This report assesses the potential applications, limitations and relevance of transition credits in Southeast Asia. Coal is the largest source of power generation worldwide and the largest source of energy-related carbon dioxide emissions. All Southeast Asian countries with coal in their power generation mix have adopted commitments to reduce coal-fired generation or emissions targets that imply a significant decline in coal consumption in the coming decades. To meet these targets, the International Energy Agency (IEA) has long emphasised that a range of strategies can be deployed to reduce coal emissions. The global energy crisis of the first half of 2026 has added a layer of complexity to coal transition and energy security strategies: heightened volatility in gas markets, driven in large part by conflict in the Middle East, has increased the short-term economic value of existing coal assets. At the same time, interest has grown in new financing mechanisms that could help accelerate coal transitions. Transition credits are one such option that have received increasing attention in the energy and carbon markets community in Southeast Asia. This report examines how transition credits could be designed to accelerate a coal transition for those countries seeking to do so, while maintaining energy security and grid reliability. This report focuses primarily on Southeast Asia, where coal remains an integral part of the electricity mix and where many of the current discussions and pilot initiatives for transition credits are concentrated.

Despite rapid growth in renewables, coal remains critical to meet growing electricity demand and fulfil key power system needs. Coal use is in structural decline in advanced economies, but it continues to play a central role in some emerging market and developing economies. Southeast Asia illustrates this dynamic, as one of the world’s fastest‑growing regions for electricity demand, driven by population growth, urbanisation, industrialisation and electrification. Although the share of coal in electricity generation in the region is expected to decline over the coming decade as renewables expand rapidly, coal-fired power generation is anticipated to remain important for system adequacy, reliability and energy security. Recent disruptions in gas markets have reinforced this role, with governments in Southeast Asia increasing coal-fired power generation to maintain electricity supply and manage fuel supply risks.

If operated for typical lifetimes and utilisation rates, the existing worldwide coal fleet would emit 330 gigatonnes (Gt) of carbon dioxide (CO2) to 2100 – more than the historical emissions to date of all coal-fired power plants that have ever operated. Countries across developing Asia have added over 1 450 gigawatts (GW) of coal power since 2000. In 2024, the region accounted for nearly three-quarters of global coal-fired power capacity, with around 80% of plants under 20 years old. At current utilisation rates and standard lifetimes, existing coal plants in developing Asia would emit over 280 Gt CO2 to 2100, over 85% of the projected global coal-related emissions, and equivalent to over 20 times the People’s Republic of China’s current annual energy‑related CO₂ emissions, or nearly 90 times India’s. The young coal fleet in Southeast Asia adds to the risk of long-term coal emissions.

Achieving coal transitions at the speed and scale required by government policies, national climate goals and international commitments has large implications for coal fleets. While many of these policies include caveats that constrain their practical application, such as partial coverage across the coal fleet, meeting stated targets would still require substantial and co‑ordinated changes in generation, investment and system operation across Southeast Asia.

Four strategies to reduce emissions from operating coal-fired power plants could cut cumulative global emissions by 140 Gt CO2 to 2050. In the Announced Pledges Scenario (APS), which reflects governments’ announced energy and climate commitments, repurposing coal plants to focus on system adequacy or flexibility services accounts for half of global CO2 emissions savings achieved, while retiring coal plants ahead of the end of their technical lifetimes delivers another 45%. Retrofitting coal plants with carbon capture, utilisation and storage (CCUS) and co‑firing with lower-emissions fuels such as biomass and ammonia can also reduce emissions while keeping assets operational. Repurposing and retrofitting enable coal plants to continue providing important peak capacity and load balancing services. The choice of which emissions reduction strategies to deploy depends on the specific circumstances of the country and the nature of the existing coal fleet.

Coal transitions in Southeast Asia require scaling up replacements not only for the electricity that coal plants produce, but also the system services they provide. Coal-fired power plants are dispatchable and can contribute close to their nameplate capacity to meeting peak demand, giving them an important role in system adequacy. In the APS, low-emissions electricity sources meet all demand growth and progressively displace coal, with more than three‑quarters of the displaced coal‑fired generation in Southeast Asia replaced by solar photovoltaic (PV) and wind. Because coal plants in the region typically operate at a moderate to high capacity factor, replacing the electricity generated by 1 GW of coal in the region requires 1.5 GW to 2 GW of onshore wind or around 3 GW to 4 GW of solar PV, unless complemented by storage or other firm resources. The contribution of unabated coal capacity to system adequacy in Southeast Asia declines by over 2 GW per year to 2050 in the APS and is offset through a diversified mix of technologies, led by battery storage and supported by demand‑side response and stronger regional grids.

In Southeast Asia, around USD 20 billion in investment per year is required in the APS to 2050 to reduce emissions from coal-fired power. Of the USD 20 billion, 70% of investment is directed towards replacing the use of unabated coal power with solar PV and wind. Mobilising this investment will require supportive regulatory and market frameworks, complemented by international public finance to help accelerate coal asset retirement and unlock private investment.

Accelerated coal transitions are compatible with keeping electricity prices affordable, but their socio‑economic impacts need to be addressed in a people-centred and just manner. In the APS, where coal plays a smaller role in 2035 than today, an 80% decline in coal fuel costs in the next decade delivers substantial cost savings. In Southeast Asia, these savings more than offset rising capital recovery costs associated with investment in new infrastructure, leading to an overall reduction in total electricity system costs. Lower electricity system costs do not necessarily translate into lower household electricity bills, though, as retail prices are driven by a range of regulatory, fiscal and structural factors beyond generation costs, underscoring the continued value of targeted policy support to protect affordability. Moreover, early closure of coal-fired power plants will have economic consequences for coal-dependent communities, requiring development strategies that offer alternative sources of employment.

