Transition Coal Credits: A Rising Tool For Financing the Energy Transition

In a bid to accelerate the global transition towards cleaner energy sources, the carbon industry is looking to introduce a new type of carbon credit - transition coal credits. These credits have been gaining momentum since 2023 and early 2024 as a potential financing tool to accelerate the early retirement of coal power plants, particularly for Asia’s nearly 2,000 plants. They have recently captured the attention of financial institutions such as HSBC and Standard Chartered, offering a means to sustain relationships with carbon-intensive client bases in Asia while advancing climate objectives through coal phaseouts. Although still in their early stages, various initiatives like ETA, TRACTION, and CCCI are actively exploring and refining these credits.

So, what are transition coal credits and what’s needed for them to become a viable investment option?

What are Transition Coal Credits:

Transition coal credits offer a novel approach to financing the phaseout of coal power plants, a critical step in combating climate change. They are designed to facilitate the retirement of coal power plants, by closing the financial gap of decommissioning coal power plants. The avoided emission from retiring coal power plants ahead of schedule, and replacing them with renewable energy sources would equal carbon credits available to be bought and sold.

Coal power plants are one of the main power supply globally but coal is the largest source of greenhouse gas emissions in the sector, accounting for 44% of fuel combustion emissions in 2021. An IPCC report released in March 2023 suggests that the number one solution for climate change mitigation is to retire coal plants, followed by investing in clean energy and efficiency. These new credits could support both. Additionally, transition coal credits could support coal-dependent regions and industries in their shift towards cleaner energy alternatives. Providing financial incentives for early decommissioning and redirecting investment into renewable infrastructure, transition coal credits could play a pivotal role in accelerating the global energy transition.

Current Landscape for Transition Coal Credits

Areas Needed to Develop Transition Coal Credits

Transition coal credits offer a promising avenue for overcoming the challenges posed by coal power plants. However, their viability requires significant development in several key areas.

1. Finance

Transition coal credits present a potential solution for financing the closure of coal power plants. Yet, the financial incentives must be substantial enough to encourage early shutdowns. Studies suggest there is a considerable economic gap for early closures, necessitating either a carbon price higher than current estimates or a blended finance approach, where a partnership of both private and public actors provide capital. Moreover, concerns arise regarding the source of financing for the renewable energy projects that would replace the plants, infrastructure development, and support for affected workers. Transition coal credits will help unlock additional finance for the energy transition, but they might not provide the full financing needed.

2. Government Buy-In

Effective implementation of transition coal credits relies on garnering support from governments and establishing a robust regulatory framework. Government involvement is crucial due to the close relationship between coal phase-out and national energy policies. Most corporate targets for phasing out coal are decades ahead of national net-zero targets, which can lead to a lack of urgency from governments. Interest from governments is growing, indicating a potential shift, especially if these credits align with national climate targets (NDCs). 

3. Methodology Development

The efficacy of transition coal credits hinges on the development of standardized methodologies and transparent mechanisms to maintain their integrity. As this concept is still in its nascent stage, establishing standards and principles by authoritative bodies is imperative to ensure credibility and effectiveness. Bodies like the Integrity Council for Voluntary Carbon Markets (ICVCM) play a crucial role in shaping the development of these methodologies.

4. Corporate Interest

To effectively bridge the finance gap for the early retirement of coal power plants, transition coal credits must attract potential investors. While questions persist regarding the mechanics of delivery,  there are actionable steps and room for advancement to enhance the appeal of these credits to buyers. For example, addressing concerns about reputational risks and establishing solid credit standards. To stimulate demand, it is critical to establish common guidelines and frameworks to enhance the quality and integrity of these credits to offer stability and appealing returns. 

Recent interest from HSBC and Standard Chartered to be part of the development of transition coal credits shows growing market momentum towards their adoption. While they hold promise in accelerating the phaseout of coal power plants, their implementation is not without challenges. 

Want to learn more about these new credits and how they might fit into your carbon strategy? Reach out to our team.