MAS explores using carbon credits to accelerate closure of coal plants

Singapore’s central bank wants to incentivise the phasing out of coal plants with carbon credits and replace it with transition credits towards renewable energy, it revealed in a joint research paper with management consulting firm McKinsey & Company.

If the region wants to achieve net zero by 2050, it must close two coal power plants every week from now until 2040, said Ravi Menon, managing director of the Monetary Authority of Singapore.

“This is a system-wide challenge that will require a system-wide approach and involve the public, private and people sectors to act in concert and to act fast,” he said in a statement.

Coal accounts for a third of CO2 emissions in the Asia-Pacific region. Coal plants generate about 60% of power in the region and are on average less than 15 years old. This presents a challenge for phasing out coal, MAS and McKinsey wrote in the paper.

Retiring coal plants five years early will create an economic gap of US$70mn per gigawatt, which could be covered by carbon credits. MAS and McKinsey propose what they call a high-integrity carbon credit or transition credit that is generated from retiring coal plants and replacing them with clean energy sources.

“If high-integrity carbon credits can be generated from the early retirement of [coal-fired power plants], they can serve as a complementary revenue stream to enhance the economic viability of the projects and scale early retirement of CFPPs,” Menon said.

To make sure coal plants retire early, the paper proposes using investor protection mechanisms such as a special purpose vehicle to facilitate the refinancing of existing debt and develop the transition credits needed. It is also important to ensure a just transition to protect workers and communities that rely on the coal industry, MAS and McKinsey say.

MAS said it plans to launch pilot projects to study the effectiveness of transition credits and is looking for stakeholders to partner with.

While carbon credits are good for developing longer term transition plans, they are subject to investor and industry manipulation which could “over-inflate the cost of avoided emissions”, said Tim Buckley, director of Climate Energy Finance.

One issue the MAS and McKinsey report does not address is that energy demand still needs to be met even as coal plants are closed, Buckley said, especially in emerging areas like Asia where there is strong demand for energy growth. But having cost-competitive renewable energy would likely lower the value of coal plants, giving these countries greater incentives to pursue clean energy such as solar.

And while the paper talks about ensuring communities are not negatively impacted by coal plant closures, Buckley said this ignores the fact that these same communities are also negatively impacted by climate change.

“It is pure greenwash to say the coal plant workers will be looked after – flowery words that come from developed world do-gooders who don’t really understand the power of financial markets,” he said.

Still, Buckley believes “the concept has real value and power, if done correctly”.