This Pillar provides guidance on a managed phase down/out of fossil fuels and delivery of a just transition for affected communities, industries, and regions. It focuses on identifying and understanding transition risks and developing strategies to respond to them, structuring dialogue mechanisms between government, employers and employees as well as wider stakeholder engagement to define equitable strategies for the phase-down/out of fossil fuels, and offsetting negative impacts through the roll out of social protection schemes and labour market policies. Pillar 2 also outlines strategies to ensure any new fossil fuel infrastructure is transition ready, enabling repurposing for low-carbon re-use to avoid risks of high-carbon lock-in and stranded assets. It also provides guidance to support fossil fuel-based developing countries close the financing gap, including through mechanisms to de-risk green projects, developing a pipeline of robust and investible low-carbon projects, and innovative mechanisms to raise finance for the low-carbon transition.
Equitable Framework and Finance for Extractive-based Countries in Transition (EFFECT)
Pillar 2. Sustainable fossil fuel exit strategies and just transition plans
Abstract
2.1. Understanding transition risks
Fossil fuel producer emerging and developing economies are among the most vulnerable to risks arising from the low-carbon transition. Many face severe fiscal and economic contractions as a result of the COVID-19 pandemic, have high poverty levels, and are already finding the simultaneous requirements of investing in debt servicing, health service provision and decarbonisation immensely challenging. Fossil fuel producer countries are likely to be increasingly vulnerable to transition risks depending on the carbon intensity of their economies, the importance of fossil fuel exports to macroeconomic stability and government revenue, and the role of subsidised fossil fuels or cheap access to fossil fuels in keeping basic products and services affordable for poorer households. For many fossil fuel producer developing countries, delivering universal access to affordable, reliable electricity and clean forms of fuel remains a central priority to achieve inclusive economic growth, and will depend on their resource endowments and availability of renewable sources of energy.
The low-carbon transition presents a range of opportunities for fossil fuel producers to build more inclusive, resilient economies which work better for their citizens. Diversification away from fossil fuels can promote macroeconomic stability, reducing import dependency on petroleum products and reliance on volatile commodity prices. Transition to green forms of energy and other low-carbon sectors also offers the chance to create jobs, build new value chains that are integrated into the global economy and with more value added retained locally, stimulate the non-fossil fuel private sector, broaden the tax base and create a healthier environment with less air pollution and reduced public healthcare costs.
However, taking advantage of these opportunities entails careful management of a range of interconnected transition risks, which could undermine the low-carbon transition, and requires building support among citizens to minimise socio-economic disruptions. Fossil fuel producer economies will need to find a way to generate revenues to invest in alternative low-carbon sectors for the long term, while continuing to pay for imports and service debts in the meantime. This will need to be done in the face of projected declining global demand for fossil fuels and the likely adoption of stricter import conditions requiring the abatement of fossil fuels emissions, potentially constraining market access. Amid declining revenue, increased price volatility and devaluation of fossil fuel assets, governments will have to walk a delicate balance between generating revenue and investing in non-fossil fuel sectors including enabling access to affordable and ready capital for investment in low-carbon projects. Meanwhile, they are likely to need to adjust their balance of trade. Challenges will surround whether or how much to invest in the fossil fuels sector while in transition and how to limit stranded assets.
The low-carbon transition also requires strong investment growth in mineral supplies to keep up with the pace of demand. The IEA estimates that to hit net-zero globally by 2050, six times more mineral inputs will be required in 2040 than today (IEA, 2021[1]). Clean energy technologies, like electric vehicles, solar panels and wind turbines, rely on the supply of critical minerals such as copper, graphite, lithium, nickel, cobalt and rare earth elements. Factors such as the high geographical concentration of production, long project development lead times, declining resource quality, growing scrutiny of environmental and social performance, the potential for substitution and high exposure to climate risks will affect the availability and reliability of supply of critical minerals used for clean energy technologies.
Box 2.1. Critical minerals: Managing risks and capitalising on opportunities
Uncertainties around the supply of critical minerals represent a central threat to achievement of the global low-carbon transition. Metals including cobalt, copper, graphite, iron ore, lead, lithium, nickel, manganese, platinum, rare earth metals (including cadmium, molybdenum, neodymium and indium), silver, steel, titanium and zinc, are key to manufacturing technology that is core to the low-carbon transition, such as solar and wind facilities and battery storage. Many critical mineral value chains are likely to undergo transformational growth in the coming decades as the low-carbon transition gathers pace, representing an important opportunity for developing countries to capitalise on their resource endowments (AfDB, 2022[2]).
Critical minerals markets are relatively small, and extraction and processing facilities are unevenly spread across the world. The overwhelming majority of rare earth metals, for instance, are currently sourced from and processed in China. This raises the possibility that supply chain disruptions and fluctuations in prices could slow down the low-carbon transition. This is a concern both for developed and developing countries whose transition plans will be equally reliant on sourcing critical minerals.
For many emerging and developing economies, unexploited reserves of critical minerals could present a transformational opportunity to take advantage of growing demand for commodities, underpinning economic development and financing the low-carbon transition. For example, Argentina, Brazil, Chile, and Peru, are well positioned in terms of copper, iron ore, silver, lithium, nickel, magnesium and zinc, while many countries in Africa have significant reserves of platinum, manganese, chromium and bauxite.
However, taking advantage of these opportunities can be fraught with risk. Investments in extraction and processing can be significant in terms of upfront capital costs, and with long project development timelines – sometimes up to ten years – with no direct incomes for mining companies. The fact that many critical minerals are frequently extracted as by-products means that extraction at scale is often challenging. Profound uncertainty as to what the future make-up of the global energy mix will look like also adds to risk. For instance, a sudden technological breakthrough could reduce demand for certain critical minerals. An example of this might be the discovery of a cheaper alternative to lithium for batteries, potentially leading to wasted investments and stranded assets. In fact, significant substitution potential already exists. For example, battery cathode materials can be adjusted to reduce cobalt use and copper use cabling can be replaced with aluminium. Moreover, identification of “winning” critical minerals will also be contingent on trade-offs in the global energy mix, for example the balance between solar and wind generation. Notwithstanding positive demand projections, it is unclear whether these will translate into sustained high prices and revenue flows. This will depend on supply and demand forces, which are highly elastic and therefore may well result in a first-mover’s advantage. Against this backdrop, it is important that governments make their critical minerals sectors responsive and attractive by providing infrastructure and a sound regulatory environment.
In addition, ongoing efforts to increase the recycling of critical minerals from waste electrical and electronic equipment (i.e. urban mining) might reduce pressure on future primary supply demand, while eliminating waste from electrical and electronic equipment (WEEE) and creating additional employment opportunities. Efficient life cycle management and the recycling of waste into secondary critical raw materials facilitates maintenance of the value of products, materials and resources for as long as possible in the economy, while minimising the generation of waste. The average global end-of-life rate of recycle (EOL-RR) of many metals is in many cases far lower than their potential for re-use. Notwithstanding, current recycling deficiencies, the IEA estimates that by 2040, critical minerals recycled from clean energy technology waste (e.g. batteries and wind turbines) could reduce primary supply demand for copper, lithium, nickel and cobalt by around 10%. However, estimates of expected recycled quantities of critical minerals are somewhat uncertain and are contingent on several factors. The future amount of recycling will depend on governmental regulation and investment in smarter product design to stimulate recycling activities. It will also be necessary to deploy new recycling technologies and practices for energy transition metals and develop the ability to recover materials stored in complex and diluted waste streams
Lastly, current extraction of many critical minerals is often associated with human rights abuses, environmental degradation and transparency issues. Direct and indirect impacts on land use including deforestation with hazardous legacies, have all been historical aspects of mining that still affect many countries today and merit serious reconsideration of policies and practice. Processing of magnesium and lithium is very energy intensive and can contribute significantly in terms of a country’s GHG emissions, while waste elements from thorium and mercury are hazardous and can be hard to dispose of safely.
Given these uncertainties and risks, emerging and developing economies should carefully monitor recycling trends and factor these in when considering potential opportunities, build partnerships with consuming countries to ensure responsible sourcing practices, and shape sustainable supply chains from extraction to waste management (see Pillar 3, Section 3.2.3).
The political economy of fossil fuel-based economies can also entail transition risks, with vested interests interfering with the progress of policy reform. Governance structure is often concentrated around the presidency, the ministry of energy/resources and state-owned enterprises. All areas of government involvement, including policy design, licensing, regulation, enforcement, commercial participation, tax administration, management and spending of revenues present major corruption risks, and many fossil fuel-producer countries have limited capacity to mitigate and prevent corrupt practices. Corruption can distort governance decisions and undermine economic performance. Consequently, there is a risk that fossil fuel-producer countries may become trapped in resource dependence as corruption and rent-seeking behaviour are key disincentives for these countries to transition to a low-carbon economy (OECD, 2015[9]).
Moreover, fossil fuel subsidies, whose elimination is key to decarbonisation, are seen in many producer countries as underpinning the social contract between the state and its citizens. Plans to eliminate them, without adequate support measures can face resistance and lead to civil unrest. In general, mitigating the negative impacts of the low-carbon transition on poorer households, for example, by providing compensation or exemptions when prices go up, also represents a significant transition risk, and if managed poorly, can lead to widespread opposition to low-carbon policies, which could derail decarbonisation plans and inclusive economic growth.
Misaligned incentives, given mismatches in timing between the high short-term costs of diversifying away from fossil fuels and profitability of continuing to invest in established industries and sectors, and the long-term benefits of systemic decarbonisation, exacerbate transition risks. There are no quick fixes to overcoming these tensions. Doing so will require governments to provide short-term benefits for citizens, while mitigating negative impacts on poorer households, and, at the same time, articulating a compelling long-term vision of the benefits of decarbonisation which can outlast election cycles and changes in government administrations.
Geopolitical tensions and energy security concerns can also exacerbate transition risks, resulting in considerable volatility and supply disruptions in energy markets, as well as disruptions in minerals and metals supply with implications for the deployment of low-carbon technologies. Periodic shortages in crude, refined products and gas supply could lead to higher and more volatile prices, which could undermine the progress of the transition if people believe ambitious transition policies will affect energy affordability and security. Additionally, the likelihood that global production will be concentrated in fewer hands could increase transition risks, giving greater geopolitical influence to a few number of petro-states with low-cost, low-carbon production in the medium term. Similarly, the concentration of capacity to cheaply manufacture components for new technologies in few countries could stall progress of the transition if their supply is interrupted, as could concentration of production of low-carbon fuels, such as hydrogen and ammonia, in fewer countries, with important knock-on effects in hard-to-abate sectors.
Further risks may arise in the renewable energy sector. Investment in renewable energy is forecasted to grow significantly as countries seek to meet their commitments under the Paris Agreement. IRENA’s Roadmap on Global Energy Transformation forecasts that the share of renewable energy in the power sector will increase from 25% in 2017 to 85% by 2050 – mostly through growth in solar and wind power generation (IRENA, 2018[10]). This investment will come at a significant cost, and according to the IEA, to reach net-zero emissions by 2050, global clean energy investment will need to more than triple to around USD 4 trillion per year by 2030 (IEA, 2021[11]).
The significant scaling up of renewable energy investment can create opportunities for corruption, and these risks are likely to be higher in developing and emerging economies due to local conditions of corruption and instability (Rahman, 2020[12]). These risks include the oversight role played by governments, discretionary decision-making power, government subsidies, the issuance of green certificates, and access to national power and distribution grids. For example, the scaling up of renewable energy may be incentivised by feed-in tariffs to provide investors with guaranteed sales through power purchase agreements (PPAs), and corruption risks may occur in the selection of investors for these projects. Wind energy projects require rights to access public or private land, and these processes often involve discretionary power for government officials and politicians. Lastly, specific corruption risks may arise in jurisdictions where state-owned enterprises (SOEs) have a role in renewable energy generation as either a provider or regulator.
Inflationary risk looms large over the low-carbon transition, exacerbated by disruptions caused by the pandemic, Russia’s invasion of Ukraine and soaring commodity prices. Developing countries will be hit hardest by these shocks, particularly those which are dependent on imports of crude, refined products and natural gas. Given that food and fuel make up a higher proportion of household income in developing countries than in advanced economies, the impact of sharply increasing prices will be acute. Rampant inflation will also have negative implications for the cost of finance in developing countries, with low-carbon projects on the margins of economic viability likely to be squeezed out.
Meanwhile, tackling low energy access rates will require governments to reflect on options to overcome intermittency and absorption capacity issues. These include striking the right balance between on-grid and off-grid solutions; assessing the need for complementary investment in infrastructure, power grids and transmission networks for effective renewable energy deployment at scale; and evaluating demand for pipelines for associated gas or storage, where appropriate, and other basic infrastructure to digitalise payment collection from consumers. Governments should also reflect on implications deriving from the changing landscape of energy generation and distribution, with more demand-side and passive (storage) solutions (as opposed to supply-side solutions), which call into question the need for constant power supply to ensure energy security and reliability.
For many fossil fuel producer emerging and developing countries, navigating such risks will require substantial investment in raising technical and institutional capacity across multiple layers of government. Transition risks tend to be interconnected, hard to predict, and if left unaddressed, can spiral out of control. For example, public protests against fossil fuel subsidy reform can generate widespread scepticism of climate policies, which undermines the progress of the transition. As such, governments need to build new mechanisms that are innovative and flexible, and which allow them to deal with the substantial uncertainty accompanying the low-carbon transition.
Governments should consider prioritising the following actions:
Consider stress testing approaches at a macro, sectoral and micro-level to improve management of transition risks. Stress testing can be used to model impact and likely consequences of sudden technological developments, supply chain issues or the introduction of new policies. This approach consists of a variety of useful techniques to help governments understand the implications of unexpected shocks and put in place contingency plans to mitigate any negative impacts. The Netherlands has run stress testing against technological and policy risks and provides a useful blueprint for approaching this process (Vermeulen et al., 2018[13]).
Consider taking an integrated and centralised approach to transition risk management, by setting up an agency or commission to be responsible for the identification, assessment and management of risks and co-ordination of national planning responses. In some countries, this role might be undertaken by a centralised government body, for example, a prime minister’s office, with a broad mandate across government.
Provide for multi-stakeholder consultation prior to policy changes and allow adequate time for those affected to prepare for changes before enactment. Unexpected policy changes are a key source of transition risks, and consulting with affected companies and citizens to understand how they will be impacted and devising potential mitigation measures can help to reduce adverse impacts.
Consider economic diversification at the earliest possible opportunity and take an integrated approach to transition planning. This should incorporate short- and long-term diversification of products and exports, for example, through development of green hydrogen, linking them with NDCs and long-term decarbonisation targets, such as net-zero targets, just transition plans and dialogues. It is also key to integrate economic diversification plans with programmes to improve energy efficiency and promote investments in renewable energy, in parallel to establishing criteria based on pricing and emissions targets to guide the necessary retirement of fossil fuel assets (See Pillar 3, Section 3.2).
Undertake a cross-government capacity needs assessment, identifying capacity gaps and possible solutions to achieve the low-carbon transition. Needs assessments should take place at national, subnational, sectoral, regional and institutional level, and also seek to identify weaknesses in co‑ordination between government institutions, with the end objective of developing approaches to close gaps. The United Nations Paris Climate Change Committee on Capacity Building provides a step-by-step toolkit for governments to go about undertaking capacity gap assessments across a range of sectors and institutions, with illustrative case studies and guidance on developing strategies to address gaps (PCCB, 2022[14]).
Actions requiring international support in contexts where government capacity is low:
Strengthen ministry, utility and regulator capacity in power sector design, regulation and management, as key factors in mitigating energy security risks and making the right choices in terms of technology selection, expansion of electricity access and encouraging private investment in the power sector. Further priority capacity considerations relating to regulation investment attraction and management in the power sector are covered in Pillar 3, Section 3.4.
Given the interconnected nature of transition risks, governments can aim to identify catalytic interventions, which can result in broader and long-lasting impacts (Collins, Florin and Sachs, 2021[15]).
Undertake geological mapping to better understand critical minerals resource endowments. Many developing countries, particularly in Africa, lack geoscience data relating to resources. Geological mapping represents a key step in understanding opportunities to access global or build new regional critical minerals value chains (World Bank Group, 2017[3]).
Producing and consuming countries should:
Increase collaboration in the research and development of technologies to ensure the global sustainable supply of critical minerals and sustainable supply chains, from extraction to waste management, in order to underpin a just low-carbon transition.
Share experience on how to systematically identify, assess and mitigate transition risks, and determine best practice and lessons learned for emerging and developing countries to deal with uncertainties related to the low-carbon transition.
Pursue policies and regulation that encourage recovery and processing of scrap material to reduce demand for primary supplies of critical minerals (Kettle and Wlazly, 2021[16]).
2.2. Just transition planning in fossil fuel-intensive sectors and regions
Keeping global temperatures within a 1.5 °C increase on pre-industrial times in line with the Paris Agreement will require the unprecedented global phase-down/out of fossil fuel production and consumption. Most studies agree that there will be net gains in employment created by the energy transition, but at a local level, communities and regions dependent on fossil fuel intensive industries will bear the brunt of job losses and their knock-on socio-economic impacts.
Coal mine and heavy industry closure in Europe and North America during the last 50 years has often resulted in regional economic decline, poverty and persistent legacies of marginalisation and grievance. Economic planning for industrial reconversion has largely failed to listen to those most affected and put in place measures to mitigate economic and social harm to communities and workers.
Governments need to safeguard the rights, protect the livelihoods and actively involve the most adversely affected communities and workers throughout the low-carbon transition (Rosemberg, 2017[17]). This is best achieved through a transparent and inclusive planning process. The process through which different interest groups are consulted and feed into policy formulation plays a critical role in determining whether a given approach to transition is considered “just” (Green and Gambhir, 2020[18]; Zinecker et al., 2018[19]).
Fossil fuel-producer developing countries face different challenges compared to advanced economies and will need to establish a transition pathway based on their national specific circumstances and understanding of risks. As opposed to advanced economies, the labour class is highly diverse and fractured, job losses are primarily induced in the informal sector, welfare is often underfunded or non-existent, state capacity is lower and economic development remains the highest priority (Chandra, 2020[20]).
There is no set template for how a transition should be planned and managed, especially in fossil fuel-based developing economies. Local conditions play an important role in defining which kinds of policies can best mitigate negative impacts on communities and workers.
Transition planning should be informed by territorial assessments to identify regions within a country that will be most negatively affected by the transition in terms of economic and social impacts. When it comes to identifying these regions, the eligibility criteria of the EU Just Transition Fund for EU member states to access transition finance offers potential guidance. The EU Just Transition Fund allocates funding to affected regions based on two criteria: expected job losses and expected transformation of production processes of carbon-intensive industrial facilities. These criteria are assessed through regional rates of employment in coal mining and GHG-intensive industries as well as regional rates of GHG emissions from industrial facilities (European Commission, 2020[21]).
Planning a just transition requires clear policy direction, effective co-ordination between multiple agencies and layers of governments, and strong technical capacity at all levels of government, as well as the adoption of an integrated approach. For example, at a national level, the labour ministry will need to lead on design and implementation of social protection and labour market measures, while planning and finance ministries have a key role to play in terms of budget allocation. Regional and provincial government, particularly in countries such as China and India where there is substantial devolution of authority, may also be central protagonists in the planning process. In all contexts, local and municipal administrations, which will lead in the formulation and implementation of local labour market and economic regeneration programmes and are well placed to engage with local groups, should play an integral role, despite often lacking the capacity and resources to effectively deal with local structural transformation.
Where possible, governments should communicate early and clearly the deadline for achieving fossil fuel phase-out or incremental targets for their progressive phase-down, their intention to mitigate negative impacts on affected groups, and the mechanism through which social dialogue will take place (TRACER, 2020[22]).
Past industrial restructuring processes are instructive in providing a set of principles which can guide transition management, helping to build consensus, smooth implementation and ensure appropriate policies are selected to safeguard rights and livelihoods and promote green growth (Strambo, Aung and Atteridge, 2019[23]).
Tripartite social dialogue between the state, industry and worker representation, is a minimum requirement (Gambhir, Green and Pearson, 2018[24]; UNFCCC, 2016[25]; ILO, 2015[26]; Zinecker et al., 2018[19]; Harrahill and Douglas, 2019[27]). In parallel, wider stakeholder engagement should take into account the needs and views of communities affected by the low-carbon transition. Evidence suggests that transition processes which embrace genuine co-determination, in which worker and community groups have a meaningful influence in decision making, is a key success factor in generating buy-in for transition plans and smoothing implementation (Green and Gambhir, 2020[18]).
Given this complex array of stakeholders, many governments have taken the approach of establishing a dedicated just transition agency or commission to act as a high-level decision-making body, co-ordinating inputs from relevant government bodies, as well as external actors such as unions. Establishing clear roles and responsibilities within this structure is an important component of ensuring efficient co-ordination (Stanley et al., 2018[28]).
However, lack of strong technical capacity required for meaningful participation of community and worker groups, as well as local governments, represents a significant gap that needs to be considered when designing effective participatory governance arrangements (UNFCCC, 2016[25]; Strambo, Aung and Atteridge, 2019[23]). At the same time, there is concern that stakeholder consultation and consensus-building processes may slow down the speed of the low-carbon transition and lower ambitions. Some institutions overcome this concern by using ambition-raising scenarios to challenge current targets or to determine the preferred transition pathway that informs national energy plans (IRENA, 2021[29]).
Box 2.2. Weaker institutions, informal labour and fiscal constraints: The challenge of applying just transition best practice in developing country contexts
Overwhelmingly, just transition case studies are derived from wealthier, industrialised countries, particularly Australia, the EU, North American countries and the UK. Fossil fuel phase-out in these contexts, normally associated with broader reconversion and competitiveness trends, rather than climate change imperatives, has been fraught with challenges, in many cases, often failing to result in economic regeneration and employment creation.
In developing countries, the number of people dependent on fossil fuels for their livelihoods tends to be higher than in OECD countries, while government institutions are weaker and funding to invest in affected communities is less available. In these contexts, safeguarding livelihoods and creating jobs in sectors not linked to fossil fuels is likely to be doubly challenging.
