The Monetary Authority of Singapore (MAS) has backed the use of carbon credits to finance the early retirement of coal-fired plants in a new working paper published in collaboration with McKinsey.
The central bank proposed the creation of “transition credits” that would generate a revenue stream to compensate the owners of coal plants for the loss of income caused by premature plant closures – together with possible transaction structures and social safeguards.
MAS has made a strong case for leveraging sustainability-oriented capital to finance a move away from coal in recent months, having delayed the launch of Singapore’s taxonomy to integrate criteria for coal phase-outs and supported the development of investor guidance by GFANZ’s APAC office on the topic.
It comes just months after the launch of a separate Rockefeller Foundation-led initiative to set global standards for such credits, which is due to be presented this year at COP28. The Coal to Clean Credit Initiative (CCCI) is supported by Climate Policy Initiative, RMI and South Pole, and has formed a partnership with the Indonesian government to develop a roadmap for local coal plants.
The need to end coal dependency is especially acute in APAC, where coal plants are relatively young – 14 years old on average, compared to around 45 years in the US and Europe – and unlikely to be driven out business by competition due to varying forms of state ownership, long-term energy contracts and subsidies.
Current financing mechanisms which have been proposed, including the Just Energy Transition Partnerships (JETPs) and the Asian Development Bank’s (ADB) Energy Transition Mechanism, “have yet to scale due to the heavy reliance on concessional capital, which is insufficient to mobilise the necessary private capital”, said MAS.
Coal phase-out is not explicitly recognised as an eligible activity for carbon credit financing by the sector’s de facto standard setter, the Integrity Council for Voluntary Carbon Markets (ICVCM), or major credit issuers such as Gold Standard and Verra, but could offer the same benefits as approved activities.
According to MAS, this would mean transition credits are able to prove additionality, meaning that the early closure of plants is dependent on the revenue generated by credits, and ensure the complete dismantling of plants.
Coal-fired plants would also need to be replaced by renewable alternatives to be eligible for transition credit funding, and would have to meet the global baseline standards for carbon credits which have been developed by ICVCM.
ICVCM has been contacted for additional details.
However, MAS has stopped short of proposing technical standards for transition credits in areas such as how emissions reductions and removals should be quantified, having noted progress in ongoing initiatives such as the CCCI.
Key challenges identified by the supervisor include the prospect of political pressures and energy supply constraints, which could cause retirement targets to be delayed or cancelled altogether. MAS also noted that any funding of coal plants may not be aligned to public climate commitments made by financial institutions.
“A small portion of the revenue generated” would be allocated to affected communities to finance the Just Transition, said MAS, including activities such as impact assessments, worker compensation and training.
MAS is seeking potential pilot projects and feedback on its proposals. Interested parties are invited to contact transition_credits@mas.gov.sg.
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