Transition credit: Why asset owners will benefit from its success
The Monetary Authority of Singapore’s efforts to drive the development of transition credits, a new market-driven financing approach, will benefit asset owners although it will take time before investors warm to the idea.
“The number one stakeholder that benefits from the success of transition credit, is an asset owner,” Asilah Azil, partner at McKinsey Singapore, told AsianInvestor.
Singapore’s central bank launched the Transition Credits Coalition, or TRACTION, last December at a major UN-led climate conference, known as COP28.
The initiative, backed by nearly 30 members, will study the challenges and propose solutions to scale the use of transition credits for coal-fired power plants.
It aims to generate an additional revenue stream to enhance the economic viability of the early retirement of coal-fired plants.
COMPLEMENTARY FINANCING
MAS and McKinsey launched a working paper in October 2023 explaining how high-integrity carbon credits or transition credits can be utilised as a complementary financing instrument.
There are multiple ways asset owners could get involved in transition credits depending on what assets, brown or green, they have.
“First, if you have a brown [carbon-intensive] asset, and wish to participate in a transition credit transaction, raise your hand. MAS has introduced an Asia-focused ecosystem for taking forward such opportunities, with no geographical constraints,” said Azil.
Another option is for asset owners to acquire brown assets directly or via a special purpose vehicle to facilitate their transition.
"Lastly, if you are an asset owner owning renewable energy plants, you can bundle up the brown assets that you acquire and replace them with renewable energy, in turn scaling up your renewable energy solution as well," said Azil.
For its pilot programme, MAS is collaborating with the listed energy platform of the Ayala Group, ACEN Corporation of the Philippines, and the Rockefeller Foundation.
The objective is to test the Coal to Clean Credit Initiative (CCCI) methodology, overseen by the Rockefeller Foundation, which dictates how power plant owners and investors can utilise carbon offsets to finance early plant retirement.
The goal is to retire the plant by 2030, a significant 25 years ahead of its technical life's end, via a combination of carbon credit revenues and cost-effective climate finance.
WAITING AND WATCHING
Still, the market is expected to adopt a "wait and see" approach in the initial six months as two projects for transition credits are initiated.
“The extent to which transition credits will benefit any investor who purchases these credits is uncertain”, noted Mike Caughlin, senior investment manager, natural capital at Federated Hermes.
“Emissions reductions from the cessation of specific industrial activities are not the same as emissions reductions generated through the restoration of the world’s natural carbon sinks; the latter has additionality, the former may not,” added Caughlin.
McKinsey’s Azil also acknowledged these challenges.
“Firstly, as a carbon credit instrument, success relies on stable carbon markets, which have been volatile due to 2022's reputational and verification issues, with no recovery yet. Secondly, the methodology is new, with key verification bodies committing to developing frameworks. The pilot will reveal measurement challenges," Azil said.
In addition, ensuring transparency and motivating asset owners to shift from brown to green requires concerted efforts from governments and financial institutions to engage them in this transition.
Caughlin noted that transition credits could provide investors with exposure to just transition -- greening the economy by being broadly fair and inclusive -- but only if they are accompanied by managed workforce transition and training plans.