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  • Writer's pictureArnau Marti Ezpeleta

UNDERSTADING CARBON LOCK-INS: MAGNITUDE, RISKS, AND STRATEGIES FOR PREVENTION

 

Carbon lock-in


Carbon lock-in, occurs when the infrastructure investments made today bind us to high levels of greenhouse gas emissions for years to come. These investments foster assigned interests in maintaining the status quo, hindering the adoption of lower-carbon alternatives and the reduction of emission [1]


Imagine two families, the Smiths, and the Joneses. In the early days of home video, both families invest in VHS players. VHS dominates the market for years, and a vast library of VHS tapes becomes available.  Nevertheless, later technology emerges - Blu-ray players - offering superior picture quality. The Joneses, recognizing the benefits, readily switch to Blu-ray.  The Smiths, however, are hesitant. They've invested heavily in VHS tapes and their player still works fine. Switching to Blu-ray means buying a new player and replacing their entire movie collection. This situation creates a "lock-in" effect, where the initial investment in VHS hinders their adoption of better technology.


Like the Smiths' predicament, carbon lock-in occurs when we heavily invest in highly polluting technologies. Even if cleaner machineries are available, transitioning away from the existing one can be a significant challenge due to the initial investment and established systems.

 

How does it work?


A practical example

As mentioned above, carbon locks-in occur when it comes to strategic investments in major structural developments for a society. For example, energy infrastructures, housing, or mobility.  


Imagine yourself as a government executive tasked with urban planning. Picture a rapidly growing city   with   inadequate   transportation   infrastructure   to   support   its   expanding   population. Addressing this requires significant investment in new transport projects. However, the choice of   infrastructure can   either   perpetuate   car-dependent   behaviors   or   pave   the   way   for sustainable modes of transport. Opting for roads, car parks, and service stations entrenches car reliance, trapping the city in a carbon lock-in. Shifting towards sustainable transport, though feasible, demands substantial additional efforts and resources.


Far from being a fictitious situation, it was the case in the United States in 2021. Following the passage of the infrastructure law, a total of $1.2tn was allocated to Federal States for the purpose of improving mobility infrastructure, with a choice between investments in cleaner mobility or continuing to invest in polluting infrastructure. According to “Transportation for America”, "more than half of the funds were used into the widening of roads rather than improving the threadbare network of bus, rail and cycling options". The advocacy organization claims that this new investment is a “climate bomb”, already exerting a carbon lock-in of 69m tons of CO2e and is expected to emit a total of 178m tons of greenhouse gases by 2040 [2].


This graph from the World Resources Institute shows the lifetime of some of those essential infrastructures for a society. For instance, an oil-fired power plant opened today could continue to emit oil until 2044 if it is not phased out [3]


Typical lifetime of infrastructure and equipment

Source:   Sato, Ichiro, Beth Elliott, and Clea Schumer. ‘What Is Carbon Lock-in and How Can We Avoid It?’ World Ressources Institute, 2021

 

 

Why does carbon lock-in supposes such a significant risk?


“Oil is the blood of mankind.”

Among all the technologies mentioned above, the risk of carbon lock-in in oil and gas infrastructures is critical. On the one hand, global hydrocarbon consumption today is approaching 100 million barrels per day, equivalent to 33% of the world primary energy mix. [4] As stated by Matthieu Auzanneau, oil has been “the blood of mankind” for over a century as it irrigates all consumer sectors (agriculture, chemicals, transport, etc.). [5]

]

Oil industry is the largest source of GHG emissions to the atmosphere.

On the other hand, it is also the industry that emits the most emissions. According to the IEA, it is responsible for 27% of global emissions.4 The combination of dependence on the hydrocarbon industry and its major role in global emissions implies that carbon lock-in risks in that industry puts our climate targets at serious risk.

 

For Fatih Birol, Director of the IEA, "keeping global warming below 1.5°C is the only solution if we want to continue living in the same way as we do now. If we are to achieve this objective, demand for fossil fuels must fall by almost 25% between now and 2030.” [6]

 

How to escape the carbon lock-in of the oil industry?


Risk of Increasing renewable energy production, electrification of uses, avoidance of gas leaks, energy efficiency and sobriety, and boosting CO2 capture technology.

