Regulating lock-in effects

“Carbon lock-in refers to the self-perpetuating inertia created by large fossil fuel-based energy systems that inhibits public and private efforts to introduce alternative energy technologies.”

“Carbon lock-in” has been characterized as an equilibrium in which certain carbon-intensive technological systems or practices persist over time, either “locking out” the potential for change or braking further movement towards low or zero carbon . This equilibrium directly or indirectly hinders the deployment of low-carbon technologies, which either cost more upfront or cannot compete with the lower prices of high-carbon technologies. The literature refers to various categories of lock-in effect.

Infrastructures and energy technologies often lock societies into carbon-intensive emission pathways because of the length of time before investments pay off . Oil and gas extraction projects are usually not only capital intensive but also require many years of planning, exploration, and development, and only once the projects have been explored, appraised, and developed, revenues can be earned.

Institutional carbon lock-in can shape choices and limit the actions of state institutions, and institutional choices sustain the competitive advantage of fossil-fuel technologies, inhibiting public and private investment in clean energy

Since a sustainable energy transition is complex and uncertain, it is also claimed that behavioural carbon lock-in must be absent in order for individual and collective decision-making to be made in accordance with principles of sustainability.

Carbon Lock-in and State Aid

The EC’s new Guidelines on climate energy and environmental state aid (the CEEAG) adopted in 2022, provide the framework for public authorities to support the European Green Deal objectives efficiently and with minimum distortions of competition. These Guidelines provide that when approving state aid for. ‘transiton fuels’ such as natural gas, the Commission may require commitments to ensure the ‘lock in’ of fossil fuels is avoided and fossil fuel installations are compatible with the 2030 and 2050 targets. This may include for example commitments related to the future deployment of Carbon Capture and Storage (CCS).

Carbon Lock-in and the Taxonomy

The concept of ‘carbon lock-in’ is also topical in relation to the proposed Taxonomy Regulation (TR). Article 10(2)c of the present draft states that an economic activity should not lead to the lock-in of carbon-intensive assets.

The definition of ‘transitional activities in’ Art. 10(2) TR explicitly states the need to avoid environmentally harmful carbon lock in-effects. However, the measure allows for the greenfield construction of fossil-based energy infrastructure with ambitious targets for low-carbon/renewable phase-in only at a later stage.

It has been observed that as these forward-looking assumptions cannot be validated as of 2022, the risk of creating stranded fossil-based energy assets in Europe should be highlighted- going against the TR principle of avoiding stranded assets in Art.19 1(i) TR. Asset stranding or extended operation at high emissions levels may result if insufficient quantities of low-carbon gaseous fuels are available. Negative consequences for financial market stability and concerns about greenwashing arise . Next to financial market impacts arising from stranded assets, there could be a risk of crowding out necessary investments in renewable energy generation capacities and development of alternative low-carbon technologies , given the ability to shift sustainable finance towards financing fossil gaseous fuels, particularly until 2030.

This Debate will discuss how the risks associated with carbon-lockin can be avoided. How should regulators identify these risks and what tools are available to assess the nature and extent of the risks? How can forward-looking assumptions be validated in an effective way?

Programme

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Host: Leigh Hancher | Florence School of Regulation and Tilburg University