Equitable Framework and Finance for Extractive-based Countries in Transition (EFFECT)

Overview: Context, guiding principles and key policy recommendations

The Equitable Framework and Finance for Extractive-based Countries in Transition (EFFECT) provides action-oriented recommendations for fossil fuel-producer and mineral-rich developing economies, industry, and financial institutions to enable a just transition to a low-carbon future. While there has been a strong push towards achieving net-zero at a global level, little attention has been paid to “how” fossil fuel-producer developing countries can undertake a managed decline of production and use in a way which safeguards the rights and interests of their citizens.

In a context of increased uncertainty and volatility in global energy markets and geopolitical instability created by the Russian invasion of Ukraine, EFFECT accounts for the practical, political and financial constraints these countries are facing. It supports policy measures to deliver on the Sustainable Development Goals (SDGs) and climate objectives. The Framework aims to make fossil fuel-producer developing economies less vulnerable to the low-carbon transition by reducing their exposure to risk, increasing their resilience, and realising the benefits of a low-carbon economy.

The Framework addresses the short-term pressure to ensure energy security, without compromising on climate targets or losing sight of long-term structural transformation. Such a structural transformation is not just about replacing fossil fuel energy sources with cleaner alternatives: it is also about preparing for the manifold effects (positive and negative) on workers, communities, enterprises, and potential humanitarian consequences. EFFECT emphasises the need to manage the social, economic and environmental aspects of this structural transformation. In this regard, it supports a more equitable sharing of the benefits and costs of the transition across and within countries, wherever possible.

EFFECT recognises that delaying action implies sharper subsequent corrective measures with higher system costs and adverse distributional impacts, coupled with an increased risk of high-carbon lock-in and stranded assets.

Key findings

• Many fossil fuel-producer developing countries are in the midst of severe economic downturns caused by the enduring effects of the COVID-19 pandemic and Russia’s invasion of Ukraine, exacerbated by high vulnerability to climate change and natural disasters.

• Fossil fuel-producer developing countries are highly exposed to declining revenue from fossil fuels as the global low-carbon transition reduces overall long-term demand, while continued dependence on high-carbon commodities will affect competitiveness and prospects for future market access.

• Often characterised by rapid demographic growth, urbanisation and burgeoning demand for energy, these countries require a large amount of new sustainable infrastructure, yet they face a significant capacity and technology gap, as well as substantial constraints in mobilising climate finance and attracting private investment in low-carbon projects.

• Pervasive fossil fuel subsidies and the fact that negative externalities of carbon intensive technologies and products are not priced means that investment incentives are distorted, most often at the expense of low-carbon alternatives.

• At the same time, growing global demand for critical minerals and low-carbon fuels presents a transformational opportunity to create jobs, foster innovation, promote sustainable infrastructure and diversify the economy through the development of local value-added industries, as well as regional low-carbon value chains such as battery storage, electric vehicle manufacturing and hydrogen.

• Net-zero plans in most advanced economies are largely unachievable without substantial hydrogen and renewable electricity imports from developing countries. This presents an opportunity for fossil fuel-producer emerging and developing economies with abundant renewables potential, know-how and experience.

• The reorganisation of global energy trade relationships, prompted by Russia’s invasion of Ukraine, offers an opportunity for developing country producers to monetise their gas reserves in pursuit of national development objectives, but it also raises risks of high-carbon lock-in and stranded assets, as well as competitiveness loss if countries are unable to adapt to more stringent emissions reduction requirements.

Guiding principles for a just, low-carbon transition

EFFECT emphasises the responsibility that producing and importing countries share in accelerating the low-carbon transition in fossil fuel producer developing countries. It calls for new forms of transformative partnerships – as set out across the three Pillars – supported by sustainable investments, technology transfer, capacity building and financing. In so doing, the Framework aims to support a more equitable sharing of the benefits and costs of the transition across and within countries, taking into consideration the increasing global demand for electricity due to growing electrification in the building, transport and industry sectors. An even distribution of the costs and benefits of the low-carbon transition within and across countries will be essential to generate public support for transition policies both at the local and global level.

EFFECT builds upon existing commitments contained in the 2030 Agenda for Sustainable Development, particularly SDG7 (Ensure access to affordable, reliable, sustainable, and modern energy for all), while outlining options for a sustainable low-carbon transition. EFFECT recognises that developing countries need to prioritise access to energy, industrialisation, clean cooking fuel, and broader sustainable development objectives, and that these investments should lead to improved health and environmental conditions and livelihoods.

EFFECT is based on the guiding principle of common but differentiated responsibilities, and respective capabilities in the light of different national circumstances, enshrined in the Paris Agreement. It emphasises the role of technology, finance and partnerships, and clarifies the type of support required for fossil fuel-producer emerging and developing economies to navigate through the transition. It builds on relevant existing international frameworks and guidance, such as the ILO Guidelines for a just transition towards environmentally sustainable economies and societies for all.

