Transition credits

High-integrity transition credits can serve as a complementary financing mechanism to accelerate and scale the early retirement of coal-fired power plants (CFPPs).

Urgency of Coal Transition

Accelerating the retirement of coal-fired power plants is a critical decarbonisation lever.

  • Asia accounts for 50% of global greenhouse gas emissions, of which a third is from coal-fired power plants.
  • If these plants operate as planned, they will exhaust about two-thirds of the carbon budget that we have remaining to keep the rise in global temperatures from increasing to within 1.5 degree Celsius.

However, phasing out coal is particularly challenging for Asia in three ways.

  1. First, the scale: Coal accounts for nearly 60% of power generation in the region. Asia’s energy demand is projected to increase by two-and-a-half times by 2050, on the back of economic development, population growth, and urbanisation.
  2. Second, the downstream social impact: Coal economy is also a key source of employment, particularly among the developing nations. Based on IEA’s estimates, of the 8.4 million employed globally across the coal value chain, more than 80% of these individuals are in Asia.
  3. Third, the profile of Asia’s coal: Asia’s coal plants are young, less than 15 years old on average. This makes the economics of phasing out coal more challenging, especially as new coal plants continue to be built to keep pace with energy demand.

Transition Credits as a Complementary Financing Instrument

Notwithstanding existing efforts to finance the early retirement of CFPPs, the large and young fleet of CFPPs in Asia means that additional financing mechanisms are needed to improve the economic viability of such transactions and to crowd in significant private capital at scale.

In September 2023, MAS and McKinsey & Company jointly published a working paper setting out how high-integrity carbon credits (termed as “Transition Credits”), arising from the emissions reduced through retiring a CFPP early and replacing with cleaner energy sources, can be utilised as a complementary financing instrument to accelerate and scale the early retirement of CFPPs. The credits must be aligned with globally recognised standards such as the Core Carbon Principles (CCPs) set out by the Integrity Council of Voluntary Carbon Market (ICVCM) and other Article 6 integrity requirements, as mandated by the United Nations Framework Convention on Climate Change (UNFCCC). MAS will explore ways for transition credits to align with the CCPs, in consultation with the ICVCM.

Simplified cashflows from early retirement of illustrative CFPP in Indonesia by 5 yearsNPV for business as usual; calculated based on expected net earnings based on the existing PPA of the CFPP. Illustrative numbers are based on the following key assumptions: 1GW Indonesia subcritical plant at 50% capacity factor, with an age of 10-12 years, 15 years PPA tenure remaining, early retirement by 5 years, and cost of capital in local currency at 8-9%

Diagram on MAS and McKinsey working paper economic model

Source: MAS and McKinsey working paper economic model


A whole-of-system approach is needed to develop transition credits into a viable market solution. To further develop the approach and establish solutions for Transition Credits, MAS launched the Transition Credits Coalition (TRACTION) with the support of industry partners. MAS also collaborated with partners to test the feasibility of integrating transition credits for early CFPP retirement through pilot projects. 

 

MAS' Initiatives

Transition Credits Coalition (TRACTION)
TRACTION, convened by MAS, comprises close to 30 members and knowledge partners across all key stakeholder groups from carbon credit services, energy financing, project development, risk management and non-governmental organisations.

It will identify system-wide barriers and develop solutions for transition credits to be utilised as a credible financing instrument. These include identifying robust crediting approaches that can be applied to regulated and deregulated electricity markets, mitigating risks of non-delivery of credits, and exploring avenues to build buyers’ confidence in transition credits.

TRACTION will conduct its work over a two-year period.

  Financial Institutions / Investment Managers 
  Bank of America
Citi
Clifford Capital 
Climate Smart Ventures
DBS Bank Limited 
GenZero 
HSBC
MUFG
Mizuho Financial Group 
OCBC 
Sumitomo Mitsui Banking Corporation
Standard Chartered Bank 
Temasek 
United Overseas Bank Limited
 
  Insurance Advisors
  Aon
Howden Insurance Brokers
 
  Exchanges / Traders 
  AirCarbon Exchange
Climate Impact X
Vitol Asia
 
  Foundations 
  The Rockefeller Foundation
 
  Carbon Service Providers  
  Asia Carbon Institute
BeZero Carbon
Global Carbon Market Utility
Gold Standard
Sylvera
 
  NGOs / Multilateral Development Banks / Industry Organisations / International Organisations
 

Asian Development Bank
Glasgow Financial Alliance for Net Zero
International Emission Trading Association
International Energy Agency
Multilateral Investment Guarantee Agency
Rocky Mountain Institute
World Wide Fund for Nature (WWF) Singapore


Pilot Projects 

To explore and test the practicality of different approaches in integrating high-quality transition credits in the early retirement of CFPPs, MAS announced two pilot projects in collaboration with: 

While TRACTION members and partners will not be directly involved in any pilot transactions, insights from these pilots will contribute to TRACTION’s work in examining the possible standardisation of approaches that can be replicated across markets.

Contact Information

Those with enquiries or have potential pilot projects to discuss are invited to write to transition_credits@mas.gov.sg .