Some estimates, for example, put the number of people dependent on coal in India at between 10 million and 15 million. Many of these people work informally around coal mines and depend on the sector for their livelihoods, for example coal picking or artisanal coal mining for sale, or rely on coal pickings for fuel. In South Africa, the coal sector provides some 200 000 formal jobs, each supporting an estimated three dependents per job, not including informal workers around coal sites. Coal accounts for 88% of electricity generation, and generates billions of dollars in export revenue each year.
In many developing countries where unemployment levels are high, wages generally low, and there are no, or few social welfare protections, every job is doubly important in terms of the people it supports. This is particularly the case given that those impacted by climate change tend to be those who are most vulnerable. Moreover, the prevalence of informal labour means that the extent of those who will be adversely affected can be hard to ascertain.
Lessons learned from just transition case studies in the Global North can be instructive for developing countries facing the need to rapidly decarbonise. However, tailored advice and guidance, case studies and research that focuses on approaches that work in developing countries, and above all, finance, are key to supporting emerging and developing countries in managing the decarbonisation process in such a way that those affected are not pushed further into poverty and inequalities in society are not exacerbated.
Allowing sufficient time for gradual and progressive change is important. Previous transitions, such as the phase-out of the coal and steel industries in Germany’s Ruhr Valley, have taken more than a decade to negotiate and implement (Strambo, Aung and Atteridge, 2019[23]; EBRD, 2020[32]). The combination of multiple measures, including worker-focused policies (e.g. early retirement, relocation of workers to other jobs in the energy sector, and training and skills certification programmes), substantial state investment, empowerment of local actors through unions, forward-looking long-term structural policies, and the prioritisation of secondary and tertiary education led to the transformation of the region from dependence on fossil fuels to a knowledge and tourism-based economy.
As a testament to the relative success of Germany’s Ruhr transition, the average annual growth rate of the region has been a modest, though positive 1.3%, unemployment has remained quite low, and mass outward migration and long-term economic decline have largely been avoided. In terms of employment, between 1961 and 2011, production industries, composed mainly of coal and steel, but also some other sectors, declined from 1 426 000 workers – about 62% of the region’s workforce – to 496 000 workers by 2011, representing a loss of almost a million jobs. At the same time, jobs in the service sector grew from 876 000 to 1 824 000, meaning the overall number of jobs remained more or less the same (Taylor, 2015[33]; WRI, 2021[34]). However, on average, workers transitioning from the coal sector to the non-coal sector found jobs with lower pay and lower levels of job security (Haywood, Koch and Janser, 2021[35]).
Early planning can give workers and communities time to accept change, allow for social dialogue to take place, and enable companies to gradually reduce their workforce through retirement, attrition and recruitment freezes (Atteridge and Strambo, 2020[36]; EBRD, 2020[32]). Economic diversification and fostering growth in new, job-creating industries can take years to bear fruit, requiring the ability to adapt. Planning for the long term is therefore key to success. Any just transition plan needs to be sufficiently resilient to survive contextual changes, for example, transition to a new government administration following an election, as well as sufficiently adaptable to respond to changes in context or to be adjusted when they prove not to be working or ineffective (Popp, 2019[37]).
Governments should consider prioritising the following actions:
Provide strong leadership on the necessity of fossil fuel phase-down/out, committing to a tripartite approach to achieving consensus. Seek to build cross-party consensus on just transition integrated planning, funding and appropriate policies, with the intention that measures and policies put in place to help workers and communities be sustained over multiple election cycles to avoid them failing or running out of funding.
Commit to and communicate a schedule for coal, oil and gas gradual phase-down, and ultimately, phase out, establishing social dialogue and stakeholder engagement mechanisms to agree with worker, industry and community groups on just transition pathways.
Communicate openly and transparently not only on the environmental and economic need to phase-down and ultimately phase out fossil fuels, and the associated negative effects on workers and communities, but also on the advantages and opportunities presented by the transition to a green economy. Avoid masking the negative impacts of the transition, and instead be open and honest with people about what the challenges are, and how they can be overcome. Avoid communicating about the need to phase-down fossil fuels in GHG emissions reduction terms only, focusing on other aspects of the transition to a more sustainable and greener economy, such as new more sustainable ways to access, produce and consume energy, the reduction in health risks and environmental hazards, and new employment opportunities.
Actions requiring international support in contexts where government capacity is low:
Conduct territorial assessments to identify regions within a country that will be most negatively affected by the transition in terms of economic and social impacts.
Strengthen the technical capacity of actors participating in just transition social dialogues and broader stakeholder engagement, particularly worker, community and local government representatives.
Development finance institutions should:
Consider establishing a global Just Transition Fund, making finance available to support just transition planning and policy measures in developing countries, as well as the provision of technical assistance to build social dialogue mechanisms, and plan for and implement a just transition (ITUC, 2017[38]).
Increase funding for just transition projects under dedicated climate finance funds.
Establish a dedicated just transition technical forum where policy approaches, lessons learned and peer learning on a just transition can be discussed, encouraging governments and other actors to share their learning and understanding of what works in different contexts (ITUC, 2017[38]).
Build on existing just transition case studies from developing countries, such as from the Climate Investment Funds (CIF, 2021[39]), and conduct additional ones in an effort to build a comprehensive body of just transition case studies tailored to the needs of developing countries, in order to guide governments embarking on the process.
2.2.1. Structuring social dialogue and stakeholder engagement mechanisms
Inclusive social dialogue and stakeholder engagement mechanisms offer effective means to build consensus around available policy options and to identify acceptable pathways to a just transition, which can be agreed on by governments, unions, industries and community groups. Many governments have taken the approach of establishing just transition commissions or agencies to manage the social dialogue process and to co-ordinate inputs from government and external actors. The mandates of these bodies vary depending on local conditions and government objectives. However, regardless of scope, evidence suggests that social dialogues which are genuinely predicated on principles of tripartism and co-determination are more likely to result in successful consensus building and ultimately lasting outcomes for affected communities and workers (UNFCCC, 2016[25]; Zinecker et al., 2018[19]; ILO, 2015[26]).
Stakeholder mapping is an important part of the social dialogue planning process. Governments should recognise that policy responses are likely to be more sustainable and implementable when there is substantive local input in the planning process, particularly from local administration and civil society stakeholders. Where this is more challenging, for example, if dialogue is national in focus, governments must decide how decision making and planning will cascade down to local authorities (Popp, 2019[37]). Spain’s recent system of signing region-specific Just Transition Agreements provides a good practice example (see Box 2.2) (Government of Spain, 2019[40]).
Governments should also consider how involved they will be in the social dialogue process. Some have established a commission’s mandate and then removed themselves from proceedings, as in the case of the German Coal Commission, while others have decided to play a leading role in discussions and policy formulation - a model followed by South Africa’s National Planning Commission (NPC).
Establishing governance arrangements, timeframes and processes, as well as levels of representation for participants, is equally important in the design of social dialogue mechanisms. Governments should transparently map out the processes for arriving at recommendations, being clear as to the level of influence participants will have on final decision making, for example, through voting rights or discretion of commission chairs, and how results from the process will be approved and implemented by the government.
Some social dialogue processes have been criticised for allowing policy dialogue to recommend just one set of outcomes, rather than multiple policy responses, ultimately constraining government options when it comes to selecting transition pathways.
The scope and number of participants can also have an important bearing on the ability of social dialogues to come up with clear and actionable recommendations. South Africa’s Social Partner Dialogue for a Just Transition, led by the National Planning Commission (NPC), for example, has involved broad-based consultations with local and national actors on a range of complex topics, such as distributional justice and the nexus of land use, water and energy. This has stimulated significant discussion as to what a just transition means for South Africa, but has made it hard to draw out actionable recommendations based on which the country can begin to move away from a dependence on coal (Popp, 2019[37]; EBRD, 2020[32]).
Box 2.3. Lessons learned from three approaches to structuring social dialogue and stakeholder engagement mechanisms in the coal sector
The German Coal Commission
Established in 2018, the German Coal Commission convened 31 representatives from industry (5), trade unions (3), environmental associations (3), the scientific community (5) the energy sector (4), representatives of regional groups (7), government administration (1) and parliament (3) to agree a phase-out timetable for coal-fired power plants. The German government, which strongly prioritised consensus, tasked the Commission with negotiating a recommended phase-out date between participating groups, as well as investments in affected areas and compensation for operators of power plants. Each participant was given a vote, with the exemption of parliamentary representatives.
The German government provided the Commission with a clear mandate, but then stepped back from the process, and assigned an office attached to the Federal Ministry of Economics and Energy to support the achievement of negotiated outcomes. Between June 2018 and January 2019, the Commission held ten plenary meetings, with the first part of the period focusing on gathering inputs from experts, and the second focused on negotiating its final recommendations. These were presented to the federal government in January 2019, having been approved almost unanimously by Commission participants at 27:1 (not including parliamentary representatives).
The Commission’s recommendations included a phase-out of all coal by 2038, with a review in 2032 to ascertain whether a 2035 phase-out date would be feasible. They also recommended the closure of 12 GW out of 43 GW of coal capacity by 2022, a further reduction of 17 GW by 2030, EUR 40 billion in transition measures in lignite mining regions over a 20-year period and compensation for coal plant operators.
The German Coal Commission has been praised as an example of government bringing together representation from a broad set of actors to build consensus on challenging issues related to the transition.
However, it has also been criticised by environmental NGOs, who would have preferred a 2030 deadline, and argued that the phasing out of coal between 2035 and 2038 was not in line with Germany’s commitments under the Paris Agreement and could potentially dissuade other countries from setting earlier phase-out dates. Critics also argue that by allowing the Commission to chart a recommended approach, rather than asking it to provide multiple phase-out options, the government was able to avoid taking a politically difficult decision in line with Germany’s established climate commitments.
Critics further argue that tasking the Commission to negotiate agreements on multiple fronts – a final phase-out date, compensation for regions and compensation for coal power plant operators, among other elements – was a strategic mistake, because it encouraged participants to prioritise certain outcomes (postponing the phase-out date and higher levels of compensation) and to use other elements as bargaining chips, rather than considering the transition as a whole.
Presidential Climate Change Commission, South Africa
Dialogue on the just transition in South Africa has been underway since 2011, when the Congress of South African Trade Unions (COSATU) issued its Policy Framework on Climate Change. This framework called for the government to take a lead on addressing South Africa’s GHG emissions while simultaneously addressing socio-economic issues, including the need to create green jobs and ensure universal access to electricity and clean water.
The National Planning Commission (NPC), which leads the just transition process has undertaken numerous consultations and assessments since 2011. A full chapter was included on the just transition in South Africa’s National Development Plan in 2012, and the concept was referenced in its 2015 NDCs. In 2017, the government launched a National Employment Vulnerability Assessment (NEVA) to assess the employment impacts of reducing coal production and use in the power sector. In 2019, the NPC completed a Social Partner Dialogue on Pathways for a Just Transition, bringing together government, unions, civil society and industry. In December 2020, the government established the Presidential Climate Change Coordination Commission (P4C) to oversee the process.
However, despite strong government focus and engagement from labour unions, South Africa is still working to define an actionable just transition pathway. The challenges of transitioning away from coal are undoubtedly considerable. South Africa is the world’s fifth biggest coal exporter, and the sector is therefore an important source of foreign currency. Coal accounts for 88% of electricity generation, and provides 200 000 jobs, representing about 1% of total formal employment, with each job estimated to support about three other people. Strong labour unions have legitimate concerns about the impact of energy transition on its members’ livelihoods, and vested interests have also mobilised against change.
The South African just transition process has also struggled in other areas, due to lack of capacity to manage transition planning effectively. Moreover, the approach to social dialogue and broader stakeholder engagement has been very broad and high level, focusing on socio-economic challenges in general and process. The Social Partner Dialogue on Pathways for a Just Transition generated consensus on high-level issues, such as the need for social dialogue, anti-corruption and participatory decision making, but produced few conclusions regarding actual measures and policies to enable and support a just transition for those most affected. The process has also failed to effectively involve subnational governments and other local organisations, particularly in the Province of Mpumalanga, where 80% of coal mining takes place, in order to define a practical route away from dependence on coal mining.
Spain’s Just Transition Agreements
The Spanish government’s approach to negotiating closure of its remaining coal mines between 2019 and 2020 has been praised as an example of an all-encompassing approach to just transition planning, and has been described by union leaders as a best practice model for a just coal transition. It also illustrates how government can take a national approach to the issue, while also dealing with regions to ensure policy responses are context-specific.
To comply with EU requirements to remove financial support from uncompetitive coal mines by 2018, the Spanish government negotiated a deal with employers and workers unions - Comisiones Obreras (CCOO), Unión General de los Trabajadores (UGT) and Unión Sindical Obrera (USO) – and the coal-mining association – Federación Nacional de Empresarios de Minas de Carbón (Carbounión), – for a EUR 250 million package to cover investments in coal-mining regions over a ten-year period. This covered a range of policy measures, including early retirement, active labour market measures including upskilling and use of existing skills for environmental rehabilitation planning, and local investment.
In February 2019, the government introduced the Integrated National Energy and Climate Plan (2021‑2030). Building on national-level agreements with unions, it negotiated regional-level Just Transition Agreements with the involvement of as many stakeholders as possible, including local authorities, companies, business organisations, schools, universities, NGOs, environmental associations and other interest groups, and involved local-level impact assessments and employment trends. The Just Transition Agreement for Asturias, for example, where 550 jobs are expected to be lost, has involved consultations with 67 representative groups across councils and local authorities, regional governments, employer organisations, unions, businesses, environmental organisations, and education and research institutions.
Just Transition Agreements include roadmaps and just transition calendars, as well as detailed monitoring and evaluation indicators, for example, number of jobs created or businesses supported. A Just Transition Institute has also been created to support the drafting of Just Transition Agreements, and the Public Employment Service’s Occupations Observatory has been tasked with undertaking regular analyses on employment trends and job creation opportunities.
Source: (Litz, Graichen and Peter, 2019[41]); (Taylor and Makszimov, 2021[42]); (Reitzenstein and Popp, 2019[43]; Robins and Rydge, 2019[44]); (COSATU, 2011[45]; WRI, 2021[46]); (Burton, Caetano and McCall, 2018[47]; Strambo, Burton and Atteridge, 2019[30]); (EBRD, 2020[32]); (Government of Spain, 2019[40]; WRI, 2021[31]).
Governments should consider prioritising the following actions:
Consider establishing a just transition commission to co-ordinate structured dialogue between government, industry, worker representatives and community groups, to build cross-sectoral consensus around fossil fuel phase-down/-out schedules, and possible pathways to ensure the transition is just, leaving no one behind.
Commit to genuine co-determination and tripartism in social dialogue processes.
Map relevant sub-national government, industry, worker and community actors who should be involved in the tripartite decision-making process, as well as community groups (including Indigenous and identified vulnerable groups) who should be consulted through parallel stakeholder engagement processes. Recognise that failing to properly involve relevant actors in the policy-making process in a meaningful way will undermine the transition and its acceptance by local governments as well as worker and community groups.
When establishing a just transition commission, consider carefully its mandate, scope, and how results of social dialogue and parallel stakeholder engagement will feed into just transition planning and be communicated with stakeholders, in line with success factors outlined in Box 2.3. Governments should consider how recommendations from a just transition commission feed into and complement its transition plans, for example, negotiating phase-down/-out schedules, offering options for different transition pathways for governments to choose from and providing options for policy responses.
In designing just transition commissions, social dialogue and stakeholder engagement mechanisms, undertake a political economy analysis to identify challenges, obstacles and opportunities (Zinecker et al., 2018[19]).
Define with participating groups how recommendations from the consultation process will be incorporated into just transition planning.
Consider how agreements and recommendations emerging from the just transition commission or dialogue can be made binding, for example, through signing just transition agreements between unions or worker representative groups, industry and government, or through legislation.
If establishing national-level social dialogue and stakeholder engagement mechanisms, consider how recommendations can be cascaded to local regions to ensure policies reflect context-specific conditions.
Subnational governments should consider prioritising the following actions:
Develop a communication strategy to ensure that local communities and workers understand the social dialogue and stakeholder engagement processes, the differences between the two, how results will be used and how they can contribute to the process.
Identify local actors to participate in the social dialogue and stakeholder engagement processes.
Identify vulnerable groups and work to incorporate their interests and views into stakeholder engagement consultations.
Participate in local-level impact assessments and studies to ensure that analysis accurately captures local conditions, strengths and opportunities, and that local stakeholders feed into this process.
Civil society organisations and trade unions should:
When operating at the local level, consider partnering with international civil society organisations (CSOs) to increase their capacity to participate in social dialogue and stakeholder engagement.
Consider how to represent vulnerable people and groups in just transitions discussions, on the basis that local representation does not necessarily guarantee that vulnerable people will be safeguarded. Additional steps need to be taken to ensure these people’s interests are represented in line with the recommendations included in Box 2.4.
Work to publicise social dialogue and stakeholder engagement plans including how results will be used at a local level, ensuring that affected communities understand the process that is taking place, how it will affect them and how they can participate. Work to educate local groups about the issues at stake and collect their viewpoints and perspectives to feed into social dialogue and civic engagement processes.
Leverage local know-how, networks and knowledge to ensure that impact assessments and analyses undertaken as part of the social dialogue and stakeholder engagement processes are contextually accurate and represent local-level challenges affecting workers and communities. Impact assessments undertaken by non-local actors may not be sufficiently granular to represent local interests.
Hold social dialogue and stakeholder engagement mechanisms to account, ensuring they abide by stated terms of reference and governance arrangements, and call for the publication of findings and recommendations at all stages.
Development finance institutions should:
Provide technical assistance and guidance to governments to establish social dialogue and stakeholder engagement mechanisms, as well as mediation support.
Provide technical assistance to non-governmental actors to increase their capacity to meaningfully participate in social dialogue and stakeholder engagement, particularly in terms of representing local groups.
Box 2.4. Success factors in establishing a just transition commission
There are three main ways to structure a just transition commission:
Independent advisory councils provide evidence-based advice to inform policy formulation, and can also act as independent watchdogs monitoring government progress against stated objectives.
Just transition commissions can also be housed in existing government departments, such as a Ministry of Planning. This can mean that just transition planning is closely integrated with broader government planning, as well as making it more likely that a commission has access to adequate resources. However, its close connection with the government can mean that its independence is sometimes perceived as having been compromised in the eyes of the public (even if this is not necessarily the case).
Lastly, stakeholder engagement platforms can serve as a conduit for the viewpoints of citizens, industry, unions and other groups into the formulation of government plans and policies. If a just transition commission is structured as either an independent advisory council or as part of a government department, it is essential that a well-structured policy dialogue process also be set up.
In addition to the established mandate and purpose of a just transition commission, several other factors can be important in determining whether it has an impact:
Establishing recurring and regular touch points and processes through which the commission can provide input into government policy formulation, in an iterative manner, is key to ensuring recommendations are not side-lined. Ideally, government would be required to formally respond to a commission’s suggestions and recommendations, as is the case, for example, with the UK’s Committee on Climate Change. This approach significantly increases influence over policy making.
Commissions which have mixed representation comprising government and non-government representatives are more likely to be perceived as unbiased, and their recommendations considered as objective by stakeholders. This can help generate buy in and build consensus for potentially unpopular policies.
Adequate resourcing makes a big difference in enabling a commission to effectively fulfil its function. The better resourced a commission, the greater its ability to provide evidence-based policy recommendations, and to hold government policies to account on in terms of progress made on policy implementation through undertaking in-depth evaluations of government action, and effective engagement with stakeholders through well-designed communications campaigns.
A commission’s mandate should be clearly defined, including regular reporting cycles and a clearly articulated purpose and set of objectives.
Structuring a voting system with an uneven number of total votes can avoid deadlock on important decision making.
Lastly, visibility is important to generating public buy in for transition policies and pathways. Ensuring that a commission has an up-to-date website, available publications and a regular presence on social media can be an important success factor and can serve to promote accountability.
Source: (Evans and Duwe, 2021[48]).
2.2.2. Assessing impact in affected areas and designing a comprehensive policy response
Consideration of how fossil fuel phase-down/out will impact local areas and communities, including any associated unintended consequences, and the choice of policies and measures to mitigate them is one of the most challenging aspects of transition planning. This process should begin as soon as possible to enable the discussion and implementation of mitigation measures before lay-offs take place (TRACER, 2020[22]). Quantitative scenario modelling can be useful in determining timeframes and the location of job losses caused by fossil fuel phase-down/out, as well as job creation resulting from economic diversification and growth in new areas such as renewable energy (IRENA, 2021[29]; UNFCCC, 2016[25]; Zinecker et al., 2018[19]).
However, in developing countries where informality is high and data may not be readily available, a more granular and localised approach to impact assessments is needed. Qualitative methodologies, including use of surveys and interviews, should be used to build detailed pictures of the impact of closure at the local level to inform policy making. These methodologies should also be used to assess the extent of informal labour market coverage of social protection measures. In addition, impact assessments of the labour market should also extend direct employment to also consider informal, induced and indirect jobs, for instance, companies selling services to the households of coal miners, as well as the quality of jobs created in terms of income, security and working conditions (ILO, 2015[26]; UNFCCC, 2016[25]). The European Commission Joint Research Centre (JRC), for example, estimates that the coal, peat and oil shale production in the EU, employs more than 200 000 direct workers, with 140 000 indirectly related jobs also reliant on the industry (Mandras and Salotti, 2021[49]).
Impact assessments should also try to understand the extent and adequacy of existing social protection mechanisms, opportunities for economic regeneration based on local strengths, and environmental restoration requirements. In addition, political economy analysis represents a useful tool to identify potential roadblocks. Planning should also review existing regulations and sector-specific agreements, for example, labour regulations, to identify the existence of any factors that might hinder the transition process (Stanley et al., 2018[28]).
