Singapore's central bank, the Monetary Authority of Singapore, is looking to test the usage of high integrity carbon credits to finance the early retirement of coal-fired power plants (CFPPs), according to working paper published late Sept. 26.
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"If high integrity carbon credits can be generated from the early retirement of CFPPs, they can serve as a complementary revenue stream to enhance the economic viability of the projects and scale early retirement of CFPPs," MAS managing director Ravi Menon said in the paper, co-authored with McKinsey & Co.
Asia in particular lacks a cohesive plan to decommission coal-fired power plants as the region relies on coal for over 60% its power generation. The MAS said on average coal plants are less than 15 years old and more than 80% of the 8.4 million people employed globally in the coal industry are concentrated in Asia.
The paper also cited a study by Rocky Mountain Institute showing that 93% of coal plants globally are insulated from competition from renewables, through long-term power purchase agreements, regulated tariffs and subsidies.
While initiatives like the Just Energy Transition Partnership are moving forward, there is a need to accelerate decarbonization plans.
There are around 5,000 units across nearly 2,000 coal plants in Asia and to achieve net zero by 2050, at least two plants need to be retired every week from now till 2040, which is a formidable system-wide challenge, the paper said.
The MAS proposed a new class of high integrity carbon credits called "transition credits" that would be generated from the early retirement of a coal plant and its replacement with cleaner energy sources that demonstrate "irreversible action to reduce emissions at source."
"They could be classified as high-quality credits and differentiated from existing avoidance credits," the paper said.
It said these transition credits must be aligned with the Core Carbon Principles (CCP) set out by the Integrity Council for the Voluntary Carbon Market (ICVCM). They should also meet the principles of additionality, where early retirement would not have occurred without the transition credits; and permanence, where safeguards ensure the carbon emissions are irreversible.
"To meet energy demand and still ensure a transition to a lower-carbon future, the replacement energy needs to be from a lower-emitting source and optimized for renewable energy to maximize the reduced emissions," the paper said.
"As yet, no methodology exists on the market that combines the elimination of an emission source, such as a CFPP, and its replacement with cleaner energy, although several efforts are underway, such as those by Gold Standard, South Pole (under CCCI), Winrock (under US Energy Transition Accelerator), and the World Bank," it added.
There are several challenges in the logistics of using transition credits, the bank said.
"Financing is often needed to secure a plant for early closure and also for the remaining operational life of the CFPP until its retirement date. Yet, transition credits will only be issued at the time of retirement," the paper said, citing one such challenge.
It said possible solutions include innovative insurance products to cover breaches of agreement, a futures market to establish price floors for credits, and working with regulators to set out taxonomies and other credible guidance, and Special Purpose Vehicles (SPV) to facilitate the refinancing of existing debt.
MAS said it intends to work with interested parties to test this working concept, and has invited participation to take the concept forward.