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The question of whether transition credits constitute a viable tool for accelerating coal phase-out or merely a methodologically refined version of a financing logic that has repeatedly been challenged in practice is no longer abstract since the launch of the first pilot of the new generation of credits in the Philippines.
Yet the global operational record consists of zero issued credits to date, and several conditions that would make the model work, such as sustained sovereign demand, host-country administrative capacity and political will, and syndicated long-term off-take agreements, remain unresolved. Whether they can be met within the time frame relevant to global mitigation goals under the Paris Agreement is a policy question worth exploring in the context of both the 2028 reopening of the Article 6 package at the UNFCCC level and choices to be made in Brussels on post-2030, carbon-credit-based flexibilities.
The underlying problem is well rehearsed. The coal question has largely migrated outside the EU’s perimeter, apart from a limited number of plants in prospective Member States in the Balkans: India’s coal demand grew by over 5% in 2024; China’s consumption continues to set records even as Beijing dominates global clean capacity additions; and South Africa, a key partner of the EU, still draws 82% of its electricity from coal. The Asia-Pacific region alone hosts close to 5,000 coal-fired plants, many young, many embedded in long-dated PPAs that shield them from market competition. The conventional response (concessional public finance from developed economies) is contracting: the United States has withdrawn from the Paris Agreement and JETPs, European budgets are absorbed by defence and competitiveness, and the multilateral and climate finance debates remain substantially stuck. Transition credits are emerging in the gap but should be assessed against the same standards by which their predecessors are now judged.
A transition credit “is not a new asset class. It is a carbon credit issued by a legitimate carbon standard such as Verra or Gold Standard under a methodology that recognises the climate contribution of the early retirement of a coal plant and its replacement by renewable energy,” explains Frédéric Gagnon-Lebrun, a consultant to the Rockefeller Foundation’s Coal to Clean Credit Initiative (CCCI).
The novelty lies at the methodological level, and it is on methodological grounds that comparison with the Kyoto-era Clean Development Mechanism should be drawn. Four features of the Verra methodology, approved in May 2025 and co-developed by CCCI, aim to address recognised CDM-era weaknesses. Permanence is enforced through compulsory physical demolition: “Some host countries may be willing to keep coal plants in a semi-dormant state... just in case, but the methodology doesn’t permit that”, Gagnon-Lebrun noted.
Additionally, a widely debated feature for this kind of credit is established against the earliest plausible closure date set by technical, financial or regulatory conditions, rather than the nominal end of a PPA, and this becomes the end of the crediting period. Baselines are dynamic, adjusting to host-grid decarbonisation trajectories rather than locking in static counterfactuals, and a just-transition plan for affected workers and communities is treated as vital to the credit’s integrity, with a share of revenue ring-fenced and compliance verified alongside the emissions accounting.
These provisions represent an improvement compared to past practices. Whether they are sufficient will depend on conditions that are, in part, external to the methodology itself. The proof-of-concept project is ACEN’s 270 MW South Luzon (SLTEC) plant in the Philippines, whose closure would be brought forward from 2040 to 2030, avoiding roughly 19 Mt CO₂ between 2031 and 2040. SLTEC is currently the only project applying the methodology at scale, and its structuring has surfaced two constraints that any future transaction will face.
The first is scale: “No single buyer has demand at this volume yet, whether on the voluntary market or the compliance market”, Gagnon-Lebrun observed. Coal phase-out projects are indeed usually large, and each project requires a syndicate of buyers, with the legal, accounting, and political complexity that entails. The second is the time gap between the decommissioning decision and credit issuance: four to five years, during which upfront capital for closure, replacement renewables, storage and the just-transition package must be raised against off-take agreements running into the 2030s and 2040s. And while there are signals of post-2030 demand, firm purchase commitments “are not quite there yet”.
The new Article 6 architecture, which could provide visibility and exposure to financial support for such endeavours, might compound the challenge. The countries with the largest pipeline of coal plants to retire are often among those with the least experience operating projects under the Paris Agreement’s mechanisms. These projects are not nature-based pilots in a remote province; they are grid-shaping interventions touching directly on energy security and economic strategy, requiring high-level political authorisation that most host governments are not yet equipped or willing to provide.
The constraint is therefore not just methodological but also lies in the host country’s political and administrative readiness. A partial mitigation worth exploring could lie in using credits from a single project across different end uses, i.e., corresponding adjustments for sovereign buyers, mitigation contribution units (MCUs) for voluntary corporate buyers, or CORSIA eligibility for airlines.
Whether the European Union becomes a meaningful source of demand for credits, and for this type of credit as well, will determine whether the model survives the present decade. The revised Climate Law admits high-quality international credits for up to 5% of the 2040 target, with a pilot phase from 2031 and full acceptance from 2036, making the EU the only credible large-scale demand signal currently on the table. “The EU can indeed become a major buyer,” Gagnon-Lebrun adds. “The question is whether there will be continuity in project eligibility between the pilot phase and the post-2036 phase.” Were such continuity to be absent, transactions requiring structuring in 2026-2028 simply cannot be financed.
A further question concerns whether transition credits compete with or complement domestic compliance carbon pricing, while smaller economies have to decide on which policy tool to prioritise to comply with obligations under the Paris Agreement. “The two are likely compatible,” Gagnon-Lebrun says, and carbon pricing policies are taken into account in the methodology. One can even envisage that an Article 6 transaction retiring a coal plant would “support the institutional development domestic pricing requires”, but this is still uncharted policy territory, and the proposition is empirically untested.
Coalitions launched at COP30, such as the Open Coalition on Compliance Carbon Markets, bringing together the EU, China, Brazil, and others, and the parallel Coalition to Grow Carbon Markets, may bear on this question more than the headline pledges suggest. Their substantive work is methodological convergence, and for transactions of SLTEC's size, such convergence is the precondition for assembling buyer groups across jurisdictions with otherwise incompatible national eligibility criteria. Whether transition credits will be prioritised and whether they deliver such interoperability arrangements within the relevant time frame remains to be seen.
Are transition credits waiting for a political Godot? Sustained demand, particularly sovereign demand, is not materialising, and the bilateral architecture under which most transactions would proceed has yet to demonstrate its capacity to issue credits at any scale. The next eighteen months, during which the EU pilot phase is designed, COP31 and COP32 are negotiated, and the new coalitions begin substantive work, will determine whether transition credits will move from methodological development to operational instrument or remain, like several earlier innovations in international carbon markets, well-designed responses to a problem the international system has not yet decided to solve – or, at least, not this way.
Cover: Frankfurt, Envato