Mobilizing Finance for the Just Energy Transition in the European Union

Abstract

Minimizing the adverse social and economic consequences of the energy transition is an important social aspiration. It is the essence of the “just transition,” the connective tissue that binds together climate goals with social outcomes centered around jobs. This policy note proposes the first iteration of a just transition policy framework built around three interrelated and mutually reinforcing pillars. These include: (i) a system for determining a hierarchy of priorities for activities, sectors, or groups that are to be compensated for the negative impacts they suffer from the transition to a low-carbon economy or supported because they contribute directly to a more equitable sharing of the costs and opportunities from the transition; (ii) a fiscal transfer mechanism to allocate public funds consistent with these priorities; and (iii) financial flows enablers, a set of instruments or policy interventions to facilitate private financial flows to activities or projects that are deemed to contribute to a more just transition. The assessment provides seven key takeaways for consideration by competent authorities to strengthen further the EU just transition policy framework going forward. These are: (i) narrowing the scope of the framework by focusing on social support and/or land restoration, while encouraging private sector funding for economic revitalization projects; (ii) enhancing data collection on social impact assessment to better understand the negative effects of climate transition initiatives and prevent "social washing"; (iii) embedding just transition considerations in sustainability regulations by including relevant indicators and metrics; (iv) providing guidance on assessing just transition-related risks for financial firms in prioritized regions and sectors; (v) clarifying supervisory expectations for financial firms regarding just transition-related litigation and liability risk; (vi) encouraging the development of financial instruments for the just transition; and (vii) maximizing the role of multilateral development banks in de-risking just transition projects, especially in member countries with limited resources and capacity.