Mechanisms to Prevent Carbon Lock-in in Transition Finance / OECD.

Format:

Book

Author/Creator:

Organisation for Economic Co-operation and Development, author, issuing body.

Language:

English

Subjects (All):

Carbon, Activated.

Physical Description:

1 online resource (92 pages)

Edition:

1st ed.

Place of Publication:

Paris : OECD Publishing, 2023.

Summary:

Carbon lock-in occurs when high-emission infrastructure or assets continue to be used, despite the possibility of substituting them with low-emission alternatives, thereby delaying or preventing the transition to near-zero or zero-emission alternatives. Transition finance, which focuses on the dynamic transformation and decarbonisation of hard-to-abate sectors, frequently faces the issue of carbon lock-in, particularly in considerations of investment feasibility and eligibility. Despite most transition finance approaches incorporating lock-in avoidance as a core principle, existing transition instruments and approaches put in place varying or limited mechanisms to prevent lock-in. Building on the OECD Guidance on Transition Finance, this report takes stock of how carbon lock-in risk is addressed in existing transition finance approaches (such as taxonomies, roadmaps, or guidance), financial instruments, and relevant public and private investment frameworks and methodologies. The report provides good practices on the integration of credible mechanisms to prevent carbon lock-in, address greenwashing risks and build confidence in the market. It can inform both public and private actors in the development of transition finance approaches, standards for green, transition and sustainability-linked debt, frameworks for corporate transition plans, or broader climate-related disclosure frameworks.

Contents:

Intro

Foreword

Acknowledgements

Abbreviations and acronyms

Executive Summary

1. Overview

1.1. Background and context

1.2. Carbon lock-in is a key risk in transition finance

1.3. Aim and scope of the report

1.4. Overview of key findings of the report

Carbon lock-in considerations in transition finance definitions: the role of feasibility assessments

Carbon lock-in considerations in financing and investment frameworks

Carbon lock-in considerations in transition financial instruments

References

Notes

2. Carbon lock-in considerations in transition finance definitions: the role of feasibility assessments

2.1. The evolving landscape of transition finance definitions

Core concepts in transition finance

2.2. Navigating the concept of feasibility

The importance of economic and institutional feasibility

How economic feasibility is assessed impacts the environmental integrity of technology selection, especially in industry

Institutional and social feasibility are likely key factors influencing eligibility under existing transition finance approaches

2.3. Key findings and good practices for transition finance methodologies and definitions

Transition finance definitions can be strengthened and made more transparent by providing clarity on how to assess feasibility as part of eligibility criteria, and by taking a long-term approach in the assessment.

3. Carbon lock-in considerations in financing and investment frameworks

3.1. Carbon lock-in considerations in selected public and private investment frameworks and tools

Public finance approaches

European Commission State Aid Guidelines

The European Union's Recovery and Resilience Facility

MDB methodologies to assess alignment with the Paris Agreement.

Financing early retirement and repurposing of fossil fuel-fired power plants: ADB's Energy Transition Mechanism

Private finance approaches: transition finance tools and frameworks

Activity-level approaches: taxonomies

Entity-level approaches: transition plan initiatives

Portfolio-level approaches: investment strategies guided by portfolio alignment metrics

Existing mechanisms to prevent carbon lock-in are unevenly applied and insufficient across transition finance approaches

3.2. Key findings and good practices for mechanisms to prevent carbon lock-in in transition finance frameworks

Guidance, standards, or frameworks for credible corporate climate transition plans, with net-zero targets based on the Paris temperature goal, are key tools to prevent carbon lock-in in transition finance.

National sectoral emissions pathways can guide technology roadmaps, robust transition taxonomy criteria, and allow companies to develop credible net-zero plans and targets.

Excluding the most emission-intensive energy sources from eligibility can enhance the credibility of transition finance frameworks.

Actions to future-proof transition investments can include setting requirements with technical specifications that enable infrastructure for the use of low-carbon and renewable fuels.

Sunset clauses for eligibility to phase out the use of fossil gas are an effective mechanism to prevent lock-in for assets where a fuel switch is planned to ensure alignment with the Paris temperature goal (e.g., natural gas to low-emission hydrogen).

For assets where a fuel switch is planned, flanking measures to ensure the switch can happen in a timely manner can contribute to preventing carbon lock-in.

To prevent lock-in, it is important to establish a date for early retirement of assets that cannot be retrofitted or refurbished to be consistent with net zero, accompanied by a strategy to finance the retirement process.

4. Carbon lock-in considerations in transition financial instruments

4.1. Green bonds

4.2. Transition bonds

4.3. Sustainability-linked debt

4.4. Key findings and good practices for transition financial instruments

Clearly distinguishing between green and transition eligible activities will make frameworks for transition financial instruments more credible. Credibility can be enhanced by linking frameworks with corporate transition plans, using ambitious KPIs a...

The development of standards and frameworks for SLBs is necessary to strengthen the credibility of this instrument and address emerging loopholes that currently increase the risk of lock-in of related investments.

Eligibility criteria of standards and frameworks for transition financial instruments should be regularly updated and reassessed as factors affecting feasibility evolve.

Annexes

Annex A. Glossary

Annex B. Ten key elements of credible corporate climate transition plans

References.

Notes:

Description based on publisher supplied metadata and other sources.

ISBN:

92-64-47625-3

92-64-73296-9