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Collaboration in Asia needed to transition to low-carbon financial system

Yixiang Zeng  Southeast Asia correspondent / Thomson Reuters Regulatory Intelligence

· 5 minute read

Yixiang Zeng  Southeast Asia correspondent / Thomson Reuters Regulatory Intelligence

· 5 minute read

As countries in the Asia-Pacific region begin to retire or retrofit their coal-burning power plants, collaboration will be needed to make this process happen successfully

Asian countries have been urged to accelerate the retirement of their coal-fired power plants as part of their efforts to go further into sectoral decarbonization, which will have implications for the investment sector, according to Singaporean authorities. Jurisdictions across Asia are being urged to review their investment in high-carbon projects, such as cement and steel projects that rely primarily on coal for energy.

The accelerated retirement of coal-fired power plants is the single most important step to help reach net-zero by 2050, according to Ravi Menon, managing director at the Monetary Authority of Singapore (MAS). The central banker was speaking in his capacity as chair of the Glasgow Financial Alliance for Net Zero’s (GFANZ’s) Asia-Pacific (APAC) network advisory board.

Asian countries need a coherent strategy for the managed phaseout of coal that achieves environmental sustainability, energy security, and a socially acceptable transition for communities whose livelihoods depend on coal. A combination of public and private collaboration on decarbonization and financing is required.

Singapore has been a leader in the region in terms of pushing the sustainable finance agenda. The government launched its Singapore Green Plan 2030 in February 2021, which aims to help boost Singapore’s commitment under the U.N. 2030 Sustainable Development Agenda and the Paris Agreement. It aims to cut carbon emissions in half from 2010 levels by 2030 and reach net-zero around 2050.

Coal’s phaseout consultation

A public consultation report, launched by the GFANZ APAC network, provides detailed guidance on financing the managed phaseout of coal-fired power plants in the region. Ensuring there are credible plans for coal phaseout at the government, company, and project level is the first step, Menon says, adding that this is critical to address two major risks in managed phaseout projects. The first risk refers to emissions leakage, in which the closure of a coal-fired power plant is offset by increased operation of other coal plants or new coal plants being built, and the second risk refers to moral hazard, in which a phaseout transaction perversely encourages more coal power generation to later benefit from a potential coal phaseout plan.

Once this first step is done, the second step involves optimizing meaningful outcomes across climate impact, financial viability, and socio-economic considerations. There are several measures that financial institutions can take to achieve this. “One, prioritize projects that align with a science-based pathway that is consistent with timelines set by internationally recognized bodies,” Menon says. “Two, ensure measures are in place to support access to secure, reliable, and affordable clean energy.”

Assessing the programs that are in place to mitigate adverse socio-economic impacts — such as social cost assessments, stakeholder engagement, land-repurposing plans, and worker and community transition plans — is the third pillar. The last measure is to conduct a holistic financial viability assessment of the project that includes the cost of socio-economic support measures.

Then, the final step in the GFANZ framework will provide transparency and accountability for coal phaseout plans in line with the GFANZ Net Zero Transition Plan framework, explains Menon.

Amber activities and green taxonomies

Amber activity is part of the traffic light classification system defined by the proposed Singaporean green taxonomy. A taxonomy is a classification tool which divides economic activities into distinct groups, such as green activities and activities that are in transition towards being green.

Under the traffic light classification system, an amber classification represents transition activities, including those that are either transitioning towards green within a certain time frame or enabling significant emission reductions in the short term.

The Green Finance Industry Taskforce (GFIT) under the MAS has proposed a measures-based approach to define amber activities, especially in the industrial sector. Production of cement is a sub-sector under the industrial category, according to the third public consultation of the Singaporean green taxonomy, which was released by the GFIT under the MAS. The final consultation by GFIT occurred in June/July 2023.

The industrial sector, including cement sub-sector, is separately recommended to follow a measures-based approach. This is due to a lack of certainty around the technological solutions to achieve net-zero in the industrial sector. The consultation requires the production process for industrial raw materials to adopt a range of emissions-reduction measures.

Other sectors are covered by both the second and third public consultations, including energy, transport, real estate, agriculture and forestry, waste and water, information and communications technology, carbon capture, and sequestration. These sectors mainly adopt a technical screening of criteria-based — or so-called science-based — metrics and thresholds-focused green taxonomy.

A major representative of this category is the European Union’s green taxonomy, with both Singapore and Hong Kong being influenced by the EU taxonomy.

In the manufacturing of cement, which is one of the most carbon-intensive products to make, the amber category in the third proposed taxonomy provides a list of decarbonization measures or retrofitting plans, which should be put in place to support better energy efficiency outcomes, MAS said.

Most of the output of industrial sectors will be required in a low-carbon future, according to the third consultation. Most of the industrial sector activities will not be phased out, like coal, but will need to be decarbonized, such as green cement or green steel.