of unique challenges for standard-setting.

Unlike carbon credits, which can be issued immediately once a project is verified, transition credits can only be issued once coal phase-outs and emissions reductions have been delivered, potentially exposing buyers to political or policy risks for a decade or longer.

It also means that future commitment to purchase carbon credits will need to be translated to upfront payments, via securitisation or other methods, to facilitate investments by the asset owner into cleaner alternatives.

A portion of the revenue generated by CCCI transition credits is to be allocated to fund the Just Transition, in a first for the voluntary carbon credit market. The standard has built in additional safeguards to prevent carbon leakage through the construction of new coal plants.

This will include requirements on “pairing” coal plants with renewable energy infrastructure, to ensure there is a ready energy replacement for coal once it is taken off-grid.

“We have not undertaken this project because we love carbon credits,” said Joseph Curtin, a managing director at the Rockefeller Foundation and one of the scheme’s creators.

“Coal asset owners have told us there is only so much they can do using conventional financing, and we have already seen that the amount of concessional finance available through JETPs will be marginal at best, so we are absolutely convinced that it is not the way forward.”

Verra approval 

The pilot project will only start once the transition credit methodology is approved by Verra, the world’s largest issuer of carbon credits, which also plans to exclusively offer the scheme to clients in the future.

The selection of ACEN for the pilot comes after CCCI sources told Responsible Investor last month that a pilot was not expected to be ready in time for COP28.

Verra has separately launched a consultation on the CCCI methodology today, due to close in January.

According to Curtin, CCCI initially tried to coalesce a number of different providers around the standard but ultimately recognised that it would have to select a single provider as “they are all essentially in competition with one another”. Verra was chosen because it had the most technical capacity and expertise, he said.

Today’s announcement is a coup for CCCI – Curtin earlier described finding an appropriate pilot project as the biggest challenge it currently faced.

“The hardest part is going to be to find one project and to show this happening in practice. If we do this once, I see no reason why we can’t do it 100 times. But we have to show that it works first,” he said.

“Proving it in practice right now is where we see the biggest barrier because of  the project finance itself to the carbon credits and the structuring to the contracting around the carbon credits, securing the off-takers, closing the deal, all of that. It’s very complex.”

However, Curtin said that the organisers were “extremely confident” in the CCCI standard and had entered into “very positive” early discussions with sovereign and private buyers of carbon credits.

“We have had many engagements with experts and haven’t heard of anyone finding a major problem with the approach we are proposing.”