3. Carbon lock-in considerations in financing and investment frameworks
This chapter provides an overview of existing financing and investment frameworks that consider the risk of lock-in and that contain mechanisms to mitigate that risk. The overview includes relevant frameworks for both public and private finance and investment, notably: environmental State aid guidelines, Paris alignment methodologies of Multilateral Development Banks (MDBs), as well as transition finance tools and frameworks designed to increase private finance in the net-zero transition. The analysis shows gaps in existing transition finance approaches for private finance when it comes to mechanisms to prevent lock-in. The chapter proposes ways to strengthen them, taking inspiration from mechanisms that can be found in public finance approaches.
The concept of carbon lock-in is not exclusive to transition finance and is a recurring theme in discussions around policy and financing for climate change mitigation. It is particularly important to consider when designing (public or private) investments in energy production and use. Existing frameworks and tools guiding such investments reflect to varying degrees the growing importance of carbon lock-in risk. However, as the window of opportunity to stay within the Paris temperature goal is closing, the issue of lock-in risk and how best to mitigate it can be expected to take centre stage as stakeholders develop relevant financing frameworks and tools.
To date, there are broadly two areas where mechanisms to prevent lock-in have been developed and applied:
Domestically, such as in the context of state aid policies and recovery funds in the European Union (EU);
Internationally, such as for investments by international financial institutions (which can be extended to either public or private entities and used to mobilise additional commercial resources), notably Paris alignment methodologies developed by Multilateral Development Banks (MDBs) and those associated with energy transition mechanisms;
Private sector approaches, notably in transition finance tools and frameworks developed by public and private actors (globally, but with a higher concentration of approaches in Asia).
Public finance approaches
European Commission State Aid Guidelines
The 2022 European Commission Guidelines on State aid for climate, environmental protection and energy are, to date, the only state aid framework that explicitly requires the consideration of carbon lock-in risk. They require that state aid measures bring about positive effects on the supported economic activities, including with regards to the net-zero transition and environmental protection. The positive effects of state aid measures must outweigh any negative effects of the investment (e.g., on competition and trade). This requirement includes the consideration of the EU Taxonomy criteria, including the “do no significant harm” (DNSH) principle, which means that supported economic activities cannot do significant harm to any of the six environmental and climate objectives set out in the EU Taxonomy (climate change mitigation, climate change adaptation, pollution prevention and control, circular economy, protection of water and marine resources, protection of biodiversity and ecosystems).
The Commission Guidelines specify that aid measures directly or indirectly involving fossil fuels “are unlikely to create positive environmental effects and often have important negative effects”, meaning they are unlikely to be eligible for state aid, including on DNSH grounds. This includes new natural gas investments unless it can be shown that there is no carbon lock-in effect. The absence of lock-in can be demonstrated through a “national decarbonisation plan with binding targets”, or through “binding commitments by the beneficiary to implement decarbonisation technologies […] or replace natural gas with renewable or low-carbon gas or to close the plant on a timeline consistent with the [EU’s] climate targets”. The latter implies a clear reduction in fossil fuels, including a reduction of 66-71% by 2050 in the use of unabated natural gas compared to 2015 (European Commission, 2022[1]).
The European Union’s Recovery and Resilience Facility
A similar approach is taken in the Recovery and Resilience Facility (RRF), set up by the European Commission in 2020 to support European Member States in the recovery from the negative economic and social impacts of the COVID-19 pandemic. The European Commission, as part of the RRF’s requirement to respect the principle of DNSH across all investments and reforms supported by the fund, provides additional guidance on how to prevent carbon lock-in in the case of fossil fuel investments.1 Notably, all investments or reforms involving liquid or solid fossil fuels are excluded from support, while measures involving natural gas need to comply with additional criteria (European Commission, 2021[2]).
Criteria for natural gas power and heat/cool production limit support to “Member States that face significant challenges in the transition away from carbon-intensive energy sources”, which refers to countries that currently have a very emission-intensive energy system (e.g., those that are heavily dependent on coal for energy production). They also require that measures are in line with the EU’s 2030 and 2050 emissions targets, that the asset be future-proof (by installing technological solutions that enable the use of renewable and low-carbon gases by the asset), and either adherence to a lifetime emissions threshold for the asset, or the introduction of additional “flanking measures” to help ensure the asset is deployed in a manner that prevents lock-in. Flanking measures have to include national strategies and related commitments for the development of low-carbon gases like hydrogen, “the simultaneous closure of a significantly more carbon-intensive power plant” (notably, coal- or oil-fired) “with at least the same capacity” as the new asset, a credible national trajectory to reach 2030 renewables targets, and concrete accompanying reforms and investments to increase the share of renewables (see Box 3.1 below for further details and examples on the use of flanking measures for future-proofing).
Network investments (transmission networks and distribution infrastructure, including for domestic heating) can be supported, if they are future-proof (i.e., enabled for the transport or storage of renewable and low-carbon gases). Similarly, domestic gas boilers can be supported as part of wider energy efficiency or building renovation programmes, if those programmes lead to a significant decrease in GHG emissions,2 and a significant improvement in air pollution and public health. This could be the case, for example, when replacing coal- or oil-based heating systems and boilers with gas-based heating systems or boilers.
What are flanking measures?
The concept of “flanking measures” (or “flanking policies”) refers to complementary measures that can ensure or enhance the effectiveness of a given policy or investment (PPMi, 2019[3]). In an environmental policy context, flanking measures can contribute to building the right enabling environment for investments to be future-proof, or combine several investments in a manner that makes them future-proof, and notably effective in preventing carbon lock-in.
Flanking measures that improve the enabling environment usually take the shape of government reforms, such as through national industrial decarbonisation strategies, electricity market reform, phase out of fossil fuel subsidies, amongst others. In the absence of government intervention, market actors can still make use of this concept to future-proof their investments, notably by carrying out accompanying investments in support of the initial investment. The below examples cover possible public and private interventions in energy, transport, and industry.
Flanking measures are useful in preventing lock-in in high-emitting sectors (energy, transport, industry)
Flanking measures are relevant for transition finance and for preventing lock-in because they:
allow the decision-maker to take a longer-term and more holistic perspective on decarbonising high-emitting sectors, when low-carbon alternatives are not yet feasible; and
prevent greenwashing when it comes to investments that comply with low-carbon criteria but will likely not be operational and fully implemented without additional interventions.
