Carbon credits for coal phase-out likely not price competitive against wider market, need state buyers: CIX chief

Energy storage and just transition costs would make such novel credits several times more expensive than the typical renewable energy or forest conservation offsets available today.

Mikkel Larsen Genzero 2024
Mikkel Larsen, chief executive of Singapore carbon exchange Climate Impact X, speaking at the Genzero Climate Summit 2024. Image: Eco-Business/ Liang Lei.

Carbon credits for early coal phase-out projects in Southeast Asia will unlikely sell for under US$30 a tonne, the head of Singapore carbon bourse Climate Impact X (CIX) has said, providing an estimate much higher than the price of existing offsets on the market today.

The price quoted by Mikkel Larsen, CIX’s outgoing chief executive, factors in the cost of additional infrastructure needed to support the replacement of coal power with renewables, along with social spending to secure livelihoods for displaced workers.

Shutting Southeast Asia’s many pollutive coal plants is critical to halting climate change. But these power stations generate almost half of the electricity for the rapidly developing region. Many are also recently built, making it even more costly to shelve them with decades of operational lifespan remaining.

In recent years, financiers have floated the idea of financing a coal phase-out with carbon credits, generated from the emissions saved by transitioning early to clean energy.

The high price of such coal phase-out credits means that governments will need to step in and buy the credits, Larsen said on a panel at the Genzero climate summit in Singapore on Tuesday. 

“We need to work this into compliance markets, and we need to get some key anchor buyers in here,” he added.

In the voluntary market today, where businesses buy carbon credits to counterbalance their own emissions and move closer to their green goals, popular offsets trade much lower than US$30 per piece.

For instance, popular forest protection credits sold at just over US$3 per piece in early April, according to analyst S&P Global Commodity Insights. Larsen said offsets from renewable energy credits are trending around US$5-7. This means corporate buyers are unlikely willing to fork out a premium for coal phase-out credits.

As it stands, few governments appear keen to buy coal phase-out credits. Singapore said it was prepared to do so in the future at the end of last year.

Earlier studies suggest coal phase-out credits can be priced lower at US$15-20, but those only factored in the cost of the new electricity capacity needed – not the additional expenditure needed for just transition safeguards, Larsen noted.

Singapore’s central bank and consultancy Mckinsey had last year in a report said the per-tonne cost of carbon dioxide savings is US$11-12, if a 1-gigawatt coal plant is closed five years early.

The term “just transition” generally refers to the equitable benefit and cost sharing in decarbonisation initiatives – such as making sure coal plant workers can switch to new jobs when their old workplace shuts, or that energy security for local communities is not impacted. But figuring the price tag of such ventures is difficult as there is no consensus on what a just transition should exactly encompass.

“[Has anyone] ever seen any statement that succinctly describes what a just transition really is, or when something is good enough? I’ve spoken to a lot of people in finance, industry and corporations, nobody has a framework for it quite yet,” Larsen said.

He added that the cost of installing batteries – needed to stabilise power output from intermittent solar and wind power – would make up a “fairly large component” of the final asking price.

But Larsen said the premium is fair, given that closing coal plants is an almost guaranteed way of slashing emissions, compared to other project types. 

“We shy away from avoidance credits…because of the lack of permanence. But once you take a coal-fired power plant offline, it really is offline,” he said.

Avoidance carbon credits focus on preventing or reducing greenhouse gas emissions that would have otherwise occurred. Forest conservation projects in particular have been called into question over permanence issues, since protected trees could still be cut or burnt down in the future.

Beyond the high pricing, experts have said the large volume of carbon credits that can be generated from coal phase-out could flood and destabilise the voluntary carbon market.

Key coal phase-out initiatives today include an initiative led by the Asian Development Bank (ADB) to retire a 660-megawatt coal plant in Indonesia. Singapore is also working with ADB and local partners on closing two smaller Philippine coal plants.

The two largest carbon credit certifiers, Verra and Gold Standard, are each developing their own coal phase-out methodology. On Wednesday, Singapore-based certifier Asia Carbon Institute announced work on a new rulebook along with partner firm Sustainability Economics.

Indonesia, the largest coal power operator in Southeast Asia, had floated the idea of closing several gigawatts worth of coal plants in past years, as it negotiated large international climate financing deals. But progress has been slow, and last year its policymakers said the focus would instead turn to operating coal plants with alternative fuels instead.

The hope is that carbon credits could provide more money to revitalise such initiatives, alongside blended financing models that involve multiple lenders.

Speaking alongside Larsen, Lim Wee Seng, group head of energy, renewables and infrastructure at the institutional banking group of Singapore’s DBS bank, said that impact funds could help boost financing given their parallel focus on doing good.

Such funds are willing to accept lower returns to shut coal plants down earlier, Lim said, though conceding that dealing with neighbouring countries’ national utilities in such projects is “not easy”, and called for regulatory improvements.

Cindy Lim, chief executive of Singapore’s Keppel Infrastructure, noted that coal plant workers have much of the requisite skills needed for them to shift into operating new waste-to-energy facilities, which would also address the region’s mounting waste and landfill emissions issues.

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