1. Overview

In April 2022, the Intergovernmental Panel on Climate Change (IPCC) concluded that the continued installation of unabated fossil fuel infrastructure will “lock in” GHG emissions.1 According to the IPCC, projected cumulative future CO2 emissions over the lifetime of existing and currently planned fossil fuel infrastructure without additional abatement will exceed remaining cumulative net CO2 emissions in pathways that limit warming to 1.5°C (>50%) with no or limited overshoot. They are approximately equal to total cumulative net CO2 emissions in pathways that limit warming to 2°C (IPCC, 2022[1]). This means that already today, existing and planned fossil fuel assets are largely inconsistent with the temperature goal of the Paris Agreement of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels” (UNFCCC, 2015[2]).

In a “net zero emissions by 2050” (NZE) scenario, updated IEA modelling indicates that between 2021 and 2050 coal demand declines by 90%, oil declines by around 80%, and natural gas declines by more than 70% (IEA, 2022[3]). In this scenario, the remaining fossil fuels are used exclusively for the following purposes:

  • In the production of non‐energy goods where carbon is embodied in the product (e.g., fertilisers),

  • in plants with carbon capture, utilisation and storage (CCUS), and

  • in sectors where low‐emissions technology options are scarce (e.g., aviation) (IEA, 2021[4]).

However, the IEA shows that annual investment in assets that produce and use fossil fuels continues to be on a rising trend. Global net income from oil and gas production reached a record high of USD 4 trillion in 2022, double 2021 levels (IEA, 2023[5]). Global coal investment increased to USD 135 billion in 2022, a 20% increase with respect to 2021 levels, and is expected to further increase in 2023. According to the IEA, the risks of locking in fossil fuel use are increasingly clear, as fossil fuel investment in 2023 is more than double the levels required to meet much lower demand in IEA’s NZE scenario (IEA, 2023[5]). According to Wood Mackenzie, new global oil and gas discoveries in 2022 drove exploration to the highest value creation in over a decade (Wood Mackenzie, 2023[6]). It is estimated that fossil fuel financing2 from the world’s 60 largest banks reached USD 5.5 trillion over the period of 2015 to 2022, with average annual financing amounting to USD 781 billion (Rainforest Action Network (RAN) et al, 2023[7]).

These levels of fossil fuel finance and investment run contrary to the IEA’s 2021 Net Zero by 2050 Roadmap, which concluded that no fossil fuel exploration and no new oil and gas fields are required beyond those that have already bee8n approved for development in 2021. Similarly, under this scenario, no new coal mines or mine extensions are required beyond what currently exists, and no new unabated coal plants should be approved for development (IEA, 2021[4]). Since the 2021 Roadmap was published, oil and gas demand rose and additional oil, gas and coal projects have reached final investment decisions, which would result in 25 Gt of emissions if operated to the end of their lifetime (around 5% of the remaining carbon budget for 1.5 °C) (IEA, 2022[3]).

Despite the clear evidence that investment to scale up low- and zero-emission technologies is urgently needed to achieve the Paris Agreement temperature goal, net-zero pathways of countries around the world continue to rely on the use of fossil assets in the short term. Moreover, the risk for fossil fuel producer countries (especially EMDEs) of being locked into carbon-intensive development trajectories has increased with Russia's war of aggression against Ukraine. As crude oil and natural gas prices have risen significantly, while demand for fossil fuels and related consumption subsidies have remained high (IEA, 2023[8]), there are few incentives for producer countries to reduce fossil production and exports (OECD, 2022[9]).

According to IEA’s updated NZE scenario, declining fossil fuel demand can be met through continued investment in existing production assets without the need for any new long lead time upstream conventional projects, provided that reducing fossil fuel investments is accompanied by clean energy investments and policy action to reduce energy demand (IEA, 2022[3]). New fossil fuel infrastructure projects will need to be compensated by even deeper emission reductions, making the later stages of the net-zero transition more challenging and creating a risk that targets move out of reach.

The IEA recognises that some natural gas infrastructure investments may be necessary in the transition to net zero, such as to support intermittent energy generation and to replace more emitting energy sources in industry until low-emission solutions are fully feasible and scalable. However, investments in energy generation likely need to be limited to supporting the objective of balancing electricity grids, rather than investing into natural gas as a baseload source of power (IEA, 2022[3]; FrontierEconomics, 2021[10]). In addition, the role of natural gas will change rapidly in the next decades and will vary significantly across regions, countries, and sectors. According to IEA’s 2022 Sustainable Africa Scenario, natural gas will continue to play an important role for the fertiliser, steel and cement industries and water desalination in Africa (IEA, 2022[11]). In Southeast Asia, natural gas plays an important role in enabling the move away from coal in power generation and to replace oil and biomass as a source of heat in industry. But in the IEA’s Sustainable Development scenario, natural gas use in Southeast Asia will decrease over time and after 2030 will switch from bulk generation to supporting the integration of variable renewables through the provision of different system services (IEA, 2022[12]).