The OECD’s Key Indicators of Informality based on Individuals and their Household (KIIbIH) database is available to support policy makers looking to address informality in the labour market and to expand social protection coverage. The KIIbIH database uses household survey data to provide comparable indicators and harmonised data on informal employment, and the well-being of informal workers and their dependents across 42 countries across North and sub-Saharan Africa, Eastern Europe and Central Asia, Asia and the Pacific, and Latin America and the Caribbean. Whereas other publicly available harmonised statistics on workers in the informal economy only take into account the individual characteristics of the workers, the KIIbIH database uses household surveys to provide more comprehensive information on the socio-demographic and economic status of workers and their households.
Box 2.5. Safeguarding vulnerable groups and gender dimensions of the just transition: Leveraging opportunities to address inequalities through just transition plans
Safeguarding vulnerable groups
Safeguarding the livelihoods of and affording opportunities to vulnerable groups, such as people with disabilities, the elderly, indigenous communities, youth and migrant workers, is an important component of ensuring a just and equitable transition that leaves no one behind. Indeed, low-carbon transition plans should offer an opportunity to redress existing local injustices and inequalities.
Transition policies can affect vulnerable groups in a multitude of ways. This includes exclusion from benefits such as job opportunities arising from the transition, and increasing costs of goods and services such as transport and electricity bills owing to green policies.
Six key principles can assist governments and others involved in just transition planning processes to mitigate these negative impacts:
1. Take steps to identify vulnerable groups and do not assume that the mere establishment of a just transition commission or stakeholder engagement process means that these groups will be consulted and represented. Consider identifying local champions with which to work to ensure that these groups are identified, properly consulted and understand how to participate in consultations.
2. Tailor policy measures to ensure they cater to and can be accessed by vulnerable groups as well as women. This might, for example, necessitate childcare facilities so that women can participate in consultations or courses, running workshops in remote locations, or making materials relating to the transition accessible in other languages or through alternative formats.
3. Understand that green policies are likely to result in higher costs which disproportionately impact the most vulnerable and poorest. For example, green policies such as carbon pricing and cuts to fossil fuel subsidies can cause energy, fuel and transport prices to increase. These impacts can be mitigated through carefully designed mitigation measures, including cash transfers to vulnerable groups.
4. Ensure that policies are tailored to respond to the needs of women and vulnerable groups based on their inclusion in consultations. For example, active labour market policies might seek to increase the participation of women in the renewable energy workforce.
5. Establish monitoring and evaluations systems to assess the impact of policies on vulnerable groups and make changes to improve measures where policies are proving ineffective.
6. Empower marginalised stakeholders by establishing local-level platforms to formally engage with them and build their capacity to influence transition outcomes.
In 2022, the Extractive Industries Transparency Initiative (EITI) launched “Engaging communities in a just transition”, a two-year project funded by the Ford Foundation. The project aims to shed light on how the energy transition is impacting livelihoods in communities living near mining and energy projects, and seeks to amplify the voices of local stakeholders in public debate and policy discussions. The project is being implemented in Colombia, Ghana and Indonesia. The project also explores the obstacles that local communities face in accessing and using information on the mining and energy projects impacting their lives – including in relation to subnational revenue flows, community investments, and environmental and social impacts. The project will engage a broad range of stakeholders through dialogues and capacity development training to identify the best means to ensure the interests of communities are better represented in the energy transition.
Mainstreaming gender in low-carbon transition planning
Women are disproportionately affected by climate change and environmental degradation, particularly in poorer and rural communities, where they are more likely to lack access to finance and resources, and decent work. They also bear the brunt of many of the physical impacts of climate change and environmental degradation. Women, for example, are more likely to die of indoor pollution than men, while also being more exposed to unsafe water and sanitation – all aspects which have been exacerbated by the COVID-19 pandemic – and highlighting the links between environmental degradation and well-being. The burden on women can also be significant during fossil fuel closure and can often leave them as the sole breadwinner in a household, doubling their burden on top of existing unpaid work such as child-care.
Despite playing prominent roles in climate and environmental activism, women are also underrepresented in decision-making roles on climate and the environment. Women also tend to be excluded from many of the opportunities and benefits that will accrue from the transition. Despite quality jobs being created in innovation and green energy, among other areas, women are often overrepresented in low-skilled, low-paid, assembly jobs. This is reinforced by the fact that many jobs created by the transition tend to require an educational background in STEM (science, technology, engineering and maths) subjects, in which women and girls are underrepresented. Women, for example, account for 15% of workers in technology development roles, 10% of employees in power generation and 8% in general engineering technology roles in OECD countries.
Key actions to mainstream gender in low-carbon transition planning include improving the availability of disaggregated data on the gender implications of the low-carbon transition in order to improve policy making, better integrate women into decision-making processes and leadership roles relating to the environment and the low-carbon transition and encourage women and girls’ uptake of STEM subjects. Gender dimensions should also be mainstreamed into all climate and gender policy making, and considered at all stages, ensuring that women are adequately incorporated into consultation processes.
Based on these assessments, policy formulation should aim to balance reactive (social protection, compensation and environmental restoration) measures, with proactive (active labour market and economic regeneration measures) approaches. The policy response should be context specific, and policy options should be discussed and negotiated through the social dialogue and stakeholder engagement mechanisms established for the just transition.
Strong technical capacity and resourcing of local and municipal government is needed throughout the planning and implementation process. This is key to undertaking civic engagement with local groups, developing financing plans for affected regions, and developing proposals to capture funding for just transition measures. Just transition policies which are accepted by worker and community groups should be designed from the local level up, and local government must play a central role in this process. Efficient administration and delivery of social protection and active labour market measures are also key to retaining community trust in the transition process. Peer-to-peer engagement between local government actors can facilitate lessons learned, and national or regional government and international development partners can set aside funding to raise local government capacity through technical assistance (Green and Gambhir, 2020[18]; TRACER, 2020[22]).
Affordability and securing funding sources should be prioritised throughout the planning process. Planners should work with ministries of planning and finance and other relevant bodies (e.g. the international co‑operation ministry to obtain international development assistance) to identify and secure funding. This might include allocating funds from the central budget, mobilising funding through green finance mechanisms such as just transition bonds, international financial assistance or applying to existing funds which allocate funding for the just transition. As discussed in Pillar 3, Section 3.3.1, carbon pricing offers the possibility of raising substantial revenues which can be used to finance just transition programmes and to ease impacts on workers (Botta, 2019[53]).
Regular and transparent communication with affected communities and groups is important to build trust and facilitate civic engagement. Poor communication between government and affected groups, as happened for instance during the closure of UK coal mines in the 1980s, can undermine social dialogue efforts and lead to conflict. Information campaigns can help to reduce misinformation and provide those affected with means to participate in dialogue. At a minimum, information campaigns should avoid overpromising, should communicate the intent to provide social protection and labour market support, and outline the approach to social dialogue (Stanley et al., 2018[28]).
Lastly, just transition planning should also look to establish monitoring and evaluation mechanisms, enabling transparent assessment of whether just transition policies are working or not. Results indicators should be publicly available, and where possible, inform adjustment of measures to improve performance.
Box 2.6. Impact assessments: The importance of going beyond quantitative approaches and building a granular picture of impact at a local level
Understanding the impact of fossil fuel phase-down/out on employment and livelihoods, particularly in developing country contexts, requires a multidimensional approach to labour market analysis and impact assessments.
Traditional approaches to labour market analysis struggle to accommodate the large-scale informality so prevalent across fossil fuel industries in developing countries, particularly in coal mining. In India, for example, formal, direct employment in coal mining through Coal India, accounts for a relatively small proportion of total employment in the coal sector. Other data, such as average age of fossil fuel employees – a key factor in assessing the potential for early retirement schemes in just transition planning – can also be hard to come by in many cases, pointing to a need for an alternative approach to impact assessment in the context of the transition.
Failure to understand and account for informal employment, as well as the role such jobs play in supporting households and communities, can result in gross miscalculations as to the impact of fossil fuel phase-down/out, as well as misguided development of policies that do not take into account the full impact of closure.
These issues, as well as the heterogeneity of fossil fuel regions, point to the need for a blended approach to impact assessment, mixing traditional quantitative approaches with qualitative methodology. This should draw on region-specific knowledge, interviews and surveys, and should leverage networks of CSOs and NGOs which know communities well to paint a picture of local conditions that fully captures the impact fossil fuel phase-down/out will have on people’s livelihoods
Source: (Chandra, 2020[20]).
Governments should consider prioritising the following actions:
From an early stage, while setting clear policy direction on fossil fuel phase-down/out with timelines, communicate the intention to safeguard livelihoods through social protection and active labour market measures, and provide an outline of how social dialogue and parallel stakeholder engagement will contribute to shaping a just transition away from fossil fuels. Recognise that it will take time to build consensus around just transition pathways.
Map which national, regional and local government actors should be involved in the just transition planning process, considering how to effectively engage relevant departments and agencies on specific issues.
Ensure relevant national-level ministries have clearly defined roles and responsibilities in formulating just transition plans. National governments should consider how these roles feed into the broader process of transition planning, including through the establishment of a just transition commission or agency. It is important that a broad range of public institutions and agencies are involved in the planning process, including those in charge of enhancing technical and scientific capabilities.
Consider how to operationalise efficient communication and co-ordination between multiple layers of government involved in just transition planning, to avoid delays and ensure local initiatives can be allocated funding.
Develop a stakeholder engagement strategy, outlining how it will work and engage with government and external actors, in terms of research and policy formulation, as well as social dialogue and stakeholder engagement to agree on just transition pathways for affected regions.
Consider the scope and objectives of impact assessments on affected areas, ensuring analysis goes beyond quantitative analysis, utilising qualitative research tools, including interviews and surveys, to develop a granular picture of expected impact and differences at a local level.
Ensure labour market impact assessments go beyond direct jobs, considering informal labour, indirect and induced jobs, and job quality in impacted areas. Impact assessments should also consider the socio-economic implications of unemployment on households.
Undertake assessments of potential impacted areas and associated risks to enable broad-based policy making across multiple policy areas, including social protection measures, active labour market measures, economic regeneration and environmental restoration. Decide which government departments will be responsible for policy formulation in given areas and how this will interact with other policy options, and ensure the mechanism allows for a balanced approach to policy making blending both reactive and proactive measures.
Throughout the planning process, consider how just transition policies and measures will be financed, balancing affordability and value for money. Involve closely planning and finance ministries in this process.
Establish monitoring and evaluation mechanisms, ensuring lesson learning and sufficient adaptability to build on success and eliminate failures.
Actions requiring international support in contexts where government capacity is low:
Incorporate into the planning process the mapping of industrial opportunities for workers throughout the value chain, including data relating to likely employment opportunities that can match labour supply and demand, as far as is possible.
Consider where just transition policy measures should be uniform nationally, for example, setting early retirement thresholds or compensation rates for miners, and where locally driven solutions are preferable, for example, by developing approaches to environmental restoration.
Consider alternative fundraising options to pay for the just transition, including carbon taxes and green finance. Work with central banks and finance sector regulators to establish frameworks to raise finance through mechanisms such as green bonds, as discussed in Pillar 2, Section 2.4.3.
Explore with international development partners options for multilateral and bilateral funding to finance just transition measures, and to provide technical assistance to facilitate just transition planning and implementation.
Consider establishing a national just transition fund to pool finance for just transition projects in affected areas, capitalised by carbon taxes to finance retooling, reskilling and reschooling programmes for affected workers, as well as contributing to a pension/dislocation fund for those that cannot be retrained.
Subnational governments should consider prioritising the following actions:
Work with national and local government to undertake regional assessments to assess the impact of fossil fuel phase-down/out on employment and livelihoods.
Consider how to improve availability of data on employment (often informal) and social protection in producing areas.
Take a subnational or district-by-district approach to socio-economic impact assessment through surveys and interviews with local people, with the understanding that conditions in one district may be very different from neighbouring districts and, that it is important to develop as full a picture as possible of socio-economic conditions, and numbers and type of employment for the process of transition planning. This is particularly important to understand the extent of informality in labour markets and the differentiated impacts of fossil fuel phase-down/out on different people. Where possible, identify local CSOs that possess a strong granular knowledge of local areas and consider partnering with and funding them.
Develop strategies to transparently communicate with worker and community groups on the transition. These should focus on providing accessible information (e.g. through radio, community leaders, etc.), publishing plans for the transition, outlining the parameters of the social dialogue and stakeholder engagement process, and conveying the government’s intent to provide social protection and labour market policies to mitigate the impacts of fossil fuel closure.
Seek to understand who are the most vulnerable among groups impacted by transition planning, and how the perspectives of these groups can be incorporated into policy making processes, ultimately with the intention of safeguarding their rights and livelihoods.
Consider how best to provide inputs into regional economic planning and environmental restoration strategies, recognising that local governments are best placed to identify regional strengths and opportunities and to design projects which are best suited to community needs.
Actions requiring international support in contexts where government capacity is low:
Review capacity and finance gaps in planning and implementation for just transition policies, focusing in particular on the capacity to undertake civic engagement, impact assessments, administration of social protection and labour measures, strategic planning and bidding for just transition funding.
Consider allocating additional funding to involved local and municipal government agencies. Funding can be used to raise technical capacity through technical assistance in areas such as civic engagement, communication, undertaking research and analysis, and administration of social protection and labour market support mechanisms. Funding can also be allocated to pay for studies and strategy development, as well as for local administration to recruit staff to posts necessary for transition planning and implementation.
Consider partnering with relevant universities who can provide capacity building to regional and local government on innovative research techniques to understand the granular impacts on localised areas.
Strengthen government capacity to undertake monitoring and evaluation of progress against just transition plans. This is important to build consensus for the low-carbon transition and to ensure policy makers are accountable to the public. Whether a monitoring and evaluation function is embedded in government or within an independent watchdog, it must be well resourced and credibly independent, and its findings and recommendations should be readily accessible to the public.
Civil society organisations should:
Participate in social dialogue and stakeholder engagement, ensuring the interests of vulnerable groups are integrated into discussions.
Leverage local networks to ensure people in affected areas understand the social dialogue process taking place, the probable impact on their livelihoods and the scale of coming change. Help them to participate in the process and plan for the future.
Take a lead on district/localised-level analysis of labour markets and community impacts, leveraging local knowledge, networks and connections to build an accurate picture of the local impact of closure to feed into social dialogue and policy making.
Monitor the implementation of just transition strategies.
Consider forming partnerships with international NGOs to strengthen capacity to assist local groups in participating in social dialogue related to the transition.
The fossil fuel industry should:
Communicate early and transparently on closure, providing workers time to adjust and, where possible, find new employment.
Plan to reduce the size of the workforce gradually in advance of closure through recruitment freezes and retirement to reduce the number of staff being made redundant at closure.
Adjust/develop internal strategies to integrate climate risk, mobilise financial flows and influence boards to adopt just transition strategies and plans (Robins and Rydge, 2019[44]).
Ensure that industry-delivered training plans for workers are tailored to local opportunities and conditions as well as the ambitions of individual employees. This might include, for instance, training programmes targeting skills necessary for employment in specific industries, such as renewable energy, or plans tailored to provide more general skills and competencies, such as management classes for micro, small and medium enterprises (MSMEs). These plans should be implemented in collaboration with local institutions, civil society and universities.
Development finance institutions should:
Consider paying for or implementing regional or local-level impact assessments which take a granular, qualitative approach to understanding the impact of closure on local workers and communities.
Provide technical and financial/funding assistance to national, regional and local governments, and educational and vocational training institutions on the planning, design and implementation of just transition measures.
Support developing country governments to incorporate just transition plans into NDCs and long‑term decarbonisation plans consistent with their low-carbon development strategies.
2.2.3. Promoting skills transferability and quality jobs through active labour market measures
The ILO estimates that 18 million net jobs will be created by 2030 and that 43 million renewable energy jobs will be needed by 2050 under a scenario aligned with the Paris Agreement. These include opportunities in the mining and renewable energy sector where growing demand for critical minerals could create new jobs for fossil fuel workers. Of all the jobs that will be created in the energy sector by 2030, some 13 million will be for medium-skilled workers (ILO, 2018[54]; IRENA & ILO, 2021[55]).1 There is a big overlap between the skills utilised in fossil fuel sector jobs and those needed in renewable energy jobs, and in that regard, many new jobs created in the energy transition will be highly transferable with only minor upskilling and reskilling required.
However, challenges remain, as these jobs may not be created in the same region and may be characterised by a high degree of informality, a lack of collective bargaining and inadequate social protection measures. Additionally, the renewable energy sector will only be able to absorb some of the fossil fuel jobs eliminated by the low-carbon transition. Labour market planning, therefore, should put in place measures at the earliest possible opportunity to identify synergies and job profiles, and to leverage transferable skills across a range of both traditional and low-carbon sectors.
One of the major challenges that government will face when undergoing a low-carbon transition is how to enable workers in sunset industries to find new jobs and livelihoods. Fossil fuel industries may be significant direct or indirect employers at a local, regional and national level. Governments need to consider the labour mobility of their workforce in order to deliver a just transition, but also take steps to increase the portability of skills across the energy and other sectors of the economy. Some sets of skills and expertise from occupations in fossil fuel industries are applicable to careers in climate-friendly sectors as there are overlaps between conventional and renewable energy industries. Green industries can borrow from existing expertise; for example, the Norwegian solar cell industry was able to develop by drawing on familiar know-how, scientific knowledge and technology from the oil and gas sector – in particular from the process industry used in new petroleum fields. The skills of electrical engineers, electrical technicians, electricians and information technology specialists employed in operating fossil fuel power stations can all be adapted to operating renewable power plants (UNFCCC, 2016[25]).
Skills synergies between the offshore wind and offshore oil and gas industries can be utilised as both these industries use the same port facilities and have similar supply chains. Offshore oil platform engineers, for example, could potentially be deployed in the installation of offshore wind turbine foundations. Other transferable expertise includes surveying and offshore installation, the design and manufacturing of support structures, and large-scale installation and operation and the maintenance of offshore assets (IRENA, 2021[29]; Pinker, 2020[56]). There are also similarities in occupational profiles between oil and gas drilling and geothermal development (Gambhir, Green and Pearson, 2018[24]). In addition, oil and gas expertise is valuable in the development of CC(U)S projects. Many of the job opportunities that will arise in the CC(U)S sector will also be able to make use of the subsurface skills and experience of workers from the oil and gas sector. These opportunities include near-term employment needs associated with CO2 storage exploration, as well as the more intensive phase of characterisation and development of new storage facilities (IEA, 2020[57]).
Similarly, expertise from the coal industry can be harnessed to support the low-carbon transition. Coal sector workers can find new opportunities in renewables, and recent years have seen many instances of targeted recruiting of coal miners for work in the solar and wind sectors (IRENA, 2021[29]). For example, thermal plant operation skills can be transferred to renewable plant operation, or an operations engineer in the coal industry could retrain to work as a manufacturing technician in the solar industry. In addition, explosive workers, ordinance handlers and blasters in the coal industry could capitalise on their technical safety experience and obtain additional training to become commercial solar technicians (Pearce, 2016[58]).
The needs of workers currently employed in hard-to-abate sectors, such as cement and steel, also need to be considered during the transition. While these sectors will experience fewer job losses than fossil fuels industries, workers will need to be provided with skills and training to adjust to new norms. Many will need support through the process of the transition, particularly younger workers who are often more vulnerable.
Governments should also consider the quality of jobs created through the low-carbon transition, including decent pay, respect for fundamental rights at work (including the effective right to organise and bargain collectively, gender equality and workplace democracy), decent working conditions and provision of social protection in line with the ILO’s Decent Work Agenda (ILO, 2015[26]). Jobs in extractive industries are often high quality, and there is a risk that displaced workers will be moved into roles without adequate protections in place.
Labour market policies should also take into account informal workers dependent on fossil fuel industries, recognising their capacity to organise collectively and participate in social dialogue processes. It is important that labour market policies related to education and training, employment services, partnerships with educational institutions and relocation support, are joined up with robust social protection provision and effective public services, to support workers through retraining and reskilling, Meanwhile, universal social protection floors are needed to safeguard others who will be impacted by fossil fuel industry closure (EBRD, 2020[32]; Johnstone and Hielscher, 2017[59]).
Governments should consider prioritising the following actions:
Undertake research to take stock of existing skillsets in the fossil fuels sector as well as expected job opportunities in the renewable energy and other low-carbon sectors and to better understand the impact of under-utilisation of skills on achieving a just transition (Scottish Government, 2021[60]).
Ensure a cross-governmental approach to skills transfers by involving all relevant government departments in the planning process (ministries of energy/mining, industry, labour, finance, education, social welfare, etc.).
Review certification and regulation to ensure they are fit for purpose and do not inhibit the transfer of employees to similar roles. For example, a certified offshore oil and gas worker may already meet many of the requirements for an offshore wind turbine worker (e.g. health and safety) without extensive additional training.
Review regulatory frameworks and national policies governing labour standards and mechanisms for implementation to ensure jobs created through the low-carbon transition adhere to the standards defined by the ILO’s Decent Work Agenda (ILO, 2022[61]).
Link active labour market policies, such as training, reskilling and careers counselling, with social protection measures to ensure that workers have sufficient time and resources to retrain and are incentivised to look for new work. Workers who are nearer retirement age and for whom there is little point in reskilling will need to be provided with support until they can access a pension.
Actions requiring international support in contexts where government capacity is low:
Build well-resourced, efficient and competent local employment services that can have a significant impact on facilitating fossil fuel workers to transfer into new roles.
Invest in labour ministry capacity to undertake labour market assessments and modelling to underpin the design of active labour market policies as a key measure in identifying relevant skill‑sets for re-skilling programmes to target.
Following the identification of transferable skills, dedicate funds to the reorientation and reskilling of the workforce. For example, the Scottish government’s Transition Training Fund offers grants for the retraining of oil and gas workers who have lost their jobs or are at risk of redundancy (IRENA, 2021[29]).
Introduce incentives for industry to assist in reskilling workers through tenders and consenting processes. Tenders for renewables projects are often determined by price alone, but to support just transition outcomes, governments can include additional criteria in respect of wage levels, social protection benefits for employees, approach to rights at work and overall employment numbers (including gender breakdowns), alongside financial penalties for companies who fail to fulfil these requirements.
Consider introducing gender requirements into public procurement to address gender inequality in the low-carbon transition. Currently, women are underrepresented in jobs in the energy sector. Access to training is essential to empowering women in the low-carbon sector, and universities and other training institutions can play a key role in training and preparing women to take on future positions.