Energy
A gas transmission network can be theoretically future-proof if it is built to be able to transport hydrogen as well as fossil gas, and if it complies with the technical specifications on turbines, materials, and other key criteria. However, without a sufficient and steady supply of hydrogen, the network may end up transporting fossil gas, despite not being intended for that purpose. An example of a flanking measure would be policies and investments to ensure hydrogen supply. This could be done through accompanying reforms, like the adoption of a national hydrogen strategy, or investments into the hydrogen production value chain.
Transport
Similarly, to avoid increased emissions from higher traffic associated with the construction of new roads, flanking measures can be put in place to support the shift to cleaner modes of transport. This could be done by way of accompanying investments in rail and public transport, equipping roads with low-carbon infrastructure (such as charging stations for electric vehicles), putting in place appropriate road access or congestion charges, and wider reforms to facilitative broader access to public transport.
Industry
To reduce emissions in steelmaking, coking-coal-based blast furnaces (BFs) can be replaced with direct-reduced-iron (DRI) that use natural gas as a feedstock or reducing agent. DRI plants can be converted to run on low-emission hydrogen. Like the lock-in risks in the energy sector, one of the key challenges to ensure that DRI plants are future-proof is to ensure a sufficient supply of low-emission hydrogen. To prevent risk of carbon lock-in in this case, flanking measures could include accompanying investments by the company into the hydrogen production value chain, such as investments to ensure enough electrolysers come on-stream to support a fuel switch of the company, as well as accompanying government reforms to build up the hydrogen value chain.
Source: Authors.
MDB methodologies to assess alignment with the Paris Agreement
In 2017, MDBs committed to align their financial flows with the objectives of the Paris Agreement and to develop a joint approach to assess such alignment. In 2023, they published joint methodological principles for assessment of alignment with the Paris Agreement (for both mitigation and adaptation) of several types of financing, such as direct and policy-based investment lending operations, intermediated financing and general corporate purpose finance (World Bank, 2023[4]). Such principles are relevant to transition finance approaches as they directly apply to high-emitting activities and explicitly focus on addressing carbon lock-in risk.
The joint MDB assessment of direct investment lending operations and their alignment with the mitigation goals of the Paris Agreement is comprised of two main steps. The first one is a “uniform assessment”, i.e., a screening using lists of “universally aligned and universally non-aligned” activities,3 which are periodically updated, moving further away from higher-emitting activities over time (World Bank, 2023[5]). If an activity falls under the “universally aligned” list, then it can be considered aligned and therefore lock-in risks are negligible. The second step applies to activities whose classification is unclear and consists of a “specific assessment”, i.e., a second screening based on specific criteria.4 Two of the criteria used for the specific assessments closely relate to lock-in risks. The first is whether the activity prevents opportunities to transition to Paris-aligned activities, or primarily supports or directly depends on non-aligned activities in a specific country/sectoral context. The second assesses whether the activity is economically unviable, when considering the risks of stranded assets and transition risks in the national and sectoral context. Other criteria include consistency with relevant Nationally Determined Contributions (NDCs), Long-Term Climate Strategies (LTS) or national economy-wide, sectoral, or regional low-GHG strategies, and sectoral pathways (World Bank, 2023[5]).
The methodological principles for other types of financing are broadly similar to those for direct lending, with some adjustments to account for the specificities of the different financing approaches. For example, for intermediated lending, an MDB can choose whether to assess Paris alignment at transaction level or at counterparty level and follow a similar approach to that outlined above. In case an MDB’s use of eligible proceeds includes investments that may lead to potential carbon lock-in, then the MDB should “demonstrate that at the time of investment either (i) the risks within the eligible use of proceeds have been addressed or reasonably managed, or (ii) the counterparty commits to verifiable management practices to ensure that carbon lock-in and transition risks are managed before the end of the investment tenor, as applicable” (World Bank, 2023[6]).
In the case of general-purpose corporate finance, if a counterparty supports universally non-aligned activities, it can still be classified as “aligned” if “the MDB finance is structured with the objective of decarbonising the counterparty in line with the principles of Sustainability-Linked Finance”. If the counterparty engages in “high-emitting sectors”,5 then it is subject to a further screening which includes a lock-in risk assessment if the MDB financing is long-term. In this case, to be considered Paris-aligned, the transaction must either be structured as a sustainability-linked bond or loan, or the counterparty must commit to develop and implement a Paris alignment pathway which shall explicitly include how carbon lock-in risk is addressed. The counterparty must report to the MDB periodically on the progress of development and implementation of the pathway (World Bank, 2023[7]). It is worth noting that while sustainability-linked instruments are promising instruments that create financial incentives for corporates to set and reach credible emission reduction targets, these instruments can also create lock-in and greenwashing risks if adequate safeguards are not in place – this issue is further explored in Chapter 4.
Due to differences in mandates, policies, and strategies across MDBs, the methodological principles could be operationalised in different ways (World Bank, 2023[4]). Since the methodological principles do not provide detailed guidance, frameworks, or metrics to assess potential lock-in risk, each MDB might follow a different approach. Building on the joint principles, some MDBs have already developed their own Paris alignment approaches, which address lock-in risk to different extents – see Box 3.2 below for further details on how existing MDB own methodologies on Paris alignment tackle lock-in risks. Existing methodologies can provide a useful reference for other MDBs that have not yet developed a definitive methodology on addressing lock-in. For example, as described in Box 3.2 below, it is important to consider whether and how a project’s commercial arrangements and broader market conditions may increase lock-in, and to factor in long-term cost assessments in lock-in evaluations (EBRD, 2022[8]). In case high lock-in risk is identified, the MDB can require the client to adopt a credible climate transition plan to address the risk and include such provisions in legal covenants (World Bank, 2023[9]).
EBRD
EBRD’s Paris Alignment methodology includes a carbon lock-in test as one of the criteria of the “specific assessment” (the second screening) (EBRD, 2022[8]). The test requires “assurance that the project does not enable an emissions-intensive asset to continue operating when economically preferable, lower-carbon options could replace it”. The lock-in test looks at project-specific criteria as well as at the circumstances and conditions under which the project is taking place: if the investable asset will cease to operate in an emission-intensive manner in (approximately) less than 10 years, or if it complies with additional criteria, the risk of lock-in is considered low.