EFFECT recognises the heterogeneity of low-carbon development pathways across countries, the importance of flexibility and the need to consider a wide range of policies and technologies to develop tailored and context-specific low-carbon development roadmaps. These should reflect the differences between advanced and developing economies, as well as the fact that developing countries have contributed least to cumulative emissions yet suffer the worst physical impacts from climate change.

Key policy recommendations

Pillar 1: Decarbonising extractives and managing uncertainties

Pillar 1 provides guidance on how to manage the uncertain outlook for fossil fuels in a global decarbonised economy and how to ensure that fossil fuel extraction, processing, transportation and refining are as low-carbon as possible. Recommendations are primarily directed at ministries, departments and agencies of energy, petroleum, mining, finance, national oil companies, importing countries and the fossil fuel industry.

• Carefully assess the risks of a continuous reliance on fossil fuels, including exposure to high-carbon lock-in and path dependency, and the corresponding implications for fiscal stability and revenue spending as the speed of the global energy transition increases. In particular, national oil companies (NOCs)’s investment strategies need to align with national low-carbon transition strategies and objectives.

• As the outlook for high carbon commodities is changing, reduce emissions from fuel extraction, processing, transportation and refining to the fullest extent possible, by deploying the best available technologies and practices.

• Create an enabling environment that discourages methane emissions and flaring, and encourages upstream electrification, and, where appropriate, carbon capture (utilisation) and storage (CC(U)S).

• In particular, consider integrating methane emissions reduction targets into National Determined Contributions, and establishing a measurement, disclosure and verification framework for methane emissions. Governments may also consider requiring the public disclosure of methane emissions data. Governments and industry can work together to improve national methane emissions inventories, utilise existing reporting templates, and design leak detection and repair programmes (LDAR) across the oil and gas, LNG and coal mining value chains.

• Provide incentives to put associated gas to productive use, where economically feasible, by charging royalties on flared gas or by granting preferential access for associated gas to the national gas pipeline system and for electricity produced from associated gas to the wholesale market to create domestic demand.

• Engage with importing countries to seek technical and financial support for curbing flaring and venting in developing producing countries.

• Explore the potential for scaling up the deployment of CC(U)S, while assessing the risks of relying on assumptions about the timing and costs of global CC(U)S deployment as well as technological, economic, institutional, environmental and socio-cultural barriers to implementation. Bring together oil and gas operators and heavy industries to identify CC(U)S hubs across energy-intensive industrial sectors to achieve scale and create demand for CO₂ storage. Decouple repurposing and decommissioning regulations and address legal liability for decommissioning.

• Create an enabling environment to facilitate low-carbon technology transfer, including by reducing trade tariffs and leveraging partnerships between national and international oil and gas companies to foster sustainable technology transfer.

Pillar 2: Sustainable fossil fuel exit strategies and just transition plans

Pillar 2 provides guidance on how to manage progressive fossil fuel phase down/out and related transition risks, while safeguarding the livelihoods of people who will be negatively affected, future proofing new fossil fuel infrastructure to minimise risk of stranded assets, and enhancing affordability and access to climate finance. Recommendations are primarily addressed to finance, planning, economy and labour ministries, departments and agencies.

• Centralise and consolidate identification, assessment and management of transition risks, raising cross-government capacity to adopt innovative techniques, including stress-testing and scenario modelling.

• Structure inclusive and effective just transition management processes. These include leveraging tripartite social dialogue mechanisms between government, employers and workers, as well as inclusive consultations to build a shared understanding of the costs and opportunities of the low-carbon transition and ways to realise benefits for local people.

• Assess who will be affected by fossil fuel phase-down/out, accounting for labour market informality. Blend quantitative and qualitative approaches to data collection, including interviews and household surveys, to assess impacts on jobs and households and how these will vary by region, to provide a nuanced picture of the distributional impacts of the low-carbon transition.

• Put in place measures, such as targeted cash transfers, fuel vouchers and other targeted support, to mitigate impacts on those who will be adversely affected, particularly fossil fuel workers and poorer households. Given the skills overlap, active labour market measures can support the transfer of workers from fossil fuel industries to low-carbon jobs. Such measures must be complemented by robust social protection coverage and effective public services to support workers through retraining and reskilling.

• Where feasible, transition-proof new fossil fuel infrastructure, enabling future repurposing for low-carbon re-use to mitigate risks of stranded assets and high-carbon lock in, and to accelerate the pace and reduce the overall CAPEX requirements of the transition. Repurposing existing fossil fuel infrastructure can avoid enormous decommissioning costs, extend the life of infrastructure for low-carbon re-use, help to decarbonise industrial production, create jobs, and accelerate the pace of the low-carbon transition in fossil fuel-producer developing countries.

