Foreword
In 2022, the Intergovernmental Panel on Climate Change (IPCC) warned that the continued installation of unabated fossil fuel infrastructure will “lock in” GHG emissions for decades to come. Keeping the Paris Agreement’s goal of limiting the global temperature rise to 1.5 °C within reach requires a dramatic acceleration of investment towards low- and zero-emission technologies. However, countries around the world continue to invest in fossil fuels, either for energy security reasons or even as a part of their net-zero strategies.
In this context, transition finance as a means to enable decarbonation of high-emitting industries has grown in importance over recent years to complement more narrow green finance approaches that focus on activities that are already considered as low-carbon. Transition finance focuses on emission-intensive industries where low-carbon technologies might not always be fully feasible today, so carbon lock-in is an important risk increasingly factored in. Financiers, investors, and corporates may hesitate to engage in transition investments, for fear they could be perceived as greenwashing. Currently there is limited guidance for financiers and corporates to reduce or avoid this risk.
This report, Mechanisms to Prevent Carbon Lock-in in Transition Finance, takes stock of how carbon lock-in risk is addressed in existing transition finance approaches, financial instruments, and relevant public and private investment frameworks and methodologies. The report then proposes ways to strengthen mechanisms to prevent carbon lock-in in transition finance policy frameworks.
Developed by the OECD Secretariat for the Working Party on Climate Investment and Development of the Environmental Policy Committee, this report builds on previous OECD work on green and transition finance, especially the 2022 OECD Guidance on Transition Finance. The Guidance sets out key elements and good practice on what constitutes a credible corporate climate transition plan. Since its publication, the Guidance has informed and influenced key international policy initiatives, such as the 2022 G20 Transition Finance Framework and several G7 Communiqués, as well as domestic frameworks including the European Commission’s recommendation on transition finance and the UK Transition Plan Task Force Disclosure Framework.
Governments and market actors must ramp up transition finance and investment to meet their net-zero commitments. This report aims to support policymakers and regulators that have developed or are considering developing transition finance policies, such as standards for transition finance related instruments, frameworks for corporate transition plans, or broader climate-related disclosure frameworks. The OECD stands ready to support governments, foster international dialogue and convergence, and ensure that transition finance credibly advances the global net-zero transition.