Beyond project-specific criteria, the lock-in test also involves an analysis of the project’s commercial arrangements that may increase lock-in (such as long-term contracts guaranteeing operation at high utilisation rates), the market structure of the project itself (such as the lack of a regulatory framework to attract low-carbon options or the project’s dominant market position that would deter market entry), and the broader project context (such as decarbonisation or carbon pricing policies in the jurisdiction in which the project is operating). Lastly, where a project has significant emissions, the EBRD assessment includes a long-term cost assessment, looking at the project’s cost structure, compared with the costs of future low-carbon alternatives. Specifically, this can involve an assessment of sunk costs and how they affect the overall cost of the project, compared with a low-carbon alternative.
World Bank
According to the World Bank’s own methodology for Paris Alignment of investment project financing, if a financial institution’s portfolio is exposed to carbon lock-in risks and does not have adequate institutional processes in place to address them, then the institution will be required to adopt and implement a set of measures to assess and reduce those risks (World Bank, 2023[9]). The World Bank can embed these in legal covenants, monitor them throughout the project implementation, and provide technical assistance as needed.
The EIB also has a framework for Paris Alignment for Counterparties (PATH), to help their clients (corporate and financial intermediaries) align their operations over time with the goals and principles of the Paris Agreement (EIB, 2022[10]). The PATH Framework focuses on companies for which the need to align is most acute, namely those in high-emitting sectors and those operating in contexts of high climate vulnerability. The PATH Framework does not explicitly address the risk of carbon lock-in, but requires eligible, high-emitting companies to have a public decarbonisation plan with “a mid-term, rolling, quantitative emission reduction target and options over a longer time horizon to achieve carbon neutrality towards mid-century”. Any potential role of offsetting must be clearly defined and must take into account the interests of social partners. For companies that either do not have adequate plans or are not verified by independent organisations, the Framework contractually requires them to develop and publish an “alignment strategy” within one year of the contract signature, with flexibility provided for companies outside the EU with challenging enabling environments. Failure to comply with this contractual obligation would constitute a breach of contract.
Financing early retirement and repurposing of fossil fuel-fired power plants: ADB’s Energy Transition Mechanism
Long-lived infrastructure that cannot be adapted to low-carbon and zero-emission pathways are at risk of getting stranded and creating carbon lock-in. According to the IPCC, evidence suggests that without carbon capture, the worldwide fleet of coal- and gas-fired power plants would need to be retired about 23 and 17 years earlier than expected lifetimes, respectively, in order to limit global warming to 1.5°C and 2°C (IPCC, 2022[11]).
The Energy Transition Mechanism (ETM) is an initiative developed by the Asian Development Bank (ADB) to catalyse public and private capital to accelerate the transition from carbon-intensive coal-based power plants to clean energy in ADB’s developing member countries. Eligible activities include: (i) reducing emissions from coal-fired power plants through early retirement or repurposing of such plants for clean energy; (ii) increasing the share of clean energy, including through support for enhanced grid capacity; (iii) helping countries develop and enact policy and regulatory measures to accelerate the shift from coal to clean energy; and (iv) supporting a just transition. To mobilise resources for ETM activities, ADB set up a new multi-partner trust fund, the Energy Transition Mechanism Partnership Trust Fund (ADB, 2023[12]).
The ETM will include two financing vehicles: (i) a carbon reduction fund, which will be devoted to early retirement or repurposing of coal-fired power plants on an accelerated timeline; and (ii) a clean energy fund, which will focus on new clean energy investments in generation, storage, and grid upgrades (ADB, 2022[13]).
The ETM started with three pilot countries: Indonesia, the Philippines, and Viet Nam. It now has been extended to Pakistan and Kazakhstan (see Box 3.3 below). Retirement projects could have severe negative socioeconomic impacts, such as direct job losses in retired plants, indirect job losses in industries within the coal-value chain and in the informal sectors that depend on it, and potential slowdown of economic activity along the supply chain. For this reason, the ADB is implementing safeguards to avoid, minimise, mitigate or compensate potential adverse impacts of projects on the environment and affected people, for example through retraining and reskilling programs for vulnerable workers, in many cases women (ADB, 2022[14]).
Indonesia
In Indonesia, ADB signed a Memorandum of Understanding in 2022 with Cirebon Electric Power, an independent power producer (IPP), and other partners to explore the early retirement of the first coal-fired power plant under the ETM programme. The planned transaction would retire a 660-megawatt coal power plant in Western Java. ADB is supporting the design and operation of Indonesia's ETM Country Platform, which oversees the broad structure of energy transition activities in Indonesia and future programs to accelerate the retirement or repurposing of coal-fired power plants. ADB is also supporting the development of Indonesia’s investment plan under the Climate Investment Funds Accelerating Coal Transition (CIF-ACT) program, which received approval to receive USD 500 million of concessional capital in October 2022. ADB is also providing institutional support for the Indonesian Just Energy Transition Partnership (JETP) secretariat, which will coordinate the implementation of the JETP.
Philippines, Viet Nam, Pakistan and Kazakhstan
In the Philippines, Viet Nam, Pakistan, and Kazakhstan, the ADB is conducting feasibility studies to analyse the viability of early retirement and/or repurposing of high-emitting fossil fuel-powered plants. Unlike in Indonesia, the Philippines, and Viet Nam, the priority for Pakistan is to transition away from oil- and diesel-fired power plants, although coal-fired power plants will likely be addressed as part of ETM’s pre-feasibility study.
Note: This box is based on an ADB public update on ETM activities as of April 2023.
Source: (ADB, 2023[15])
Private finance approaches: transition finance tools and frameworks
As transition finance has gained in prominence over the last years, an increasing number of taxonomies have begun integrating transition considerations into their eligibility criteria. In this process, it has become clear that while activity-level criteria are useful to prevent greenwashing in green-labelled use-of-proceeds instruments, activity-level approaches need to be complemented by entity-wide strategies and tools like scenarios and emissions pathways. This is necessary to ensure that an entity-wide process of decarbonisation is taking place, in addition to individual green investments, which may be limited to a specific portion of the business.
It is important to note that taxonomies were initially developed to define what can qualify as a green economic activity for the purposes of use-of-proceeds instruments, notably green and climate bonds. The first jurisdiction to develop such a system was China, with its 2015 “Green Bond Endorsed Project Catalogue” (OECD, 2020[16]) and the first market actor was the Climate Bonds Initiative (CBI) which developed a taxonomy as part of its Climate Bonds Standard and Certification Scheme in 2013 (CBI, 2023[17]). The specific aim was to put in place a system that could help ensure the environmental credibility and integrity of green-labelled use-of-proceeds instruments. Therefore, taxonomies had to have an economic activity, project, or asset focus.