Consider including binding clauses in public procurement contracts to incentivise skills transfers from fossil fuel sectors to renewable energy sectors.
Where regions face mass unemployment, as part of a broader package of measures, consider establishing an employment guarantee scheme which provides unemployed workers with a guaranteed number of paid days per year. This can provide support to poorer households while furthering socio-economic, climate or environment objectives. For example, India’s Mahatma Gandhi National Rural Employment Act guarantees 100 days of work at a set rate for one member of poorer households. The scheme covers 70 million people, with a third of jobs reserved for women. Participants in the scheme work on water, environmental and climate adaptation projects (GIZ, 2019[62]).
Where migrant workers are impacted by low-carbon transition policies, government to government collaboration may be necessary to limit the impacts of unemployment on foreign workers. The impacts of transition policies on migrant workers needs to be incorporated into impact assessments from an early stage.
Industry should:
Consider re-deploying employees internally as well as funding or co-funding training programmes to support the re‑deployment of workers, in instances where oil and gas companies diversify into broader energy companies. Electric utilities can retrain their coal-fired power plant workers for positions involving utility-scale solar farms (Pearce, 2016[58]). The transition may be smoother where companies support multi-skilling within their labour force as this gives workers greater flexibility to adapt to future changes in the labour market (Atteridge and Strambo, 2020[36]).
Consider diversifying their core business model based on the existing skills of their employees. For example, when the oil sector began to decline in California in the 1990s, many local, offshore, oil-related firms adapted by diversifying into related sectors, such as scuba diving equipment, marine electronics, or sales and rental of environmental impact measurement tools. In Germany, following the decline of coal mining, heavy industry firms such as RAG and Thyssenkrupp developed new activities in related fields, including plant engineering, environmental technology and control services (Atteridge and Strambo, 2020[36]).
Governments, the fossil fuel industry, and educational institutions together should consider prioritising the following actions:
Jointly identify solutions related to re-skilling in the context of the transition. By bringing these entities together, it would be possible to encourage the development of solutions well-tailored to the needs of the job market (industry), and provide tailored training solutions that match these needs (educational institutions) and are adequately resourced and funded (government and industry). Alignment between governments, industry and educational institutions, and information sharing regarding the evolution of the job market will enable more efficient interventions.
Actions requiring international support in contexts where government capacity is low:
Create a detailed and publicly available database with labour market information pertaining to fossil fuel workers, such as skills profiles, demographics, locations and employers. This can serve as a baseline of labour market information, and can match supply and demand for skills by enabling workers to connect with potential new employment opportunities (ILO, 2016[63]; Pinker, 2020[56]). This database could be managed through an international organisation, or by government at the national level.
Collaborate on training and re-skilling initiatives to maximise the existing skillsets of employees in the fossil fuel sectors and enable the transfer of those employees to new low-carbon sectors. For example, in New Zealand, a collaboration among various energy companies and Te Pūkenga, the New Zealand Institute of Skills and Technology, led to the development of an action plan to train and upskill energy sector workers, to ensure that this highly skilled workforce is not vulnerable to labour market restructure as New Zealand transitions to a lower-emission economy (Energy Resources, 2021[64]).
Consider employee transfers within the fossil fuels sector where appropriate. For example, following the closure of the Hazelwood Coal Fire Power Station and Mine in Victoria, Australia in 2017, the local authority set up a scheme whereby impacted workers could transfer to other power generators. The local authority provided early retirement packages to workers in those other power generators to create employment opportunities for impacted workers from the Hazelwood Coal Fire Power Station and Mine (Premier of Victoria, 2017[65]).
2.2.4. Mitigating negative impacts through universal social protection and compensation measures
Expanding basic social protection to all can mitigate the negative socio-economic impacts of the low‑carbon transition, particularly in countries with high levels of informal labour. As part of a coherent policy package, supplementary social protection and compensation measures can be provided to fossil fuel workers to mitigate the short-term impacts of redundancy and support them to reskill and find new jobs.
Governments should work towards providing basic safeguards, including unemployment relief, a state pension and access to healthcare, for all citizens, regardless of historic employment contributions. The view that only advanced economies are able to provide universal social protection is misplaced. The UK had comparable GDP per capita to Botswana and Indonesia when it first introduced social protection. Recently, several emerging and developing economies, including Kenya, Namibia, Nepal and South Africa, have introduced tax-financed pensions, ensuring basic coverage for all citizens in old age (ILO, 2021[66]).
Fossil fuel producer governments need to identify new financing mechanisms to expand social protection and pay for effective public services, given the central role of fossil fuel revenue in financing such expenditure. According to the ILO, lower middle-income countries and low-income countries need to invest 5.1% and 15.9% of GDP per year, respectively, to close the financing gap on social protection. Short-term financing options include revenue recycling from carbon taxation, bond issuance and reallocating wasteful public expenditure.
Box 2.7. How can governments finance the expansion of social protection?
ILO Recommendation 202/2012 encourages governments to invest more and better to expand social protection to all citizens. Multiple options to achieve this goal:
Expanding social protection through benefits linked to employment-related contributions: This can generate revenue and encourage the formalisation of informal workers. Additional non-contributory safeguards will be required for people who do not work. Long-term, blended contributory and non-contributory coverage is the best way to ensure a financially sustainable system.
Domestic revenue mobilisation through fiscal reorganisation (see Pillar 3, Section 3.3), and revenue mobilisation through new taxes such as a carbon tax or taxes on specific goods. In Ghana, for instance, unions have called for a levy on gold, while Nigerian unions have called for a luxury goods tax to fund expansion of social protection floors.
Eliminating illicit financial flows: targeting bribery, money laundering and tax evasion would free up substantial resources to finance social protection schemes.
Reallocating wasteful public expenditure to social protection: Costa Rica and Thailand, for instance, have both redirected military spending to fund universal healthcare programmes.
Bond issuances to finance basic services and infrastructure: For example, in 2017 Colombia issued a social impact bond. South Africa has issued municipal bonds to finance basic services and infrastructure.
Source: (ILO, 2021[66]).
Additional social protection packages may be provided to fossil fuel workers to provide financial support after redundancy. Financial packages should be agreed in advance of closure, and need to be negotiated between government, industry and unions through an established social dialogue process. Financial packages should also be integrated with labour market measures to motivate and support workers to re‑skill and re-train and should not be a disincentive to looking for new jobs. Older workers who are near retirement age and for whom there is little point in reskilling can be provided with transition packages to support them to an age when they will qualify for a pension.
A strategy which emphasises high levels of compensation for workers without considering job creation and local regeneration, risks resulting in long-term economic decline, and potentially increases in societal issues such as apathy, alcoholism or migration. Spain’s use of substantial voluntary redundancy and early retirement packages for workers affected by coal power plant closures in Asturias, for example, has led to outward migration from affected areas, as younger people seek opportunities elsewhere (Bridle et al., 2017[67]).
Box 2.8. Spain’s coal sector restructuring programme (1990-2018): Prioritising early retirement and generous compensation measures
Faced with an uncompetitive coal mining sector and EU state aid rules which required the elimination of subsidies to coal, the Spanish government since the 1990s has implemented a number of coal mining restructuring plans. These have aimed to raise the competitiveness of the sector by reducing the workforce and closing some mines.
Through implementation of these plans, coal’s share of primary energy production fell from 31% in 1990 to 4.7% in 2014. Employment in the sector has also reduced significantly, from about 32 000 jobs in 1993 to 3 715 in 2014.
In managing this restructuring process, the Spanish government has relied heavily on early retirement and voluntary redundancy compensation to encourage acceptance of its policies and to prevent economic decline in affected areas. Strong links between miners and powerful unions, such as Comisiones Obreras (CCOO), as well as union influence on Partido Socialista Obrero Español (PSOE), which governed Spain during much of the implementation period, have been credited with bringing compensation and early retirement to the forefront of negotiations. Generous compensation was a key condition for unions’ acceptance of any job losses.
Eligible workers accepting voluntary redundancy received compensation of EUR 10 000, plus an additional amount for every year worked, with those suffering from Silicosis receiving an extra EUR 24 000. Early retirement for those eligible – workers over the age of 54 having worked more than ten years in the most recent iteration of the programme – has included 70% of gross wages for the previous six months worked.
Assessments as to the success of these policies have been mixed. The Spanish government’s agreement to union demands for generous compensation measures has been credited with generating overall acceptance for policies that ultimately sought to drastically reduce the number of jobs in the coal industry. It has also been seen as a major factor in maintaining the economic health of affected communities, given that spending by former mine workers did not fall substantially when unemployment hit.
However, across Spain, these policies have been criticised for being too expensive, with early retirement wages two to three times higher the national minimum wage. Moreover, they have largely failed to stem the flow of outward migration from affected areas, and social issues such as divorce, depression and alcoholism have risen in former mining communities.
Governments should consider prioritising the following actions:
Recognise that a just and equitable, people-centred transition should be premised on universal basic social protection. Low-wage informal workers and their dependents will not be insulated from the negative impacts of the transition without universal social protection floors covering public pensions, healthcare and basic income security. This is key in contexts where there are large numbers of informal workers with no social protection provision and where individual workers on low wages often support multiple other dependents. Governments can set a target to provide universal basic social protection, regardless of historic employment contributions, and establish social protection standards in national legislation.
Review the adequacy of existing social protection mechanisms and model the costs of expanding basic protections to all citizens, particularly public pensions, healthcare, unemployment relief and financial support to poor households.
Identify new financing mechanisms to expand social protection measures, as outlined in Box 2.8. In the long term, social protection mechanisms need to be financially sustainable, and should look to blend contributory revenue from wealthier citizens with tax revenue.
In legislation or social protection policy, make the link between climate change and social protection policies, ensuring that climate change is acknowledged and outlining how policies have been designed to deal with negative impacts.
Prioritise the provision of effective public services, especially education, healthcare and public transport, as critical to achieving a people-centred transition that prioritises human capital and enables citizens to capitalise on new opportunities.
Consider additional support packages for fossil fuel workers whose jobs will be eliminated by the low-carbon transition. Compensation packages should be defined in advance of closure through established social dialogue processes between government, industry and employee associations. It is crucial that financial support is integrated with active labour market policies, providing workers with the support they need to retrain, reskill and find new employment. Eligibility can be contingent on participation in schemes to find new work. Packages should not be so large to deter workers from re-entering the job market.
For older workers who are unlikely to find new work, or for whom reskilling is not an option, consider transition packages which can support them to an age when they will qualify for a pension.
Recognise that in many cases, informal workers unionise and are able to bargain effectively. They should be incorporated into discussions relating to provision of social protection packages in response to fossil fuel phase-down/out.
Consider strategies to encourage the formalisation of artisanal and small-scale mining, including through uptake of good practices in extraction and ventilation, and training on health and safety.
Actions requiring international support in contexts where government capacity is low:
Consider the practicalities of enrolling in social protection schemes to ensure effective coverage. Undertake communication and education campaigns to ensure people fully understand the eligibility requirements and know how to access benefits and services. Review system design and administration to simplify enrolment and access. Consider automatic enrolment.
Consider the role of local governments in providing counselling, mental health support, employment and financial management guidance in areas affected by closure.
Consider the broader social implications of fossil fuel phase-down/out on communities, for example, increases in cost of fuel or electricity. Devise approaches to offset these impacts on the poorest in society through cash handouts or exemptions.
Box 2.9. Takaful and Karama: Prioritising education and healthcare at a time of economic crisis in Egypt
From 2014, the Egyptian government embarked on an ambitious economic reform programme, involving refloating the currency, reducing fossil fuel subsidies and introducing a new value added tax (VAT). To mitigate the impact of these reforms on the country’s poorest people, the government introduced two cash handout programmes with USD 400 million in World Bank funding.
Takaful, or Solidarity, is a conditional cash handout programme providing EGP 325 (approximately USD 20.50) per month to poor families. To receive the money, families have to demonstrate that their children between the ages of 6 and 18 have an 80% school attendance rate, as well as meeting other criteria, such as participation in nutrition awareness sessions and regular visits to health clinics for children under 6. Households are provided with extra support for additional children. Karama, or Dignity, is an unconditional cash transfer programme providing EGP 450 (about USD 28.60) per month to Egyptians over the age of 65, those with disabilities and orphans.
Takaful and Karama were developed in parallel with the government’s economic reform programme on the basicprinciple that no Egyptian should be left worse off because of the necessity to undertake difficult macro-level reforms. The development of human capital, and the idea that the health and education of the country’s young people should be prioritised despite the country’s economic crisis, is also central to the design of Takaful.
Since 2014, 2.3 million households, equivalent to 10 million people, have benefitted from support through the two programmes, and the Egyptian government, with the assistance of the World Bank, recently introduced a new pilot programme, Forsa, or Opportunity, exploring options to get people off cash handout programmes and into work.
For developing countries considering the implications of fossil fuel phase-down/out on their poorest people and informal workers, this case study offers a useful model on how to approach the safeguarding of livelihoods and prioritise human capital alongside the necessity of economic restructuring, which would otherwise result in suffering and hardship among the poorest and most vulnerable.
Source: (World Bank Group, 2018[69]).
Subnational governments should consider prioritising the following actions:
Consider how vulnerable groups will be impacted by the transition, consult with them and establish plans to safeguard their interests and livelihoods to avoid the just transition exacerbating existing inequalities.
Assess social protection and compensation options, including costs and potentially negative impacts. Recognise that social protection and cash handouts can play a key role in sustaining livelihoods and local economies, particularly in areas where there are high levels of poverty, but understand that from a long-term perspective, social protection can lead to other problems and may not be sustainable from a finance point of view.
Develop plans to understand the scale and implications of informality in the labour market and approaches to deal with this, including social protection mechanisms, such as cash handouts, which can be used to directly target the poorest and most vulnerable people.
2.3. Decommissioning and repurposing fossil fuel assets and infrastructure
Increasingly cost-competitive low-carbon technologies, energy security concerns and the acceleration of international climate policy will likely quicken the pace of fossil fuel phase-down/out to 2050. The number of fossil fuel-intensive assets reaching the end of their commercial lives earlier than anticipated could increase in a low-price scenario, and countries will need to bring forward decommissioning and retirement schedules to meet their GHG emissions targets. Failing to plan for a managed closure process poses significant environmental and financial risks for governments, including the possibility of stranded assets. Effective decommissioning planning and management, including opportunities for materials recycling and re-use, is also relevant for renewables infrastructure, particularly offshore wind turbines.
Repurposing can enable governments to capture value from ageing assets which would otherwise need decommissioning at high cost. It can also reduce the overall capital expenditure (CAPEX) requirements of the low-carbon transition by utilising existing infrastructure. Gas pipelines, for example, can be built or repurposed to transport CO2 or hydrogen fuel, and oil and gas reservoirs can store sequestered CO2 via CC(U)S. Coal-fired power plants can be converted to renewables generation, offering also ancillary services to stabilise the grid if combined with battery storage.
However, asset repurposing can be expensive, technically challenging and will only be viable in certain conditions. While exploring opportunities for repurposing, therefore, governments should also plan for the phased decommissioning of carbon-intensive assets in a way that is compatible with their long-term emissions reduction commitments. Key priorities include clarifying decommissioning liabilities in the oil and gas sector, and developing selection criteria through which to determine which carbon-intensive facilities should be retired and when. Throughout this process, regular and constructive engagement with industry, and robust environmental and socio-economic safeguards, will be critical in facilitating the gradual closure of high-emitting assets.
Box 2.10. The potential scale of stranded assets: A growing risk for fossil fuel-based economies
Analysis undertaken by the International Renewable Energy Agency (IRENA) provides two scenarios for understanding the future scale of fossil fuel asset stranding. A REmap scenario assumes the acceleration of renewable energy deployment from the date of publication of the report (2017) to 2050, and a delayed action scenario assumes policy action to accelerate the energy transition is delayed until 2030, but then accelerates to 2050.
IRENA’s analysis estimates that the total value of stranded assets across the upstream energy, power generation, industry and buildings sectors will be USD 20 trillion under the delayed action scenario, compared with USD 10 trillion in the REmap scenario by 2050. This includes USD 7 trillion in the upstream energy sector under delayed action against USD 3 trillion under REmap. Power generation will see USD 1.9 trillion in stranded assets under the delayed action scenario, compared with USD 0.9 trillion in the REmap. This is mainly attributed to continued investment in coal-fired power plants in developing countries through to 2030, which will then require stranding.
IRENA’s report also notes large variance across countries and sectors In China and India, for example, power generation accounts for between 25% and 45% of stranded assets, reflecting their large reliance on coal-fired power generation and the relatively young age of their coal fleets. Meanwhile, Australia, Brazil, Canada, Indonesia, Mexico, Russia and South Africa will experience significant stranding of upstream assets, while the EU, Japan and US would see a high degree of stranded assets in the buildings sector.
Recent research calculated the risk ownership of 43 439 oil and gas production assets across 1.8 million companies worldwide, and showed that much of the losses from fossil fuel stranded assets would fall on private investors, particularly pension funds and financial markets mainly in OECD countries, as the ultimate owners of these assets. This means that advanced economies have an important stake in ensuring a well-managed phase-down in production in all countries across the world, as they could face significant financial market consequences or have to provide large bailouts to equity investors such as pension funds.
2.3.1. Managing accelerated decommissioning in the oil and gas sector
Oil and gas decommissioning is technically challenging, entailing significant environmental and safety risks, as well as costs that could run into billions of dollars. Many emerging and developing economies are relatively new oil and gas producers with limited experience in decommissioning. Gaps in regulatory frameworks, a lack of clarity over decommissioning liabilities, and weak government capacity and expertise to oversee the process, can present significant environmental, health and safety risks for oil and gas producer countries, as well as potentially severe economic consequences if decommissioning costs are passed to the taxpayer.
The low-carbon transition could accelerate the number of oil and gas projects requiring decommissioning over the next two decades, as demand for oil and gas is projected to decline in the medium to long term. Governments should prioritise addressing gaps in the regulatory framework, understanding the costs and schedule of decommissioning requirements, and clarifying decommissioning liabilities for all projects (Ogeer, 2022[72]). Otherwise, they risk being overwhelmed, particularly if their experience of decommissioning is limited.
The upstream decommissioning process is generally similar for onshore and offshore facilities, albeit with some key differences. Onshore decommissioning, involving plugging and capping wells, securing and dismantling facilities, recycling steel and land reclamation, is more straightforward and less expensive. However, the requirements are complicated by a need to co-ordinate with multiple local authorities, regional governments and environmental agencies, and the need to adhere to overlapping non-sector specific regulations. The default requirement for onshore decommissioning tends to be full removal of all oil and gas apparatus and land reclamation. Decommissioning of offshore facilities is altogether more complex, challenging and controversial, often involving vast fixed steel platforms, concrete gravity structures and floating production systems. Offshore decommissioning is governed by sector specific regulations, normally requiring operators to submit a Decommissioning Plan for approval. For both onshore and offshore decommissioning, well plugging and abandonment represents around 50% of the total cost. It is therefore crucial that onshore scrapping and recycling facilities are in place before any physical decommissioning takes place.
There has only been limited decommissioning of offshore pipelines around the world, and the process is often overlooked in regulations. Pipelines require flushing and cleaning, and available decommissioning options include removal, trenching, backfilling or remediation through rock cover. Key considerations include whether or not leaving a pipeline in situ will interfere with other users of the seabed, particularly fishing trawlers, and whether attempts to remove them would have adverse safety or environmental impacts given the structural integrity of the pipeline and water depth. Angola, for instance, requires the removal of all pipelines in water depths of less than 400 m, unless otherwise justified. Shore-based pipelines can present additional challenges owing to overlapping regulatory requirements and because they are more likely to interfere with other users of the seabed. Major pipelines connected to multiple projects can have complex owner-operator regimes. In this case, phased decommissioning may be required to account for staggered field depletion. Depending on national regulations, pipeline size, and whether they serve multiple fields and operators, pipeline decommissioning can be considered as part of its own decommissioning plan, or as part of that of a field (IOGP, 2021[73]).
The United Nations Convention on the Law of the Sea (UNCLOS II, 1982) and the International Maritime Organisation (IMO)’s Guidelines and Standards for Removal of Offshore Installations and Structures on the Continental Shelf and in the Exclusive Economic Zone (EEZ), are the most widely used international standards for offshore decommissioning. In 2017, the International Standards Organisation (ISO) issued ISO16530-1: Petroleum and Natural Gas Industries Well Integrity - Part 1: Life Cycle Governance, which defines criteria for permanently abandoning a well.
From a national standpoint, Norway and the UK have the most advanced decommissioning requirements, given the scale at which decommissioning has taken place in the North Sea. Both follow a risk-based evaluation process requiring approval of a decommissioning plan by the relevant national regulator. Key steps include supporting studies incorporating recent environmental surveys and the technical feasibility of different decommissioning options, a comparative assessment of different options (though this may not always be required when removal is the preferred option) and an environmental appraisal. These documents support the development of the decommissioning plan, the layout and contents of which are defined in national guidelines, as well as a monitoring framework for after decommissioning takes place. Public consultations are considered key to the process. Most other countries which are in the process of developing decommissioning requirements are adopting a similar risk-based evaluation approach.
Box 2.11. Ring-fencing funding for decommissioning through financial assurance mechanisms, clarifying liability and adapting bankruptcy legislation
A key issue for governments is to clarify decommissioning liabilities and to secure the availability of required funds to avoid costs being transferred to taxpayers. Decommissioning costs should be considered at the design phase of a project, and several financial mechanisms are available to ensure funds for decommissioning are available at the end of a project’s life:
Parent company guarantee, where an operator’s corporate parent guarantees the cost of decommissioning.
Letter of credit, which is a form of third-party guarantee to cover decommissioning costs.
Surety bond, consisting of a guarantee by a third party that assumes responsibility for payment if an operator cannot fulfil its payment obligations.
Trust or escrow fund, whereby the operator is required to deposit cash into the fund at a predetermined rate, up to the full cost of decommissioning by the end of the project’s life.
