Transition Credits Coalition (TRACTION) Highlights Integrity and Scalability of Transition Credits for Accelerating Coal Plant Retirements

To support the use of transition credits in accelerating and scaling the early retirement of coal-fired power plants (“CFPPs“), the Transition Credits Coalition (“TRACTION“) (convened by the Monetary Authority of Singapore during COP28) on 14 November 2024 released an interim report highlighting key insights and considerations in developing a transition credits framework which will improve the viability of transition credit transactions for CFPP owners, investors and purchasers (“Interim Report“).

What are Transition Credits

Transition credits are high-integrity carbon credits generated from the emissions reduced by retiring CFPPs earlier than planned and substituting them with cleaner energy alternatives.  Properly priced, these credits can financially assist CFPP owners and investors in voluntary decommissioning efforts.

The Interim Report covered learning points from three main areas:

1. Integrity Standards: The report emphasises the necessity of clearly defined and rigorous standards as guardrails for the quality and credibility of transition credits. Four common baseline integrity attributes are outlined, drawing upon various coal phase-out financing guidelines, taxonomies and draft transition credit methodologies. These integrity attributes are:

• • Additionality where early retirement of a CFPP demonstrates a positive fair market value and positive absolute emissions savings compared to a business-as-usual scenario.
  • Permanent reduction and avoiding leakage in emissions which can be shown through commitments to cease the building of new CFPP at the power sector and/or entity level, and replacement of the retired coal power with clean energy sources, whether full or partial.
  • Robust verification and monitoring of emissions reductions.
  • Just Transition and Sustainable Development Goals contribution as project co-benefits, to address the socio-economic impacts of coal plant closures on workers and communities in a fair and inclusive manner.

2. Scalability: The report looked at aspects of viability and replicability of transition credit transactions, crucial for scaling them.

• • To ensure the viability of transition credit transactions, it is necessary to have a thorough awareness of the risk factors faced by different stakeholders throughout the life cycle specific to the early retirement of CFPP, in addition to the common risk factors of carbon project development. This awareness allows for the early implementation of tailored risk mitigation strategies. The report identifies particular risk factors such as timing mismatch, delay in finalising crediting methodology, miscalculated value of project assets, and carbon credit invalidation from the reversal of no new coal commitments. To address these risks, it is suggested that a combination of conventional and innovative instruments (e.g. carbon credits insurance and advance market commitment) can be used, which will improve the certainty of future revenue streams and thus bolster the viability of transition credit transactions.
  • Replicable transactions across different market scenarios or archetypes will require robust transaction structures and a strong demand for transaction credits.

3. Boost Buyer Confidence: TRACTION aims to understand the motivations of various buyer segments — compliance, voluntary, and investment — and develop intentional approaches that could stimulate demand for each buyer segment.

• • Buyers, in general, emphasise high integrity and seek clarity on the credible use and disclosure of transition credits within their decarbonisation plans from international carbon accounting and disclosure standards.
  • Compliance regimes are expanding globally, which can be potential sources of demand if the transition credits can meet the respective eligibility requirements.
  • Voluntary buyers indicate a preference for credits that are aligned with the geographic locations of their assets as they aim to support decarbonisation in regions where they operate.
  • Investment buyers seek fungibility and standardised contracts that encourage market liquidity and trading.

Next Steps

TRACTION plans to refine its strategies for scaling the implementation of transaction credits further and will release a final report at COP30 in 2025, which will be a playbook for scaling the implementation of transaction credits.

Click on the following links for more information (available on the MAS website at www.mas.gov.sg):

• Media release on “The Transition Credits Coalition (TRACTION) Outlines Integrity, Scalability and Demand Considerations in Utilising Transition Credits to Accelerate the Early Retirement of Coal-fired Power Plants“; and
• TRACTION Interim Report.