According to IEA’s Net Zero Emissions by 2050 scenario reducing dependency on the oil industry and thus reducing emissions from this sector can be achieved through 5 levers:

  1. Tripling renewable energy capacity to 11,000 gigawatts by 2030.

  2. Promoting sobriety and increasing energy efficiency minimizing the use of carbon-intensive transportation modes, lowering energy requirements in buildings, and reducing single-use plastics.

  3. Electrifying our uses by replacing carbon intensive technologies, like internal combustion engines or gas boilers, with electrically powered equivalents. For instance, electric vehicles or heat pumps.

  4. Addressing methane leaks and ending wasteful practices like venting and flaring increasing electrification

  5. Boosting carbon capture, utilization, and storage (CCUS) technologies, although its role in decarbonization may be minor compared to reducing operating volumes.[4], [5]


Combined, these actions should make possible 80% of the necessary efforts by 2030. The IEA estimates that only 35% of the emissions reductions expected between now and 2050 are linked to technologies that are not yet available on the market, compared with half in 2021.7

 

Transitioning to a greener system is not more costly. 


Renewable energy could be cheaper than fossil fuel best alternative.

Firstly, according to IRENA, the share of renewable energy that achieved lower costs than the most competitive fossil fuel option doubled in 2020 – 162 gigawatts (GW) or 62% of total renewable power generation added last year had lower costs than the cheapest new fossil fuel option.[8]


Transition will be cheaper if done faster.

Secondly, the European Central Bank conducted economy-wide climate stress tests to evaluate the economic risks associated with climate change. These tests revealed that a quicker transition initially involves higher investment and energy costs but significantly reduces financial risks in the medium term. For Luis de Guindos, ECB vice-president, “moving at the current pace will push up risks and costs for the economy and financial system. There is a clear need for speed on the road to Paris.” [9]

 

Still, several barriers remain preventing societies from escaping oil and gas.


Investments and exploration on fossil fuels continue to increase.

First, 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 $4 trillion in 2022, doubling of 2021 levels. [10]


According to IPCC projections, the cumulative CO2 emissions from existing and planned fossil fuel infrastructure will surpass the allowable emissions for limiting warming to 1.5°C.11 The graph below shows the IEA's Net Zero Emissions trajectory and that of the IPCC, both of which are compatible with 1.5°C warming.5 As we can observe, new hydrocarbon exploration activities (in orange and light orange), if fully implemented, will exceed our carbon budget to keep us on a 1.5°C temperature rise trajectory by 2050.


Global oil and gas production trends, based on IPCC and IEA 1.5°C scenarios.

Source: Bapst, Eugénie, and Adriaan Rademaker. ‘The Oil Sector: Towards the Last Drop?’ Carbon4 Finance (2021).

 

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 and middle east tensions due to possible energy security concerns. [12]


Our social system is rooted on fossil fuels.

In second place, Gregory Unruh, based on the concept of the Techno Institutional Complex (TIC), explains that fossil fuels are deeply ingrained in all sectors of our society due to their high energy output and versatility. They power transportation, electricity generation, manufacturing, and heating systems. Our infrastructures, from roads to shipping ports, depends on fossil fuel-powered machinery. For Unruh “large technological systems, like electricity generation, distribution and end use, cannot be fully understood as a set of discrete technological artifacts but have to be seen as complex systems of technologies embedded in a powerful conditioning social context of public and private institutions”. [1]


The coal transition in Germany's Ruhr region exemplifies the challenge of overcoming the oil TIC to transition to a clean energy system.


Challenges and barriers to the coal transition in Germany. [13], [14]

Infrastructure Investment

Over decades, Germany has built a substantial infrastructure for coal-fired power generation, including mines, transportation networks for coal delivery, and power plants themselves. These power   plants   are   long-lived   assets   with   significant   upfront   investments. Retrofitting   or decommissioning them requires substantial financial resources and planning.


Economic Interests

The coal industry in Germany has played a crucial role in providing jobs and economic stability in the Ruhr Valley. During the 1950s, approximately half a million people had a job associated with coal mining.  Transitioning away from coal would have had significant socio-economic implications.


Energy Security Concerns

Coal has traditionally been viewed as a reliable and secure source of energy, particularly during those times of geopolitical uncertainty. Germany's reliance on domestic coal reserves has been seen as a mean to ensure energy security and reduce dependence on energy imports from Russia. Breaking away from coal, without already existing alternatives, raised concerns about maintaining a stable and secure energy supply.


