Philippine Energy Policy Wiki

Carbon Markets and Transition Credits

Status
operative
Confidence
high

Carbon markets and transition credits are key financing enablers for the Philippine energy transition — particularly for the voluntary early retirement of coal-fired power plants (CFPPs) through the Energy Transition Mechanism (ETM). See Energy Transition Mechanism (ETM) and Voluntary CFPP Retirement and Repurposing .

Carbon Market Types

Compliance markets arise from national, regional, or international policy mandates. Covered entities must hold sufficient credits (allowances) to offset their GHG emissions ; over-emitters buy from under-emitters in a cap-and-trade system [PEP 2023-2050 Vol. II, p.126, 2023].

Reference model — Korea Emissions Trading Scheme (K-ETS, 2015): East Asia’s first nationwide, mandatory ETS covering approximately 74% of South Korea’s national GHG emissions across 684 large emitters in power, industrial, buildings, waste, transport, and domestic aviation sectors. Aligned with South Korea’s Carbon Neutral Framework Act of 2021 and a national carbon neutrality target of 2050 [PEP 2023-2050 Vol. II, p.127, 2023].

Voluntary markets involve the issuance, buying, and selling of carbon credits on a non-mandatory basis. Supply comes from private entities developing emissions reduction projects or governments using certified carbon standards. Demand comes from individuals, corporations with net-zero or sustainability commitments, and traders [PEP 2023-2050 Vol. II, p.126, 2023].

Carbon Credits

A carbon credit is generated by a project that avoided or removed GHG emissions, typically representing one metric ton of CO₂ equivalent (tCO₂e). Credits are independently audited and verified. In a cap-and-trade system, companies below their emissions cap may sell surplus credits; overemitters must purchase credits to cover the gap [PEP 2023-2050 Vol. II, pp.126–127, 2023].

Carbon credits incentivize investment in RE projects, energy efficiency improvements, and carbon capture and storage technologies.

Philippines Status

As of 2023, the Philippines does not operate a domestic compliance ETS. Philippine entities can participate in voluntary carbon markets and in bilateral frameworks under Article 6.2 of the Paris Agreement. No timeline for a domestic compliance market has been announced [PEP 2023-2050 Vol. II, p.126, 2023].

Article 6.2 — Bilateral Carbon Mechanisms

Article 6.2 of the Paris Agreement allows countries to exchange Internationally Transferred Mitigation Outcomes (ITMOs) through direct bilateral agreements, outside a centralized market. Leveraging Article 6.2 enables corresponding adjustments (to avoid double-counting between the buyer and seller countries) and strengthens credit integrity [PEP 2023-2050 Vol. II, p.126, 2023].

For the Philippines, Article 6.2 creates a pathway to monetize emission reductions from CFPP retirements and RE deployment through bilateral arrangements with partner countries — directly funding the energy transition without requiring a domestic compliance market. The Philippine Energy Transition Program (PETP) and the Energy Transition Mechanism (ETM) are the primary instruments through which these carbon finance flows are deployed.

Transition Credits

Transition credits are a specialized carbon finance mechanism designed to facilitate the gradual early retirement of CFPPs. They aim to:

  • Guarantee the cost of substitute energy replacing retired CFPP capacity with RE
  • Facilitate fair transitions for impacted workers and local communities

Key principles [PEP 2023-2050 Vol. II, p.126, 2023]:

  • PPA remaining term is the basis for calculating financial value and quantifying mitigated carbon emissions — suitable for regulated markets (e.g., Vietnam, Indonesia) and for PPAs with retail clients in liberalized markets like the Philippines
  • Can address both compliance and voluntary market demand; Article 6.2 corresponding adjustments strengthen credibility

ACEN SLTEC application: Transition credits can accelerate the early retirement of the South Luzon Thermal Energy Corporation (SLTEC, 246 MW, Batangas) from the 2030–2040 Call Option window to as early as 2030 if sufficient credit value is mobilized [PEP 2023-2050 Vol. II, p.126, 2023]. See Energy Transition Mechanism (ETM) for the full ETM structure.

NDC Accounting Implications

The NDC 75% conditional GHG reduction target (2020–2030) creates the national baseline against which Philippine carbon credit claims must be accounted. Future transition credits and Article 6.2 bilateral agreements will need to be consistent with — and deducted from — the NDC accounting framework to maintain integrity and avoid double-counting. See Nationally Determined Contribution (NDC) — Philippines .