Mechanisms to Prevent Carbon Lock-in in Transition Finance
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.
Overview
Transition finance has grown in importance over recent years to enable decarbonation of high-emitting industries, complementing more narrow green finance approaches that focus on activities that are already considered as low-emission. This Chapter explains why carbon lock-in is a key risk in transition finance and summarises the key findings and good practices to strengthen mechanisms to prevent carbon lock-in in transition finance policy frameworks. The chapter also presents the background, scope and aim of this report.
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