Standby trust fund, only partially funded as a back up to a letter of credit or surety bond.
Decommissioning Security Agreements (DSAs), where participants can agree to deposit cash, or another type of security, such as a letter of credit, into a trust to cover decommissioning costs, in case of overlapping liabilities.
However, financial assurance mechanisms have not been universally applied across all projects, with the attendant risk that costs will be borne by the taxpayer if an operator cannot fulfil payment obligations or disappears. Moreover, there is a lack of standardised guidance on how decommissioning costs should be calculated, resulting potentially in costs far in excess of the amount of funds ring fenced. Additionally, transfer of interests between entities can create confusion as to who is actually liable.
NOCs often face specific decommissioning issues. Countries using Production Sharing Contracts (PSCs) tend to be particularly vulnerable to lack of clarity around decommissioning liabilities. An asset is normally transferred to the state, usually the NOC, when the PSC expires on the basis that the asset will continue to produce. Many PSCs do not consider decommissioning liability, meaning that the NOC will eventually be left to cover the cost.
Increased oil price volatility has also made the operating environment more hostile for oil companies. Bankruptcies of companies with smaller balance sheets are likely to become more common, increasing the risk that decommissioning costs will be transferred to the state. The number of bankruptcies in the US and Canada, for instance, increased by 50% in 2019, and by a further 62% in 2020. Moreover, as international oil companies (IOCs) divest themselves of and sell oil assets to smaller players, this is likely to further increase the risk of bankruptcies.
These issues have led to an increase in orphaned wells, or abandoned oil and gas projects with no legally responsible entity, but with persisting environmental issues and ongoing decommissioning costs. In Alberta, Canada, the government raises a levy on existing operations to cover the decommissioning of orphaned wells to ensure the associated costs are not transferred to Albertans. Additionally, in April 2020, as part of its COVID-19 relief package, the Government of Canada committed to spending USD 1.7 billion to clean up abandoned and orphaned wells in Alberta, Saskatchewan and British Columbia. The programme was designed to support Canada’s energy sector to maintain jobs, creating 5 200 in Alberta alone, as well as to support companies to avoid bankruptcy.
Financial assurance mechanisms can help governments guard against the risk of operators going bankrupt. In some cases, such as in the UK, regulators have sought to establish liability in perpetuity, meaning that if the existing operator cannot fulfil payment obligations, liability transfers up the chain to previous owners. However, this can risk acting as a disincentive to repurposing, as operators may be unwilling to hand over an asset if they will retain liability once it is repurposed. Additionally, adapting bankruptcy laws to ensure decommissioning is given priority creditor status can help governments recover as much of the decommissioning costs as possible when an operator goes bankrupt and there are no financial assurance mechanisms in place.
Source: (Ogeer, 2022[72]); (Anderson, 2020[74]).
Governments should consider prioritising the following actions:
Develop an inventory of all wells, facilities and associated installations which will require decommissioning, including costs, timeframes and an assessment of each project’s environmental and safety risks. This should include an analysis identifying projects that lack a liable entity, where liability is unclear (e.g. because of transfer of assets) or where the operator is at risk of bankruptcy. Governments can build a picture as to the potential scale of the decommissioning risk and a preliminary picture of decommissioning options for each asset. Based on this, they can begin to define solutions to financing gaps in partnership with industry (Ogeer, 2022[72]).
Complete a diagnostic on the legal and regulatory framework to identify decommissioning gaps and weaknesses. Particular focus should be given to who has liability for decommissioning in different circumstances, for example, bankruptcy and asset transfer, including residual risks. In some countries, for example the UK, regulators have opted for liability in perpetuity to cover changes in asset circumstances (Ogeer, 2022[72]).
Ensure the regulatory framework incorporates decommissioning requirements for oil and gas operations based on the principle of polluter pays (Ogeer, 2022[72]).
Ensure the design of any new oil and gas projects includes high-level information on decommissioning, in particular on financial security to cover liabilities. Regulators should ensure well-formulated and costed decommissioning plans are developed during the production phase (Ogeer, 2022[72]).
Ensure the government has access to full and credible data relating to environmental and safety risks and costs for decommissioning, allowing it to effectively evaluate decommissioning options for each asset (Ogeer, 2022[72]).
Require operators to undertake ongoing environmental and data reporting throughout the life cycle of the project to ensure decommissioning costs and options are based on current information and have evolved based on changing project circumstances (Ogeer, 2022[72]).
Clarify the kind of environmental monitoring that has to take place following decommissioning (groundwater, hydrocarbons presence, species diversity, etc.) based on risk assessment. Set requirements for implementation, including for the length and frequency of monitoring (Ogeer, 2022[72]).
Actions requiring international support in contexts where government capacity is low:
Introduce financial assurance mechanisms to ensure taxpayers do not end up paying for decommissioning. These include parent company guarantees, letters of credit, surety bonds decommissioning trust funds/escrow funds, and Decommissioning Security Agreements (DSAs). Such mechanisms should cover the full amount of costs, and should be capable of accommodating transfer of assets to a new operator (Ogeer, 2022[72]).
Regulatory approval of planned divestments and asset transfer to a new entity should ensure the financial mechanism or financial assurance covers decommissioning costs, including in event of bankruptcy. The financial capability of the buyer should be taken into account, including their ability to meet future decommissioning liabilities and their access to adequate financial security.
Adapt bankruptcy legislation to ensure government decommissioning claims are treated with priority creditor status to maximise the amount of money that can be recouped in the event an operator goes bankrupt and adequate financial securities are not in place. Bankruptcy policy should also ensure that if the existing operator becomes insolvent, leading to the regulator calling upon a predecessor in the chain of title, financial liability for decommissioning is still retained by the insolvent company, even if the physical decommissioning is performed by the predecessor or a different party. Often companies restructure and emerge from bankruptcy, and under these circumstances they should reimburse the relevant party for the physical decommissioning work that was performed as a result of the existing operator’s (temporary) default.
Assess risks relating to temporary suspensions. In a low-price environment, it is likely operators will prefer to suspend production, rather than plug and abandon wells, given this represents 50% of the cost of the decommissioning process. However, this approach could risk the creation of large numbers of orphaned wells if a number of companies were to go bankrupt during the same period. Moreover, the longer a well is idle, the more likely it is that decommissioning will become more costly and unsafe. Governments can mitigate this risk by establishing a time limit for suspended wells, also referred to as the “idle iron” approach, whereby a requirement exists to remove installations and subsea infrastructure by a defined time following a cessation in production (Ogeer, 2022[72]). In California, for instance, a lease expires after six months if there is no pre-approved suspension of production. Decommissioning must take place within a year of the lease expiring.
Put in place policies and rules requiring industry to estimate decommissioning costs and keep these regularly updated. This should include a requirement to provide underlying assumptions (Ogeer, 2022[72]). Governments can assist this process by producing guidance documentation in partnership with industry, outlining how to approach financial securities and calculate decommissioning costs, as well as general guidance to help companies comply with decommissioning legislation and regulations.
Consider separating regulatory responsibilities for overseeing the environmental and safety aspects of decommissioning from oversight of financial security to avoid potential conflict of interest within regulatory bodies.
Assess the capacity of the government agency responsible for overseeing decommissioning. Expertise in evaluating decommissioning options and ability to engage with industry is critical to ensuring environmental and safety risks are adequately managed and costs are not transferred to the taxpayer (Ogeer, 2022[72]).
Governments and the fossil fuel industry should consider prioritising the following actions:
Work together to establish a standardised methodology to calculate costs of decommissioning. This will help to ensure a complete cost assessment, enable governments to compare costs between assets, benchmark costs, assess performance against actual costs and build confidence in cost estimates as the number of assets needing to be decommissioned increases (Ogeer, 2022[72]).
Consider working together to establish a mechanism to cover the decommissioning costs of orphaned wells based on the polluter pays principle (Ogeer, 2022[72]).
Establish an international dialogue on decommissioning in the oil and gas sector, bringing together industry and government stakeholders to share lessons learned and best practice, and to agree on a common set of principles and guidelines governing decommissioning in the light of increased risks posed by the low-carbon transition.
2.3.2. Repurposing oil and gas upstream and midstream infrastructure in support of industrial decarbonisation objectives
Integrating industrial decarbonisation planning with repurposing of oil and gas infrastructure can avoid large decommissioning costs, extend the life of assets for low-carbon re-use, create green jobs and foster low-carbon value chains. A cluster-based approach, which leverages effective spatial planning, can be used to integrate oil and gas transport systems with upstream facilities in relatively close proximity to industrial centres, utilising CC(U)S technology for sequestration of CO2 in depleted offshore oil and gas reservoirs. Upstream oil and gas facilities or renewables installations, meanwhile, can be linked with hydrogen production facilities to produce blue or green hydrogen as feedstock for industry. Re-purposed midstream infrastructure can provide connections with industrial centres.
A recent study examined the potential for repurposing oil and gas pipeline infrastructure for hydrogen and CO2 transport in EU countries. It concluded that a large proportion of both onshore and offshore pipelines (between 60% and 80%) could be repurposed at lower cost than building brand new infrastructure (Carbon Limits and DNV, 2021[75]).
A cluster-based approach to systems integration, which identifies the optimum combination of available technologies, can leverage economies of scale, contributing significantly to a country’s overall decarbonisation objectives, while also reducing CAPEX requirements for new low-carbon infrastructure and maintaining part of the workforce as the oil and gas industry is gradually wound down. Moreover, systems integration can be built out in a modular fashion. This can enable fossil fuel producer developing and emerging economies, which are largely dependent on fossil fuel revenues and with infrastructure already in place, to approach industrial decarbonisation in a managed way, gradually shifting from blue to green hydrogen in line with their need to monetise proven reserves, generate revenue, ensure an affordable and sustainable energy mix, and implement industrialisation plans.
Integrating oil and gas asset repurposing with industrial decarbonisation planning is technically challenging, and requires advanced integrated planning from a regulatory standpoint given overlapping onshore and offshore jurisdictions, and the diverse roles and skillsets of the entities involved (upstream and midstream operators, mandated gas and electricity transport operators, hydrogen off-takers, industries producing CO2, and onshore and offshore regulators). Robust partnerships are needed to balance the allocation of costs and risks, and provide fiscal incentives to encourage industry participation. Additionally, clarifying decommissioning liabilities in the event of repurposing can encourage industry participation by reducing risks for oil and gas operators. Decoupling repurposing requirements from decommissioning regulations could also allow for repurposing to be considered at an earlier stage, enabling oil and gas operators to adjust technical specifications and field development plans to ensure that repurposing is feasible at the end of an asset’s life.
Box 2.12. The UK’s cluster-based industrial decarbonisation strategy
UK industrial sectors, including energy-intensive industries such as chemicals, glass, cement, fertiliser, oil refining, paper and pulp, iron and steel, employ more than 2.6 million people, and generate exports worth over GBP 300 billion. They also contribute 16% of CO2 emissions. The UK’s Department for Business, Energy and Industrial Strategy (BEIS) has established an industrial decarbonisation programme to reduce emissions from industry in line with its net zero by 2050 target. The strategy aims to develop four low-carbon clusters by 2030, and one net-zero cluster by 2050. Most of these will be in relatively deprived regions of the UK, including in the North East, the Humber, the North West, and in Scotland and Wales. The strategy is premised on industrial clusters where multiple industries are co‑located, and where there are also available offshore oil and gas assets for CC(U)S, and oil and gas transport infrastructure for CO2 and hydrogen transport. BEIS aims to deploy CC(U)S in two industrial clusters by the mid-2020s, increasing to four by 2030, with the objective of capturing up to 10 Mt CO2 per year.
As part of this strategy, BEIS is co-ordinating closely with industry and providing finance to encourage the development of low-carbon technology. This includes a GBP 1 billion CC(U)S Infrastructure Fund and a GBP 240 million Net Zero Hydrogen Fund which issue grant funding to CC(U)S and hydrogen production developments to cover early project costs and de-risk the early stages of development. The government is also working on a strategy to provide subsidies and revenue support to cluster-based businesses to help them switch to hydrogen fuels, given the associated costs. This is an important factor in building regional demand for hydrogen. The government expects to phase out subsidy support to businesses in the long term. It has also established a task force to streamline the planning process, as well as to work with industry to identify and resolve regulatory barriers to systems integration.
In October 2021, the Hynet North West project, which aims to decarbonise industrial centres in the North West of England and North Wales from 2025, was selected as one of two industrial clusters in Track One of the BEIS industrial decarbonisation programme. The project aims to reduce CO2 emissions by 10 Mt CO2 per year by 2030 through the development of facilities to produce, store and distribute hydrogen as feedstock for industry, and capture and store CO2 produced by industry. The project combines building new infrastructure and upgrading and reusing existing infrastructure. This includes storage of CO2 in depleted gas reservoirs under Liverpool Bay, for which Eni-UK has a CC(U)S licence, the use of existing gas transport infrastructure to transport CO2 to storage sites, and the utilisation of salt reservoirs for hydrogen storage. New infrastructure includes the development of a hydrogen transport network and the development of the UK’s first low-carbon hydrogen production facility at Stanlow.
Advantages of the project include its relatively low cost, given the extensive use of existing infrastructure, its flexibility, given hydrogen production and CO2 storage can be expanded in line with demand, and the close proximity of depleted reservoirs for CO2 storage with substantial industrial centres. Hynet North West aims to create 6 000 direct jobs, as well as support a further 350 000 through maintaining industrial competitiveness. It also aims to generate GBP 17 billion for the local region by 2050 and deliver 80% of the UK’s clean power target for transport, industry and housing by 2030.
By 2025, during its initial phase, the project would reduce CO2 emissions by over 1 million tonnes per year. Key milestones include direct capture of 400 000 tonnes of CO2 from industrial sites, construction of a low-carbon hydrogen production facility capable of producing 3 TWh per year, the repurposing of existing natural gas pipelines for transport and storage of CO2 up to 1 million tonnes per year in depleted gas reservoirs, and development of a new hydrogen pipeline network to supply blended gas and hydrogen (20%) to industry.
Between 2027 and 2028, further CO2 emissions reduction of 3-4 million tonnes per year is envisaged through increasing hydrogen production capacity and supplying additional sites.
By 2030, the project would reduce emissions by a further 10 million tonnes per annum through capture of an additional 1 million tonnes per year of CO2 from industry, scaling up hydrogen production to 30 TWh per year, providing at least one major power station with 100% hydrogen, and decarbonising heavy transport including trains, heavy goods vehicles, buses and ships. By 2030, hydrogen storage of 1 TWh across the Cheshire salt basin is envisaged, as well as the development of a 350 km hydrogen pipeline network.
The project involves co-operation and partnership between multiple public and private bodies, each fulfilling a different role and bringing a different skillset to the table. On the private sector side, Eni-UK has the licence for CC(U)S; Cadent, the UK’s largest gas network operator is developing the project’s hydrogen network and Progressive Energy, a company specialised in CC(U)S and hydrogen production, is responsible for repurposing the CO2 pipeline and development of the hydrogen production plant.
From a regulatory perspective, the project involves co-ordination between multiple institutions responsible for different aspects of the value chain. The UK’s cluster-based industrial decarbonisation programme is managed by BEIS, which is also responsible for engaging with industry on the most efficient approach to hydrogen production and storage, and CO2 capture. It also manages planning permissions for the project alongside local planning authorities. The Department for Transport is responsible for transport policy and can amend the existing Renewable Transport Fuel Obligation (RTFO) to enable hydrogen to be sold as vehicle fuel at a price comparable with petrol and diesel. The Crown Estate owns the UK seabed and has established a system to lease the seabed for transport and storage of CO2. The Oil and Gas Authority (OGA) has an existing regime for CO2 storage licensing. Meanwhile, the Health and Safety Executive (HSE) will regulate and oversee the safety of hydrogen distribution to homes and businesses, along with hydrogen storage and CO2 transport. For hydrogen blending, this will be undertaken using the existing Gas Safety Management Regulations (GSMR), with the transport and storage of hydrogen and CO2 governed by the existing Control of Major Accident Hazards (COMAH) regime.
Source: (Hynet, 2020[76]).
Repurposing oil and gas transport infrastructure for hydrogen and CO2 transport
Governments should consider prioritising the following actions:
Undertake an initial assessment of national pipeline infrastructure to determine potential for repurposing for hydrogen and CO2 transport re-use. This should be based on criteria such as material composition, age, location and capacity. Transport infrastructure with re-use potential can be mapped against forecast supply (e.g. hydrogen and carbon), and potential storage sites and consumption centres.
Based on a preliminary assessment, build a business case to compare the costs of re-purposing infrastructure with those of investing in new infrastructure. Assets with the highest conversion potential can form the object of feasibility studies and environmental impact assessments (EIAs).
Actions requiring international support in contexts where government capacity is low:
Consider introducing environmental, and health and safety regulations to provide guidance on repurposing oil and gas transport infrastructure for hydrogen and CO2 transport re-use. Safety standards of pipelines repurposed for hydrogen transport may require adjustments to account for the different physical and chemical properties of hydrogen, while the transportation of CO2 offshore can be more complex due to the need transport CO2as a liquid, which may require pipelines to be reinforced.
Repurposing depleted oil and gas reservoirs for CC(U)S
Actions requiring international support in contexts where government capacity is low:
To guide development of a CC(U)S industry, consider developing a CC(U)S roadmap. This should include an assessment of national CC(U)S potential, development of a CO2 storage atlas, CC(U)S pilot projects, and elaboration of an actionable strategy for commercial deployment of CC(U)S. The South African CCS Roadmap, which was formally adopted in 2012, provides a good model in this regard. It incorporates five phases to be completed over a period of 20 years: an assessment of CC(U)S potential, completion of CO2 storage atlas, CO2 test injection, CC(U)S demonstration and commercial CC(U)S application.
Consider establishing an expert group to work with industry and lead consultations on potential options to incentivise CC(U)S development. Industry consultation can help to identify reservoirs which would be suitable for CC(U)S, as well as to identify potential regulatory barriers and financial models and incentives to make CC(U)S commercially viable.
Require industry to undertake a technical assessment of whether an asset has potential for CC(U)S. All project and licence approvals should be contingent on assessment of potential for a reservoir to be repurposed for CC(U)S at the end of the project’s life.
Consider decoupling regulatory requirements for oil and gas infrastructure repurposing from decommissioning regulations. In most jurisdictions, potential repurposing options are only considered during the latter stages of the oil and gas cycle, by which point it may be too late to adjust technical specifications to facilitate re-use. Separating repurposing and decommissioning regulations would enable consideration of repurposing at an earlier stage. Governments should also clarify decommissioning liabilities in the event of repurposing.
Consider introducing a clean break liability provision for repurposing oil and gas projects. If an asset is repurposed and subsequently operated by a new entity, it will be necessary to clarify who has the decommissioning liability for the facility. If the existing operator retains liability, they may be disincentivised to hand-over an asset for re-purposing.
Consider introducing regulations to prevent selected oil and gas licences from expiring so they can be used for CC(U)S. Grandfathering licences in this way could streamline administration of CC(U)S licences, as projects would not need to go through a lengthy licence administration process.
Ensure data relating to oil and gas reservoirs are stored centrally by government, given the risk that data could disappear if a company closes or goes bankrupt.
Issue guidance on well plugging and abandonment to industry to ensure an option is left open for reservoirs to be used for CC(U)S.
Consider the role of the shipping industry in the CO2 sequestration value chain, given that not all countries have available depleted oil and gas reservoirs for CC(U)S, and not all power plants are connected to pipeline infrastructure. Standardisation of facilities will be important to ensure any ship can dock and inject CO2, and cross border co-operation between regulators will need to be ensured to transport CO2 across borders.
Integrating oil and gas infrastructure repurposing with industrial decarbonisation
Actions requiring international support in contexts where government capacity is low:
Adopt a cluster-based approach and use spatial planning to identify the optimum combination of integrating various technologies to maximise cost effectiveness and leverage economies of scale, as opposed to investing in repurposing of individual facilities which are isolated from one another. Governments can map national industrial clusters, assessing their relative proximity to oil and gas facilities which could be converted to hydrogen production and depleted oil and gas reservoirs for CC(U)S, as well as available gas transport infrastructure which can be repurposed for hydrogen or CO2 transportation. Leveraging geographic proximity of industrial centres with oil and gas assets nearing the end of their commercial lives can generate economies of scale, and form the basis of a framework to establish an integrated decarbonisation strategy.
Consider options to incentivise the establishment of well-defined and robust partnerships between industry actors with the necessary skillsets to structure an integrated, cluster-based industrial decarbonisation project. Well-structured tender frameworks covering potential industrial clusters provide an effective means to guide and incentivise partnerships between upstream operators, gas and electricity infrastructure operators, and industry who will require hydrogen feedstock or who produce CO2. Tenders can also be helpful in soliciting workable and innovative solutions from industry, while at the same time delivering cost-effective solutions by requiring consortia to compete with one another on price. No single company is capable of getting such a complex project off the ground, and fostering effective partnerships should be prioritised as a key success factor. The UK’s Industrial Decarbonisation Strategy provides a useful blueprint in this regard (BEIS, 2021[77]).
Assess the regulatory framework to identify ways to reduce complexity, identify overlapping responsibilities between regulators, and facilitate co-ordination, for instance between onshore and offshore regulators on joint permitting, oversight mandates of offshore oil and gas regulators and onshore gas market regulators and electricity transmission regulators, or co-ordinating skillets of regulated entities, such as mandated gas transport companies. Such efforts should seek to simplify the value chain, reduce regulatory complexity as far as is possible, and ensure the roles and responsibilities of all entities involved are clear.
Ensure the fair distribution of risk and costs between government and industry, including designing and adjusting fiscal terms in legislation or contracts to incentivise investment.
Incorporate repurposing plans into long-term national decarbonisation strategies, including NDCs.
In collaboration with industry, systematically identify opportunities for repurposing infrastructure before decommissioning is approved, and even ahead of its retirement (Huang et al., 2021[78]; WEC, 2019[79]).
Develop a transparent process for consulting local stakeholders on the repurposing of existing infrastructure. Effective communication with local stakeholders is key to the success of repurposing projects, and industry and government alike should effectively communicate benefits including the provision of low-carbon energy, job creation and supply chain benefits, as well as developing plans to mitigate negative impacts.
