Transition credits need to be at least US$30 to close coal phase-out financing gap: CIX

TRANSITION credits need to be priced minimally at US$30 to not only finance the early retirement of coal-fired power plants, but also ensure that the transition to renewable energy takes place in a “just” manner, said Mikkel Larsen, chief executive officer of carbon exchange Climate Impact X (CIX).

Some studies have estimated that this new form of carbon credits – generated when coal-fired power plants are shut earlier than their intended retirement date and replaced with renewable energy – would have to be priced at around US$14 per credit to bridge the financing gap of such projects.

This assumes a financing gap of about US$70 million, with a portion of it covered by blended finance.

Larsen said this doesn’t factor in the “just” in a “just transition”.

“And if we just care about the electricity that is produced, that probably is about right. But if you actually take care of the “just transition” and try to factor that in, the price needs to be much higher,” said Larsen, who was speaking on Tuesday (Apr 16) at a side event organised by decarbonisation investment platform GenZero, as part of the Ecosperity sustainability conference.

In addition to containing the potential negative effects of a transition to renewable energy, such projects also involve integrating battery storage solutions into the grid.

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“Anything less than US$30, if you start to add that up, it’s not going to be feasible in a lot of places,” said Larsen.

CIX has been involved in the two pilots where transition credits have been used to finance the early closure of two coal plants in Philippines, and Larsen noted that the credits often “surprised on the high side”.

However, the voluntary carbon market currently doesn’t trade at these prices, even though transition credits could be considered higher quality avoidance credits given their low permanence risk.

Permanence – which refers to the durability of the solution that led to emission reductions or avoidance – is one key component in assessing the quality of the carbon credit.

For transition credits to be able to trade at US$30 or above, Larsen said that governments need to be willing to purchase such credits, as well as set policies for transition credits to be accepted in compliance markets.

In contrast to compliance markets, which has a size of over US$150 billion, the size of the voluntary carbon market is about US$2 billion.

The Singapore government said at the United Nations climate change conference at the end of 2023 that it was prepared to buy transition credits if they meet standards of environmental integrity.

Transition credits were first proposed by the Monetary Authority of Singapore (MAS) and McKinsey as a means to compensate coal plant owners for income lost when their plants are closed early.

They estimated a financing gap of US$70 million per giga-watt to bring forward the closure of a 1 GW coal plant by five years. This translates to between US$11 and US$12 per tonne of carbon dioxide equivalent.

The idea was for transition credits to increase the economic viability and scalability of early-retirement coal plant projects, which have long struggled to take off.

But the landscape has changed over the last year with more regulatory and industry support, such as the release of two taxonomies in the region that make the early closure of coal plants eligible for sustainable financing.

MAS also launched an international coalition called the Transition Credits Coalition or Traction, with the purpose of studying how solutions can be developed for transition credits to be utilised as a credible financing instrument.