MAS proposes use of carbon credits to accelerate retirement of coal power plants

The central bank published a paper on how this can be done.

The Monetary Authority of Singapore (MAS) and McKinsey & Company published a working paper setting out how high-integrity carbon credits can be utilised as a complementary financing instrument to accelerate and scale the early retirement of coal-fired power plants (CFPPs). 

The paper explores the use of high-integrity carbon credits to reduce the economic gap for early retirement of CFPPs. It considers the possible generation of “transition credits”, arising from the emissions reduced through retiring a CFPP early and replacing with cleaner energy sources. 

There are several elements to this approach. First To retire a CFPP early, it is important to quantify the economic gap as well as the financing neededfor the transaction to be viable. As an example, MAS explained the economic gap to retire a CFPP with a 1-gigawatt (GW) capacity five years earlier will be $96.01m (US$70m) per GW. The financing in this example is estimated at $425.20m (US$310m) per GW.

The revenues from the sale of transition credits could reduce the economic gap from retiring a CFPP early. These credits must be of high integrity which includes alignment to the Core Carbon Principles set out by the Integrity Council for the Voluntary Carbon Market. 

However, MAS said the long-term horizon of such transactions creates risks and uncertainties, as transition credits will only be issued much later when the emissions reductions are verified. 

“A combination of different undertakings could enable greater market adoption of this new form of credits. These include the relevant government’s agreement to enforce CFPP closures or insurance solutions to mitigate political risk that could lead to delays in the generation of carbon credits,” MAS said.

It is also crucial to assess and implement measures to mitigate potential harm to livelihoods and communities arising from the early retirement of CFPPs. This includes accounting for such costs in the financing of early CFPP retirement.

MAS and McKinsey have also proposed a template that provides detailed steps and sample tools for market participants to assess and execute such transactions. This includes a cashflow model to compute the economic gap that could potentially be covered by transition credits, and a list of standardised documents required to execute such a transaction.

MAS is inviting interested parties to join a coalition of partners to further validate this transaction approach, and identify suitable CFPPs to pilot integrating transition credits into the early retirement of CFPPs. 

“To achieve a successful energy transition in Asia, we need to develop effective and scalable financing mechanisms to catalyse early phase-out of CFPPs. Today’s launch marks the beginning of a multi-year journey to pilot a broader market-driven approach to finance the early retirement of CFPPs at scale. This requires close collaboration among key stakeholders – asset owners, carbon credit buyers, financial institutions, MDBs, credit methodology developers and international standard setters, to road test the approach and develop rigorous solutions suitable for broad based market adoption. We look forward to working with like-minded partners to bring this to fruition,” Leong Sing Chiong, Deputy Managing Director said.