Efforts to accelerate the early retirement of Asian coal plants have stalled due to the difficulty of attracting sufficient volumes of concessional finance. This has led the Singaporean central bank to propose bringing extra funding into phaseout transactions through the sale of carbon offsets. This effort is likely to replicate the failure of past attempts to use tradeable offsets to cut emissions and generate finance for the energy transition in developing countries. If governments and financial actors are serious about pushing a just transition out of coal they need to provide adequate concessional finance to make it happen, with a focus on supporting the sustainable power sources and policy changes that are needed to allow coal plants to be retired and grids decarbonized.
The Monetary Authority of Singapore (MAS) is promoting a scheme to raise finance for retiring coal plants in Asia through the sale of carbon offsets. (1) MAS hired consultants McKinsey to produce a working paper on the idea which was published in September 2023. (2) Shortly after, MAS announced the launch of a Transition Credits Coalition (TRACTION) to implement the scheme. TRACTION includes major global private banks and investors; (3) multilateral development banks (4); offset industry players; (5) and pro-offsetting NGOs and philanthropies. (6)
MAS and McKinsey explain that efforts to shut down coal plants in Asia have stalled because of a lack of the concessional finance that is needed to make buy-out deals pencil out. They argue that by selling as offsets the estimated emission reductions resulting from coal closures, sufficient funding could be generated to make plant retirement deals work.
MAS and McKinsey posit a hypothetical coal plant in Indonesia with 15 years remaining on its Power Purchase Agreement (PPA), the contract that governs the plant’s power sales. Investors would form a company to buy the plant, run it for ten years, and then close it five years early. The investors would make up for the lost income from five years of foregone power by creating “transition credits”. Each credit would represent a ton of carbon not emitted by the shuttered coal plant, and would be sold to corporations and governments as a cheap method of meeting their climate commitments.
Carbon offsetting schemes have long faced criticism for failing to deliver real climate benefits, and the TRACTION scheme appears no different. While TRACTION claims to promote “high-quality” credits, the MAS and McKinsey paper offers no solutions to the core issues plaguing both voluntary and regulated offset markets. Since the mid-2000s, (7) the offsets industry has claimed that it has resolved its offset quality issues, yet scandals continue to rock the industry. (8)
A structure made for cheating
The basic assumption behind carbon offsets is that the projects generating them lead to emission reductions that are “additional” to what would have happened if the projects had not been able to benefit from offset income. This means additionality is based on a future counterfactual, and is impossible to definitively prove or disprove. One can only estimate its probability— which is obviously highly subjective. And because all the actors involved in deciding project additionality — mostly project developers, consultants, and offset certifiers — have an interest in projects being classified as additional and thus eligible to generate offsets, these actors are incentivized to make and believe highly optimistic claims of additionality. (9)
The result of this dynamic is that many hundreds of millions of offsets have been generated that likely represent emission reductions only on paper. (10) The same dynamic will be at play in TRACTION deals. In the case of the hypothetical Indonesian coal plant, it is impossible to know the exact financial, policy, and political landscape impacting coal plants a decade in advance. But it is likely that everyone involved in a TRACTION deal will have a strong interest in that deal moving ahead, and so likely that they will promote a story about the Indonesian power sector a decade hence in which coal plants are ONLY shut down because they can sell offsets. (11)
The incentives to believe a self-serving version of the future that influence decisions on whether projects should be eligible for generating offsets, also drive decisions on how many offsets should be generated from individual projects. The result of this is hugely inflated estimates of offset generation volumes (12). In the case of the illustrative Indonesian power plant, the number of transition credits is based on the gap between a baseline of the emissions if the coal plant were to continue operating, and what they would be the plant were switched off. The baseline assumes that the plant would continue to generate power at its historical rate, but this is by no means certain for the period between 10 and 15 years from now. (13) Furthermore, estimating emissions reduced by the coal plant will also depend on the quantity of emissions from whatever generation sources might replace its lost power, something else which can only be guessed ten to 15 years out. (14)
Perverse incentives to not act on climate
Offsetting also creates perverse incentives that deter governments from enacting emission reduction policies and encourage offset market beneficiaries to lobby against climate regulations. Closing a coal plant cannot be considered additional if it would likely have been legally forced to shut down anyway. MAS and McKinsey note that if a government enacts a national coal phaseout commitment it would invalidate the additionality claim of a TRACTION deal. They also note that carbon pricing or other policies that might push coal plant operators to reduce generation levels or shut plants, would impact the feasibility of TRACTION deals. An offsets-based coal phaseout scheme may also deter governments from providing concessional finance for closing coal, as this could render closures viable without offset revenue, and therefore non-additional.
A zero-sum game
Carbon offsetting is, at best, a zero-sum game. It is not intended to cut emissions at the global level, but to move emission reductions around. Corporations and governments buy offsets as a cheaper alternative to cutting their own emissions. But emissions need to be cut to near zero, and so ALL emission reduction opportunities need to be exploited — and quickly — and not traded off against one another. In practice offsets are worse than this idealized zero-sum model, as so many do not represent real emission reductions, so the net impact is to increase emissions, not just balance emissions in one place with reductions elsewhere.
Taking the offsets road in coal phaseouts is likely to further delay a successful just transition away from coal, including because of the complexity of implementing the concept, and because of the scandals that are likely to occur and delegitimize the process. Instead, public concessional funds must be increased to shut down coal plants, while the growth of public and private financing for sustainable alternatives to coal must be accelerated. Coal plants will not be shuttered unless replacement power sources are available, meaning that policies and finance to accelerate the deployment of sustainable power are at least as much a priority as coal phaseout mechanisms.
