Could ‘Transition Credits’ Make the Switch Away from Coal Economically Viable?

October 11, 2023 14:00:26

Asia is the largest producer of emissions on the planet, accounting for more than one-half of global emissions and tripling the level of emissions from the United States, currently the world’s second-largest emitter. With China leading as Asia’s top emitter at over one-quarter of global emissions, the continent has been keen on cutting its reliance on coal in favor of cleaner energies.

However, major Asian nations such as China are heavily reliant on coal for energy production, especially as energy shortages and high prices have made other sources of energy nonviable in recent months. Transitioning away from coal to cleaner alternatives such as solar and wind would require significant private and public investment to ensure grids can still provide enough affordable energy to meet demand during the transition.

In Singapore, the central bank has proposed using a new class of carbon credits dubbed “transition credits” to accelerate the transition from coal to clean energy and keep the process economically viable.

According to a working paper published by McKinsey and Company, Asia is currently home to almost 2,000 coal-fired power plants (CFPPs). Initiatives focused on the early phase-out of coal mainly use blended finance, which leverages concessional capital from philanthropic investors, multilateral development banks and governments, to derisk the coal-phase-out process and attract capital from private investors.

However, this approach is yet to complete the first Asian phase-out transaction mainly because of its reliance on concessional capital, which often isn’t enough to attract the private capital needed to fund the closure of Asia’s coal-fired power plants.

According to Leong Sing Chiong, the Monetary Authority of Singapore’s (MAS) deputy managing director of markets and development, retiring a coal-fired power plant is “inherently uneconomical.” Closing the economic gap caused by the closure of a CFFP at scale requires “significant funding,” Chiong said.

With the industry estimated to need at least $500 billion to close the thousands of CFPPs on the Asian continent, novel approaches such as transition credits may make their closure economically viable. These credits are generated when major polluters such as coal-fired power plants are retired early in favor of cleaner alternatives, resulting in a reduction in carbon emissions. Any renewable that produces lower emissions, including hydrogen, natural gas and ammonia, may qualify for transition credits depending on regional and national taxonomies, the McKinsey-MAS report noted.

Furthermore, the report noted that keeping the transition credits in line with Core Carbon Principles will ensure they are of “high integrity.”

Such innovative proposals to making the shift away from coal less economically painful for communities and utilities point to how vital it is for major coal companies such as Peabody Energy Corporation (NYSE: BTU) to find ways to transform their businesses so that they are in line with the new paradigm of energy generation as coal makes its exit.

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