Maximise dialogue between governments and industry to define policies aimed at optimising and co-ordinating asset life-cycle planning (WEC, 2019[79]).
Ensure hydrogen infrastructure is built up in parallel with existing gas assets (Findlay, 2020[80]).
Systematically and in a timely fashion identify assets at a high risk of stranding due to decarbonisation requirements so that regulators and investors are better aware of risks and can make informed decisions (WEC, 2019[79]).
Promote cross-sector co-ordination to leverage cross-sector synergies regarding repurposing to ensure the most cost-effective and sustainable management of the infrastructure and reduce stranded assets (WEC, 2019[79]).
2.3.3. Managing early retirement of carbon intensive power generation
Keeping global temperatures within 1.5°C will require widespread early retirement of coal, diesel and unabated gas-fired power plants. Carbon Tracker estimates that in 2018, 42% of the world’s coal-fired power plants were uneconomic, with this figure forecast to increase to 72% by 2040. Moreover, 35% of coal capacity cost more to run than renewables in 2018, a figure that is expected to rise to 96% by 2030 (Carbon Tracker Initiative, 2020[81]). The IEA estimates that there is more than USD 1 trillion in unrealised capital in coal-fired power plants globally, mainly in Asia. The relatively young age of many of these power plants means that developing finance options for early closure and repurposing is vital to ensuring a transition that minimises socio-economic disruptions (IEA, 2021[1]).
Retiring power plants early can be challenging. The nature of project finance in the power sector relies on capital being recouped over the full life of a project, which normally covers a 20 to 40-year period. For relatively new facilities, early retirement is likely to entail significant losses for a utility and the investor, as shortening the lifespan of a project means capital invested will not be fully recovered. Additionally, if a government embarks on an early retirement process without sufficient warning or consultation with utilities and investors, it can raise perceptions of risk. This may undermine a country’s investment attractiveness which could have implications for the low-carbon transition and energy security, and result in grid absorption issues.
The key to the process is early planning, as well as open and consultative dialogue with utilities and investors. This can help to mitigate negative market perceptions and can open up avenues for financing early retirement, thus avoiding the transfer of costs of early retirement to rate payers and consumers through raising tariffs.
Introducing a well-signalled and gradual early retirement programme for coal, diesel and unabated gas-fired power plants, which establishes clear and predictable criteria, based on factors such as age, efficiency and cost, through which assets will be selected for early retirement well ahead of time, can set the foundations for a well-managed phase-out. This can maximise return on capital expenditure for utilities and investors, limit price increases for consumers and recycle as far as possible capital for investment in renewable energy alternatives.
Scenario modelling of the risks of not retiring carbon intensive power plants early is key to this process, and should look to model the cost to consumers of continuing to run uneconomic projects. It should also model the cost of stranded assets to investors, utilities and consumers (as well as fiscal implications) if no action on early retirement is taken. This process is key to generating buy-in for early retirement programmes and communicating the necessity of closing plants early.
When early retirement costs are borne by consumers, clear communication explaining the rationale for rates increases and mechanisms to alleviate costs on poorer households will be necessary. In the United States, for example, ratepayer-backed securitised bonds have been used to refinance coal-fired power plants where capital has not been fully realised, by spreading costs across ratepayer bills. This mechanism can also be used to recycle power utility capital for reinvestment in cheaper renewables, but requires a legislative environment that will allow for this. It is also dependent on high rates of collection of energy bills to provide sufficient guarantees for finance to be affordable, which is not always the case in emerging and developing countries.
Governments can consider compensating power plant operators for early retirement. Germany, as part of its programme to close hard coal-fired power plants, has taken this approach. The country is holding a series of auctions whereby coal operators state the price at which they would be willing to shut their plants in return for state-paid funding to cover some of their financial losses. Winners are also selected based on anticipated emissions reductions (Reuters, 2021[82]).
Governments should clearly establish criteria to prioritise which facilities should be retired early, and when. Such criteria need to include cost comparisons of renewables and abated gas alternatives, against carbon intensive technologies (coal and diesel), identifying inflection points for when these become uncompetitive against cleaner technologies (e.g. new coal is less expensive than new renewables or gas, or, new renewables or gas are more competitive than existing coal), taking into consideration environmental externalities. They also need to incorporate quantitative analysis of targets relating to long-term decarbonisation plans, or stipulate how much carbon-intensive generation capacity needs to be phased out and when to meet NDC commitments, including any net-zero targets. Power plant age should also be considered, given that plants become increasingly inefficient as equipment and machinery deteriorate with time.
Governments should take an integrated approach to power sector planning. This should consider the potential to transform some plants to low-carbon generation, for example, through retrofitting coal plants to accommodate abated gas, as well as the potential for CC(U)S to reduce CO2 emissions. Replacing baseload coal-fired power generation with variable renewables capacity can also impact grid stability, and should also be factored into plans. Based on this, governments can send clear signals to the market based on price and GHG emissions reduction targets, and identify relevant plants for early closure based on these criteria.
Emerging and developing countries with shallow capital markets and more limited public funding will need to pursue financing options based on blended or concessional finance from developed countries or development finance institutions. South Africa’s power utility Eskom, for example, is looking to raise a USD 10 billion finance package, mainly in concessional financing, over the next ten years to help it repurpose its ageing coal-fired power plant fleet to cater for renewable energy generation under South Africa’s energy transition programme. Plans could include the closure of the Medupi and Kusile coal-fired power plants, which have a combined capacity of almost 9.6 GW, 20 years ahead of schedule, in the 2040s (African Energy, 2021[83]; Sguazzin, 2021[84]).
Governments should consider prioritising the following actions:
Link carbon-intensive power generation (early) retirement plans to long-term, low-carbon development strategies, for example, NDCs and net-zero decarbonisation targets, incorporating avoided emissions over time.
Undertake scenario-based modelling, incorporating the costs of CO2-emitting technologies versus those of non-emitting sources of electricity, reflecting environmental and health impacts. Based on inflection points, publish long-term investment signals. Power generation facilities can be ranked based on economic, contractual and market factors to identify potential plants which are most suitable for early retirement or repurposing. Such a dataset can be used to identify facilities for early closure once inflection points are met. This approach should also identify opportunities to repurpose or retrofit facilities, for example, for abated gas-fired power or renewables with battery storage. For example, if investments in new renewables or abated gas capacity cost less than investments in new coal-fired generation capacity, investments in new coal-fired power projects could be banned. If investments in new renewables cost less than running coal, introduce plans for early phase-out. Scenario-based analysis should also incorporate risk of stranded assets, and the implications on consumer rates versus raising consumer rates over time to pay for early retirement (Carbon Tracker Initiative, 2020[81]).
Consider the social implications of early retirement or repurposing of assets.
Actions requiring international support in contexts where government capacity is low:
Develop financing plans for carbon-intensive power plant retirement or repurposing, including the use of concessional finance from development finance institutions.
Consult with industry operators early and openly on the necessity of carbon-intensive power plant phase-out and on options to maximise return on capital, while offering consumers sustainable solutions based on available alternative options.
Consider the feasibility of refinancing for early retirement to maximise return on capital, for example, through ratepayer-backed securitisation, including an analysis of the security of bill payment collection and the impact on consumer bills, as well as necessary changes in legal framework and strength of capital markets.
Explore, where appropriate, least-cost mechanisms for compensating power plant operators, for example, through a similar mechanism to Germany’s coal-fired power plant phase-out compensation auction.
Development finance institutions should:
Provide technical assistance to emerging and developing economies to understand the potential costs and benefits of carbon-intensive power plant retirement and repurposing, alongside the scale up of renewable energy. Technical assistance can be used to develop a roadmap for early retirement or repurposing of assets and mechanisms to access concessional finance.
Increase concessional finance to unlock private sector investment in repurposing carbon-intensive power generation facilities for renewable power generation.
2.3.4. Capturing value from ageing coal-fired power plants through repurposing
Repurposing coal-fired power plants for renewables generation can facilitate the retirement of old, unprofitable and polluting assets, while offering a cost-effective re-use option for distressed or stranded facilities. Repurposing can address constraints facing greenfield developments, including land availability, with low opportunity costs given limited options for land re-use. Other benefits include the utilisation of existing infrastructure, including substations, transmission and evacuation lines, which can significantly reduce CAPEX requirements for renewable projects and ultimately lower the overall cost of electricity. Repurposing can also help manage social opposition to power plant closure by sustaining the labour force, while also maintaining a revenue stream for government which would be lost if a plant were instead decommissioned.
Combined with battery storage or a synchronous condenser, repurposing can also provide ancillary services to stabilise the grid, which were previously provided by the coal plant. This can increase grid absorption capacity of variable renewables technologies, and could accelerate the low-carbon transition while boosting access to affordable energy. Moreover, as battery storage costs come down, and governments introduce increasingly stringent remediation and environmental requirements, which place greater decommissioning costs on companies and utilities, the economic case for repurposing will strengthen.
Given the different local conditions, types, sizes and ages of coal-fired power plants, and the varying roles they play in the local economy (i.e. meeting national electricity demand and stabilising the grid), repurposing should be considered on a case–by-case basis. Analysis of individual cases should assess different technology combinations and consider different scenarios, including the impact on a system’s capacity to meet national electricity demand and risks to grid stability. Cost-benefit analysis can help to shortlist potential technology options, and governments should also assess the socio-economic implications and environmental risks of repurposing.
Governments should consider prioritising the following actions:
Integrate coal-fired repurposing plans into long-term decarbonisation planning, NDCs and electricity master plans, quantifying the planned contribution of repurposing to overall GHG emissions reduction objectives. An integrated plan which provides clarity on government policy direction can help to reduce risk for the private sector and encourage investment in repurposing projects.
Consider the socio-economic dimensions of repurposing and develop clear plans to engage and consult with local communities and workers. Develop a transparent mechanism to address grievances and concerns.
Actions requiring international support in contexts where government capacity is low:
Consider the upstream impacts of repurposing, particularly the implications for mines which provide coal to power plants. In some contexts, where utilities have long-term supply contracts involving multiple power plants, supply can be redirected to other plants and impacts on communities and workers dependent on mines can be mitigated. Where this is not possible, governments should assess the socio- economic impacts of reduced demand for coal in line with just transition recommendations in Section Pillar 2, Section 2.
Undertake a detailed power system assessment to understand the implications of changing coal capacity to renewables capacity, alongside the retirement and repurposing schedules of other plants and the addition of greenfield renewables projects to the grid, in terms of system stability and energy security. Consider potential solutions to intermittency through the addition of ancillary services and use scenario-based analysis to gauge the impact of different repurposing (and retirement) scenarios on energy systems.
Undertake a technical analysis on a plant-by-plant basis to determine potential technology combinations and options for each plant, including solar PV, concentrated solar, wind, natural gas, biogas, biomass, battery storage, thermal storage and synchronous condenser technology. This should incorporate a cost-benefit analysis which would run scenarios in which the power plant continues to operate as a coal-fired plant, and in which it is decommissioned. Cost-benefit analysis options can be used to build a shortlist of potential technology options to be taken forward to the feasibility stage.
Ensure preliminary environmental impact assessments take place for each shortlisted option. These should detail the required assessments or studies that need to take place at the feasibility study phase.
Consider the financial and economic dimensions of the preferred repurposing option, including opportunities to encourage private sector investment through PPPs. Outline potential financing structures and business models, and seek inputs from private sector through consultation.
2.3.5. Managing decommissioning, land remediation and restoration, and redevelopment of thermal power plant sites and coal mines
Properly planned and implemented land remediation and restoration, and redevelopment of thermal power plant sites and coal mines can create opportunities to revitalise an area, increase the well-being of citizens and create local employment. Conversely, failure to properly formulate and implement mine and power plant closure, remediation, restoration and redevelopment plans in concert with communities often results in persistent negative health and environmental impacts and in many cases land being unfit or unsafe to be re-used for alternative purposes. Given the importance of land as a key asset for communities, full consultation in the design of land remediation, restoration and redevelopment plans, aligning with the local vision for redevelopment is essential to deliver environmental and restorative justice as part of the low-carbon transition (EBRD, 2020[32]; Krawchenko and Gordon, 2021[85]).
Land remediation is also important to attract investment, as contaminated land or unaddressed environmental damage can deter investors if there are associated health and safety risks for staff (EBRD, 2020[32]). Beautification and site redevelopment can also play a role in limiting outward migration, which is an important factor in local economic regeneration through the longer term.
Governments must ensure industry fulfils its obligations in paying for land remediation, rather than transferring costs to the public sector (Atteridge and Strambo, 2020[36]). For both coal mine closure and thermal power plant decommissioning, long-term planning is important, and understanding the range of site re-use options and associated costs can inform clean-up decisions and facilitate consultations on redevelopment with local leadership and community groups.
Preparing a site for re-use is a complex, three step process, involving removal or demolition, then disposal of industrial structures as part of the decommissioning or closure stage, followed by clean-up of contaminated land and any hazardous materials, based on testing of soil and water samples, to ensure the safety of the site, in line with local environmental regulations. Community representatives should be consulted on the design of land remediation and restoration plans and updated on progress of their implementation.
There are a range of site redevelopment options for both coal mines and thermal power plants. Selection of the preferred option should be based on local redevelopment goals, assessment of economic opportunities, and availability of amenities and infrastructure, and should be made in accordance with permit requirements. In Germany’s Ruhr Valley, decommissioned mines have been turned into museums and monuments to attract tourism (Robins and Rydge, 2019[44]). Alternative options include the restoration of natural habitats and other wildlife, and community use. Greening of ash dumps is also a feasible option, either through production of green concrete, or for other products, such as bio-degradable geo-textile, which is used to reinforce and stabilise steep slopes.
Governments should consider prioritising the following actions:
Require companies to plan for and implement environmental clean-up plans through regulation and contracts, ensuring these plans will be paid for through financial mechanisms such as insurance, rehabilitation bonds and bank guarantees.
Ensure the cost of environmental remediation and restoration does not get passed to the taxpayer.
Ensure funding to pay for environmental remediation and closure is ring fenced, for example, through financial guarantees, surety bonds, insurance, cash payment or irrevocable standby letters of credit. Financial guarantees should be updated if the mine closure plan is updated.
Actions requiring international support in contexts where government capacity is low:
Invest in environmental agency capacity to evaluate EIAs and follow up on implementation.
Look for opportunities for environmental restoration projects to provide employment for unemployed fossil fuel workers.
The fossil fuel industry should:
Develop rigorous plans for environmental remediation and restoration.
Ensure a range of redevelopment options are explored and costed as early as possible in advance of mine or power plant closure. Community viewpoints should be incorporated into redevelopment design to ensure the proposed redevelopment plan aligns with local redevelopment goals. Local stakeholders should also be consulted and informed as to the scale and progress of remediation and clean-up of hazardous materials.
Update mine and power plant closure/decommissioning, remediation and redevelopment plans based on potential early closure schedules, as well as progressive restoration throughout a mine’s life. This will reduce overall costs.
Ensure a full EIA is conducted covering all aspects of closure.
2.4. Closing the financing gap
Fossil fuel producer countries face access to capital constraints beyond those common to most emerging and developing countries. Across the oil and gas sector, the low-carbon transition could result in asset devaluation and write downs of varying severity, depending on the pace and scale of decarbonisation.
Fossil fuel-based developing countries are also heavily indebted as a result of the pandemic, facing high cost of capital owing to deteriorating foreign exchange rates. On top of this, asset devaluation for fossil fuel producer countries could further inhibit access to capital and make it significantly more expensive. A key weakness for fossil fuel producer developing economies, relative to other developing countries, stems from the fact that while multilaterals and donors are curtailing support for fossil fuel projects, they experience declining investment from IOCs, whose credit rating normally enables NOCs through joint ventures to access finance. Overall, this harms the creditworthiness of government and NOC alike, both of which as a consequence will find it harder and more expensive to finance low-carbon investments necessary for the transition.
Cost of capital for oil investments, and to some extent gas, is forecast to increase through to 2050, given price volatility and shifts in investor appetite away from fossil fuels, while cost of capital for renewables is expected to come down. As such, maintaining access to affordable capital will be contingent on fossil fuel producer governments undertaking an orderly reorganisation of their assets from being predominantly fossil fuel based, to a diversified portfolio based on low-carbon energy sources. At the same time, current inflationary pressures are increasing capital costs globally, including for renewable energy and climate investments, with important implications for global climate objectives, particularly in developing countries, where perceptions of investment risk tend to be elevated. The transformation is delicate: earnings from fossil fuel assets need to be maintained to support new low-carbon investments to diversify the overall portfolio, but should avoid the possibility of stranded assets which would drive up the cost of capital (OECD, 2019[86]).
However, the regulatory framework and investment environment in many fossil fuel-producer countries currently acts as a deterrent to low-carbon investment, which means that conditions for governments and NOCs to rebalance their portfolios at the necessary rate, in order to avoid spiralling cost of capital and constrained access, are not present.
Because their economic models are premised on ready access to cheap fossil fuels, many producer countries lack the enabling environment to rebalance asset portfolios towards low-carbon alternatives to oil and gas, such as renewable energy and hydrogen fuels.
For instance, in many producer countries, fully integrated state power utilities are responsible for the overwhelming majority of investment in the power sector. These are often highly inefficient, act as obstacles to reforms which would encourage private sector participation, and owing to financial difficulties, fail to make the investments in network and transmission infrastructure needed to accommodate new renewables generation capacity.
Electricity tariffs and transportation fuels in fossil fuel producer countries also tend to be kept artificially low, with consumers protected by fossil fuel consumption subsidies. This distorts market incentives and makes renewables investments less attractive. It also contributes to financial difficulties facing utilities, which would otherwise generate electricity from renewables more cheaply, making them unreliable partners for the private sector who view them as not credit worthy. Additionally, problems with the regulatory framework can increase uncertainty and risk for investors, and in some cases even prohibit private participation.
Governments can take steps to address these challenges by creating an enabling legal and regulatory framework. This should include a gradual phase-out of inefficient fossil fuel subsidies and a plan to make electricity tariffs cost-reflective. Regulatory changes, such as strengthening the independence and authority of the regulator, and clarifying land acquisition processes and conditions for connecting to the grid, can encourage private investment, while a well-structured and predictable renewable energy auction can encourage competition and inspire confidence in investors.
Governments can also take steps to strengthen local capital markets, and address barriers to investment from global institutional investors. In many fossil fuel producer emerging and developing countries, shallow capital markets limit national financing potential due to competition among investments from a number of different sectors for a limited pool of capital. Foreign sources of capital, financing from development finance institutions and concessional funding, therefore, play an outsized role in financing renewable energy projects, which is not sustainable, nor sufficient to fulfil global low-carbon transition objectives. The nature, composition and distribution of development finance needs to shift rapidly and at scale towards private capital mobilisation in order to close the global clean energy, and wider sustainable development financing gaps (OECD, 2022[87]).
In the context of a shrinking fiscal space and an investment gap of USD 2.5 trillion to USD 3 trillion globally, institutional investors, such as pension funds, insurance funds and sovereign wealth funds (SWFs), can offer an important source of finance for low-carbon infrastructure projects, which can offer long-term, stable returns which align with their investment requirements. Yet, green investment currently accounts for about 8% of total funds investment in OECD and G20 countries, ranging between 1% and 58% depending on the size of the fund, a country’s fossil fuel dependence and national transition progress, alongside other factors. Of USD 1.04 trillion of institutional investor infrastructure assets in these countries, USD 314 billion or 30% is invested in green infrastructure. Energy accounts for the greatest share of investments at USD 488 billion, with asset managers accounting for USD 263 billion, pension funds for USD 159 billion, insurance companies for USD 48 billion and SWFs for USD 18 billion, with renewable energy the largest investment subsector (OECD, 2020[88]).
Key actions to raise institutional investment in green infrastructure include improved national and project planning to build up an investible green project pipeline, availability of risk mitigation tools, removal of inefficient fossil fuel subsidies and the introduction of some form of carbon pricing. In addition, fiduciary duties limit the amount which can be invested via unlisted funds, securitised vehicles, or direct investing through project equity and debt.
Box 2.13. OECD guidance on developing green project pipelines
OECD policy guidance highlights the need to build robust pipelines of identifiable, investment-ready and bankable low-carbon projects to which investors can readily commit their time, effort and funding in closing the financing gap for low-carbon infrastructure. Clear infrastructure investment plans need to be translated into clear policy outlining which projects will be needed and when, as well as how to finance them. This approach will eventually enable developers to select projects that match their needs from a range of options, and invest time, and resources in pursuing multiple opportunities.
OECD highlights six success factors in developing robust low carbon project pipelines:
Leadership. Ensuring governments as a whole and relevant government agencies champion the development of a robust project pipeline.
Transparency. Having transparent approaches in place to develop sectoral investment plans, source projects, and use data effectively.
Prioritising. Expediting strategically valuable projects – and shepherding them through development processes.
Project support. Securing various elements of the investment-enabling environment that affect the risk-return profiles of projects such as policy incentives, the supply of public funds and institutional support.
Eligibility criteria. Ensuring the pipeline of projects is properly aligned to or supports of long-term climate objectives with strong systems to assess which projects should be promoted and which should not.
Dynamic adaptability. Ensuring governments have capacity to keep project pipelines aligned with policy objectives over time, so that they remain pertinent and relevant in the long term, and tailored to changing external conditions.
Source: (OECD, 2018[89]).
Meanwhile, securitised products and specialised vehicles formed to operate infrastructure, such as infrastructure investment funds or YieldCos, can support the freeing up of risky capital for new investments. Given institutional investors have long-term investment horizons, the use of securitised vehicles can free up scarce risky capital for new investments, as project sponsors or short-term financiers monetise operating assets by offloading them to the balance sheets of institutional investors (OECD, 2020[88]).