While carbon lock-in is an important risk in transition finance, not all existing frameworks explicitly address it. Several frameworks can be considered “hybrid” approaches, as they tend to combine mechanisms that can be found in activity-level or entity-level approaches. Examples of “hybrid” approaches include notably Japan’s Basic Guidelines on Climate Transition Finance by the Ministry of the Economy, Trade, and Industry (METI), the Ministry of the Environment, and the Financial Services Agency (FSA) (FSA, METI and Ministry of Environment, Japan, 2021[18]), and ICMA’s Climate Transition Finance Handbook (ICMA, 2020[19])”.6
Activity-level approaches: taxonomies
Several taxonomies7 explicitly cover transition activities to various degrees, including the Association of Southeast Asian Nations (ASEAN) Taxonomy (ASEAN Taxonomy Board, 2023[20]), Canada’s Taxonomy Roadmap (Government of Canada, 2022[21]), the EU Taxonomy (( (European Commission, 2021[22]) and (European Commission, 2022[23])), Indonesia’s Green Taxonomy (OJK, 2022[24]), Korea’s K-Taxonomy (InvestKorea, 2022[25]), Malaysia’s principles-based taxonomy (Bank Negara Malaysia, 2021[26]), Singapore’s traffic light taxonomy (Monetary Authority of Singapore, 2023[27]), and South Africa’s Green Finance taxonomy (National Treasury, 2022[28]).
Taxonomies most commonly deploy a combination of three mechanisms to prevent lock-in when defining transition economic activities for the purposes of climate change mitigation:8
Exclusion and eligibility criteria: Most taxonomies contain technical screening criteria or similar requirements to delineate the expected level of environmental performance of economic activities to be eligible for inclusion in a given taxonomy. In addition, some taxonomies, such as the EU Taxonomy and the ASEAN Taxonomy, exclude some activities from eligibility. Similarly, some taxonomies define activities as part of traffic light systems, as in the case of the Singaporean and Indonesian taxonomies (European Union, 2020[29]; ASEAN Taxonomy Board, 2023[20]; Monetary Authority of Singapore, 2023[27]; OJK, 2022[24]).
“Future-proofing” of carbon assets: This approach calls for ensuring that newly built or retrofitted gas infrastructure is enabled for the use of near-zero and net-zero technologies, notably hydrogen. This approach is taken, for example, by the EU Taxonomy, when requiring that power generation plants that use fossil gas are designed to be able to use renewable or low-carbon fuels (European Commission, 2022[30]).
Sunset clauses: Under this approach, the relevant activity is only counted as a transition activity until a specific date (e.g., 2030) and must comply with a new set of more stringent criteria thereafter to continue qualifying as part of the taxonomy. Examples include a certain level of blending with renewable or low-carbon gases, or a complete fuel switch to a low-carbon or renewable gas, as part of investments in natural gas infrastructure. Sunset clauses are used in the ASEAN Taxonomy, the EU Taxonomy, the South African Taxonomy, and the Singaporean Taxonomy (ASEAN Taxonomy Board, 2023[20]; European Commission, 2021[22]; European Commission, 2022[30]; Monetary Authority of Singapore, 2023[27]; National Treasury, 2022[28]). The Singaporean Taxonomy does this by way of a traffic light system, defining “green”, “amber”, and “red” activities based on their compatibility with net zero by 2050, with “red” activities being ineligible under the Taxonomy, while “amber” activities are, in most instances, eligible until 2030 (Monetary Authority of Singapore, 2023[27]). To avoid carbon lock-in, in the Singaporean Taxonomy the amber category is relevant only for existing transitioning infrastructure and activities, whereas any new activity (whether a new power plant, a new building, etc.) must meet the green criteria. The ASEAN Taxonomy has a tiered system, with a 2030 sunset date for “tier 3” activities, a later 2040 sunset date for “tier 2” activities, and no sunset date for “tier 1” activities, reflecting the various levels of environmental performance of the activities that are covered by each tier (Monetary Authority of Singapore, 2023[27]).
Entity-level approaches: transition plan initiatives
In addition to defining transition activities, some taxonomies are starting to integrate an entity-focused approach to issue of the lock-in. An entity focus is partially reflected in the principles-based taxonomy developed by the Green Finance Industry Taskforce (GFIT) for the Monetary Authority of Singapore: in the context of fossil fuel financing, it emphasises the importance of the “broader environmental strategy of businesses”, including pathways, implementation plans, and targets to meet climate objectives (Monetary Authority of Singapore, 2023[27]). The same entity-level approach is also reflected in the Canadian Taxonomy Roadmap Report, which has issuance requirements as part of its proposed taxonomy: issuing companies have to set targets (net zero by 2050 or earlier, in addition to a 2030 interim target, as well as additional targets between 2030 and 2050), develop a net-zero transition plan, follow annual reporting requirements and prepare climate disclosures “in compliance with emerging […] international standards” (Government of Canada, 2022[21]).
In addition to the broadening of taxonomy approaches, the last years have seen a mushrooming of new purely entity-focused approaches in transition finance, which revolve around corporate transition plans and related corporate climate disclosures. The development and disclosure of credible corporate climate transition plans has been limited to date. According to CDP, which holds a large corporate climate disclosure database, in 2022, 22% of the over 18,600 disclosing organisations reported that they had already developed a 1.5°C-aligned climate transition plan (CDP, 2023[31]). However, of these 4,100 organisations, only 81 (that is, 0.4% of the full sample) reported sufficient detail to all key indicators that align with a credible climate transition plan. Moreover, only 9% of the full sample of disclosing companies reported that their transition plan was publicly available.
