"Harnessing the Potential of High-integrity Carbon Credits for Managed Phaseout of Coal" - Opening Remarks by Mr Leong Sing Chiong, Deputy Managing Director (Markets & Development), Monetary Authority of Singapore, at the MAS-McKinsey Working Paper Launch Event on 26 September 2023
1. Good afternoon, ladies and gentlemen.
2. It gives me great pleasure to welcome you to today’s launch of MAS’ and McKinsey’s paper on Accelerating the Early Retirement of Coal-fired Power Plants through Carbon Credits.
Urgency of Coal Transition
3. We know that the world will not reach net zero by 2050 without accelerating the transition away from coal power generation. In Asia, to tackle transition, we must tackle coal.
- Coal power generation is the largest source of carbon emissions globally.
- In the Asia Pacific, coal plants account for a third of greenhouse gas emissions.
- If these plants operate as planned, they will exhaust 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.
4. There is growing understanding of the importance of early coal retirement, but actual examples of such transactions in the region are few. This is due to multiple challenges.
- First, retiring a coal-fired power plant (CFPP) is inherently un-economical.
- Some stakeholders fear that the phaseout of one coal plant could simply lead to a replacement by another one.
- Financial institutions are concerned that the financing of coal phaseout will impact their ability to meet their net zero commitments, even though the spike in financed emissions is for a climate positive outcome and has a clear end point by 2040.
- Last, domestic policies may make the case for financing even more complex. These include long tenure power purchase agreements and other policies that insulate the coal power generation sector from market pressure, such as subsidies and tariffs.
5. We therefore need stronger frameworks that provide credibility for early phaseout projects and innovative financing structures, regulatory clarity on financed emissions, and appropriate policy reforms. Taken together, these will provide the right enabling conditions for owners to voluntarily wind down their coal plants ahead of their technical end of life.
6. MAS has been actively involved in initiatives that provide important guidance on the elements needed for early coal phaseout to be considered credible and responsible.
- The GFANZ APAC Network’s draft guidance on this issue details how financial institutions can collectively drive a credible, impactful, and inclusive phase-out.
- The ASEAN and Singapore-Asia taxonomies provide clear criteria on how investing in the phaseout of coal could be classified as green or transition.
- Just recently, MAS announced that we will set supervisory expectations to steer the transition planning process within financial institutions. The guidance provides for situations where short-term increases in financed emissions may arise due to actions supporting longer term climate positive outcomes.
7. These developments provide clarity on “what” a credible phaseout project should look like. Today, we seek to address the “how”.
Carbon Credits as a Complementary Financing Mechanism
8. To be able to retire coal plants early, the economic case for such transactions has to be viable.
- Retiring a plant earlier means forgoing revenues because of the reduced operating period.
- To successfully retire CFPPs at scale, we need to find a way to close the economic gap, and this requires significant financing - industry estimates that at least US$500bn is needed to decommission CFPPs in Asia.
9. Some regional initiatives to phase out CFPPs are already underway.
- These include the Asian Development Bank’s Energy Transition Mechanism and the Just Energy Transition Partnership, which use blended finance to de-risk transactions and crowd in more private capital.
10. We need to scale such transactions quickly.
- The IEA envisions the need for unabated coal power generation to end by 2040, for the world to achieve net zero transition.
- Against the backdrop of a large fleet of young Asian coal plants that easily have 30-40 years of operating life, there is much to do.
11. This is why MAS and McKinsey are launching today, a working paper on how and whether carbon credits can be part of the solution to accelerate and scale early retirement of coal plants.
- If high-integrity carbon credits can be generated from future emissions reduction due to early coal retirement transactions, the additional revenue from selling the credits could significantly improve the economic case for CFPPs to be retired early.
- By aligning the interests of CFPP owners and capital providers, carbon credits can potentially provide an additional means to scale early coal retirement transactions, and bring a broader market-driven financing mechanism to bear on such transactions.
12. We term these credits “transition credits”.
- This encapsulates the nature of the credit – representing the transition away from dirty fuels by decommissioning high-emitting assets, and replacing them with cleaner energy sources, ideally renewable ones.
13. But this approach is complex and transition credits could understandably come under scrutiny.
- For one, the voluntary carbon market has yet to mature, and there have been recent debates surrounding the integrity and credibility of credits.
