The Philippines tests 'transition credits' to cut coal use in novel experiment

CALACA, Philippines — The Philippines is testing a new type of carbon credit aimed at encouraging companies to cut their climate warming emissions by creating funds that can be used to turn coal-fired power plants into renewable energy facilities.

Called transition credits, they are meant to help pay for phasing out coal use by creating value out of the emissions that would prevent. The funds would then pay to replace fossil fuel equipment with clean energy gear.

Proponents say transition credits could unlock a windfall of investment for the power hungry Asia-Pacific region and speed up Southeast Asia’s transition to renewable energy. But some experts wary of longstanding problems in the carbon market view them as a dead end.

Transition credits offer fresh take

A carbon credit represents one metric ton of carbon dioxide removed or not sent into the atmosphere. Credits are bought and sold on carbon markets by countries and companies trying to comply with emission regulations, meet pollution reduction targets or offset environmental impacts.

Transition credits differ because they put a value on prevented future emissions caused by burning fossil fuels, which contributes to climate change.

But integrity concerns plague carbon credit projects around the world.

Projects meant to save carbon-absorbing forests have been accused of greenwashing, miscalculations and causing carbon leakage, a term for when companies move to countries with looser emission rules. They've been found failing to deliver on promised benefits to local communities and linked to allegations of human rights violations in Cambodia and an uptick in deforestation in Peru, among other problems.

The credits have pros and cons, like any untested new idea, said Ramnath Iyer, of the United States-based Institute for Energy Economics and Financial Analysis. He calculates that a transition credit could be worth $11 to $52.

“There will be challenges and flaws, like in every deal,” Iyer said. “But it’s not like we have a smorgasbord or buffet of climate change solutions to choose from.”

Southeast Asia counts on coal

The world will likely overshoot the global goal of keeping Earth's temperatures from warming above 1.5 degrees Celsius.

In November, the United Nations failed to negotiate an international road map to phase out fossil fuels at annual climate talks, known as COP30.

Emissions are rising as coal is used to meet growing energy demand in the Asia-Pacific region's emerging economies, worsening air pollution.

Southeast Asia is the world's third largest coal-consuming region after India and China, according to the International Energy Agency, which forecasts regional electricity demand will double by 2050.

“There’s no question that efforts to support phasing out coal-fired power plants are worthy, important and of critical need,” said Danny Cullenward, of the University of Pennsylvania’s Kleinman Center for Energy Policy. “But it is a really thorny issue to try to accurately quantify the benefits of an intervention, like transition credits.”

Philippine pilot project splits opinions

The transition credit experiment is playing out at the 270-megawatt South Luzon Thermal Energy Corp. power plant in Calaca City, south of Manila.

The site was built a decade ago by ACEN Corp., the energy arm of the massive Philippine conglomerate Ayala Corp.

Coal plants typically can run for 50 years. Southeast Asia's coal sites are on average under 15 years old, like the one in Calaca. However, ACEN has committed to retiring the South Luzon facility by 2040.

Transition credits may speed this up.

“If it works, there will be a playbook for coal asset owners and their energy transitions,” said Irene Maranan with ACEN. “There will be more believers than non-believers in this initiative."

The Rockefeller Foundation designed the transition credits concept to help finance early retirement of coal plants by paying for replacing fossil fuel gear with renewable energy equipment used to keep generating power at the same sites.

“It would be irresponsible to just turn off a coal plant without a replacement,” Maranan said. “The country still needs its energy supply. There is a growing demand that isn’t stopping.”

Joseph Curtin, vice president of energy transitions at The Rockefeller Foundation, said an independent non-profit carbon market governance body is reviewing the transition credit method, which already has been backed by business giants like Japan’s Mitsubishi Corp.

There are about 60 coal plants in the Asia-Pacific region with transition credit potential that together could attract $110 billion in public and private capital by 2030, and the Calaca project is needed to show the idea works, Curtin said.

“We want to do dozens of projects to drive real impact,” he said. “But to have any credibility, we need to do one project and we need to use that to learn and evolve.”

The problems with carbon credits

Skepticism over transition credits stems from the carbon market's somewhat tarnished reputation.

Elle Bartolome, with the Philippine Movement for Climate Justice, was among dozens of activists who protested what she called the “carbon casino” in demonstrations during the COP30 in Brazil.

Given integrity issues in past projects, Bartolome said transition credits will likely fall into the same trap of not benefitting local communities, especially if reparations aren't provided for those negatively impacted by the Calaca coal plant.

Patrick McCully, an energy transition analyst for Reclaim Finance, wrote in a recent report that transition credits would likely repeat failures of the carbon market," asserting the credits are a “dead end” because the industry hasn't addressed false promises, inaccurate carbon calculations and other issues.

Southeast Asia's focus and funding should prioritize “an all-hands-on-deck, full court press” on building out renewable energy, McCully said.

“This is old wine, in a new bottle,” McCully said. “It's going to waste a lot of time, energy and money.”