Moreover, to be in line with a 1.5°C goal, global GHG emissions need to peak before 2025, with rapid and wide-reaching emissions reductions across all sectors needed during the subsequent decades until 2050 (IPCC, 2022[13]). This implies that unabated natural gas use must remain short-term. Natural gas infrastructure should be retired, repurposed, or retrofitted to utilise exclusively renewable and zero-emission fuels or be otherwise brought in line with a Paris-aligned net-zero trajectory through the use of low- or zero-emission technologies across the full value chain. Given that the lifetime emissions of existing and planned investments in fossil fuel infrastructure are today consistent with 2°C pathways (IPCC, 2022[1]), any additional natural gas investments, even if they remain short-term, have to be coupled with additional abatement and possibly the early retirement of other high-emitting assets. This is particularly important if 1.5°C is to remain within reach.

Against this background, any investment involving fossil fuels and any lending to companies with fossil fuel assets have a high risk of carbon lock-in3 and must therefore be carried out with the appropriate safeguards in place (Box 1.1 below presents a definition and examples of carbon lock-in and how it differs from the concept of stranded assets). Carbon lock-in can come about as a result of technical, economic, political, or institutional factors. Whenever government or market actors have stakes in fossil fuel assets, there is an incentive to continue operating the asset until the end of its useful life, given that the construction is by then a sunk cost (OECD, 2022[14]; FrontierEconomics, 2021[10]).

Considering the tension between the financial interests of fossil fuel asset owners and the need to avoid carbon lock-in, intense debate continues among policymakers, industry, and civil society on whether certain investments in fossil fuel assets and infrastructure can be considered as necessary for the net-zero transition and sustainable development, and therefore eligible for transition finance. Such investments include, for example, those that deploy emissions abatement technologies, refurbishments, and retrofits across existing (and potentially new) fossil assets and infrastructure.

In setting out elements of credible corporate transition plans, the OECD Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans aims to unlock the capital flows required to reach net zero and reduce the risk of greenwashing in transition finance. The Guidance proposes to anchor transition finance transactions (use-of-proceeds and general-purpose instruments, such as sustainability-linked bonds (SLBs)), including their Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs), in entity-wide corporate climate transition plans. Annex B recaps the ten key elements of credible corporate climate transition plans set out in the Guidance.

The Guidance identifies carbon lock-in as one of the main factors contributing to risks of greenwashing in transition finance, which in turn can hamper the development of this market (OECD, 2022[14]). Investments that increase the risk of lock-in will ultimately undermine net-zero transition efforts, even if they may result in short-term emissions reductions (OECD, 2022[14]; Tandon, 2021[15]). To be credible, transition finance needs to tackle the risk of carbon lock-in.

This report reviews and compares mechanisms to prevent carbon lock-in that are currently being used in transition finance policy frameworks and approaches and relevant financial instruments. Recognising that the risk of carbon lock-in is not limited to private sector investment and transition finance but has also been a recurrent theme in public sector climate mitigation policy and related financing and investment for some time, the report draws lessons from Paris-alignment methodologies of Multilateral Development Banks (MDBs), and public investment frameworks, notably state aid.

Key elements of the OECD Guidance relate to target-setting and implementation steps, as well as using relevant supporting tools, such as taxonomies, technology roadmaps, and sectoral emissions pathways. The latter are being developed (e.g. by the IEA and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS)) and applied (e.g., by the Transition Pathway Initiative and the Science Based Targets initiative (SBTi), amongst others) to assess whether an asset or company is in line with a selected decarbonisation or net-zero trajectory. However, such emissions pathways have mainly been developed at macro level (e.g., at global or regional level) and accounting for country-specific considerations remains challenging (Noels and Jachnik, 2022[21]; OECD, forthcoming[22]). Technology roadmaps (also sometimes referred to as “technology pathways” or “investment pathways”), build on emissions scenarios by providing a forward-looking perspective on technologies that are needed to decarbonise a given sector, including the relevant timelines. Their use also remains limited for the moment, with the most prominent example being the sectoral roadmaps developed by Japan’s Ministry of Economy, Trade and Industry and Ministry of Land, Infrastructure, Transport and Tourism. The roadmaps today cover ten high-emitting sectors in Japan (METI, 2023[23]).4 Lastly, transition taxonomies aim to account for transition considerations through eligibility criteria such as: sunset clauses, limiting eligibility of economic activities to a specific timeframe; and future-proofing requirements, to ensure that assets and infrastructures use technologies which enable them for the use of low-carbon and renewable alternative energy sources in the future. This remains insufficient as it does not guarantee that fossil assets will ultimately be transitioned to near-zero or zero-emission alternatives.