Several regulatory initiatives are emerging at national and regional level, setting out expectations on the need for companies to develop and publish climate transition plans, for example in the UK, Switzerland, EU, and Japan. The OECD Guidance on Transition Finance provides an analysis of these initiatives, including a detailed mapping in Annex B of the Guidance, as well as presenting 10 elements of credible corporate transition plans (OECD, 2022[32]). It builds on existing initiatives but additionally puts forward elements that have remained underexplored by other frameworks, notably by highlighting the importance of companies assessing whether there are existing parts of their business that are at risk of carbon lock-in (see Annex B of this report for a summary of the ten key elements of credible corporate transition plans set out in the Guidance). Initiatives launched prior to the publication of the Guidance, for the most part, did not explicitly cover the issue of carbon lock-in. Since the publication of the OECD Guidance, which has fed into the work of the G20 Sustainable Finance Working Group (SFWG), the SFWG has recognised the importance of reducing lock-in risk as part of their high-level principles for “approaches to identify transition activities or investment opportunities” (G20 Sustainable Finance Working Group, 2022[33]). Similar notions have also been picked up by the G7 in various communiqués since, emphasising the importance of preventing lock-in in transition finance, citing the OECD Guidance as a key reference in this context (G7, 2023[34]; G7, 2023[35]). Similarly, the recently published European Commission Recommendation on Transition Finance highlights the importance of preventing lock-in and builds on elements from the OECD Guidance (European Commission, 2023[36]).
Despite the limited explicit recognition of lock-in risk and the need to reduce it, entity-level approaches do implicitly put in place mechanisms that can ultimately help prevent lock-in:
Long-term net-zero targets: Requirements for company transition plans can significantly reduce carbon lock-in risk, especially if they include a long-term net-zero target. Where that net-zero target is based on an emissions pathway and underlying scenarios aligned with the temperature goal of the Paris Agreement, carbon lock-in risk can be significantly reduced (see, for example, (International Platform on Sustainable Finance, 2022[37]; CBI, 2020[38]; WWF, 2022[39]; OECD, 2022[32])). This is generally accompanied by additional requirements or recommendations to put in place interim targets, with overall alignment with an emissions pathway that is based on a credible and science-based scenario (see, for example, (International Platform on Sustainable Finance, 2022[37]; Transition Plan Taskforce, 2022[40]; OECD, 2022[32])).
Strategy, actions, and implementation steps: To support the implementation of the transition plan, most existing approaches emphasise the importance of setting out a clear strategy on the specific steps and actions the company intends to take to achieve the objectives of the transition plan. This often includes risks and opportunities, as well as any possible limitations, constraints, and uncertainties with regards to the achievement of the plans targets (see, for example, (CDP, 2021[41]; International Platform on Sustainable Finance, 2022[37]; OECD, 2022[32]; TCFD, 2021[42]; Transition Plan Taskforce, 2022[40]).
A notable example of a standard for company transition plan that would include an explicit lock-in assessment is the latest version of the European Sustainability Reporting Standards, in particular the standards related to climate change (ESRS E1). The latter includes a qualitative assessment of the potential locked-in GHG emissions as one of the elements that an undertaking shall disclose as part of its transition plan for climate change mitigation. The lock-in assessment concerns the undertaking’s assets and products. It must include “an explanation of if and how these emissions may jeopardise the achievement of the undertaking’s GHG emission reduction targets and drive transition risk, and if applicable, an explanation of the undertaking’s plans to manage its GHG-intensive and energy-intensive assets and products”. In particular, when disclosing such information on lock-in, the undertaking must include the cumulative locked-in GHG emissions associated with key assets from the reporting year until 2030 and 2050 in tCO2eq as well as those associated with the direct use-phase GHG emissions of sold products in tCO2eq (European Commission, 2023[43]).
Further guidance on specific emission lock-in indicators in relation to the development of corporate transition plans can be found in the Assessing low-Carbon Transition (ACT)’s methodologies, available for a wide range of sectors. The ACT is an initiative founded by the French Environment and Energy Management Agency (ADEME) and CDP, which supports and assesses companies’ readiness to transition to the low-carbon economy using future-oriented, sector-specific methodologies. ACT’s methodologies provide a tool and calculation method to assess emission lock-in. The lock-in related indicators in ACT’s generic methodology highlight the importance of measuring absolute GHG emissions of a company’s existing and planned assets over time (up to 2050), comparing it with science-based pathways and related emission budgets (ACT, 2021[44]).
Portfolio-level approaches: investment strategies guided by portfolio alignment metrics
Lenders and investors have a wide range of investment strategies at their disposal to move their portfolios towards low-emission pathways, including pre-investment (exclusion, screening, tilting and thematic investment) and post-investment strategies (divestment, either temporary or full, and engagement, including through proxy voting). Such strategies are commonly used in Environmental, Social and Governance (ESG) investing and, depending on how they are applied, they can avoid locking portfolios into high-emission pathways. There is continued debate around the effectiveness of such strategies. Exclusion of fossil fuel-related investments and divestment from them can be considered some the most direct ways to avoid locking portfolios into long-lived, high-emitting assets. However, they might not be the most effective as they do not necessarily starve such assets from capital, and do not provide incentives to undertake corrective action to decarbonise or retire them early (Edmans, Levit and Schneemeier, 2022[45]). They may also fail to provide capital to companies that have high emissions today but are credibly committed and engaged in the net-zero transition by decarbonising their business model and operations (IPSF, 2022[46]). For example, (Edmans, Levit and Schneemeier, 2022[45]) show that tilting can be more effective than divestment.
Portfolio alignment metrics can be used to guide decisions on which investment strategy shall be applied and assess the level of alignment of portfolios with the temperature goal of the Paris Agreement.9 Well-designed portfolio alignment metrics can in principle support a whole-economy transition, minimising the risk of disorderly wholesale divestment from high-emitting sectors and companies that will continue to be important for economic activity (IPSF, 2022[46]). (Noels and Jachnik, 2022[47]) developed an approach to analyse climate-alignment assessment methodologies for the financial sector across four dimensions: (i) asset class coverage, (ii) GHG performance metrics (including targets), (iii) climate change mitigation scenario(s) used, and (iv) the approach to assess alignment at the financial portfolio level. The analysis identified common practices and opportunities for improved and more comprehensive financial sector alignment assessments. The paper finds that climate-alignment methodologies for several asset classes, such as private equity, real estate, and infrastructure are underdeveloped. Such gaps could undermine the environmental integrity of climate-alignment assessments and their results. Moreover, the choice of scenario and related range of assumptions and characteristics, as well as the temporal coverage of a GHG performance metric play an important role in the alignment assessment results.
