Carbon Credits: A Savior for Clean Energy Transition

The scheme aims to fund the coal-to-clean energy transition in emerging economies like Indonesia but experts warn the fine print is key.

A new scheme could create a huge number of carbon credits to unlock rich countries’ financial support for the switch from coal to clean energy in emerging economies.

The coal to clean credit initiative aims to plug funding gaps in the Just Energy Transition Partnerships (Jetp) agreed last year between wealthy nations and IndonesiaSouth Africa and Vietnam to wean them off coal power.

Currently in the late stage of development, the offsetting scheme is linked to the early closure of coal plants and their replacement with renewable energy. The greenhouse gas emissions avoided in the transition would be monetised through carbon credits.

Nations or companies will be able to buy them to compensate for their direct greenhouse gas emissions in the pursuit of their own climate targets.

Seismic change
Joseph Curtin, a managing director at the Rockefeller Foundation and one of the scheme’s creators, says these carbon credits could be “a game-changer” in fast-tracking the replacement of coal with clean power in emerging economies.

“Carbon credit finance will be instrumental in getting the industry moving. We see it as making up for some of the weaknesses [in Jetp deals],” he told Climate Home. “ This carbon finance will blend with and unlock private and concessional [with more generous terms than offered in the market] capital, which is theoretically available to support the just energy transition but is not flowing”.

But experts warn there are a number of concerns about using carbon finance to phase out coal, especially given the massive number of credits potentially on the line. The project developers hope to retire dozens of coal plants with support from carbon credit finance, leading to gigatons of avoided emissions and, as a result, offsets.

“Phasing out coal plants is absolutely essential, but whether or not this should be eligible for carbon crediting is another question entirely,” Jonathan Crook from Carbon Market Watch told Climate Home. “If the credits were to be generated with an unrealistic baseline or aren’t additional in nature, then they actually would undermine ambition”.

Jetp ambitions
Last year a consortium of rich countries – made up of G7 nations plus the EU, Norway and Denmark – development banks and private financiers signed Jetp deals with Indonesia, Vietnam and South Africa.

The multi-billion dollar agreements are supposed to help recipient countries move away from coal which generates most of their electricity while supporting workers in the transition.

The programmes, which are at various stages of implementation, have attracted some criticism over the type of financing.

Recipient countries have been calling for grants and cheap loans because they don’t want to be burdened with more debt. But G7 countries with tight purse strings have been pushing back on those terms.

“Let’s be honest, there is very little new truly concessional capital on the table and a lot of disappointment in Jetp countries,” says Curtin, who believes new solutions need to be developed to keep the green deals on course.

Carbon credit solution
The idea of using carbon credits to fund energy transition projects in coal-reliant countries was floated at the end of last year by John Kerry, the US special envoy on climate. Kerry said the private sector could be “enticed to the table because you then have a way of them getting something they need and want, which may be a credit towards their goal”.

Some of the Jetp partners, however, have been sceptical about this solution. The German minister Jochen Flasbarth told reporters at Cop27 they had “some concerns that the commitments we gave as governments should not be replaced by private offsetting”.

About 60% of Indonesia’s electricity is produced from coal. Photo: Ezagren

For months, a group of philanthropies involved in Jetp and carbon market specialists have been busy trying to turn this into reality. They have secured a partnership with the Indonesian government, begun talks with South Africa and Vietnam, and sounded out interest from investors.

Crucially, they have also been working on the thorny matter of setting the rules for this new type of offset. The methodology will determine which projects qualify, and how the emission reductions are calculated and translated into carbon credits. Climate Home News has not been able to see the terms which are still under discussion.

Number of concerns
Carbon Market Watch’s Crook says it’s difficult to comment on specifics without consulting the methodology but he underlines how delicate the task is.

“There a number of factors that would have a large impact on the volume of credits generated and the overall credibility of such an approach,” he said. “The stringency of additionality tests, the assumptions on the future viability of coal plants and the capacity at which they would run.”

Additionality is one of the key tests of any offsetting project: in simple terms, this concept boils down to whether the project would have been possible without carbon credit financing.

Proving this could be tricky in a scenario where multiple funding streams – including public finance – are being directed at the same set of activities. In Indonesia, for example, five separate energy transition schemes are moving ahead at the same time.

Renewable energy link
Curtin says the initiative is targeting “relatively new coal plants” with power purchasing agreements of 20-30 years. He added the methodology includes a series of tests assessing regulatory, economic and financial conditions to prove additionality.

The rules will also determine how to establish a direct link between the closure of a coal plant and the rollout of renewable sources to make up for the electricity shortfall. The simplest solution under consideration involves the installation of renewables on the same site as the coal plant. But the programme developers say there will be a number of options available.

Curtin says the role of gas in this scheme “has not been quite bottomed out yet”. “We don’t want new gas plants to be built to replace coal ones, but some gas may be needed to bring in the renewables,” he added. The prospect of expanding gas consumption, even just temporarily while renewables ramp up, would likely anger campaigners keeping an eye on the Jetps implementation.

Flooding the carbon market
Curtin acknowledges that devising the methodology has been “extremely difficult and technically challenging”. He says the initiative is striving for the “Goldilocks zone between extremely strong environmental integrity and yet having to be realistic to work on the ground”.

The initiative is eager to unveil the rules at Cop28 in November and clinch a first project agreement next year. South Pole, one of the world’s biggest project developers, will be in charge of the implementation on the ground.

If the scheme reaches their stated ambition, it could have far-reaching consequences not only for the Jetp, but for carbon markets more widely.

Buyers appeal
At scale, coal-to-clean offsets could in fact rise to dominate the carbon market. Each coal plant closure is expected to generate tens of millions of credits. Fewer than twenty of the world’s biggest forest protection offsets produce a similar volume of offsets.

The future buyers of the credits will also be closely watched. Curtin says the initiative has so far attracted the most interest from countries keen to purchase credits under article 6.2 of the Paris Agreement.

This is a mechanism allowing countries to exchange offsets through bilateral agreements and count them towards their climate goals, or nationally determined contributions (NDCs).

Governments like Switzerland, Singapore, Japan and South Korea have shown the most interest in using article 6.2.

Given the high stakes, Carbon Market Watch’s Crook said it is paramount to get the scheme right. “One mustn’t forget the broader context: these credits — which could be issued at a huge scale — will be used to offset real ongoing emissions,” he said. “If the finer details end up being wrong, then you have a serious problem”.

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