- The committed CO2 emissions expected from existing fossil fuel infrastructure exceed the remaining carbon budget consistent with the Paris Agreement target temperature range. Yet governments, companies and investors continue expanding infrastructure for production and consumption of fossil fuels.
- Such investments risk creating stranded assets worth trillions of dollars and undermine decarbonisation efforts.
- Governments should implement a managed and equitable phase-out of fossil fuel production and consumption. This can help to promote policy coherence and ensure an accelerated and just energy transition as we scale up renewable energy systems.
- Further delaying action would require even more ambitious efforts later, increasing the cost and disruptiveness of the unavoidable energy transition.
Past climate mitigation efforts have been insufficient in phasing out fossil fuels from our energy systems and replacing them with clean energy sources at the speed required to stop dangerous planetary heating. Fossil-CO2 emissions reached record highs in 2021–2022, as did government subsidies for fossil fuels. The CO2 emissions expected over the lifetime of existing infrastructure for fossil fuel production and consumption already exceed the remaining carbon budget for a 50% chance of limiting long-term warming to 1.5°C (see Figure 2). But governments and companies worldwide still plan to extract vastly more fossil fuels than would be consistent with limiting warming to 1.5°C, with many also expanding their fossil fuel infrastructure. The development of any new long-lived fossil fuel infrastructure is wholly inconsistent with limiting warming to 1.5°C, and risks creating trillions of dollars of stranded assets (see In Focus box).
Potential asset stranding in the oil and gas extraction sector is estimated at over USD 1 trillion. Governments are directly exposed to this risk through state-owned companies, taxes and royalties, and indirectly via potential bailouts for stabilising the financial system. Consequently, governments and financial institutions need to actively plan for and implement a fossil fuel phase-out while accelerating the phase-in of renewable energy, aiming for a comprehensive and coordinated energy transition.
The challenges of a global fossil fuel phase-out are complicated especially by:
- Geopolitical considerations related to energy security.
- Energy poverty, especially in lower-income countries, and insufficient international support to diversify or leapfrog to clean energy systems and alternative development pathways.
- Heavy dependence on fossil fuel revenues in many countries.
- Fossil fuel interests that continue to undermine, delay and block climate action through lobbying, greenwashing and disinformation campaigns.
In recent years, several governments and international institutions have committed to phasing out fossil fuel production and consumption, and related investments. Examples include the Powering Past Coal Alliance, Beyond Oil & Gas Alliance, Fossil Fuel Non-Proliferation Treaty Initiative, and Clean Energy Transition Partnership (“Glasgow Statement”). However, many of the world’s largest coal, oil or gas producers and consumers have yet to join such initiatives.
Another positive development is that several governments have recently withdrawn from the Energy Charter Treaty. This is an important step in preventing fossil fuel companies from using the treaties’ investor-state dispute settlement to protect their investments by suing governments that act decisively to reduce emissions from this sector. Estimates suggest that governments could be subject to up to USD 340 billion in claims from oil and gas investors through such mechanisms.
Renewables are now the cheapest form of power in most parts of the world, and ample research charts pathways to achieve a clean, resilient and inclusive energy system globally. Governments must therefore direct all efforts towards phasing out all fossil fuels and scaling up renewable energy. Efforts should ensure energy access and affordability, and minimise impacts for communities and workers who are dependent on fossil fuels. An equitable global transition should also recognise countries’ differentiated responsibilities and capabilities.
Asset stranding, financial risks and lock-in
A key problem for a rapid fossil fuel phase-out is the long operational lifetimes of many fossil fuel assets, up to 60 years for some infrastructure. Asset stranding occurs when the firm faces early retirement or substantially lower revenues than anticipated at the time of the initial investment. Financial assets that depend on physical fossil fuel assets, such as shares in a fossil fuel company, can also become stranded. This can precede physical asset stranding due to expectations, and might happen abruptly if many investors adjust their expectations of future returns downward at the same time. Such a “green swan” event substantially devalues stocks, which in turn risks affecting macro-financial stability through contagion to other financial assets and spillovers from the financial world to the real economy. Due to the inherent financial interest of incumbent firms and their shareholders to avoid asset stranding, among other sources of system inertia, fossil fuel investments tend to create infrastructural, technological and institutional “carbon lock-in”.
Implications & Recommendations
Governments should commit to a phase-out of all fossil fuels at COP28 and beyond, following through by:
- Stopping approval of new investments in fossil fuel infrastructure for extraction and consumption now, especially in high-income countries.
- Accelerating the retirement of existing fossil fuel infrastructure.
- Withdrawing from international investment treaties that pose litigation liability risks from fossil fuel companies via investor–state dispute settlements.
- Redirecting fossil fuel subsidies and investments to clean energy.
- Managing the phase-out by setting near- and long-term targets to reduce fossil fuel production and use in coordination with a phase-in of renewable energy and storage systems to avoid energy shortages, price spikes and inflation.
- Reporting on plans and progress towards fossil fuel phase-out in the NDCs.
International cooperation will be necessary to foster a coordinated, transparent and just transition away from fossil fuels across countries and sectors:
- Governments from high-income countries with greater capacity to transition should agree to move faster towards phase-out.
- Governments from high-income countries should provide financial, technological and capacity-building support for lower-income countries to diversify or leapfrog their economies and energy needs away from fossil fuels.