• Pursue cluster-based industrial decarbonisation, where feasible, connecting depleted oil and gas reservoirs with heavy emitting industries via repurposed pipelines that sequester CO₂ using CC(U)S, while renewables installations and green hydrogen facilities can provide low-carbon feedstock to industry. This requires policy frameworks that guide partnerships between upstream operators, gas and electricity infrastructure operators, onshore and offshore regulators and industry; fiscal terms which incentivise investment; fair distribution of risks and costs between government and industry; and decoupling repurposing from decommissioning regulations, clarifying legal liabilities for decommissioning.

• Clearly define decarbonisation, diversification and emissions reduction objectives, and establish credible verification and reporting mechanisms to build investor confidence.

• To attract private capital, enhance project planning and preparation capacity to develop robust pipelines of investible low-carbon projects to which investors can readily commit their time, efforts and resources.

• Deploy blended finance strategically, maximising impact on low-carbon projects where limited public support can have the greatest impact in encouraging the private sector to invest, before moving to more frontier technologies which require greater levels of de-risking.

Pillar 3: Systemic change and economy-wide decarbonisation

Pillar 3 outlines strategies to achieve the long-term transition to a sustainable, low-carbon economy, while realising economic development priorities and improving citizens’ well-being. Governments should capitalise on emerging low-carbon opportunities to diversify their economies and create jobs, while at the same time reforming fiscal systems to correct misaligned incentives, and greening electricity networks to decarbonise industry and expand energy access. Recommendations are primarily addressed to advanced economy governments, industry and international organisations, and energy, finance, trade, foreign affairs, economy and planning ministries, departments and agencies in developing economies.

• Pursue long-term integrated development planning, incorporating interconnected energy, climate, environmental, macro-economic, fiscal, labour, skills, industrial, infrastructure and transport policies. To do so, strengthen fossil fuel producers’ capacities to mainstream low-carbon development strategies into national development planning. Mainstreaming and alignment will entail co-ordinated and harmonised actions being taken horizontally within government and vertically across levels of governance (national, regional, local, with meaningful stakeholder engagement), all pulling in the same direction, as opposed to an array of isolated policy measures, often implemented in an inconsistent manner, and leading to suboptimal or even contradictory outcomes.

• Undertake a fundamental reshaping of the social contract, emphasising equitable income distribution, promotion of human capital, poverty alleviation and responsible social and environmental practices through inclusive decision making as a necessary condition to building public support for decarbonisation policies.

• Define credible transition plans, including milestones and targets and reporting mechanisms to mobilise transition finance. This can enable financing of activities which are carbon intensive or in hard-to-abate sectors which are necessary for socio-economic development, but where there are few viable alternatives, if credible interim decarbonisation targets can be identified and fulfilled.

• Forge new win-win partnerships between producer and importer economies, accounting for a fair share of resources to address energy poverty and support local and regional development. These partnerships can be leveraged to deliver the sustainable investments, technology transfer, capacity building and financing necessary to achieve industrialisation, energy access, economic development and decarbonisation in developing countries. In the short to medium term, this can involve meeting energy demand in return for investments in abatement technology transfer, resource-efficient infrastructure, scaling up renewables’ generation, expanding access to energy services, while increasing the revenue predictability for producer economies. At the same time, it requires a clear commitment from advanced economies to invest in long-term transition pathways that enable developing countries to manage the phase down/out of fossil fuel dependence to support economic diversification and broad systemic change.

• Capitalise on the increasing global demand for the resources of the future, including critical minerals through sustainable mining development, underpinned by circular economy principles, and alternative low-carbon fuels, to diversify revenue away from oil, gas and coal. Enhance regional collaboration to create new demand for green products and technologies, such as green hydrogen, battery storage and electric vehicles, building the know-how and business case for investment in local value-added activities.

• Place greater emphasis on valuing natural assets and biodiversity, introducing natural capital into national accounting systems, creating incentives to preserve existing ecosystems and establishing mechanisms which enable developing economies to get paid for the provision of global ecosystem services, such as forests storing carbon.

• Reform fiscal systems to broaden the tax base, develop more redistributive tax and spending frameworks, and correct misaligned incentives. This will level the playing field between carbon intensive products and technologies and greener alternatives through gradual reform of fossil fuel subsidies and carbon pricing. Assess and mitigate negative distributional impacts of price increases on poorer households through targeted support measures, such as cash handouts, in parallel to scaling up social protection coverage and investing in more effective public services.

• Optimise the blend of power generation technologies, storage, demand-side measures and investments in transmission and distribution infrastructure, through co-ordinated power sector planning. These plans should be delivered through well-structured public procurement programmes and enabled by investment-ready regulatory frameworks to decarbonise power systems and scale up renewables. This will support industrial decarbonisation through reducing the carbon content of electricity sourced from the grid, as well as the development of affordable and green decentralised solutions to rural electrification given declining costs of solar PV and battery storage.

• Given the scale of buildings and urban infrastructure yet to be built in developing economies, progressively improve buildings’ efficiency standards and incentivise on-site renewables solutions. Encourage systems planning which takes a holistic approach to mobility. This should reduce overall demand for vehicles, bringing services closer to demand and prioritising effective and accessible public transport.