LINGO Incentives

Toolbox of Financial Incentives to Leave Fossil Fuels in the Ground

As of 2023, the remaining carbon budget to limit global warming to 1.5°C was 380 Gt of CO2 emissions, while developed fossil fuel reserves could potentially contribute 915 Gt if fully extracted and burned (Oil Change International)

To prevent dangerous levels of global warming, a significant portion of the world’s fossil fuel reserves must be left in the ground. The most effective approach to ending fossil fuel dependency is addressing both demand and supply simultaneously.

The first global stocktake (GST) under the Paris Agreement concluded at COP 28 in Dubai with a call on parties to “transition away from fossil fuels in energy systems, in a just, orderly and equitable manner”—a historic milestone that now raises the critical question of how to finance this transition.

Given the substantial financial stakes, LINGO has developed a toolbox of financial incentives to help countries leave fossil fuels in the ground

1. Just Energy Transition Partnerships (JETPs)

JETPs are financial collaborations between Global North and Global South nations. JETP processes are currently underway in South Africa, Vietnam, Indonesia and Senegal. Initially considered a mechanism to facilitate the transition away from coal specifically, Senegal has widened the scope to the transition away from oil and gas as well.

• Find more details on the dedicated JETPs webpage

2. Coal Asset Transition (CAT) Mechanisms

A CAT Mechanism provides an additional revenue stream that compensates existing coal-fired power plant owners for the income forgone from early plant closure, improving the economics of such early retirement.

• Find more details on the dedicated CAT webpage

3. Debt-for-nature/climate-swaps

Debt-for-climate swaps offer a way to reduce debt while committing debtor countries to climate-focused spending and policies. These swaps address both climate and debt issues without the economic and reputational costs of traditional debt restructuring.

• Find more details on the dedicated Debt4swaps webpage

4. Climate Bailout

A climate bailout is a tool where central banks offer fossil fuel companies a way out of their outdated business model by taking on their potentially stranded assets against a commitment to invest the money received in additional renewable energy projects.

• Find more details on the dedicated Climate Bailout webpage

5. Special Drawing Rights (SDRs)

The IMF can issue Special Drawing Rights (SDRs) to create a climate fund, converting them into national currencies through central banks to finance projects like renewable energy and incentives for leaving fossil fuels in the ground, without causing inflation or increasing debt.

• Find more details on the dedicated SDR webpage

6. Philanthropic Buy-Out

Simply buying fossil fuel deposits for the purpose of non-extraction overcomes various dilemmas faced by climate coalitions such as over-extraction, excessive consumption, and underinvestment in green technologies by non-participating countries.

• Find more details on the dedicated Philanthropic Buy-Out webpage

7. Green, Transition and Sustainability-linked Bonds

Governments and their national fossil fuel companies could leverage Green, Transition or Sustainability-linked Bonds by committing to a harvest-mode approach, reducing fossil fuel extraction by around 8% per year.

• Find more details on the dedicated Climate Bonds webpage

8. The Great Carbon Arbitrage

Significant economic and social benefits can be reaped by phasing out coal in favor of renewable energy. The IMF estimates a global net gain of around $85 trillion.

• Find more details on the dedicated The Great Carbon Arbitrage webpage

9. Plugging Oil & Gas Wells

Leaking wells are a major source of methane emissions, prompting governments, particularly in the U.S. and Canada, to allocate funds for addressing orphaned wells. Meanwhile, innovative initiatives are emerging to close profitable, high-emission oil assets to generate high-quality carbon credits.

• Find more details on the dedicated Plugging Oil & Gas webpage

10. Performance Payments in a Parallel Setup to Oil Deals

Contracts to forgo oil and gas extraction for a specified time (e.g. 10 years) can be signed between responsible governments and international creditors in exchange for debt forgiveness and annual payments.

• Find more details on the dedicated Performance Payments webpage

11. Proper Mineral Wealth Accounting