- There might also be concerns that transition credits could become an avenue for coal plant owners to raise revenue, but without truly achieving emissions reduction.
- Some question the permanence of the emission avoidance - what if a coal plant is phased out but is replaced by another with redundant operating capacity.
- These are valid concerns, and must be addressed in order to generate the trust and confidence needed for broad based market traction and adoption.
14. Let me outline three key attributes for transition credits to succeed.
15. First, ensuring that the transition credits generated are of high integrity.
- Such credits must be aligned with key international standards, such as the Core Carbon Principles set out by the Integrity Council for the Voluntary Carbon Market.
- For example, the credits must adhere to stringent principles of permanence, where the reduction of carbon emissions is not reversed.
- This could include measures to ensure retired CFPPs are no longer used for generating power, such as their complete dismantling, and the replacement of energy with cleaner sources to minimise the need to restart retired CFPPs operations.
16. Carbon crediting methodologies are therefore crucial.
- They spell out how these projects must meet key integrity principles, and define effective monitoring regimes for the generation of credits, among others.
- There are already ongoing initiatives, such as
a. The Energy Transition Accelerator programme led by the US State Department
b. Coal to Clean Credits Initiative led by Rockefeller Foundation and the Global Energy Alliance for People and Planet
c. Methodology Concept for Early Phase Out of Coal Plants by Gold Standard
17. The development of methodologies will take time, and understandably so, as these methodologies should be thoroughly scrutinised before being approved by reputable registries and standards setting bodies.
18. Second, reducing the risks associated with transition credits.
- Financing is needed to secure a plant for early closure and to support the remaining operational cashflow of the coal plant till its retirement.
- Yet, transition credits will only be issued much later when the reduced emissions are verified. This could be ten or more years away.
- In the interim period, buyers of transition credits could be subject to political or policy risks in the countries where CFPPs are based.
19. To reduce such risks, we need to explore new mechanisms that can bring forward the issuance of credits and facilitate early off-take.
- For example, insurance solutions can be used to mitigate political risk that could lead to delay in the generation of carbon credits; while standardised contracts can facilitate greater fungibility and price transparency of the credits.
- Advanced market commitments can bolster demand and future pricing. One such example is that of Frontier, which brought together global technology companies such as Stripe, Meta, Shopify and Alphabet, to commit to purchase US$ 1 billion of permanent carbon removal projects between 2022 and 2030.
20. Third, upholding Just Transition principles.
- Project design and execution should include an assessment of negative impacts to jobs and affected communities whose livelihoods depend on coal operations. It should also include mitigation and monitoring plans, and provisions to ensure that implementation is properly financed.
21. The paper launched today does not purport to prescribe industry standards, or set out regulatory views on how early retirement of CFPP transactions should be implemented.
- Instead, it aims to outline the complexities involved, identify critical issues and dependencies that must be addressed collectively by key stakeholders, and offer possible solutions and pathways to unlock the scale of financing needed.
- Together with the working paper, we are also releasing a transaction template that includes a cashflow model to compute the economic gap that could potentially be covered by transition credits, and a standardised list of documents that parties should prepare to execute such a transaction.
22. What you see today, is the fruit of much extensive engagements with our industry partners.
- We were heartened to see how the industry has stepped forward, candidly called out the challenges, and shown great interest in problem solving to accelerate the energy transition.
- This paper is a product of co-creation with the industry.
- We thank all our partners, and many of you are here today, for your strong contributions to the paper.
23. But there is still much to do. We must take a whole-of-ecosystem approach to accelerate the coal transition.
- We must shift away from addressing the issue “one bespoke transaction at a time”, and develop a much more scalable, structured and standardised approach that will allow us to address the large numbers of CFPPs across key markets in Asia.
- Where we succeed in this, it may offer a useful precedent to address transition issues in other key sectors as well.
24. Today’s launch is therefore also a call to action.
- We want like-minded partners to work with us on pilot transactions to test the practicality of the concepts and the robustness of tools and solutions outlined in the paper.
- This will enable us to uncover more insights, and keep iterating better ways to achieve our net zero goals.
- MAS is optimistic that we can get there through creativity, collaboration, and collective action.
25. Thank you very much, we look forward to continuing this journey with you.