Well-designed Paris alignment metrics, based on asset class-specific methodologies, can allow investors to identify which companies can be classified as already aligned with a pathway for a certain temperature outcome and which instead should be subject to enhanced engagement and stewardship (Noels and Jachnik, 2022[47]). Under the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD Guidelines), investors are expected to exert their leverage to the extent possible to influence their investee companies to take action to prevent and mitigate adverse climate impacts (OECD, forthcoming[48]). Engagement strategies include dialogue with corporates, shareholder resolution and proxy voting. Enhanced engagement involves increased dialogue with priority companies on the gaps toward their transition plan and targets, as well as initial and ongoing assessment of their progress against a clear delivery strategy (IIGCC, 2022[49]). This can involve regular discussions with multiple corporate functions (e.g., strategy, finance, and sustainability), to make sure expectations are aligned, including on the timeframe of engagement and planned actions in case the results are not achieved. In addition, it is important that investors set clear and constructive policies for voting on climate-related resolutions and publicly disclose their votes. OECD analysis shows how the risk-based due diligence process recommended by the OECD Guidelines can be applied by institutional investors to prevent and mitigate adverse climate impacts on society and the environment associated with their investee companies (OECD, forthcoming[48]).
Existing mechanisms to prevent carbon lock-in are unevenly applied and insufficient across transition finance approaches
Transition finance considerations are increasingly being integrated in relevant sustainable and green finance policies, which is a welcome and necessary development to ensure a whole-of-economy transition. However, key gaps remain, which contribute to the persistence of carbon lock-in risk in transition finance. Notably, most transition finance frameworks only cover a sub-set of possible elements to prevent lock-in, which is insufficient.
For example, taxonomies tend to put forward a combination of eligibility criteria, sunset clauses, and requirements to future-proof. This approach fundamentally relies on investor and corporate appetite to, respectively, use and qualify under a ‘transition label’. Unless combined with other mechanisms, it will likely be insufficient to encourage a whole-of-economy transition. Under this approach, an activity is counted as a transition activity until a specific date (e.g., 2030) and must comply with a new set of more stringent eligibility criteria thereafter. This can provide an impetus to financial market participants and corporates for whom labelling an investment as ‘transition’ is important, to continue improving the performance of emission-intensive assets until such a point where they have near-zero or zero emissions.
However, to incentivise a whole-of-economy transition, such approaches will likely be insufficient and can increase risk of carbon lock-in: assets are generally built before the sunset date, under less stringent eligibility criteria with regards to emissions, and presumably will continue to operate, irrespective of whether they comply with more stringent criteria after the sunset date, unless they are stranded. Moreover, calibrating the correct date for sunsetting is challenging, as it would need to be set in a manner that complies with the IPCC finding that global emission need to peak before 2025 (IPCC, 2022[11]). Similarly, future-proofing requirements technically prepare an asset for the use of low-emission and renewable fuels, but the operator does not have an obligation to switch to those fuels in accordance with sunset dates. The main incentive to do so is to keep the ‘transition’ label throughout the lifetime of the asset, which may be insufficient. Moreover, the ability to carry out such a fuel switch fundamentally depends on the supply of low-emission and renewable fuels. But the initial investment does not consider possible supply side problems, such as insufficient production of low-emission hydrogen.
So far, the use of flanking measures in transition finance is very limited. The EU Taxonomy is one example, as it requires certain flanking measures for natural gas investments, such as a deadline of 2035 to switch to 100% renewable or low-carbon fuels (European Commission, 2022[50]). However, no explanation is provided as to whether this date was selected based on a credible 2050 net-zero pathway. Moreover, there are limited additional, explicit mechanisms required as part of the taxonomy criteria, notably with regards to renewable or low-carbon gas supply, to ensure that the switch can happen at the right time. In addition, there is no assurance that the investee company has developed a broader transition plan or has reflected the plan in its business strategy. Similarly, the Singaporean Taxonomy contains provisions that can provide some assurance that lock-in risk is to an extent prevented in the industry sector. According to the current version of the taxonomy, iron and steel production facilities are classified as “amber” if they: (i) are implementing all necessary actions to meet the green category criteria by 2030 at the latest (for instance, if based on fossil gas, it needs to meet the green criteria for carbon capture, usage and storage (CCUS)); (ii) are currently capturing at least 20% of emissions and (iii) have a 1.5°C-aligned transition plan (Monetary Authority of Singapore, 2023[27]).
Entity-focused approaches also do not yet describe in a sufficient level of detail how to prevent carbon lock-in as part of a corporate transition plan. Not all entity-level frameworks require companies to put in place long-term net-zero targets, nor do they all require alignment with the Paris temperature target. Similarly, while most do specify that companies should put in place interim targets and implementation steps, they lack granularity with regards to how this should be done for specific assets that are at risk of carbon lock-in.
Lastly, policy frameworks beyond transition finance, notably state aid rules and MDB Paris Alignment methodologies, provide for additional mechanisms that can usefully be translated into the sphere of private investment and used to strengthen transition finance frameworks. Specifically, the concept of flanking measures has the potential to significantly reduce the risk of lock-in as part of transition finance frameworks and investments, notably by giving more credibility to existing requirements and commitments for future-proofing and sunsetting.
Policymakers and regulators have a wide variety of tools at their disposal to develop robust transition finance policy frameworks, irrespective of whether the use of these frameworks by market actors is voluntary or mandatory. This section summarises good practices in transition finance with respect to addressing carbon lock-in risk, as well as lessons learnt from other policy communities that have dealt with this issue, to help inform policymaking on transition finance. Integrating existing good practices and experience from public and MDB investment to prevent carbon lock-in has the potential to significantly strengthen the environmental credibility of transition finance.
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.
The recent focus on entity-level approaches in transition finance highlights one of the key challenges corporates face as part of the net-zero transition: the need for long-term planning, in the absence of complete certainty over the technology choices that are necessary to reach net zero. Developing a credible corporate transition plan is at the heart of the net zero transition. The OECD Guidance on Transition Finance sets out ten elements of credible corporate transition plans (see Annex B or (OECD, 2022[32]).
While all ten elements are important to ensure environmental credibility, some elements are particularly relevant to preventing carbon lock-in. Notably,
Elements 1-5: These elements focus on setting temperature goals, net-zero, and interim targets, as well as using relevant tools, metrics, and KPIs to define actions and measure their implementation, in a manner consistent with the IPCC Special Report on Global Warming of 1.5°C. In practice, this means that a credible corporate transition plan, including its targets and implementation steps, will be aligned with a scenario and emissions pathway where net anthropogenic CO2 emissions are reduced by 45% from 2010 levels by 2030 and reach net zero around 2050 (IPCC, 2018[51]). Additional findings emerging from ongoing OECD analysis on the use of climate mitigation scenarios will further inform target setting, transition planning, and Paris alignment assessments of the financial sector (OECD, forthcoming[52]).
