Fast Action on Asia’s Coal Power Plants Needed to Tackle Climate Change

Asia – and indeed, the rest of the world – must act with unprecedented urgency to combat climate change.

In September 2023, the United Nations published a “stocktake” on global efforts to address climate change, and the conclusion was foreboding. While the report acknowledged some progress in mitigating global warning, it emphasized much more is needed. In particular, the report underscored that “scaling up renewable energy and phasing out all unabated fossil fuels are indispensable elements of just energy transitions to net zero emissions”.

Asia carries a significant burden in this area. The region accounts for about half of the world’s total greenhouse gas emissions. Energy generation is a large contributor, with 60 to 70% of Asia's power plants still reliant on coal.

However, the region can also play a decisive role in cutting greenhouse gas emissions linked to coal-based energy and crafting a global solution. In a new initiative, the Monetary Authority of Singapore and McKinsey & Company are exploring how carbon credits can be used as a complementary financing mechanism to support the early retirement of these plants, and are inviting collaborators to pilot the concept.

Many hurdles must be overcome to expedite the retirement of these polluters. A collaborative effort is needed across all stakeholders, from the current owners and operators of these plants, to investors willing to put money into the effort, and the communities and individuals affected by the energy transition. The challenge is amplified in Asia, where coal-fired power plants are generally younger than those in Europe and North America, with many more operational and revenue-generating years expected from them.

Altogether, there are more than 5,000 coal-fired power units across 2,000 coal-fired power plants in Asia. The cost for an investor to refinance numerous plants, close them, and replace their output with clean energy could be insurmountable. A mechanism that accounts for the forfeited revenues of the original investors in these plants as they are retired early is needed.

To do so, the analysis suggests that a new class of carbon credits, which we call transition credits, would be a crucial component to building a commercially viable structure for the early retirement of coal-fired power plants. Of course, various programs are already underway to finance the early retirement of coal-fired power plants. However, underlying economics that rely heavily on concessional capital prevent them from being deployed broadly in most cases. Transition credits could therefore be a powerful springboard for overcoming this hurdle.

Essentially, transition credits would be generated by the permanent reduction of emissions brought by the early closure of coal-fired power plants and their replacement with cleaner energy sources. Strict rules would ensure these credits meet global standards and are deemed high quality by the market. Investor returns would come primarily from the sales of transition credits, as well as ongoing revenue from revised and shortened power purchase agreements.

A transition from coal-fired power plants is a slow process. Most of these plants in Asia have decades left in their expected existing power purchase agreements, and closing them, say, five years early would still mean years of continued use. A liquid transitions credit market could help accelerate this process, creating viable economics for even earlier retirements, as well as a gradual phasing out of coal-fired power by renewable energy sources, which could increase the feasibility of the approach by providing earlier returns for investors.

Ensuring energy resilience to match the early retirement of coal-fired power plants must also be an integral component of any transition plan. Individuals and communities reliant on coal mining and other related industries risk losing their livelihoods as coal is phased out. A Just Transition must be adopted to ensure any potential harm is mitigated.

The growing momentum in global carbon markets lends some optimism to this project. By 2030, McKinsey’s estimates suggest that the total demand for carbon credits, including transition credits, would reach about three gigatons of CO2 emissions a year.^[1] Estimates suggest that annual global demand for voluntary carbon credits could increase by a factor of 15 or more by 2030, and by a factor of up to 100 by 2050.^[2] Even so, the size of these markets would pale in comparison to the trillions under management by top institutional investors. Shifting a small share of total funds under management would provide an invaluable boost to carbon credit markets, including for the proposed transition credits. For the moment, though, voluntary carbon markets are still finding their footing, and concerns about their integrity and credibility are being raised.

From a broader perspective, the world’s shift to net zero emissions cannot be confined to a handful of headline efforts, such as increasing renewable energy production and exploring new technologies. These aspects are important, but so are less flashy efforts in industries deemed very difficult to convert to clean energy, such as power generation. The effort must reach into all corners of the global economy without exception.

The world is just beginning to feel the initial impact of climate change through recent extreme weather events. A long-overdue consensus has formed around the urgency of mitigating the impact as much as possible by dramatically reducing greenhouse gas emissions. To succeed, everyone must work together to form carbon markets products such as transition credits, as well as the necessary ecosystems to encourage adoption and scale, to accelerate the transition and sustain a livable planet.

Sources:

[1] Vivid Economics and McKinsey*