INTERVIEW: Better regulatory oversight will not disrupt voluntary carbon markets: GenZero

Better regulatory oversight is needed to restore confidence in the voluntary carbon market, or VCM, and governments' involvement will not disrupt trade flows in the manner that some market participants have been worried about, Frederick Teo, CEO with GenZero, said in a recent interview.

GenZero is a subsidiary of Singapore's state investment company Temasek that invests in decarbonization projects and carbon industry.

Teo said, impacted by the recent questions surrounding carbon markets, companies are unsure about the right thing to do and have chosen to take a step back, worried about being unfairly criticized.

"There is now a greater realization that there is a need for some degree of regulatory oversight, even for the voluntary carbon markets. That helps to give some assurance, consistency, and expectations as to how companies are to behave and what is 'good'," he said.

The suspension of VCM credit exports by several governments has raised concerns that regulatory intervention could make carbon investments riskier.

Teo said the main underlying concerns here have been the uncertainty of whether VCM credits require a corresponding adjustment.

A corresponding adjustment is required under the Paris Agreement's Article 6 to ensure that one carbon credit is only counted once toward the fulfillment of a country's national climate target, which would be agreed between the host country or the buyer of the offset. There has been debate about whether VCM, which mainly serves the private sector to meet voluntary targets, should also align with this requirement.

"I think that there's increasing clarity that voluntary carbon credits should not require a corresponding adjustment," Teo highlighted, adding that host countries will be willing to export VCM credits when this does not affect their climate targets.

Teo said, after Article 6 is fully implemented and countries set up national registries, VCM registries will still have a role to play, in terms of setting global standards for what makes a 'good' carbon credit, and providing overarching governance around how different national registries can operate with one another.

Early retirement of coal-fired plants

During the UN Climate Change Conference, or COP28, GenZero signed a memorandum of understanding with Singapore-based conglomerate Keppel Corp., to facilitate the early retirement of coal-fired power plants in Southeast Asia. Keppel, also owned by Temasek, specializes in infrastructure development, especially for energy and power.

Teo said coal-plant decommissioning is ultimately not just a financial services innovation and needs people who understand how to operate things on the ground.

"Energy transition is more than just shutting down fossil fuel power plants. It involves us thinking systemically about how to help an entire economy transition to a low carbon future," he emphasized.

"So that means preparing the grid and correcting policies that unnecessarily subsidize fossil fuels. It means having the necessary storage capabilities to make it dispatchable. It also means having the interconnectivity and even upgrading some of those substations [to accommodate increasing electric vehicles and the resulting surge of demand]."

Singapore has been exploring ways to utilize carbon markets to finance early retirement of coal-fired plants, which Teo said GenZero will be helping with.

When asked about the costs of retiring coal plants, Teo said various factors need to be considered, such as the valuation of a coal-fired plant's remaining shelf life, the cost of replacement with renewables, and the cost of upgrading the grid and building storage.

"It's not obvious that it will always be expensive, or that it will always be cheap. It depends," Teo said.

Addressing challenges in coal retirement

There have been discussions about whether the so-called transition credits should be issued through conventional VCM approaches or via intergovernmental collaborations, especially in Asia where many power producers are state owned.

"In fact, part of the debate is around whether you need a jurisdictional approach or would a project-level approach suffice. Even at the project-level, there is a possibility of it being nested into a bigger program," Teo said.

"I think everybody understands that you cannot just look at it in isolation, one plant by one plant, because there is no point if you shut one plant and build another plant in its place," he explained.

One challenge has been governments' conservative attitude toward cutting fossil fuels, wary of the negative impact on energy security and economic growth.

"Transition credits are a way of creating economic incentives for them to accelerate their transition away from fossil fuels," Teo said, adding that the conservative attitude makes such economic incentives even more important.

Another challenge is the lack of market-based power trading in some countries, which means not all costs can be passed on to end-users. In some cases, costs are largely borne by power producers who have difficulties to afford the transition.

"Transition credits need not be sold domestically. They can also be sold internationally so that international buyers with the right resources can help pay for transition credits," Teo said, adding that foreign investors can help power producers and consumers to digest certain costs in this way.

Teo said transition credits should come with corresponding adjustments and help ensure that host countries do not replace the retired coal plant with another coal plant.

"Furthermore, the host country would have reduced its emissions permanently with the accelerated closure of coal-fired power plants."