Singapore to Pilot Transactions in ‘Transition Credits’

Regulator seeks industry support to develop credits for reducing the economic gap from retiring coal plants early.  

Monetary Authority of Singapore (MAS) Managing Director Ravi Menon has called on the financial industry to start work on pilot transactions in so-called ‘transition credits’. 

Last month, MAS and consultancy firm McKinsey launched a working paper introducing the concept of using transition credits as a financing instrument to accelerate and scale the early retirement of coal-fired power plants. The paper considered the possible generation of transition credits based on emissions reduced through the early retirement of coal plants and replacement with cleaner energy sources. 

The paper said the revenues from the sale of transition credits could reduce the economic gap from retiring a coal plant early, provided the credits are of high integrity and aligned to Integrity Council for the Voluntary Carbon Market’s (ICVCM) Core Carbon Principles.  

The ICVCM is responsible for developing guidance on the supply side of carbon credit generation, while Voluntary Carbon Markets Integrity initiative is introducing demand-side rules for entities using carbon credits as part of their decarbonisation strategies and net zero pledges. 

MAS and McKinsey provided a template, sample tools, a cashflow model, and standardised documents that market participants could use to assess and execute transactions in transition credits. 

Challenges and opportunities

In a speech last week, Menon discussed the challenges and opportunities of phasing out coal and investing in green and transition infrastructure in Asia, calling for a “coherent strategy” for the managed phase-out of coal based on “credibility, viability, and justness”.  

MAS is already undertaking or exploring several initiatives to support such a strategy, including blended finance and the use of transition credits. 

On blended finance – which leverages capital from the public sector, multilateral development banks, and philanthropic sources to reduce project risk and enhance project bankability – Menon noted that there have been “a few” successful transactions, but they have thus far “not been employed at scale”. 

He said Singapore is currently developing a blended finance platform, which will “help bring together technical assistance, governance arrangements, and a capital structure that caters to different risk appetites and return objectives. Menon said MAS is keen to work with the financial industry to “better harness the wealth of foundations, family offices, and high net-worth individuals for blended finance projects”. 

On transition credits, Menon said the revenue generated from selling the credits could “significantly improve” the economic viability of early coal phase-outs and align the interests of coal plant owners and capital providers. However, transition credits “must be of high integrity” to generate trust and confidence, meaning that the host jurisdiction must commit to not build new coal plants, and there must be replacement with cleaner energy sources to minimise the need to restart a retired coal plant. 

“Transition credits must meet the needs of those who buy these credits,” Menon said. “This means addressing concerns surrounding the timing mismatch between when the transition credits will be generated and when the financing will be needed. This involves exploring mechanisms that can bring forward the issuance of credits and facilitate early off-take, such as insurance solutions or advance market commitments.” 

Menon acknowledged that the development of transition credits as a credible and viable financing solution will not be easy, as it will require “strongly supportive policies and deep product and market innovation”. However, he said he believes the financial industry has the “innovative capacity” to make instruments like transition credits work. Menon called on the industry to work with MAS on pilot transactions. “We have to learn by doing,” he said. 

Menon is set to step down from his role of MAS Managing Director on 1 January 2024 after spending 12 years at the authority. He will be replaced by Chia Der Jiun, who will serve in the position until 31 May 2026.

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