Rockefeller Foundation makes a push for transition credits
Sellers of transition credits, a new market-driven financing approach which seeks to monetise the reduction or avoidance of future emissions from a facility or project, could gain traction if long-term buyers for future credits could be secured, a senior executive at the Rockefeller Foundation told AsianInvestor.
“By 2030, we need to achieve a 50-fold increase in demand for carbon credits,” said New York-based Joseph Curtin, managing director for power and climate at the Rockefeller Foundation.
Several questions need to be answered, as the foundation directs 50% of its efforts to the scaling strategy of transition credits, a type of high-integrity carbon credit, and 50% to build the methodology.
"How will the carbon market ecosystem approach this emerging instrument? Can we present a cohesive strategy for transition products to scale in the market? Can we ensure sufficient engagement from buyers and off-takers to build demand in both compliance and voluntary markets? And can we find 50 projects or asset owners willing to take this risk? These are some critical questions,” said Curtin.
Under the transition credit framework, ACEN Corporation, an energy firm under the Ayala Group in the Philippines, and The Rockefeller Foundation announced in mid-April the first Coal to Clean Credit Initiative (CCCI) pilot project, which could avoid up to 19 million tonnes of carbon dioxide emissions.
Taking into consideration the three main elements for achieving climate impact – accelerated coal retirement, building clean power replacement, and achieving a just transition for affected workers and communities – sustainability standard setter Verra has been developing a comprehensive methodology for assessing a project’s eligibility for carbon financing.
“We are anticipating that the methodology will be approved by the end of the year and then the biggest barrier is ensuring sufficient offtake in both the voluntary carbon markets and the compliance markets, as the project involves 19 million tonnes of carbon emissions,” noted Curtin, referring to the CCCI project.
Curtin hopes to finalise buyer discussions by 2025 and reach a financial close for the world’s first coal-to-clean transition credit transaction.
ROLE OF ASSET OWNERS
There are multiple ways asset owners could get involved in transition credits depending on the assets they have.
Those who own carbon-intensive assets and wish to participate in a transition credit transaction can raise their hands, according to Curtin.
The Singaporean monetary authority, for example, has introduced an Asia-focused ecosystem for such transactions, with no geographical constraints.
Another option is for asset owners to acquire brown assets directly, or via a special purpose vehicle, for the purpose of facilitating transition.
Lastly, asset owners who have renewable energy plants can bundle up brown assets and replace them with renewable energy to achieve a “scaling up” of renewable solutions.
As one of the pioneers in the field, the Rockefeller Foundation is investing a significant amount of capital to develop the relevant market architecture.
The foundation has also invested in recruiting global experts to collaborate on the endeavour.
“We believe we can be more catalytic by developing an asset class and a new market, rather than directly investing in full asset retirements,” said Curtin.
“The amount of capital required for a single transaction is substantial, and while we can complete it once or twice, it is not a replicable model.”
BLENDED FINANCE LIMITS
Even as he acknowledged that 2030 is an impossible deadline, Curtin said that achieving net zero depends on the context: “Our approach prioritises addressing the most pressing issue first, which is coal. Decarbonising power is crucial for decarbonising the rest of the economy.”
The use of blended finance in recent years has played a key role in channeling capital to important efforts such as the retirement of coal plants, and yet its efficacy may be constrained.
Blended finance improves the risk-return profile of projects to attract private investment, whereas transition credits provide businesses with a direct financial reward for reducing emissions, such as shifting from coal to renewable energy.
“We’ve found that there are limitations to what can be achieved with blended finance for asset retirement,” Curtin shared.
The high interest rate environment globally also undermines the use of blended finance by increasing the cost of capital, reducing private sector participation, creating funding gaps, which can then cause project delays or cancellations, and amplify risks in emerging markets.
“Given the current market economics, we believe that transition credits will be an incredibly important piece of the puzzle, providing financial incentives to make the switch more feasible and addressing potential socioeconomic impacts on local communities,” said Curtin.