To further help mitigate carbon lock-in risk, the OECD Guidance concludes that companies should in addition identify in their transition plans existing assets and infrastructure, as well as planned investments, that are at risk of carbon lock-in and put in place mechanisms to prevent this risk from materialising. To this end, the Guidance analyses existing mechanisms to prevent carbon lock-in in transition finance and concludes that further work is needed to strengthen such mechanisms and broaden the suite of solutions that market actors have at their disposal to prevent lock-in.

This report proposes ways to strengthen mechanisms to prevent carbon lock-in in transition finance. The proposed mechanisms can be applied at economic activity or project level (e.g., as part of taxonomies), at the level of a corporate’s climate transition plan (e.g., as part of climate-related disclosure or transition planning requirements), and as part of KPIs and SPTs of relevant financial instruments (e.g., standards or labels for SLBs). The aim of the report is to support the scaling up of the transition finance market by helping market actors and policymakers identify ways to increase the environmental integrity and credibility of transition finance, given its importance in supporting the net-zero transition, especially in EMDEs.

The report is relevant to policymakers and regulators that have developed or are considering developing transition finance policies (for example, taxonomies, roadmaps, or guidance), standards for green, transition and sustainability-linked debt, frameworks for corporate transition plans, or broader climate-related disclosure frameworks.

The report is structured as follows:

  • Chapter 2 looks at transition finance definitions and the role that feasibility assessments play in setting eligibility criteria, which subsequently impact the degree of carbon lock-in risk and environmental integrity of those definitions. The chapter concludes that the risk of lock-in in transition finance approaches can be reduced by providing clarity on how to assess feasibility as part of eligibility criteria, and by explicitly taking a long-term approach in the assessment.

  • Chapter 3 analyses existing mechanisms to prevent carbon lock-in across relevant private and public sector financing and investment frameworks, and summarises good practices. It proposes ways to strengthen mechanisms deployed in transition finance frameworks, such as in taxonomies, pathways, technology roadmaps, and transition plans.

  • Chapter 4 focuses on relevant debt instruments, notably green, transition and sustainability-linked bonds, and analyses the extent to which the structure and requirements of these instruments can contribute to increasing the lock-in risk of the projects and entities that they finance. It provides key findings and good practices on reducing carbon lock-in using transition financial instruments.

Transition finance approaches emphasise the need to avoid carbon lock-in, but largely do not set clear criteria on how to do so. Consequently, questions relating to carbon lock-in are an important reason why market actors are hesitant to engage in transition financing. In the absence of consensus on how to avoid lock-in, corporates seeking transition financing may fear accusations of greenwashing - i.e., claims that they might use green, transition or net-zero labels for their offer of products and services while directing capital to high-emitting activities that delay rather than advance the net-zero transition. While several of the existing transition finance approaches highlight the need to avoid locking activities in high-emission pathways, limited guidance exists on ways in which financiers and corporates can practically prevent this risk.

The following section summarises this report’s key findings and good practices on how addressing carbon lock-in risk can enhance credibility of transition finance frameworks.

Transition finance focuses on providing funds to decarbonise economic activities and industries that currently do not have a fully feasible zero- or near-zero emission alternative. Therefore, for policymakers to define which activities and industries should be eligible for transition finance in their jurisdiction, it is necessary to assess the feasibility of zero- and low-emission substitutes.

How feasibility is assessed, such as whether a long-term approach is taken in the assessment and how much weight is given to institutional and political factors, fundamentally affects technology selection:

  • Institutional and political factors can effectively outweigh technological or environmental factors in determining feasibility, and therefore eligibility. This can allow for technologies that are incompatible with the temperature goal of the Paris Agreement to be selected as being eligible for transition finance, even in cases where lower-emission alternatives are technologically feasible.

  • Similarly, economic feasibility assessments may only assess short-term costs, rather than considering future transition risk and projecting costs over the lifetime of the asset. In such cases, a technologically feasible low-emission option may be assessed to be economically infeasible and potentially lower cost over the longer term. See Box 1.2 below for a summary of key findings and good practices related to the role of feasibility assessments.

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 the concept of carbon lock-in 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 questions on how best to mitigate it will take centre stage as stakeholders develop relevant financing frameworks and tools.

To date, some mechanisms to prevent carbon lock-in have been developed and applied in some public and MDB finance and investment frameworks, as well as in transition finance frameworks for private finance and investment. Integrating the following existing good practices in transition finance policies (see Box 1.3) has the potential to significantly strengthen the environmental credibility of transition finance.