Governments can also establish dedicated public finance mechanisms to support renewable energy and other low-carbon investments, including carbon pricing mechanisms and carbon taxes. For instance, national development banks could provide debt or equity financing for projects, or governments could establish dedicated funds to de-risk projects or provide guarantees. Project preparation financing can also help with development of a pipeline of bankable green projects. Ultimately, such funds, even if relatively limited, where leveraged strategically, can help to crowd in private investment and de-risk projects which otherwise the private sector would consider too risky. This requires thorough assessments of the underlying barriers to commercial investment, and the targeted deployment of public finance, including blended finance, to help overcome them. Public finance should be deployed in such a way that it does just enough to crowd-in commercial investment, but without distorting markets. Preservation of scarce public finance will also be important for wider economic, development and climate objectives, including spending on adaptation and resilience to climate impacts, where market solutions are more constrained.
Lastly, by addressing corporate governance issues, reforming incentive structures and addressing inefficiencies, such as cost-reflectiveness of tariffs and payment collection, governments should work to put SOEs on a sound financial footing. Though politically challenging, in the long term, this will serve to boost investment in infrastructure, reduce the cost of borrowing and decrease the burden on the state budget.
Box 2.14. Enhancing the role of National Development Banks in shaping national low-carbon transition pathways and building green project pipelines
National Development Banks in developing countries could play a more central role in shaping national decarbonisation pathways and facilitating financing for low-carbon technologies and infrastructure. National Development Banks tend to have a strong understanding of local actors, the national development context, sector-specific knowledge and constraints on investment, making them well-placed to shape national planning, as well as having the capacity to lend in the local currency.
Typical National Development Bank functions often include providing public financing for infrastructure projects, but in contexts where they are undercapitalised or capacity in infrastructure deal making is limited, fulfilling this role can be problematic. National Development Banks in these contexts may be better off focusing on building an investible project pipeline, in some cases, providing grants which are convertible to loans if a project succeeds in reaching financial close, as well as contributing to shaping policy through undertaking research and analysis.
In South Africa, the Development Bank of South Africa (DBSA)’s Project Preparation Fund finances prefeasibility and bankable feasibility studies, with the ability to convert this financing to loans if the project is successful. DBSA is also the implementing agency for the Infrastructure Investment Programme, a project preparation facility for South Africa and neighbouring countries, with funding from the European Investment Bank (EIB), Kreditanstalt für Wiederaufbau (KFW), and Agence Française de Développement (AFD) among others. Meanwhile, Brazil’s National Bank for Economic and Social Development (BNDES) has an infrastructure project fund which provides technical studies for infrastructure project preparation, as well as financing research on economic and social development.
Governments should consider prioritising the following actions:
Create an enabling environment for low-carbon investment, taking steps to reduce risks for the private sector. This might include establishing or strengthening the role of an independent regulator, clarifying land acquisition processes and introducing well-designed contracts to establish a basis on which to raise project finance.
Discuss all regulatory changes in consultation with the private sector.
Review rules on private participation, for example, capital controls, and consider revising them.
Prioritise spending on basic infrastructure required to encourage investment, such as robustness of the grid, expansion of networks and collection of bills in the electricity sector.
Actions requiring international support in contexts where government capacity is low:
Identify mechanisms to reduce risk to facilitate private sector participation in priority sectors, for instance, through effective tariff collection systems.
Consider introducing well-structured and predictable auctions to encourage private sector participation and competition, send market signals and develop a plan to meet emissions reduction targets.
Consider developing dedicated blended finance and state funding instruments to support commercial investment in renewable energy projects, including guarantees, concessional or subordinated debt instruments, grants for project preparation, risk insurance or other risk mitigation instruments, tailored to country, sector, and project-specific risks.
Support the development of stronger co-ordination and governance mechanisms among beneficiary countries, donors and the private sector, including through the establishment of dedicated country platforms to support the design and implementation of robust decarbonisation pathways and financing strategies to fund them.
Consider outreach initiatives and the design of a capacity-building programme to raise the ability of local commercial banks to offer financial products and lending to priority low-carbon sectors, such as the renewable energy sector.
Address inefficient fossil fuel subsidies to eliminate perverse market incentives, reduce wasteful consumption, and level the playing field between carbon intensive and low-carbon investments, as outlined in Pillar 3, Section 3.3. Reduction in subsidies should be undertaken in parallel with a programme to mitigate negative impacts on poorer households (OECD, 2022[91]).
Governments and NOCs should:
Assess portfolio distribution, with a view to rebalance assets in favour of low-carbon investments, lower the cost of capital and reduce risk of stranded assets. Balance this process with the need to maintain revenue through investment in fossil fuel sectors.
2.4.1. Enhancing and improving access and delivery of climate finance to fossil fuel-based emerging and developing economies
Achieving global climate objectives in fossil fuel-based emerging and developing countries will require a rapid scale up in climate finance. According to the IEA, by 2030, annual investment in clean energy in emerging and developing economies needs to reach USD 1 trillion annually, seven times what it is today, to put the world on track to meet net zero emissions by 2050 (IEA, 2021[92]). Mobilising such a huge amount of capital will require both private and public finance. Public finance should be a catalyst to reduce risk for private investors and boost the required breakthroughs for technologies that are not yet close enough to the market. However, multilateral public finance has a relatively poor track record in mobilising private finance in emerging and developing economies. For example, development finance institutions provide a significant amount of climate finance to the energy sector, which accounts for most of the commercial finance mobilised by development finance, but overall mobilisation figures are still relatively low: only USD 1.9 billion, or 1.2% of Official Development Assistance (ODA) is directed towards development-oriented private sector instrument (PSI) vehicles or blended finance instruments; just under USD 6 billion of commercial capital is mobilised towards renewable energy, and a total of USD 14 billion was mobilised by all climate finance in 2019 (OECD, 2022[87]). The low proportion of grants provided relative to loans (USD 12.3 billion versus USD 46.3 billion in 2018, respectively) also means that the poorest countries struggle to de-risk key projects to mobilise private capital (Bhattacharya et al., 2020[93]). The OECD estimates that private finance mobilised through bilateral and multilateral development finance in emerging and developing economies included in the DAC List of ODA Recipients reached USD 35.1 billion in 2016, USD 40.1 billion in 2017, USD 49.0 billion in 2018, USD 46.4 billion in 2019 and USD 43.8 billion in 2020 (OECD, 2019[86]).
Private finance is necessary to mobilise the resources to scale up low-carbon and climate-resilient infrastructure and low-carbon energy systems. However, the overwhelming majority of private finance currently flows to advanced economies. In sub-Saharan Africa, for example, finance from public and multilateral institutions accounts for about 90% of investments in the power sector.
In developing countries, the uptake of green finance has also been significantly slower than in advanced economies. Less than 20% of USD 1 trillion of green bonds issued globally are from developing countries. Between them, Latin America and Africa combined make up less than 3% of global green bond issuance. For the world to achieve the objectives of the Paris Agreement, affirmative action is needed to enable access to finance for countries with energy-intensive and hard-to-abate sectors, including their NOCs to facilitate emissions abatement and decarbonise asset portfolios. However, high emitters frequently do not qualify for green finance, as they do not meet the required benchmarks for GHG emissions.
A wide range of climate finance instruments are available to emerging and developing economies, with development finance institutions offering grants, concessional and semi-concessional loans, guarantees, debt and equity finance. The five climate-dedicated funds – the Green Climate Fund (GCF), the Global Environment Facility (GEF), the Adaptation Fund (AF), the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF) – are relatively small, but can be used effectively to mobilise and unlock other sources of finance from development finance institutions and the private sector. Private finance is by far the biggest untapped source of climate finance.
Yet, accessing climate finance can be challenging for emerging and developing economies, with strict fiduciary and eligibility requirements sometimes impeding access. Moreover, it can take a long time for developing countries to access climate finance, with project design and passage through various approvals processes taking between 24 and 36 months. This can deter participation of many private entities who are used to shorter lead times, and can also present issues because staff changes in both development finance and government institutions result in a lack of continuity in project counterparts.
Alternatively, as yet underutilised climate finance mechanisms are available to emerging and developing economies to complement more traditional climate finance offerings through multilateral and bilateral partners.
Carbon markets, though relatively limited currently as a source of finance, offer countries the opportunity to get paid for emissions reduction credits, and debt for climate swaps present the chance to simultaneously tackle the growing debt crisis in emerging and developing economies, free up fiscal space for investment in development and services, and allocate finance to climate projects. Carbon taxes also offer an opportunity to raise revenue, though care needs to be taken to avoid the burden falling on the poorest. Lastly, many countries have taken steps to facilitate the issuance of green bonds to raise revenue and fund investments in priority green sectors.
Box 2.15. Transforming North-South co-operation on mobilising finance for the transition and establishing national climate finance frameworks
Transforming North-South partnerships to aggregate finance for the low-carbon transition in emerging and developing economies will require new approaches to international collaboration capable of unlocking climate finance flows at scale from advanced economies, which are home to the majority of the world’s financial resources, to developing and emerging economies, where the climate finance gap is greatest. South Africa’s Just Energy Transition Partnership (JETP), signed at COP26 between EU, France, Germany, the UK and the US could provide a model for achieving this goal. The deal commits to mobilising USD 8.5 billion in climate finance though a variety of mechanisms, including grants, concessional loans and investments and risk sharing instruments, to support the country’s transition away from coal, and the adoption of renewables, while safeguarding and investing in mining workers and communities.
Though in its infancy, the South Africa JETP could be a game changer in how North-South collaboration works for the transition, leveraging the potential of G7 collective guarantee and financing mechanisms to mobilise and crowd-in private capital. At its June 2022 meeting in Elmau, Germany, the G7 agreed with India, Indonesia, Senegal and Viet Nam, to work towards further JETPs based on the South Africa model. Yet, success will require advanced economies to make good on their financial commitments. If they do not, these deals could do more harm than good, further eroding trust between North and South economies in regard to climate change.
Kenya’s National Policy on Climate Finance
Kenya’s National Policy on Climate Finance (2018) aims to improve the country’s ability to effectively identify, track and mobilise climate finance flows. It serves as a guiding framework to enhance national financial systems and institutional capacity to improve the ability to access, disburse, absorb, manage, monitor and report on climate finance in a transparent and accountable manner.
A key components of the National Policy Climate on Finance is the establishment of a national climate finance platform, which can support the mobilisation, co-ordination and tracking of climate finance to improve transparency and accountability across government, building capacity to develop bankable projects and to effectively manage and implement them. This is accompanied by recommendations to improve fiduciary standards and management. The policy also highlights the need to establish a clear and flexible legal and regulatory framework, which enables the country to capitalise on climate finance opportunities, as well as the development of a national Monitoring, Reporting and Verification (MRV) framework to provide a clear overview of domestic and international climate financial flows, trends, sources and purposes.
The policy also references the need to clearly define roles and responsibilities between government institutions to improve centralised tracking of climate finance opportunities and develop a co-ordinated approach to their mobilisation, as well as capacity building at county government level to manage climate finance funds in an efficient, transparent and accountable way. Lastly, the policy references the potential of carbon market mechanisms to rapidly scale up the amount of carbon finance for developing countries such as Kenya, and the need for the country to position itself to tap into carbon crediting mechanisms following international agreement on Article-6 of the Paris Agreement (finalised at COP26).
Governments should consider prioritising the following actions:
Establish frameworks that ensure verifiable progress towards commitments under NDCs.
Assess national policy and institutional arrangements for maximising access to climate finance. This should include capacity development needs, and the roles and responsibilities of different government actors, including subnational governments. Kenya’s 2018 National Policy on Climate Finance provides a good blueprint for reference (Government of Kenya, 2016[94]).
Consider establishing a national mechanism to co-ordinate relevant government actors, identify climate finance opportunities, support mobilisation, and improve tracking, monitoring and reporting. This mechanism should connect climate finance opportunities with sectoral and subnational government actors and projects, as well as mobilising resources and working across government to facilitate access to climate finance.
Review the legal and institutional framework to access and maximise climate finance opportunities, ensuring responsiveness to evolving international climate finance developments, for example, scaling up of international carbon markets.
Consider designating a government agency to obtain accredited status from climate-dedicated funds such as GCF and GEF. This will improve access to and management of climate finance, as well as access to capacity-building support such as readiness programmes.
Actions where international support would be required where government capacity is low:
Enhance national MRV of emissions frameworks to facilitate access to climate finance.
Review adequacy of fiduciary standards and environmental and social safeguards to access climate finance through multilateral climate dedicated funds such as the GCF and GEF. These tend to have strict fiduciary management, transparency and environmental standards, as well as regular reporting requirements. Failure to adapt to these conditions can result in delays to project approval or implementation, or a project not qualifying for funding.
Review and improve processes to establish a bankable pipeline of climate change mitigation and adaptation projects in key sectors in line with NDCs, as well as other relevant country strategies and plans.
Enhance domestic expenditure and project prioritisation processes, ensuring equitable allocation of resources in line with NDCs and value for money.
Strengthen subnational finance systems to track climate finance opportunities and monitor and report on project implementation.
Introduce reforms to strengthen domestic capital markets, for example, reviewing and streamlining the regulatory framework, clarifying roles and responsibilities of public agencies, and working with the banking sector to increase access to finance for firms.
Assess alternative climate finance mechanisms, such as green, sustainability linked or just transition bonds, debt for climate swaps and carbon crediting, to assess suitability given contextual factors, government capacity, and legal and regulatory frameworks.
Advanced economies should:
Commit to new forms of transformative North-South partnerships capable of aggregating finance for the transition in emerging and developing countries, particularly through the Just Energy Transition Partnerships (JETPs) being developed between G7 countries and India, Indonesia, Senegal, South Africa and Viet Nam. These partnerships could be catalytic in accelerating the transition to sustainable growth, but require G7 economies to make good on their commitments, or risk further undermining trust between North and South economies on climate change.
Consider how long-term factors, such as environmental improvements and emissions reductions can be factored into ratings assessments to reduce interest rates on loans and improve access to affordable finance for developing countries. For instance, measures to preserve biodiversity, or reduce emissions from fossil fuels and thermal power generation, currently do not figure in ratings agencies’ credit rating assessments, despite longer-term implications for economic stability, the environment and citizen well-being (Inter-agency Task Force on Financing for Development, 2022[98]).
Fulfil commitments outlined in the Delivery Plan for the USD 100 billion per year prepared by Canada and Germany, with support from the OECD, including meeting the USD 100 billion target by 2023, and mobilising more than USD 100 billion through 2025 (UKCOP26, 2022[99]).
Development finance institutions should:
Collaborate with emerging and developing economies to consider how access to climate finance can be streamlined for more efficient mobilisation. Current obstacles include the slow process to gain accreditation for multilateral concessional finance (e.g. GCF and GEF), complex and demanding eligibility criteria, fiduciary and reporting requirements, and lack of information on climate finance opportunities.
Collaborate with emerging and developing economies to ensure climate finance flows closely complement national development planning and NDC commitments.
Review how multilateral and bilateral provision of climate finance works to unlock and capitalise private sector investment in emerging and developing economies. In particular, consider how to increase the provision of guarantees, which represent 5% of commitments but are responsible for 45% of private finance mobilised through MDBs (Bhattacharya et al., 2020[93]).
Work to raise the proportion of grants relative to loans in the overall share of climate finance provided by developed countries to emerging and developing economies.
Provide technical assistance and mentor financial institutions and finance ministries in emerging and developing economies to raise their capacity to identify, access, mobilise, disburse, track, monitor and report on climate finance. This includes identifying targeted finance consistent with national development plans, adaptation needs and mitigation actions in keeping with Article-2-(1)(c) of the Paris Agreement.
2.4.2. Mitigating risk to encourage private investment in low-carbon infrastructure
Amplified perceptions of political and macro-economic risk, a lack of bankable project pipelines and financial risks, for instance currency or non-payment risks, can make arranging project finance in developing countries challenging. Private climate finance flows to low-carbon infrastructure projects in developing countries, therefore, tend to be far lower than elsewhere in the world. For example, in 2019/20, just USD 2 billion and USD 11 billion was mobilised in climate finance from private sources in sub-Saharan Africa and South Asia respectively, compared with USD 17 billion and USD 19 billion from public sources. In contrast, USD 79 billion and USD 62 billion was mobilised from private sources in the US and Canada, and Western Europe, respectively and USD 4 billion and USD 43 billion from public sources during the same timeframe (CPI, 2021[100]).
Weaker legislative and regulatory frameworks, shallower capital markets and financially weak public utilities mean the risk adjusted rate of return for infrastructure projects in developing countries can be uncompetitive compared with more advanced economies. Moreover, a lack of government project preparation and deal implementation capacity, combined with burdensome bureaucratic processes, particularly for public private partnership (PPP) projects requiring engagement with multiple government and municipal agencies, can lead to deal making taking far longer than is necessary. In some cases, this contributes to prohibitive transaction costs. Anecdotal evidence suggests that average deal implementation timeframes are between 30 and 72 months in sub-Saharan Africa, versus 12 months in Asia and Latin America (MacLean and Olderman, 2015[101]).
In some cases, blended finance and Development Finance Institutions’ financial tools, such as loan guarantees, political risk insurance and subordinate financing, can help to de-risk projects and mobilise private investment. However, they can be complex and take time to mobilise, and given Development Finance Institutions’ capital adequacy requirements, are limited in availability. Governments can similarly provide sovereign guarantees to facilitate project financing, for example, backing electricity off-take payments by a financially weak power utility. However, these are treated as contingent liabilities on the government balance sheet, and as such governments running large deficits cannot afford to apply guarantees for all projects.
Resolving these challenges requires an integrated approach to improving the investment environment and improving perceptions of risk. Raising institutional capacity to undertake project preparation and deal implementation, as well as strengthening the regulatory frameworks and guidance for PPP investments, are critical steps. Governments should also establish long-term decarbonisation and economic diversification strategies, clearly defining decarbonisation, diversification and emissions reduction objectives, as well as credible verification and reporting mechanisms to enhance access to climate finance.
Given limited availability, blended finance, risk-mitigation instruments and sovereign guarantees should be deployed strategically. This should aim to de-risk sectors where the private sector is generally more comfortable investing, taking investments over the risk curve to the point where they are self-sustaining. Concessional finance should then be reallocated to de-risk and incentivise private capital in riskier sectors, aiming to crowd in the private investment and improve the cost competitiveness of new technology. This approach will set the foundations for the rest of the transition, build momentum, and optimise allocation of scarce public or multilateral sourced financing.
Box 2.16. Strengthening collaboration between sovereign funds and Strategic Investment Funds to increase access to climate finance and mitigate risk
The complementarities between Sovereign Wealth Funds (SWF) and Strategic Investment Funds (SIFs) present opportunities for creating productive synergies between these two types of investment funds. Sovereign funds hold very large amounts of capital, invested in different types of securities, while having limited capabilities for infrastructure investment and for direct investment. SIFs, on the other hand, are small compared to sovereign funds, and are set up for direct investment, most commonly in infrastructure and small and medium-sized enterprises (SMEs). Many SIFs have the capabilities needed for investing in the development and construction of new infrastructure. This is a capacity that nearly all sovereign funds lack, with the exception of Abu Dhabi’s Mubadala Investment Company, through its subsidiary Masdar.
To take advantage of these complementarities for investment in low-carbon infrastructure, sovereign funds could channel part of their capital through SIFs, or set up joint investment platforms with SIFs. There are several benefits to this kind of collaboration. First, sovereign funds can take advantage of SIFs’ knowledge of their home markets, and their ability to identify and monitor projects on the ground. Second, collaboration with SIFs can strengthen sovereign funds’ deal flow, since the SIF as a local partner can identify, source and validate investment projects that sovereign funds may otherwise find difficult to access. Third, collaboration with SIFs provides sovereign funds with opportunities for diversification. Fourth, collaboration allows sovereign funds and SIFs to share the costs of due diligence, research and monitoring. Fifth, collaboration through a joint platform enables the bypassing of conventional intermediaries, thereby retaining governance rights and more direct control of investments. Sixth, as local partners, SIFs can minimise headline risk and mitigate political risk.
In an interesting example of collaboration between a SIF and sovereign funds, India’s National Investment and Infrastructure Fund (NIIF) signed investment agreements with the Abu Dhabi Investment Authority (2017) and Singapore’s sovereign fund, Temasek (2018), for USD 400 million and USD 1 billion, respectively. The NIIF also mobilised capital from foreign pension funds. The Canadian Pension Plan Investment Board, and the Ontario Teachers’ Pension Plan, as well as AustralianSuper, an Australian pension fund, in 2019 invested a total of USD 650 million in the NIIF, thereby bringing the Master Fund to its targeted size of USD 2.1 billion. Additionally, the three pension funds will have co‑investment rights with the NIIF of a total of USD 1.95 billion.
Governments should consider prioritising the following actions:
Strengthen the regulatory framework and guidance around PPPs. In some countries, a dedicated PPP unit exists to guide private investors through the challenging process of structuring a PPP project, and engaging with relevant government and municipal departments. The World Bank provides guidance through the Public Private Infrastructure Advisory Facility (PPIAF). For specific guidance relating to PPPs in the power sector, see Pillar 3, Section 3.4.
Think strategically about how to deploy sovereign guarantees. Given that sovereign guarantees are treated as contingent liabilities on the balance sheet, governments will only be able to deploy them for a select number of projects. Government strategy should look to de-risk sectors where the private sector is generally more comfortable investing, for example, energy efficiency or solar, taking investments over the risk curve to the point where they are self-sustaining. Cost competitiveness and reduced risks means that the private sector will invest without incentives, though it should be noted that continued innovation will be needed to continue driving costs down. Concessional finance should then be reallocated to de-risk and incentivise private capital in riskier investments, such as early-stage technology, which can encourage localisation of value added activities, for instance through battery storage facilities.
Developing countries can enhance access to climate finance by taking a holistic approach to improving the enabling environment for investment and reducing perceptions of risk. This should include establishing long-term decarbonisation and economic diversification strategies, given the importance of clearly defined decarbonisation, diversification and emissions reductions objectives, as well as credible verification and reporting mechanisms to access climate finance.
