[DUBAI] The Monetary Authority of Singapore (MAS) on Monday (Dec 4) launched an international coalition to develop a new class of carbon credits aimed at accelerating the closure of coal-fired power plants.

Called the Transition Credits Coalition, or Traction, the 27-member network comprises financial institutions, carbon exchanges and standard setters as well as philanthropy and non-governmental organisations.

The initial members include state investor Temasek, Singapore banks DBS and OCBC, as well as carbon standard setter Gold Standard. International organisations include the Asian Development Bank (ADB), the Glasgow Financial Alliance for Net Zero, the International Energy Agency and the World Wide Fund for Nature Singapore.

UOB, another one of Singapore’s major banks, and Verra, a major setter of voluntary carbon standards, are not currently part of the coalition.

Asked about their absence from the coalition, an MAS spokesperson said: “MAS published a call for interest to join the transition credits coalition in September, after our joint working paper with McKinsey was released. MAS is very encouraged by the strong support of the wide range of industry partners who have come forward to work with us to further develop the transition credits market to enable the acceleration of the early retirement of coal plants. While we do not comment on specific organisations’ plans, we welcome those with interest to work with MAS on transition credits to contact us.”

UOB chief sustainability officer Eric Lim told The Business Times: “Transition credits are an important innovation as the region seeks to unlock transition finance to support a just energy transition. UOB is keenly observing the development of these credits and stands ready to support high-quality transition activities and projects supporting these credits.”

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Transition credits were first proposed as a means to compensate coal plant owners for income lost when their plants are closed early. The intention is to increase the economic viability and scalability of early-retirement coal plant projects, which have long struggled to take off.

To test the integrity of this new asset class of carbon credits, which are generated when coal plants are retired early and replaced by cleaner energy sources, transition credits will be used to finance the early retirement of two plants in the Philippines.

One of those pilot projects being explored is the South Luzon coal plant, which was owned by Acen – the energy arm of Philippine conglomerate Ayala Group. Acen will work with the Coal-to-Clean Credit Initiative (CCCI) under the Rockefeller Foundation on this project, which will be coordinated by Climate Smart Ventures.

Another pilot is a coal plant in Mindanao – owned by state-owned Power Sector Assets and Liabilities Management – that is under ADB’s energy transition mechanism programme.

Work is being done to tweak the transition credits methodology by CCCI to apply it to the South Luzon plant, and a decision should be made by April next year whether the transaction will indeed go through, said Joe Curtin, managing director for power and climate team at the Rockefeller Foundation.

The methodology will also be submitted to Verra for approval.

If approved, this means bringing forward the retirement of the plant from 2040 to as early as 2030 – making it the world’s first coal plant to leverage on carbon credits to enable its early decommission.

The retirement date for the 246-megawatt coal plant was already brought forward by at least 15 years to 2040 after Acen completed its divestment in November last year, and the use of transition credits could speed up its closure.

Transition credits generated from this deal will likely only come to market either at the end of 2024 or the start of 2025, added Curtin.

Curtin said that it is unclear what the price of these credits will be when it eventually goes to market, but he expects it to be at the “very top-end” of current prices among credits that have a strong supply. “This is not going to be a US$2, US$3, US$4, US$5 or even US$10. It’s going to be significantly above that. We don’t know what that number is going to be yet, but we know it’s going to be a high price.”

He added that the potential deal has received huge interest, particularly with sovereign offtakers, although he could not reveal which governments were interested. The Singapore government had stated that it was prepared to purchase transition credits if they meet high environmental integrity.

As for the 200 MW Mindanao plant, ADB has been appointed to develop and execute the transaction structure, including the sale of transition credits to bring forward its closure to 2026, five years before its current power purchase agreement ends in 2031. As the plant was commissioned in 2006, its technical life is until 2046.

Members of Traction are not directly involved in any pilot transactions.

For transition credits to be considered high-integrity, they need to be aligned with globally recognised standards such as the Core Carbon Principles (CCPs) set out by The Integrity Council for the Voluntary Carbon Market (ICVCM), and other integrity requirements, as mandated by the United Nations Framework Convention on Climate Change in Article 6 of the Paris Agreement.

Article 6 governs rules surrounding the trading of carbon credits, and outstanding issues around the establishment of an international carbon market are still being negotiated at COP28.

MAS said that it will work with ICVCM to explore ways for transition credits to align with the CCPs.

The central bank also added that a whole-of-system approach is needed to develop transition credits into a viable market solution, and Traction will conduct its study over a two-year period to identify system-wide barriers and develop solutions for transition credits to be utilised as a credible financing instrument.

These include identifying 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.