Element 10: This element focuses on ensuring transparency and relevant progress reporting, as well as verification and certification, where applicable. This is relevant because preventing carbon lock-in involves future commitments, the meeting of which is inherently uncertain. To be credible, these commitments and their implementation needs to be regularly assessed and disclosed (OECD, 2022[32]).
National sectoral emissions pathways can guide technology roadmaps, robust transition taxonomy criteria, and allow companies to develop credible net-zero plans and targets.
Emissions pathways provide a “modelled trajectory of anthropogenic emissions”, as part of a climate change mitigation scenario (OECD, forthcoming[52]). If they are based on a country’s net zero target and developed for each sector, they can provide a robust basis for the development of further policy tools. Notably, where a jurisdiction wishes to develop a transition taxonomy, the eligibility thresholds and criteria for each economic activity can be set by taking that pathway into account. In doing so, more credible and forward-looking criteria can be developed. Similarly, they can provide the basis for the development of national sectoral technology roadmaps, whereby projected technology deployment can be derived from the emissions pathways. At the same time, assessing the consistency of country-level pathways with the Paris Agreement can prove challenging due to complexities in determining global temperature outcomes for country-level pathways as well as due to the presence of global or regional supply chains in many sectors, for which global or regional pathways might be more relevant.
As outlined in the OECD Guidance on Transition Finance and stated in the European Commission’s Recommendation on Transition Finance, such pathways can also support companies in developing credible transition plans. Notably, companies can use national sectoral emissions pathways to set relevant and ambitious net zero and interim targets as part of their transition plans, and inform investment decision-making to achieve those targets (European Commission, 2023[36]; OECD, 2022[32])
Excluding the most emission-intensive energy sources from eligibility can enhance the credibility of transition finance frameworks.
To avoid uncertainty for companies and investors, excluding certain types of investments from support, which are not in line with the Paris temperature target, can enhance the credibility of transition finance frameworks. Most existing frameworks, both in transition finance and public or MDB investment, have exclusion criteria in place, such as for coal, oil, and certain gas investments (see, for example, (European Commission, 2021[2]; European Union, 2020[29]; Monetary Authority of Singapore, 2023[27]; EBRD, 2022[8])).
The cumulative effect of carbon lock-in resulting from governments', corporates', and financiers' individual decisions to pursue fossil fuel-related activities is potentially significant. Investments marketed as “transition investments” only account for the portion of fossil fuel investment that entities are seeking to justify as in line with net-zero targets. But the majority of fossil fuel investments and expansion is being undertaken without an effort for justification.
In this context, each decision merits scrutiny from an environmental credibility and lock-in risk perspective, bearing in mind key scientific conclusions to be reflected in eligibility and exclusion criteria:
IEA modelling indicates that to achieve net zero by 2050, coal, oil, natural gas demand must decline significantly by 2050. In this scenario, the limited remaining fossil fuels are only used for the following purposes:
For the production of non-energy goods where carbon is embodied in the product (e.g., fertilisers);
In energy production with abatement (e.g., CCUS), notably for use by industry;10
In sectors where zero-emissions options are very limited (e.g., aviation).
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.
Following a long-term feasibility assessment (see chapter 2 for more details on the importance of long-term feasibility assessments as part of transition finance frameworks), some frameworks may still include natural gas investments, for example in industry. To strengthen their credibility, such frameworks can include requirements for supported assets to be future-proof and comply with technical specifications to enable the transport and use of low-carbon and renewable gases.
These requirements can include hydrogen readiness, though it is important that credible requirements reflect the state of the art and reality with regards to the possibilities of using and transporting hydrogen today. For now, there are limits to the possibility of using hydrogen in energy production, which is a limitation that credible criteria will recognise. Importantly, criteria will be selected so as to not give the impression that an asset will be 100% hydrogen-ready, when this is not possible in reality due to technical limitations or financing, institutional and capacity limitations in developing countries.
For example, with today’s technology, gas power plants can operate at a 30-35% level of co-firing with hydrogen, although the aim of many major gas turbine manufacturers is to reach blending levels of 100% (see, for example, (Young-Kuk, Ju-Hee and Seung-Hoon, 2023[53]) and (Inoue et al., 2018[54])). Similarly, for gas transmission and distribution networks to industry and households, most jurisdictions today limit the amount of hydrogen that can be blended into the national gas grid. This is notably due to the decreasing quality of the gas as blending is increased and limitations on end use (Fraunhofer Institute, 2022[55]). For example, the European Commission proposes 5% as a safe and acceptable blending level (European Commission, 2021[56]). In addition, there are limitations on the use of hydrogen in domestic heating, as laid out in chapter 4, notably with regards to the cost to the end consumer, and efficiency. Credible requirements on the future-proofing of assets will be transparent on these issues and recognise existing limitations.
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).
Coupled with the previous finding, where natural gas assets qualify for transition finance, and contain requirements to be future-proof, it is paramount to set a phaseout date by way of a sunset clause, as has been done by existing transition finance taxonomies in Europe and Asia (see, for example, (European Commission, 2022[23]; Monetary Authority of Singapore, 2023[27]; ASEAN Taxonomy Board, 2023[20]). Credible sunset clauses will be aligned with an IPCC reference scenario that is consistent with limiting warming to 1.5°C, or to below 2°C if 1.5°C is not possible (see element 1 of (OECD, 2022[32]) for an explanation of when a “below 2°C” can be considered credible). Where available, sunset clauses will be based on national sectoral emission pathways.
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.
Importantly, flanking measures can give credibility to future-proofing requirements and sunset clauses in transition finance frameworks. Examples of flanking measures include:
Accompanying investments (laid out in the company transition plan) to support the supply of the future low-carbon fuel that is expected to be used after the sunset date, such as investments in electrolyser projects to come on-stream in time for the switch. Additional research, development, and innovation investments are also needed to drive down costs and accelerate deployment of low-emission technologies, where necessary, for example CCUS.
