The Transition Credits Coalition (TRACTION)
2. Transition credits are high-integrity carbon credits generated from the emissions reduced by retiring CFPPs earlier than planned and substituting them with cleaner energy alternatives. If priced appropriately, the proceeds from the sale of such credits can reduce the costs incurred by CFPP owners and investors from voluntarily decommissioning the CFPPs early. Transition credits can thus serve as a complementary financing instrument to mobilise financing for the early retirement of CFPPs and to support Just Transition efforts.
3. TRACTION’s interim report sets out the key learnings from discussions over the past year among TRACTION members as well as experts involved in coal transition and carbon markets. The learnings are in three areas:
- Supporting the Generation of High-Integrity Transition Credits: Clearly defined and rigorous standards are critical to ensuring quality, trust and confidence in transition credits. Across existing guidance and methodologies
[3] , there are four common high-integrity attributes:- Demonstration of additionality - where a CFPP has a positive fair market value and positive absolute emissions savings compared to a business-as-usual scenario.
- Ensuring permanent reduction of emissions and avoiding emissions leakage - this can be shown through commitments to cease the building of new CFPP at power sector and/or entity level, and full or partial replacement of the retired coal power with clean energy sources.
- Robust verification and monitoring of emissions reductions.
- Contributions to Just Transition and Sustainable Development Goals.
Coal retirement transactions that demonstrate these attributes will be more suited to generating high-integrity transition credits. Understanding these attributes and how different guidance and methodologies are applied will help governments, financiers and plant owners prioritise coal assets for transition credits transactions.
In addition, TRACTION notes the encouraging development of multiple transition credit methodologies that adopt sectoral and project-based approaches
[4] . The availability of different approaches can cater to varying domestic circumstances. For example, where national energy transition plans are still under development, project-based methodologies can be used by individual plant owners to shorten the operating life of their CFPPs and plan for the development of replacement renewable energy. - Enabling Transaction Scalability: For transition credits transactions to scale, there is a need to develop risk mitigation solutions to address possible transition credits risks, such as timing mismatch
[5] , project delays caused by delays in crediting methodology finalisation, and carbon credit invalidation from the reversal of no new coal commitments. A combination of conventional and innovative instruments like carbon credits insurance and advance market commitments are essential to addressing these risks. In addition, a clear and strong demand signal for the credits is necessary to enhance the appetite for financing. The report lays out the different risk factors that feature in transition credits transactions and suggests possible terms, structures and solutions to mitigate such risks. - Bolstering Buyers’ Confidence and Trust: The motivations and requirements of different classes of buyers – compliance, voluntary and investment – differ. For instance, preliminary insights from voluntary buyers indicate a preference for credits that are aligned with the geographic locations of their assets as they aim to support decarbonisation in regions where they operate. In the next phase of work, TRACTION will build on these insights to develop specific approaches to meet the requirements of each buyer segment, in order to tap a broad base of buyers.
4. Mr Leong Sing Chiong, Deputy Managing Director (Markets & Development), MAS, said, “Transition credits represent a market-based approach to crowd-in financing for the early retirement of coal. This interim report clearly lays out the range of complex issues involved in the development and application of transition credits. This will help TRACTION develop more effective solutions to address key issues of integrity, scalability and demand certainty. We look forward to working with our partners to further develop transition credits into a credible and viable financing instrument for the region’s energy transition.”
5. TRACTION’s work is steered by industry co-leads and supported by a secretariat. They have shared their perspectives of the work and transition credits in Annex A. Refer to Annex B for the list of TRACTION members and knowledge partners.
6. TRACTION plans to build on the foundational insights gathered thus far and expand its engagements to develop possible solutions and ideas to advance the three critical areas identified. The final TRACTION report, which will be released at COP30, will serve as a playbook to scale the implementation of transition credits. We invite interested parties to review and respond to the findings of the interim report. Please refer to this link for the interim report. For more information and the latest updates, please visit the MAS website .
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[1] MAS Launches Coalition and Announces Pilots to Develop Transition Credits for the Early Retirement of Asia’s Coal Plants
[2] MAS and McKinsey Explore the Use of High-integrity Carbon Credits to Accelerate and Scale the Early Retirement of Asia’s Coal-fired Power Plants
[3] These refer to coal phase-out financing guidelines, taxonomies and draft transition credit methodologies.
[4] Sectoral approach generally entails the generation of credits at a national or sub-national level based on emissions reduced at the jurisdiction level. Project-based approach entails the generation of credits based on the emissions reduced from the early retirement of a CFPP and replacing it with cleaner energy sources.
[5] Timing mismatch is where financing is needed upfront to structure the phase-out, but cashflows from the sale of transition credits are only realised later when the coal plant is retired and replaced.
