Using carbon credits to close coal plants will not deliver climate benefits

“Promotion of carbon credits for financing coal phaseouts is misguided and unfortunate.”

PHOTO Credit: Suralaya coal plant, Indonesia - South China Morning Post.

The Coal Transition Commission was launched in 2023 by France’s President Emmanuel Macron at COP28 in Dubai. It is supposed to develop recommendations for financing the early closure of coal plants. The Commission published its first report during COP29 in Baku.

The report states that there is “clear potential” for private finance to take a more active role in closing down coal-fired power plants.

One of the sources of “innovative finance” proposed by the Coal Transition Commission is “high integrity coal-to-clean carbon credits”. The report states that, “work is in train to develop and validate a frameworks that will need to provide a high degree of confidence that they will deliver reliable emissions reductions”.

Reclaim Finance counters this obviously delusional argument:

The CTC’s support for proposals to raise funds for coal closures by selling carbon offsets is deeply misguided. Offsets are unlikely to generate funds at the scale needed, and any offset transactions would negate the climate benefits from shutting down coal plants.

The Commission’s report is critical of technologies like carbon capture and co-firing coal with biomass or other fuels. “But the report fails to convincingly make the case against investments in such technologies, including that they would likely increase emissions, and diverting finance from real climate solutions like renewables and storage,” Reclaim Finance states.

The report stresses the need for more public financing for coal phaseouts and the removal of subsidies for coal.

But given the disastrous record of carbon offsets, the chances of carbon finance actually succeeding in closing down coal plants is vanishingly small.

In a statement, Paddy McCully, Senior Analyst at Reclaim Finance, said,

The CTC’s promotion of carbon credits for financing coal phaseouts is misguided and unfortunate, not least because its recommendations on offsets are the ones that are most likely to be taken up by governments and financial institutions because they serve their interests. They must both resist the trap of this dead-end approach and step up their financing for phaseouts while ramping up investment in sustainable energy.

McCully told Bloomberg that, the commission’s support for offsetting “portrays a lack of critical thinking.” The report has “ignored the basic conceptual flaws of carbon markets and the last quarter century of failed efforts to make them work,” McCully said.

Bloomberg Philanthropies is one of the supporters of the Coal Transition Commission. Michael Bloomberg, founder of Bloomberg L.P. and Bloomberg Philanthropies is UN Special Envoy on Climate Ambition and Solutions.

Canadian economist and banker Mark Carney contributed to the report. In 2020, Carney launched the Taskforce on Scaling Voluntary Carbon Markets. He is also chair of Bloomberg Inc.

No surprises, then, that Carney is in favour of carbon trading. “There is no time to waste,” he told Bloomberg. The commission’s recommendations “should be implemented as quickly as possible”.

Monetary Authority of Singapore is promoting carbon offsets to retire coal plants

The Monetary Authority of Singapore (MAS) is pushing a scheme to raise finance to close coal plants in Asia by selling carbon offsets. MAS hired the Big Polluters’ favourite consulting firm, McKinsey to back up its proposals with a working paper, which was published in September 2023.

The report’s title doesn’t mince its words: “Accelerating the early retirement of coal-fired power plants through carbon credits”.

Not long after the report was published MAS launched a “Transition Credits Coalition”.

The Transition Credits Coalition is a round-up of the usual carbon trading suspects, including: private banks (BlackRock, Citi, HSBC, Morgan Stanley, Standard Chartered, Swiss Re); multilateral banks (the Asian Development Bank, the World Bank’s investment guarantee arm, MIGA); carbon trading companies (BeZero Carbon, Gold Standard, Global Carbon Market Utility, International Emissions Trading Association, Sylvera, Vitol Asia); and pro-carbon trading BINGOs and philanthropies (Environmental Defense Fund and the Rockefeller Foundation).

McKinsey puts forward a hypothetical coal plant in Indonesia with 15 years to run on its Power Purchase Agreement. Investors would buy the plant and run it for 10 years. They would then close the plant and cash in on five year’s worth of “transition credits”.

McKinsey, obviously, skips over the fact that the buyers of these transition credits would use them to continue polluting, thus cancelling out any climate benefit of shuttering the coal plant.

As Reclaim Finance points out, this is 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.

As a result hundreds of million of junk offsets have been generated, Reclaim Finance notes. The problem is that carbon offsetting is at best a zero sum game. It just shuffles emissions from one place to another.

Reclaim Finance writes that,

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.