Transition credits can support the modernisation of power systems and facilitate a secure move beyond coal. Transition credits are a type of carbon credits issued from verified emissions reductions in the power sector, through either emissions reductions for individual plants or through system-level reductions in emissions intensity. By providing a complementary market-based revenue stream linked to emissions outcomes, transition credits can improve the economic viability of coal transition strategies and accelerate change where national strategies, power system planning and clean energy investment are already aligned.

Most transition credit approaches today are focused on individual projects for the early retirement of grid-connected coal-fired power plants and their replacement with clean energy, addressing one of the four coal‑transition strategies. Several carbon market methodologies for project-based transition credits are publicly available or under development. Among them, Verra’s VM0052 methodology is being applied as a pilot to the South Luzon Thermal Energy Corporation plant in the Philippines, where transition credits could generate significant revenue between 2031 and 2040 from the plant’s early retirement and its replacement with clean energy.

Alignment among transition credit approaches, national transition pathways and power system planning is essential to ensure energy security. The implementation of transition credits does not occur in isolation and should consider country-specific power system conditions, market structures and planning priorities. Decisions on the scale, location, timing and modality of clean energy replacement should be guided by power system plans and close co‑ordination between transition credit proponents and system planners. Robust and flexible planning is critical to ensure that transition credit projects preserve reliability and energy security while delivering credible emissions reductions.

Managing carbon leakage is critical to the integrity of transition credits. Emissions reductions from coal retirement may be undermined if lost generation is replaced by fossil fuel sources elsewhere in the system, if there is new coal investment or if there are shifts in international coal trade. The rate of clean energy replacement is a central safeguard against carbon leakage in transition credit projects. The more coal generation is directly replaced by new clean energy, the lower the risk that emissions are merely displaced rather than reduced. Residual leakage should also be explicitly accounted for by quantifying and deducting any additional fossil fuel emissions elsewhere in the system.

Additionality is central to the environmental integrity of transition credits, requiring evidence that early coal plant retirement would not occur on the same timeline without carbon credit revenues. This is particularly relevant in Southeast Asia, where coal phase‑down commitments are emerging but early retirement is often not yet mandated by law, leaving open the possibility for transition credits to accelerate change beyond existing policy trajectories. However, falling renewable energy costs are narrowing the case for financial additionality in some markets, raising the risk that credits could subsidise closures that would have occurred anyway.

Transition credit demand is limited, but compliance markets could become a significant source of future demand. Carbon markets face headwinds from reputational concerns and evolving standards that have increased uncertainty around the use of carbon credits in corporate climate claims. At the same time, price uncertainty, limited post‑2030 visibility and policy reversal risks constrain willingness to pay higher prices. Compliance carbon markets offer the strongest potential source of demand for transition credits, particularly where governments allow their use for meeting regulatory obligations. This source of demand could be complemented by long‑term agreements under Article 6.2 of the Paris Agreement and pooling of buyers into coalitions.

Recommendations:

• Embed coal transition pathways in credible national policy frameworks. While long-term government strategies provide high-level direction, clear and co‑ordinated policy frameworks are needed to translate high-level targets into implementable coal transition pathways. Such frameworks improve policy predictability, enabling market actors to plan viable emissions reduction strategies with greater confidence. In parallel, coherent guidance on carbon market governance is critical to safeguard environmental integrity, provide consistent investment signals and ensure that transition credits operate coherently alongside other policy instruments.

• Integrate coal transition pathways and transition credits into power systems planning. Coal continues to play a central role in energy security across Southeast Asia even as governments pursue long-term coal transition goals. Reducing emissions from coal power while maintaining reliable, affordable and secure electricity supply requires co‑ordination between coal transition initiatives and power system planning for replacement capacity, grid infrastructure, flexibility resources and energy efficiency measures. This helps ensure that transition credit projects are consistent with power system needs and deliver credible, durable emissions reductions. Embedding transition credits within power system planning can also improve project feasibility and predictability, by clarifying how and when coal capacity is replaced and reducing risks to reliability and investment outcomes.

• Further develop transition credit methodologies to better integrate energy security considerations and reflect local power systems priorities. Current transition credit methodologies are largely designed for pilot projects and focus primarily on early coal plant retirement. As these methodologies evolve, there is scope to strengthen alignment with power system planning to ensure that transition credit projects are consistent with host‑country energy security objectives. Continued attention to safeguards against emissions and market leakage, together with regular updates to baselines and additionality assumptions, will be important to maintain credibility as power systems evolve. Allowing for more context‑specific application could, over time, enable methodologies to support a wider range of coal transition pathways and facilitate scaling beyond pilot projects.

• Consider transition credits as a complementary performance-based revenue stream, contingent on stronger demand-side signals. Achieving coal transitions at the scale required under national targets will require substantially more favourable clean energy economics. Within this context, transition credits can provide a performance‑based revenue stream that improves the risk‑adjusted returns of transition projects, complementary to other financing instruments and public support mechanisms. Strengthening demand-side signals, alongside durable policy commitments and risk mitigation instruments, is critical to enable transition credits to complement broader financing packages and support coal transitions more effectively.