Contracts of supply for the low-emission replacement fuel to be agreed within a specified timeframe, ideally within three years of the initial investment: To ensure that gas investments are truly future-proof, it is necessary to have a steady supply of the selected low-emission replacement fuel. Therefore, to credibly reduce the risk of carbon lock-in attached to such investments, beneficiaries will put in place contractual arrangements with suppliers of the low-emission fuel they wish to use as a replacement for natural gas. To avoid backloading commitments, these contracts of supply will ideally be agreed at the same time as the initial investment, or within three years thereof.11
Detailed plans and binding timeframes setting out a strategy of how the low-carbon fuel will be used by the company benefitting from transition finance.
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.
Credible transition finance frameworks will specify additional requirements for the managed phaseout of high-emitting assets, including the need for companies to set out a strategy and process for the responsible retirement of high-emitting corporate assets. This could include specific phase-out plans as part of transition plan frameworks, outlining how the phase-out is aligned with any net-zero or climate-related strategy, how just transition considerations are taken into account, key milestones such as phase-out timing, key metrics and targets, disclosure of progress, governance mechanisms, related capital expenditure plans and key assumptions and uncertainties with the plan (GFANZ, 2022[57]). Currently, there are no standardised criteria for ensuring the credibility and eligibility of a coal phaseout plan, but, at a minimum, it should demonstrate positive environmental impact and advance an entity’s and country’s alignment with the temperature goal of the Paris Agreement (Kekki and Holzman, 2023[58]).
The early retirement of a high-emitting asset can be an important additional requirement for new (future-proof) gas investments that are in line with other relevant good practices, as set out above. Accompanying such gas investments with the early retirement of a plant using an emission-intensive energy source like coal can help ensure the additionality of gas investments (if it is ensured that such gas investments are on a credible path to net zero), as they replace emission-intensive assets and thus significantly reduce emissions.
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[5] World Bank (2023), Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment of New operations. Direct Investment Lending Operations, https://documents1.worldbank.org/curated/en/099146306162392732/pdf/IDU0562589c907e1f047980b1b50e63bf0f19447.pdf.
[7] World Bank (2023), Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment of New operations. General Corporate Purpose Financing., https://documents1.worldbank.org/curated/en/099212406162322091/pdf/IDU057b310a50dcb504d470a05f0971d15f57eec.pdf.
[6] World Bank (2023), Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment of New operations. Intermediated Financing, https://documents1.worldbank.org/curated/en/099153206162328669/pdf/IDU0c77fadd6076d30433709a4b07b34a68508b2.pdf.
[63] World Bank (2023), List of Activities Considered Universally Aligned with the Paris Agreement’s Mitigation Goals Mitigation Goals or Not Aligned with the Mitigation Goals, https://documents1.worldbank.org/curated/en/099220306162369703/pdf/IDU00ef11f9807471044870b9c6041d5dda75c78.pdf.
[9] World Bank (2023), World Bank Paris Alignment Method for Investment Project Financing, https://documents1.worldbank.org/curated/en/099710403162331265/pdf/IDU0782c88ff0c719041ed08b850a84f82eccaa4.pdf.
[39] WWF (2022), RECOMMENDATIONS FOR A CONSISTENT EU REGULATORY FRAMEWORK ON CORPORATE SUSTAINABILITY TARGETS AND TRANSITION PLANS, https://wwfeu.awsassets.panda.org/downloads/recommendations_for_a_consistent_eu_regulatory_framework_on_corporate_sustainability__1.pdf.
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Notes
← 1. Since Russia’s unprovoked war of aggression against Ukraine, the RRF was extended to also include REPowerEU to help EU Member States phase out imports of Russian fossil fuels. The DNSH principle continues to apply, however targeted derogations are possible for energy infrastructure and facilities (such as investments related to Liquified Natural Gas (LNG)) if Member States and the Commission consider them necessary to ensure immediate security of supply (European Commission, 2022[59]).
← 2. While the term “significant” is not defined in the Commission’s guidance, an analysis of existing Recovery and Resilience Plans by Member States that contain gas boiler investments indicates that renovation programmes needed to achieve, on average, a 30% reduction in GHG emissions (see, for example, (Council of the European Union, 2021[60]), (Council of the European Union, 2021[61]), (Council of the European Union, 2021[62])).
← 3. Four types of activities are considered “universally not aligned”: (i) mining of thermal coal; (ii) electricity generation from coal; (iii) extraction of peat; and (iv) electricity generation from peat (World Bank, 2023[63]).
← 4. If a project falls among the “universally aligned” list of activities, it still needs to go through a specific criteria assessment if its economic feasibility depends on external fossil fuel exploitation, processing, or transport activities or on fossil fuel subsidies, or if its operations that significantly on the direct use of fossil fuels.
← 5. The MDB methodological principles provide for an illustrative list of high-emitting sectors, which include activities related to fossil fuel-dependent and -based industries, energy-intensive industries (such as chemicals, iron and steel, amongst others), aviation, shipping, animal products and activities that may directly lead to or promote into areas of high carbon stocks or biodiversity (World Bank, 2023[7]).
← 6. Existing OECD work provides a detailed overview and analysis of the landscape of transition finance frameworks in 2021 (Tandon, 2021[64]) and 2022 (OECD, 2022[32]).
← 7. Most taxonomies are living documents and work in progress, as they require continuous update and development. The taxonomies listed here are at different stages of development, with some being more mature than others.
← 8. To date, transition activities have only been defined in the climate change mitigation context and it is unclear whether the same logic can apply to other environmental objectives.
← 9. Different portfolio alignment frameworks and methodologies exist, such as the Swiss Climate Scores, GFANZ Portfolio Alignment Measurement approach and the Paris Agreement Capital Transition Assessment. See (Noels and Jachnik, 2022[47]) and (IPSF, 2022[46]) for an overview of the key characteristics of these different frameworks.
← 10. Noting that according to the IPCC, to not lock in GHG emissions, “abatement” should be defined as an intervention that can capture 90% or more GHG emissions from power plants (IPCC, 2018[51]).
← 11. This is based on the 3-year-timeframe currently used for district heating network investments in existing green bond frameworks, taxonomies, and state aid. Investments in network upgrades sometimes require an additional investment to take place in the heat source, which is usually run by a different operator than the network, to bring it in line with environmental and efficiency requirements. The second investment has to be carried out within 3 years of the initial investment (see, for example, (European Commission, 2022[1]) and (European Commission, 2021[22])).