Political and social challenges

Political parties, industry stakeholders, and affected communities have differing perspectives on the pace and manner of phasing out coal. Coal mining regions often have significant political influence, making it challenging for policymakers to enact aggressive decarbonization policies without facing resistance or electoral risk. Also, coal mining communities had strong cultural and social ties to the industry, which created resistance to change. The prospect of job losses and economic decline could have led to social unrest and political backlash against escorts to phase out coal. 


The solution relies on a fair and credible transition planning.


Deinstitutionalization.

Drawing from German experience, after the closing of last two coal mines in 2018, instead of widespread unemployment or recession, the region’s growth maintained a positive rate. Ruhr’s economic success was built first, through a process of deinstitutionalisation15, whereby the supportive cultural norms and governance systems that helped the industry to remain dominant were broken down. This process included extensive social dialogue with unions, workforce support, early retirement, R&D training, etc. [13]


Credible national planning founded on climate scientific basis.

Then, through well-designed policy action planning with measures including subsidy reallocation, bans and taxes on high-emitting infrastructures, and widespread investments and low carbon technologies Germany has been able to transition to a greener, decarbonized economy. According to OECD, a fair transition must be grounded in credible national, sectoral, and corporate climate transition strategies, in line with the goal of the Paris Agreement in 2050. [16]


Transparency and reporting.

To be effective such planning should incorporate net-zero and interim targets, metrics, and Key Performance Indicators (KPIs), carbon credits and offsets, guidance on governance and accountability, as well as issues surrounding transparency and verification. [16]


LEAVIT added value: decommissioning and compensating.


From LEAVIT we have developed Climate Finance instruments and methodologies that will allow countries to improve their climate transition plans. These include credits compatible with Article 6, offered in exchange for halting oil projects, and innovative methods like sovereign debt-for-climate swaps. With the latter, savings from refinancing sovereign debt are redirected to support efforts to phase out oil development.


The main challenge will be to strike a balance between maintaining economic prosperity and amortizing investments in polluting infrastructure, preserving national energy security, ensuring the well-being of the affected population, and protecting the climate and the environment.


The path to 1.5ºC by 2050 is getting narrower but it remains open. We must redouble efforts.


Bibliography

[1]Unruh GC. Understanding carbon lock-in. Energy Policy.


[2]Milman O. US spends billions on roads rather than public transport in ‘climate time bomb.’ The Guardian. 2024

 

[3].Sato I, Elliott B, Schumer C. What Is Carbon Lock-in and How Can We Avoid It? World Ressources Institute. 2021.

 

[4]IEA. World Energy Outlook 2022. International Energy Agency.; 2022

 

[5]Bapst E, Rademaker A. The oil sector: towards the last drop? Carbon4 Finance. 2021; Review of the oil&gas sector based on 2021 data.

 

[6]IEA. Net Zero by 2050. International Energy Agency.; 2021.

 

[7]Mouterde P. Diminuer la demande en énergies fossiles de 25 % d’ici à 2030, « une tâche herculéenne » mais indispensable pour limiter le réchauffement, affirme l’AIE.


[8]IRENA. Renewable Power Generation Costs in 2019. International Renewable Energy Agency.

 

[9].Bank EC. Faster green transition would benefit firms, households and banks, ECB economy-wide climate stress test finds. Published online 2023. Accessed May 3, 2024.

 

[10]IEA. World Energy Investment 2023. International Energy Agency.;


[11]Shukla, P.R & al. Technical Summary. In: Climate Change 2022: Mitigation of Climate Change.

 

[12]OECD. Mechanisms to Prevent Carbon Lock-in in Transition Finance. OECD Publishing. Published online 2023.

 

[13]Dahlbeck E, Gärtner S. JUST TRANSITION FOR REGIONS AND GENERATIONS.

 

[14].World Ressources Institute. Germany: The Ruhr Region’s Pivot from Coal Mining to a Hub of Green Industry and Expertise. World Ressources Institute. Published 2021.

 

[15]K.A. N, Wynes S. Changing Behavior to Help Meet Long-Term Climate Targets. Vol 2. World Ressources Institute.; 2019.

 

[16]OECD. OECD Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans. OECD;

 

[17]UNFCC. Paris Agreement. United Nations Framework Convention on Climate Change. New York, 2015.

 

 

 

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