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Transition Carbon Credits Face Major Design, Implementation Challenges



November 7, 2023 - The carbon industry is toying with the idea of a new type of carbon credits called transition credits that can be used to fund early retirement of coal-fired power plants, but the idea is still in its infancy and faces execution challenges, experts at the Asia Climate Summit 2023 held in Japan in October said.

The main challenges are around the setting up of a complex framework for implementation, getting policy support from governments and for the mechanism to achieve a sufficiently high carbon price to be effective, the experts said.

One of the hurdles of getting government approval is that most corporate targets for phasing out coal are decades ahead of national net-zero targets, resulting in a lack of urgency and willingness by governments to back transition credits.

There exists a clear gap between what has been committed by companies and what has been committed by countries where they operate, said Hendrik Rosenthal, director of group sustainability with power producer CLP Holdings.

He said CLP committed to phase out coal-based assets by 2040 or earlier to align with the Paris Agreement, but in some of its markets, like China and India, national targets are to reach carbon neutrality by 2060 and 2070, respectively.

"The challenge from our perspective, as an operator and owner of these assets, is how can we move faster than the government wants to? That's really fundamentally a sticking point," Rosenthal said.

He said, under CLP's plan, even the youngest and most efficient coal assets need to be phased out on time, including the ones operating on the latest ultra-supercritical technologies, but it makes no sense for the governments to accelerate the phaseout of these assets.

Policymakers' Hesitation

Experts said it is crucial to get governments involved in transition carbon credits because phasing out coal is closely linked to national energy policies, the broader roll out of renewables, transmission investments and power prices.

Mary Grady, Executive Director with American Carbon Registry, a carbon registry under non-profit organization Winrock International, said her team is developing a jurisdictional accrediting approach for transition credits, as part of the Energy Transition Accelerator (ETA) program initiated by the US government.

ETA aims at meeting the Paris Agreement's 1.5 Celsius target by using private capital to accelerate the energy transition in developing countries. Several carbon registries have been working to build a transition credit methodology including Gold Standard, ACR and Asia Carbon Institute.

A jurisdictional approach would mean tailoring coal-plant decommission needs to specific regions, and to take into account regional-level and country-level policies, as well as localized power market demand and supply dynamics.

"If you close down a coal plant and you build renewables, it doesn't necessarily mean that emissions are going down, because you're still having to supply baseload power, you're still having to meet growing energy demand," Grady said, adding that simply shutting a coal plant does not mean emissions will peak sooner.

Moreover, cooperation with the government is essential to prevent integrity issues, said John Lo, founder of ACI, a new Singapore-based carbon registry developing bespoke carbon methodologies for Asian countries.

"You can imagine that some companies want to close down their coal-fired power plant and get a lot of transition credits. But then they build another coal-fired power plant somewhere else. It does not and will not help the energy transition," he said.

"A methodology alone can do the calculation and can generate the carbon credits, but essentially much more cooperation between the governments, the operators [of coal-fired plants] and the standard bodies [will be needed] to work together to ensure such problems will not happen," Lo said, adding that ACI plans to start with a test pilot.

"There is no one-size-fits-all or perfect solution. What is important is to come up with a credible methodology with credible partners, hopefully with the governments in the countries as well, to ensure this path works," he added.

A High Enough Price

In September, a study by the Monetary Authority of Singapore and McKinsey estimated that to shut down a 1 GW coal-fired power plant five years earlier than planned, the economic gap is expected to be $70 million, which translates to a carbon price of $11-$12/mtCO2e.

But experts said this may be insufficient.

CLP's Rosenthal said $70 million may be a reasonable estimation for the loss from early plant closure but much more capital will be needed to replace it completely.

He said the cost of putting one gigawatt of wind or solar back on the grid is roughly $500 million plus to replace the coal capacity, and the crediting mechanism will have to cover both early decommissioning and new plant costs.

ACI's Lo said that besides the carbon market, the early phaseout of coal plants needs a blend of financial incentives from governments and banks.

Winrock's Grady was also of the view that transition credits will be needed to compensate plant operators, subsidize renewables, build energy storage and grid infrastructure, and support displaced workers.

"We think it's an important piece that will help unlock additional finance. But we also should not kid ourselves that the carbon market is the be-all and end-all solution," she added.