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Policy and financial tools for a just transition

The concept of just transition considers the disparities and inequalities that may accompany the transition to a low-carbon economy. As countries strive to meet their climate targets, carbon-intensive sectors such as coal or oil and gas, as well as other sectors would face significant disruptions, putting workers at risk of losing their livelihoods, especially in regions dependent on these industries. Moreover, the communities most affected by these changes are often those that have already been marginalised, including low-income populations, racial minorities, and rural areas. The economic displacement caused by the net-zero transition could exacerbate existing inequalities, leading to greater social unrest and widening the divide between the wealthy and the poor. Therefore, a just transition recognises the need to safeguard jobs, livelihoods, and communities that might be adversely impacted due to the low-carbon transition. It includes these stakeholders in the net-zero transition in a way that ensures fairness, inclusivity, and protection.

Cognisance of just transition has been observed globally, with countries like South Africa and Indonesia including it in their NDCs and long-term strategy respectively, amongst other countries. Just transition has been a key topic of discussion at international fora, with COP29 convening the second ministerial roundtable on integrating just transition in NDCs and National Adaptation Plans. However, the uptake of just transition as a policy and financing focus is still evolving. Integrating just transition principles at a systemic level requires US $500 trillion, suggesting that all levers of finance, policy, and social systems, at a national and international level, need to synthesise efforts. Towards this, it is important to consider and address the challenges that may hinder effective implementation of a just transition.

Growth inhibitors

These inhibitors impact multiple facets of society, from human development to economic security, and have implications on both local and global scales.

  • Human development: The shift away from carbon-heavy industries will result in the need to upskill the workers affected by this shift – coal miners, factory workers, and agricultural labourers. Retraining and reskilling programs for new green jobs are crucial, requiring significant investment and time to be effective
  • Socioeconomic security: reliant on carbon-heavy industries face substantial challenges in diversifying their economies. The decline of these industries often leads to job losses and economic stagnation, with no immediate alternatives for employment. In these areas, local economies can be severely impacted, and the social fabric may weaken, resulting in income insecurity
  • Global transition: The green transition requires significant investments in renewable energy infrastructure, sustainable agriculture, and new technologies. However, these investments are often concentrated in wealthier nations or regions, leaving poorer communities and developing countries behind. This disparity can create global inequality, as the regions that most need the resources to implement a green transition are often the ones with the least access to capital.

Growth enablers

To address these challenges and ensure that the net-zero transition is just, a variety of policy and financial tools are needed. These tools must work together to promote social equity, provide financial support, and ensure that the economic benefits of the transition are distributed fairly. Policymakers must navigate a complex landscape of interests, including fossil fuel industries, labour unions, environmental groups, and local communities. There is a need to enact policies that balance economic growth with environmental sustainability, while taking care to safeguard jobs and economic stability.

  • A primary policy tool for a just transition is the establishment of comprehensive social protection measures. These measures may include unemployment benefits, retraining and reskilling programs, and wage subsidies for workers in carbon-heavy industries. Such programs would provide a safety net for displaced workers, helping them transition into new sectors without experiencing prolonged periods of economic hardship. For instance, the Philippine Green Jobs Act incentivises business to pivot to decarbonisation practices by introducing tax deductions for trainings and research and development, while requiring the business to adhere to workplace security, social protection for families, fair income, amongst others
  • Another key policy measure is to promote economic diversification. Towards this, it is critical to make space for market-shaping subsidies, designed for local contexts, made available for an extended period with clear timelines and plans for phase-out, and structured to avoid crowding out private investment. This would incentivise new business development, promote adaptation and innovation by SMEs, and support infrastructure investments to attract new industries. For example, India’s Ministry of New and Renewable Energy implemented a subsidy of up to 30% and 70% for certain states for installation of rooftop solar in 2015, resulting in 45% YoY growth to 1.9 GW installations in 2024. This signals peripheral uptake, such as development of the battery storage industry, newer geographies like union territories, and sectors like MSMEs
  • A financial tool that could support the abovementioned is a Just Transition Fund (JTFs). It could be used for economic diversification, infrastructure development, and the creation of green jobs. For example, the EU’s Just Transition Fund has a total budget of EUR 17.5 billion from 2021-2027 for emissions reduction, reskilling, and industrial sites regeneration. In regions where fossil fuel industries are predominant, such funds could help transition to renewable energy projects, such as solar or wind farms, which not only provide clean energy but also create employment opportunities 
  • Just Energy Transition Partnerships (JETPs) are an innovative funding mechanism that rely on multilateral financing. The first JETP was announced between France, Germany, the United Kingdom, the United States, and the EU for South Africa in 2021, followed by Indonesia in 2022. JETPs combine leverage public and private financing from developed countries, thereby bridging the gap between developed and developing nations and catalysing private sector investments. JETPs underscore country-specific pathways, addressing the country’s unique needs and hence, fast-tracking its net-zero transition. For instance, Germany’s IKI funded the Just Transition to a Decarbonised Economy for South Africa project under South Africa’s JETP, which involved training for administrative employees at provincial and local level on three dimensions of just transition – procedural justice, distributive justice and restorative justice
  • Development finance plays a crucial role in emerging markets which tend to have higher investment needs, laxer social protections, and limited access to capital. Development Finance Institutions (DFIs) are well-suited to be first movers in developing countries, where high perceived risks or high hedging costs of foreign borrowings for projects may affect capital flows towards clean energy. The concessional and patient provided by DFIs can de-risk investments and attract private capital, paving the way for commercial investors for just transition. For example, under the Asian Development Bank’s Energy Transition Mechanism, the bank would pilot a transaction towards early retirement of a plant in Kazakhstan 

The transition to a low-carbon economy is not just an environmental challenge; it is a social and economic one as well. Without careful planning, vulnerable communities and workers risk being left behind, exacerbating existing inequalities. A just transition requires the development and implementation of a suite of policy and financial tools that prioritize social protection, create sustainable job opportunities, and ensure equitable access to resources. Comprehensive, inclusive approaches are critical to ensure that the benefits of a green economy are shared fairly and that no one is left behind in the fight against climate change.

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