A wide range of financial instruments are relevant to transition finance, namely green, transition and sustainability-linked bonds and loans. Box 1.4 below summarises key findings and good practices on how carbon lock-in risk can be addressed when designing frameworks for transition financial instruments. Relevant transition financial instruments include green bonds that finance transition activities, transition bonds and sustainability-linked bonds (SLBs).

Green and transition bonds are generally used to raise finance for specific green or transition projects. Therefore, individual issuances do not necessarily signal that issuers have a credible and whole-of-entity transition strategy in place to transform their business models and operations and drastically reduce their emissions. This is a source of greenwashing risk in particular where bonds finance projects that reduce but overall still have high emissions. In addition, individual issuances that are not directly anchored in an overarching transition plan or strategy and not aligned with existing taxonomies or other relevant classification systems cannot be considered a proxy for an entity’s transition efforts. To avoid lock-in, it is necessary to situate such projects within a wider transition plan and show how they are, over the long-term, in line with a Paris-aligned pathway.

While green bond standards and green taxonomies broadly converge on the definition of green eligible activities, some differences persist, which can create greenwashing and carbon lock-in risks. In the transition bond space, currently still very limited in size, lock-in risks are highly present, given the lack of definitions and eligibility criteria for what constitutes a transition bond.

The uptake of SLBs by a wide variety of issuers across sectors indicates that the instrument has potential to be used for a whole-of-economy, cross-sectoral transition. At the same time, evidence suggests that there are emerging loopholes and potential penalty-minimising behaviour in SLB structures. Moreover, KPIs and metrics used in SLB issuances in high-emitting sectors are not always consistent with an ambition to transition a company towards credible low-emission pathways.


[20] Caldecott, B., N. Howarth and P. McSharry (2013), Stranded Assets in Agriculture: Protecting Value from Environment-related Risks, Smith School of Enterprise and the Environment, University of Oxford.

[17] Carbon Tracker (2017), Stranded Assets, https://carbontracker.org/terms/stranded-assets/ (accessed on 6 April 2023).

[10] FrontierEconomics (2021), Lock-in all over the world, https://www.frontier-economics.com/media/4902/lock-in-all-over-the-world.pdf (accessed on 6 April 2023).

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[8] IEA (2023), Fossil Fuels Consumption Subsidies 2022, https://www.iea.org/reports/fossil-fuels-consumption-subsidies-2022.

[5] IEA (2023), World Energy Investment 2023, IEA, https://www.iea.org/reports/world-energy-investment-2023.

[11] IEA (2022), Africa Energy Outlook 2022, https://iea.blob.core.windows.net/assets/220b2862-33a6-47bd-81e9-00e586f4d384/AfricaEnergyOutlook2022.pdf.

[12] IEA (2022), Southeast Asia Energy Outlook 2022, https://iea.blob.core.windows.net/assets/e5d9b7ff-559b-4dc3-8faa-42381f80ce2e/SoutheastAsiaEnergyOutlook2022.pdf.

[3] IEA (2022), World Energy Outlook 2022, https://iea.blob.core.windows.net/assets/830fe099-5530-48f2-a7c1-11f35d510983/WorldEnergyOutlook2022.pdf.

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← 1. In this context ‘abatement’ refers to interventions that can substantially reduce GHG emissions, e.g., by capturing 90% or more of emissions from power plants.

← 2. The analysis includes the world’s 60 largest banks by assets according to Standard & Poor’s. The report assessed banks’ involvement in corporate lending and underwriting transactions (including project finance, where data was available). All deals marked as “green” were removed from the dataset, whereas those designated as “sustainability-linked” or “sustainability” were included (Rainforest Action Network (RAN) et al, 2023[7]).

← 3. Other terms that are frequently employed, often interchangeably, are “emissions lock-in”, “emissions-intensive lock-in”, and “carbon-intensive lock-in”. The terms “emissions lock-in” and “emissions-intensive lock-in” differ from the others in that they refer to all greenhouse gases (GHGs), thus not only carbon dioxide, despite often being used in the context of describing carbon lock-in. This report will use the term “carbon lock-in” to align with existing literature and because it will not deep dive into different GHGs.

← 4. Emissions pathways are distinct from scenarios and models, though the terms are sometimes used interchangeably: Climate mitigation scenarios are a “coherent set of quantitative projected pathways”, with each pathway providing a future trajectory (based on a set of assumption) for a specific variable, such as emissions, GDP, natural resource use, etc. Therefore, an emissions pathway forms part of a climate mitigation scenario. Climate change mitigation scenarios, on the other hand, “are the output of models”. For more details on climate scenarios and emissions pathways used in the financial sector, please refer to (OECD, forthcoming[22]).


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