Southeast Asian countries are exploring transition credits, a special type of carbon credit, to reduce emissions and accelerate their shift toward clean energy, but the viability hinges on whether stakeholders can develop the trust and scale needed to make these credits credible, analysts said.

They said the use of innovative climate financing tools, such as carbon credits, can attract private financing to accelerate the region's energy transition.

For Rajiv Behari Lall, professorial research fellow at the Singapore Green Finance Center of the Singapore Management University, carbon credits play an important role in unlocking finance for "sustainable decarbonization, which lies at the heart of transition strategies".

Lall said members of the Association of Southeast Asian Nations can be global leaders for nature-based credits as the region has abundant forestry resources.

Mutya Yustika, research and engagement lead for Indonesian energy transition at the Institute for Energy Economics and Financial Analysis, said the early retirement of ASEAN's coal fleet often leaves utilities and investors with stranded costs, which discourages early retirement of coal plants. This is why transition credit can help cover the financing gap created by retiring the coal assets before the end of their planned life.

She added that transition credits create another revenue stream by monetizing the emissions that are avoided when coal facilities are shut down ahead of schedule.

But Yustika said transition credits also have limitations, including complications that may arise when transactions are replicated based on them. The valuation of transition credits could also vary across countries and depend on the characteristics of each power plant.

Coal is widely used as a source of energy across ASEAN, with regional coal consumption seen to increase by 5 percent in 2026, according to the International Energy Agency.

Transition credits are an innovative tool designed to help countries move away from coal power faster. These credits put a price on the emissions that are avoided when coal plants shut down earlier than planned.

By turning those avoided emissions into something tradable, transition credits create a new source of funding. This money can help cover the financial losses faced by plant owners, banks, and governments — and redirect investment toward clean energy projects such as solar, wind, and battery storage facilities.

Singapore and the Philippines have publicly backed the use of transition credits to accelerate the early retirement of coal-fired power plants, at the UN climate conference held from Nov 10 to 22 in Brazil.

Singapore is spearheading Asia's clean energy financing drive with the rollout of transition credits. The Monetary Authority of Singapore set up the Transition Credits Coalition, or TRACTION, in 2023, which brings together several stakeholders, including the governments of Singapore and the Philippines, private banks and Temasek Holdings, Singapore's state-owned investment firm.

Temasek-backed GenZero, Keppel and ACEN, the energy unit of Manila-based conglomerate Ayala Corp, signed an agreement in August to explore the Philippines' first transition credit project.

The plan would shutter a coal plant in the northern Philippine province of Batangas in 2030 — a decade ahead of schedule — and replace it with solar power and battery storage facilities.

TRACTION released its final report in November, which shows that more than 30 percent of coal plants across 15 Asian markets could qualify to generate transition credits, representing about 1 gigaton of carbon dioxide equivalent in annual emissions reductions.

Predictable revenues

The report said scaling such projects will require predictable carbon revenues and strong risk-mitigation tools, while proceeds can help deliver appropriate transition outcomes such as worker reskilling and community support.

For Dinita Setyawati, senior energy analyst at energy policy think tank Ember, putting "a significant price" on carbon can unlock the full potential of carbon credits for energy transition.

She said carbon pricing is more important than technological breakthroughs or emission-reduction targets to avoid the catastrophic impact of climate change.

Setyawati said carbon pricing increases the total cost of running coal plants and will likely dampen future investment in the sector. While transition credits are being promoted to support the early retirement of coal plants, this initiative can only move forward if there are willing buyers.

"However, beyond the economic arguments, I believe ASEAN governments need to recognize where the region's future is heading," Setyawati said.

She cited Indonesia's declining coal exports on the back of weaker demand. "This trend underscores the urgency for governments to reassess long-term energy and industrial strategies," Setyawati said.

prime@chinadailyapac.com