Transition credits can help southeast Asia accelerate its coal transition while maintaining energy security and grid reliability despite the ongoing energy crisis arising out of the US-Iran war, according to a report released today by the International Energy Agency (IEA).
The US-Iran war has heightened volatility in energy markets, making existing coal assets more economically viable for much of Asia in the short-term. Coal remains critical to meet growing energy demand and fulfil power system needs, and governments in southeast Asia have raised coal-fired power generation to ensure electricity supply and address fuel supply risks, the IEA said in its Financing the Modernisation of Power Systems Beyond Coal report.
Countries in developing Asia accounted for almost 75pc of global coal-fired power capacity in 2024, with around 80pc of these plants younger than 20 years. These coal plants would emit over 280 gigatonnes of CO2 to 2100, or more than 85pc of projected global coal-related emissions, if current utilisation rates and standard lifetimes are maintained.
Southeast Asia's coal transitions require scaling up replacements. Substituting 1GW of coal would require 1.5-2GW of onshore wind or 3-4GW of solar power, unless complemented by storage or other firm resources, the report said.
The region needs around $20bn/yr in investments to 2050 to reduce coal-fired power emissions. Out of this amount, 70pc should go towards replacing coal power with solar and wind. Mobilising this amount requires supportive regulatory frameworks, as well as international public finance to help unlock private investment.
Transition credits
Transition credits are a type of high-integrity carbon credits issued from verified power sector emission reductions. These credits can improve the economic viability of the coal transition by offering a market-based revenue stream linked to emissions outcomes.
There are already project-based transition credits that are publicly available or under development, such as the South Luzon thermal energy plant in the Philippines.
Transition credit demand is currently limited, but compliance markets could be a source of demand in the future, the report said. But demand also depends on price. Carbon credit prices are dependent on factors such as the type of market the credits are eligible for and their perceived integrity. Transition credits could sell at $14-45/t of CO2 equivalent (CO2e), the IEA said, which is higher than other types of carbon credits such as clean cooking carbon credits which cost around $6.25/t CO2, but lower than direct air capture carbon credits, which are priced at $500/t CO2e.
To realise the full value of transition credits, governments should entrench coal transition pathways in credible national policy frameworks to improve policy predictability and provide market participants with more confidence to plan viable emissions reduction strategies, the report said.
This also means integrating coal transition pathways and transition credits into power system planning because reducing emissions while ensuring reliable electricity supply requires co-ordination between transition initiatives and plans for replacement capacity, grid infrastructure, flexibility and energy efficiency.
Transition credit methodologies should also be developed further as they are currently largely designed for pilot projects and mainly focus on early coal plant retirement. They could evolve alongside power system planning to make sure that transition credit projects are in line with the relevant country's energy security targets.
