Allowing coal-fired power plants to generate carbon credits as a way of financing their early retirement sounds better in theory than it would work in practice if the proposed methodology from Verra were to be implemented. Verra must go back to the drawing board and policymakers must seek out better solutions for moving beyond coal.

Two-fifths of global fuel emissions come from coal power, a problem that is particularly acute in Southeast Asia. Take the Philippines, for example, where almost two thirds of power generation is from the burning of coal.

Carbon credits have been put forward as a way to wean coal-dependent regions off fossil fuels, by creating a financial incentive to send these high-emitting power plants into early retirement. 

However, our latest briefing, drawing on research by Oeko-Institut, shows that Verra’s proposed methodology on ‘Accelerated retirement of coal-fired power plants using a just transition’ (VM0052) will not help clean up the power system but may simply displace polluting activities elsewhere or sweep the soot under the carpet. And, if used for offsetting purposes, the resulting carbon credits could actually increase rather than reduce emissions.

“Verra’s efforts to make a business case to reduce coal-fired power is a creditable endeavour. But the carbon credits themselves are not credible,” said Inigo Wyburd who authored the CMW briefing titled ‘Walking on hot coal’.

Coal burns on despite credits

Verra’s proposal notably lacks a requirement for cancelled coal power generation to be fully replaced by renewable sources. The methodology asks for 10% of lost energy capacity to be directly replaced with new renewables at the start of the project, rising to only 40% by the end of the first crediting period. This means that a significant share of replacement energy capacity may not actually be renewable, representing a high risk of displacing emissions.

Another loophole in the methodology is like Christmas for big polluters. While it requires private owners of coal plants selling carbon credits to not expand their coal power operations, other coal plant operators may just fill the gap. For example, a plant which will use Verra’s methodology initiated plans to close down earlier, only for a competitor to announce its intention to construct a new and larger coal plant in the same city. Instead of getting a lump of coal for their ‘naughty’ behaviour, other coal plant operators may thus reap financial benefits while cancelling out the potential mitigation of their competitors that are closing shop.

Rules for developing the counterfactual scenario against which presumed emissions reductions will be calculated also suffer from shortcomings. Assumptions about when the coal plant would normally have closed are key in determining the quantity of carbon credits that can be generated. The methodology relies on static measurements for power generation and electricity prices, yet these are expected to significantly change over the years. Problematically, these factors don’t need to be comprehensively reassessed when the project applies for a new crediting period, which risks misrepresenting the evolving conditions under which a plant might have closed earlier even without the sale of carbon credits.

Not fair enough

The methodology also aims to deliver coal retirement credits that support positive future prospects for coal plant workers and local communities dependent on plants for their livelihoods. Provisions are included for worker retraining, community support, and alternative economic opportunities to mitigate the impact of early plant retirement. These are important measures for ensuring the necessary energy transition happens in a just manner. 

However, these provisions are not strong enough and too much influence on actions is guaranteed to the people profiting from these industries. For example, a 2% benefit sharing rule, which already appears too low, is further weakened by its calculation based on net rather than gross revenue, leaving too much space for creative accounting (for example, if the plant owner artificially claims higher costs in order to report lower net revenue). 

In matters of mediation, project developers have oversight of the process and can appoint their preferred mediator should disagreements emerge between them and other stakeholders. A project developer may introduce a mediator in tune with their own interests without a veto right from local stakeholders.

Back to the drawing board

Global carbon markets policy expert Inigo Wyburd is clear on what should happen next. 

“Like the smoke generated from a coal-fired power plant, this methodology does little to clear the air on whether carbon credits are an effective approach to closing coal plants early,” he concludes. “This methodology lacks caution, clarity and the safeguards necessary for guaranteeing real emission reductions and should be put on hold.” 

Verra must go back to the drawing board and significantly revise this porous and problematic methodology. However, even an improved methodology is likely to be at most a stop gap. What we truly need are robust policies to accelerate the phasing out of coal-fired power plants and to speed up the transition to renewables. And this requires government action, not carbon credits.