In countries with well-established and mature domestic capital markets, project financing (debt and equity) typically takes place in the local currency, meaning both CAPEX and project revenues are in the local currency. Where domestic finance sectors are not strong enough to provide the volume of capital required, international financiers step in with dollar or euro financing, which in many instances can make an infrastructure project, such as an independent power project (IPP) viable. This, however, can create a currency mismatch between CAPEX in dollars or euros and project revenue generated in the local currency. In some cases, this is absorbed by the power off-taker, or electricity utility, or passed on to the consumer, removing the advantage of stable electricity prices which renewable energy normally provides. Currency hedging strategies can help to mitigate this volatility, but can also be expensive, raising the cost of finance. As a longer-term strategy to avoid foreign exchange risk, governments should support initiatives to strengthen local capital markets to mobilise flow of capital in local currency, which will be cheaper and not subject to foreign exchange risk (Mikolajczyk, 2018[104]).
Table 2.1. Risk mitigation tools to mobilise private capital for green infrastructure
|
Tool/instrument |
Description |
|---|---|
|
Co-investment |
Public actor(s) invest alongside private investor(s) with either debt or equity with an equal or lower stake than a private investor (any larger investment would be classified as a cornerstone stake |
|
Cornerstone stake |
Investment by a public actor in a fund, issue or project amounting to a majority equity stake so as to achieve a demonstration effect to attract other investors |
|
Loan |
Debt issuance by a public actor |
|
Loan guarantee |
Guarantee by a public actor to pay any amount (either in full or part) due on a loan in the event of non-payment by the borrower |
|
Public seed capital or grants |
Concessions fund allocation using public money |
|
Revenue guarantee |
Guarantee by a public actor to pay for the core product to ensure revenue cash flow for a project |
|
Back-stop guarantee |
Guarantee by a public actor to purchase any unsubscribed portion of an issue (debt or equity) |
|
Liquidity facility |
A facility by a public actor allowing the borrower to draw thereupon in case of a cash flow shortfall |
|
Political risk insurance |
Guarantee by a public actor to indemnify in case of political risks like currency inconvertibility, expropriation, etc. |
Source: Adapted from (OECD, 2020[105]).
Development finance institutions should:
Collaborate with government counterparts to develop a strategic plan for deployment of risk mitigation tools, given they are limited in availability. This approach should look to crowd in private sector investment in less risky sectors initially before moving to frontier sectors to de-risk investments for the private sector.
Assess whether it is feasible to issue more risk mitigation tools, concessional financing and subordinate financing by revisiting scope to take on risk, reviewing capital adequacy requirements and required return on investment.
Invest in early-stage project de-risking, project preparation and planning to contribute to the development of a bankable pipeline of investment projects to attract private capital.
To strengthen local capital markets, use climate finance to capitalise local financial institutions through local currency denominated credit lines in order to enable local currency lending to low-carbon projects. This approach should look to complement existing local capacity of the domestic finance sector to deliver local currency lending for renewable energy projects. This is a useful tactic in developing countries where a lack of savings limits the lending capacity of domestic commercial banks (Mikolajczyk, 2018[104]).
Leverage climate finance to enable domestic banks to issue loans with longer-term maturities to match the long payback requirements of low-carbon energy projects in the renewable energy sector (Mikolajczyk, 2018[104]).
2.4.3. Mobilising sustainable finance through green bonds
Green bond issuances, and in some cases Sustainability-linked Bonds (SLBs) (see Box 2.17 and Box 2.18), represent an important mechanism through which governments, multilateral institutions and the private sector have sought to raise finance in a range of low-carbon investments, including mitigation and adaptation projects. The first green bond was issued by the European Investment Bank (EIB) in 2008. Since then, the green bond market has grown quickly, and accelerated rapidly following the signing of the Paris Agreement in 2015. The Climate Bond Initiative (CBI) estimates green bond issuances could reach USD 1 trillion per year by the end of 2022 (CBI, 2022[106]).
China, France, Sweden and Switzerland are government leaders in the sovereign bond market. However, increasingly, emerging markets have also turned to green bonds to take advantage of growing interest in ESG compliant investments. South Africa issued the first emerging market green bond in 2012, and subsequently, a range of other emerging market governments have also issued green bonds, including Chile, Egypt, Indonesia and Morocco.
Green bonds are fixed-income debt securities which offer investors relatively low-risk returns over a given period of time. Crucially, proceeds from green bonds should be spent on a pre-identified and pre-determined set of green investments, which need to be independently verified by third parties for compliance. International initiatives such as the Climate Bonds Standard and Certification Scheme and the European Green Bond Standard offer a set of standards and guiding principles covering issuance.
Box 2.17. Green bond issuances in developing and emerging countries
Green bond issuances in developing and emerging countries has increased significantly in recent years, with 25 countries having issued green bonds since 2012. In 2019, total issuances in emerging markets amounted to USD 52 billion, a 21% increase from 2018. China is by far the largest driver behind this growth, having issued more than USD 34 billion alone, with a share of other emerging economies amounting to USD 18 billion.
Having issued USD 3.9 billion in green bonds between 2012 and 2019, Chile is one of the largest issuers among emerging market economies. As the first country in the Americas, the Chilean government created a Green Bond Framework to channel investments towards green assets, and recently updated it to extend issuances to social and sustainable bonds. In Africa, between 2012 and 2019, South Africa stood out with cumulative bond issuances amounting to more than USD 2.1 billion from 2012 to 2019, followed by Morocco with USD 355 million. In 2020, Egypt joined the green bond market with a USD 750 million issue in 2020 and intentions to increase the number of issuances in the coming years.
An increasing number of developing countries are issuing green bonds as well. Notably, Fiji was the first developing country to offer a sovereign green bond in 2017, with cumulative issuances of USD 48 million by 2019.
A number of related bonds focus on similar kinds of ESG investments. Social bonds require proceeds to be spent on projects with positive social outcomes, while sustainability bonds require proceeds to be invested in a combination of social and green projects (Amundi & IFC, 2019[107]). Recently, there has been growing interest in the potential of Just Transition Bonds, which would require investment in projects that tackle the negative impacts of the energy transition (see Pillar 2, Section 2) (Responsible Investor, 2020[110]).
Box 2.18. Sustainability-linked Bonds can support organisational decarbonisation objectives
In recent years, there has been a growing market in Sustainability-linked Bonds (SLBs). These differ from other sustainable bonds, such as green bonds or social bonds, in that proceeds are not used exclusively to fund specific green or social projects. Instead, SLBs are linked to general organisational objectives on decarbonisation, for example, a reduction in GHG emissions over a given period. If these targets are missed, then the issuer agrees to pay a higher coupon to the investor.
Italian energy company Enel, for instance, issued the world’s largest SLB in July 2019, raising EUR 3.25 billion. The SLB is linked to a reduction in GHG emissions measured by grams of CO2 per kWh. If the company fails to reduce its emissions in line with these targets, then 25 basis points are added to the investor coupon.
SLBs can offer organisations the flexibility to use funds in whichever way they need to reduce emissions, and represent good ways to support transition strategies because they include clear and measurable key performance indicators (KPIs) and targets which apply to the company as a whole, instead of specific transactions. As such, their use is very suited to companies that are gradually transitioning away from fossil fuels towards low-carbon investments, for example in renewable energy or low-carbon fuels, or in hard-to-abate sectors.
However, as with other types of sustainable bonds, effective MRV mechanisms are key to monitoring progress against targets. It is also important that sustainability targets are sufficiently ambitious to qualify such instruments as truly green, and that penalties (basic point increases on investor coupons), are sufficiently serious to incentivise companies to meet their sustainability targets. In June 2020, the International Capital Markets Association (ICMA) issued the Sustainability-linked Bond Principles, providing guidance to issuers.
Source: (ICMA, 2020[111]).
Green and related bonds can offer useful tools to fund the low-carbon transition. However, the rapid growth in issuances across emerging markets has raised concerns about their integrity as an instrument for investing in genuinely green projects. Currently, there is a lack of global agreement on what constitutes a green investment, and green taxonomies, though under development, are by no means consistent, let alone integrated into green bond issues everywhere. Monitoring, verification and reporting can be patchy across bond issuances, and in some cases, investors do not receive complete and reliable information as to how proceeds have been invested (Otek Ntsama et al., 2021[112]). The verification process can be expensive and requires access to adequate data and information relating to investments, as well as the existence of a constellation of capacitated, expert firms domestically to undertake this work, which is not the case in all jurisdictions. These weaknesses have led to concerns over lack of regulation, opacity of reporting and the risk of green washing.
Emerging and developing economies can face additional challenges in taking advantage of green bond markets to finance their low-carbon development pathways. Green bonds require considerable expertise and knowledge both in terms of bond issuance and investment in green projects, neither of which are consistently available in emerging and developing country contexts. Green bond issuance is also contingent on a sufficient pipeline of eligible green projects for investment. Underdeveloped capital markets can also result in high transaction costs, and because bonds are debt instruments, sound economic fundamentals and growth are important to convincing investors that the return is worth the risk (Otek Ntsama et al., 2021[112]).
Box 2.19. Building sustainable finance literacy and enabling frameworks: Roadmap lessons from Indonesia and Morocco
Indonesia and Morocco are among the first emerging markets to embrace sustainable finance. Both started from a basis of fairly mature financial markets and through a planned, methodological process, adopted national green finance roadmaps to embed sustainable finance principles into all institutions within their respective finance markets.
Indonesia’s financial services authority, Otoritas Jasa Keuangan (OKJ), alongside the Ministry of Environmental Affairs and Forestry, launched its Sustainable Finance Roadmap (2015-2024) in December 2014. The roadmap aims to embed sustainable finance principles across the country’s finance sector to contribute to Indonesia’s National Long-term Development Plan (2005-2025) and to support the country’s 2015 NDC objective of reducing its GHG emissions by 29% by 2030. In 2017, the Umbrella Policy was introduced to complement the Sustainable Finance Roadmap defining sustainable finance in Indonesia and requiring all finance institutions to adopt Sustainable Finance Action Plans.
Morocco’s central bank, Bank Al-Maghrib launched the Roadmap for Aligning the Moroccan Financial Sector with Sustainable Development in 2016. This sought to support Morocco’s 2015 NDC commitment to reduce the country’s GHG emissions by 2030 by 32% through strong involvement of the financial sector. The Moroccan government’s estimates suggested an overall investment of USD 45 billion would be necessary to achieve its NDC target. Development of the roadmap involved collaboration with a broad number of financial market actors.
Both countries roadmaps established a strong basis to align their respective finance systems with their climate goals. Morocco’s roadmap led to increased collaboration between the Casablanca Stock Exchange and the Moroccan Capital Markets Authority (AMMC) on the development of an ESG Benchmark Index, as well as AMMC’s publication of a legal framework and guidelines for green and sustainable bonds. This has led to four green bond issuances totalling USD 356 million. These include an issue by the Moroccan Agency for Sustainable Development (MASEN) covering a new solar plant, two banks issuing green bonds for financing energy efficiency projects, and Casablanca Finance City (CFC) issuing a bond investing proceeds in green buildings.
Meanwhile Indonesia’s Sustainable Finance Roadmap led to seven national banks issuing green bonds, and in 2018, Indonesia became the first country in the world to issue a sovereign Sukuk green bond, a Sharia compliant equivalent to green bonds. Subscriptions to the Sukuk issue totalled USD 1.25 billion, with proceeds invested in projects including renewable energy, green tourism, energy efficiency and waste management. The country’s Sukuk was significantly oversubscribed and in consequence Indonesia has issued yearly green Sukuks with a combined value of USD 3.24 billion.
The development of Morocco and Indonesia’s green finance markets has been successful in part because they started from a position of relative strength in terms of the depth and maturity of their financial markets. However, the approach of publishing clearly defined sustainable finance roadmaps also facilitated the process of pitching progress at the appropriate level, and ensuring all finance sector actors were carried along with planned market developments. In both countries, extensive consultation and engagement has been key to the process. In Morocco, for example, the process for developing the roadmap involved broad-based consultations with a range of market actors. This included the AMMC, the Supervisory Authority of Insurance and Social Welfare, the Moroccan Ministry of Economy and Finances, the CFC, the Casablanca Stock Exchange, the Moroccan Banking Association and the Moroccan Federation of Insurance and Reinsurance Companies. Several of these actors played an important subsequent role in developing core green finance policies such as Morocco’s green bonds framework.
In Indonesia, OKJ led a consultation process with 118 banks, identifying pilot institutions to commit to implementing key measures at the launch of the roadmap. Consultations with stakeholders also led OKJ to establish a two-phased approach to develop the market for green finance, based on the capacities of financial institutions in the Indonesian finance sector. In the medium term (2015-2019), the roadmap focused on strengthening the basic regulatory system and on reporting, aiming to raise sustainable finance literacy across all institutions in the sector. Through the long term (2020 to 2024), objectives of the roadmap become more ambitious, aiming to embed climate risk management, improve corporate governance and develop an integrated sustainable finance information system. OKJ has also launched a Sustainable Finance Forum to stimulate discussion among participants in the financial sector, as well as a Sustainable Finance Award to encourage proactive engagement with the process.
Actions where international support would be required where government capacity is low:
Issue domestic currency transition and green bonds to build a liquid sovereign transition and green bond market for domestic investors, in line with the International Capital Market Association’s Green Bond Principles, that recommend transparency and disclosure, and promote integrity in the development of the Green Bond market.
Define the separate criteria for issuing green bonds, transition bonds and sustainability-linked bonds, including 1) allocation of responsibility for verification and reporting of transition bond proceeds, 2) establishing criteria for verification and reporting on bonds, and 3) ring fencing of sovereign transition bond proceeds from the general budget.
Review available data collection, monitoring, verification and reporting systems for investments in green projects, considering improvements to ensure investors are provided with credible and complete information as to how proceeds have been invested. Establish a robust reporting framework to ensure this happens in practice. Useful frameworks are available through the Climate Bonds Initiative and the European Green Bond Standard.
Adopt regulatory requirements for corporate disclosure on environmental risks in line with the Taskforce on Climate-Related Financial Disclosures (TCFD).
Establish a local corporate transition and green bond index.
Consider contributing to international efforts to develop and observe a green investment principles guidance framework or green taxonomy to clearly define what constitutes a green investment. This will provide ESG concerned investors with the confidence that proceeds will indeed be invested in green projects.
Develop a pipeline of eligible green projects that can be financed through transition and green bond proceeds.
Consider developing a sustainable finance roadmap outlining necessary steps to arrive at a point where issuance of a transition or green bond is feasible. Indonesia and Morocco offer useful blueprints of how this can be done.
Provide green bond training to staff of relevant institutions, for instance financial regulatory authorities, central banks and capital markets authorities. This can be extended to third-party verifier entities.
Consider the potential to issue a Just Transition Bond. The design would need to follow similar design principles to green bonds, including the prioritisation of rigorous monitoring, verification and reporting on investments, and the development of a pipeline of eligible just transition projects (Responsible Investor, 2020[110]).
Development finance institutions should:
Under the leadership of G20 countries, accelerate international collaboration towards building international consensus on green taxonomies which can be applicable to green bond issues worldwide.
Match prospective green bond issuers with global leading institutions and networks in the green bond market. This can include the Climate Bonds Standard and Certification Scheme, the European Green Bond Standard, the Network for Greening the Financial System and the London Stock Exchange.
Pay for training in green bond fundamentals, issuance third-party verification in government institutions relevant to issuers in emerging markets.
Provide technical assistance to prospective green bond issuers to structure green bond issues.
Popularise the concept of Just Transition Bonds to finance just transition policies in emerging and developing economies.
Support emerging and developing economies to develop a pipeline of eligible green projects which can be financed from green bond proceeds.
Invest in improving MVR systems in emerging and developing economy issuers to improve reporting on the investment of green bond proceeds.
2.4.4. Leveraging debt for climate swaps to free up fiscal space in fossil fuel emerging and developing economies
COVID-19 has significantly increased levels of unsustainable debt across fossil fuel emerging and developing economies, inhibiting government capacity to invest in the low-carbon transition and fund public service delivery. According to the IMF, about half of low-income countries and a number of emerging market countries are in or at high risk of falling into a debt crisis (Georgieva, Pazarbasioglu and Weeks-Brown, 2020[116]). For many developing countries, the burden of servicing external debt is crowding out investments in education, healthcare and building resilience to climate change, given government revenue cannot keep pace with payments. For instance, debt service payments on external debt amounts to 20% or more of revenues in 18 developing countries between 2019 and 2025 (Jensen, 2021[117]). Small island developing states, for instance, which are highly exposed to extreme weather events, have limited resources to invest in adaptation infrastructure, as well as to provide disaster relief to citizens. Meanwhile, debt service burdens detract from developing countries’ ability to invest in expanding social protection to all citizens, a key factor in safeguarding the most vulnerable from the worst effects of climate change, both physical and economic, as well as those of the pandemic.
The IMF and World Bank alongside G20 countries established the Debt Service Suspension Initiative (DSSI), offering a moratorium on debt repayments to 73 of the world’s poorest countries to their bilateral creditors. Private creditors were also asked to participate in the initiative. The scheme ended at the end of 2021 and delivered more than USD 5 billion in debt relief to 40 countries. However, a long-term solution is needed. Unsustainable debt levels have prompted organisations such as the IMF to call for reform of international debt architecture to avoid defaults and economic distress across a number of countries (Georgieva, Pazarbasioglu and Weeks-Brown, 2020[116]).
Though untested, debt for climate swaps have been suggested as a potential mechanism through which to reduce global debt, while at the same time freeing up fiscal space and funding to invest in the low-carbon transition. Debt for climate swaps would build on the concept of debt for nature swaps, which since the late 1980s have successfully freed up more than USD 1 billion in finance for environmental safeguarding projects (Picolotti et al., 2020[118]).
In a debt for climate-swap, bilateral and ideally private creditors would need to forgive host country debt. In return, the debtor government would need to agree to invest in national climate mitigation and adaptation projects, rather than continuing to make external payments to continue servicing its debt. Advocates of debt for climate swaps have highlighted the potential role they can play in contributing to the commitment made by developed countries at COP26 to transfer USD 100 billion in climate finance to developing countries. They also highlight the potential to free up fiscal space for investment in public services in emerging and developing economies during a global health crisis, especially given the impacts of climate change are disproportionately affecting the world’s poorest and most vulnerable. It is estimated that restructuring 10% of total global debt (USD 280 trillion in September 2021) through debt for climate swaps would mobilise USD 20 billion to invest in climate mitigation and adaptation projects in emerging and developing economies (Picolotti et al., 2020[118]).
Structuring debt for climate swaps, however, is likely to be challenging and will require deployment of significant effort and resources even to establish proof of concept alone. The capacity of some of the world’s poorest countries to manage large-scale climate mitigation and adaptation projects, and the wisdom of insisting these governments spend resources on climate projects rather than provision of basic services, has also been questioned. These countries may be better off going down more traditional debt forgiveness or restructuring routes (Widge, 2021[119]).
Instead, it has been suggested that for debt for climate swaps to achieve scale and have real impact in terms of climate mitigation and adaptation outcomes, they are better off focusing on countries which are currently able to service their debt. In this way, the mechanism could target emerging market economies which are already investing in ambitious climate change and economic diversification objectives but need additional support (Widge, 2021[119]).
Additional requirements include the involvement of China, given its role as predominant creditor to emerging and developing economies. Private sector creditors would also need to be incentivised to participate in debt forgiveness.
Governments should consider prioritising the following actions:
Build a pipeline of climate mitigation and adaptation projects, which can be financed through proceeds generated from debt for climate swaps.
Actions where international support would be required where government capacity is low:
Consider opportunities to structure debt for climate swaps with an SOE as the national counterpart. In some countries, there is strong potential for debt for climate swaps to play a role in raising finance for NOCs or indebted utilities to invest in diversification.
Consider the establishment of a ring-fenced trust or agency to manage proceeds from debt for climate swaps. This will ensure transparency and reduce the risk of corruption (Westphal and Liu, 2020[120]).
Development finance institutions should:
Under the leadership of G20 countries, establish an international task force to raise awareness and political visibility around debt for climate-swaps (Picolotti et al., 2020[118]).
Involve Chinese creditors in potential engagement on debt for climate swaps, as they are the predominant source of credit for emerging and developing economies.
Engage with credit rating agencies, such as Moody’s, Fitch Ratings and Standard & Poor’s, to explore how requests for debt for climate swaps can avoid resulting in downgrading to a debtor country’s credit rating, and whether there are mechanisms for a debt for climate swap to work in favour of a debtor country. Currently, any request for debt relief to the Paris Club is considered equivalent to a default (Picolotti et al., 2020[118]).
In considering debt for climate swaps, prioritise countries that are currently servicing their debt and have ambitious low-carbon transition programmes which need additional funding. For heavily indebted poor countries, alternative options to debt relief should be sought, for example, through expansion of the Debt Service Suspension Initiative (DSSI) (Widge, 2021[119]).
Explore incentives for private sector creditors to participate in debt for climate swaps. This might include credits which could be held against firm commitments to reduce emissions, or restructuring old debt into green recovery bonds (Volz et al., 2020[121]).
Identify means to reduce transaction costs.
Provide technical assistance to emerging and developing economies to negotiate debt relief and terms of investment of proceeds with creditors.
Provide technical assistance to emerging and developing economy governments to develop an appropriate pipeline of projects to finance through debt for climate swap proceeds.
International organisations, creditor and debtor countries together should:
Collaborate to establish high-level champions from creditor and debtor countries to advocate for debt for climate swaps. This could also potentially include representatives from potential agency or SOE counterparts (Picolotti et al., 2020[118]).
Work to facilitate at least one debt for climate swap to establish proof of concept and provide a model and lessons learned for future debt for climate swaps (Picolotti et al., 2020[118]).
Appoint third-party advisers to oversee transactions (Volz et al., 2020[121]).
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Note
← 1. Other studies suggest the low-carbon transition will result in net gains in job creation. For example, the New Climate Economy estimates taking ambitious climate action could generate 65 million jobs by 2030, resulting in a net gain of 37 million after offsetting employment reduction in some declining industries (The New Climate Economy, 2018[122]). The International Renewable Energy Agency (IRENA) points to the creation of 111 million additional jobs on current global climate policy trajectories, and 137 million new jobs under a more ambitious 1.5°C scenario by 2030. This is equivalent to a net increase of 51 million under the 1.5°C scenario (IRENA, 2021[29]).