Q&A: What is carbon lock-in? SEI scientists give a primer

The concept of carbon lock-in can be difficult to understand and explain in any language. Carbon lock-in refers to the set of technologies, institutions and norms that are inconsistent or incompatible with a low-carbon future and limits progress toward that goal. It is a process by which social, political and technical barriers to decarbonization interact to create an inertia that favors the development of fossil fuels.

For example, in Mexico, the government decided to invest in infrastructure to refurbish old refineries and to construct a new one (called “Dos Bocas”) with massive investments – more than $8 billion just toward the new refinery. But despite the expectation of very marginal profits and the pandemic-related pressure on national government budgets, the inertia of lock-in pushed for its ongoing construction. In other words, sunken costs and political commitment kept the project going. This was reinforced by public discourse on energy security, energy sovereignty, self-sufficiency and the jobs generated in construction, as well as the political symbolism behind such projects that have become emblematic for the national government.

There are many sources of carbon lock-in risk in Latin America. Some of these are infrastructural, such as the plans for at least 109 new coal- and gas-based thermal electricity plants in the region (Global Coal Plant Tracker and Latin America Energy Portal). Several countries continue to expand or aim to expand their fossil fuel production, including Argentina, Brazil, Colombia and Guyana. Other sources of lock-in are institutional, such as the establishment of subsidies for production and consumption of fossil fuels, the dependence of public expenditures on the production of fossil fuels through the generation of taxes and royalties or international investment agreements that allow foreign investors to sue a government when new policies and rules are instituted that affect their profits. Carbon lock-in risk can also stem from cultural or behavioral factors, such as the preferences for private cars for transport.

Many Latin American countries continue to incentivize the production and use of coal, oil and gas. According to the Energy Policy Tracker, since 2020, the governments of Brazil, Mexico, Colombia and Argentina committed more than $10 billion of unconditional support to the fossil fuel sector, without requiring them to reduce greenhouse gas (GHG) emissions or plan for a just transition. Despite international commitments and investments by various countries in the region to expand the contribution of renewable power sources (wind and solar) to national energy systems, analysis by SEI and colleagues shows fossil fuels continue to be a focus of expansion, both in their production and consumption.

During 2020, when the price of oil collapsed, Brazil announced it would prioritize the expansion of offshore drilling blocks that were more economical. In 2021, when pandemic economic recovery pushed prices back up, the Brazilian government again showed interest in exploiting higher-cost production areas. Colombia followed a similar track and opened up 28 areas for hydrocarbon exploration and extraction toward the end of 2021. Similarly, following proposals from the sector, the Colombian government suggested reducing environmental and social regulations for mining and energy projects to ease the sector’s recovery. In Mexico, investments in the purchase, maintenance and construction of the three refineries were excluded from austerity cuts to public spending made during the pandemic. In 2022, the government committed over $700 million to two fracking projects, an increase of 219% compared to 2019, before the pandemic.

Governments incentivize fossil fuels regardless of their long-term commercial value for economic, institutional and cultural reasons. First, these four countries (Argentina, Brazil, Colombia and Mexico) each have state-owned oil and gas companies that play a very important role in the national economies. When prices are low, the additional volume of production can help ease the impact, while in times of high prices, increasing production can help grow revenues and generate a financial cushion. The economic pressure to keep producing more is significant; for example, some studies estimate that if Latin American countries were to reduce their hydrocarbon production to align with climate ambitions, they would lose about 40% of their potential revenue.

Secondly, political and commercial interests have perpetuated the notion that extractive industries foster development and better quality of life. In Colombia, a reform of the General Royalties System was approved in 2020 at a critical moment of the Covid-19 pandemic. This reform boosted the royalty funds allocated to regions where extraction takes place, increasing their financial dependence on the sector, while also incentivizing ongoing extraction. Finally, the cultural impact of multiple generations of workers involved in the extractive sector should not be underestimated. This, coupled with the emphasis on the sector’s importance to regional economic and social development, suggests that certain regions have developed close links to the sector and it is considered to hold a fundamental role in the development of their respective national economies.

These examples highlight the reinforcing interactions between the economic, technological, sociocultural and political dimensions of lock-in. National and regional governments in fossil fuel-producing areas endure tremendous pressure to resolve fiscal gaps from the pandemic. But instead of reducing costly subsidies, they fall back on the same arguments of energy security, sovereignty and development. These arguments perpetuate an extractive-based development model without considering the medium- and long-term consequences, resulting in shortsighted investment decisions amid the bigger-picture trend of the energy transition. These investments are at high risk of being stranded, meaning they turn out very costly instead of profitable. Thus, reinforcing the extractive-dependent model keeps regional and national economies vulnerable to the shocks and risks of price volatility, as we observed during the last couple years.

A recent report by the International Panel on Climate Change (IPCC), which collects scientific evidence on global warming, shows human influence on the climate is “unequivocal”. With this, the report refers mainly to the effects of a global economic system based on fossil fuels. Under a business-as-usual scenario, average global temperatures would increase by 1.5°C by 2040, with catastrophic consequences, such as more heatwaves, changes in the water cycle and an increase in sea levels, affecting billions of people around the world. We are already experiencing some of these consequences, such as more frequent and intense storms and hurricanes, droughts and extreme heatwaves, as well as severe floods and human migration resulting from these disasters, among others.

Unfortunately, the world is not yet on a trajectory toward a safe climate. According to the 2020 Production Gap Report, to keep global warming under 1.5°C, the world needs to reduce its fossil fuel production by about 6% per year between 2020 and 2030. However, instead of decreasing their production, countries are planning and projecting an average annual increase of 2% in fossil fuel production, which by 2030 would result in more than twice the production levels necessary to keep the global temperature increase to 1.5°C. Moreover, according to the 2019 Emissions Gap Report, carbon emissions from fossil fuel use by the energy and industry sectors increased by 2% in 2018, reaching a record of 37.5 gigatons of carbon dioxide (GtCO₂) that year. The Covid-19 pandemic resulted in a drop in global CO₂ emissions in 2020, but emissions “rose to their highest ever level in 2021”.

The continuous expansion of fossil fuel production and consumption portends the onset of increasingly severe storms, such as hurricanes Eta and Iota, which destroyed parts of Colombia and Central America in November 2021, or the disastrous floods that millions of Colombians experienced in 2010. The coming changes will affect the water cycle, food security, disease control and the state of infrastructure, risking the livelihoods and health of millions. Moreover, mitigation and adaptation costs will only increase as climate action is delayed.

Finally, there is a significant risk for countries and regions that produce fossil fuels or depend on carbon-intensive economic activities to end up with stranded assets (assets that suffer from unanticipated or premature write-offs or downward revaluations, or that are converted to liabilities, as the result of a low-carbon transition or other environment-related risks), as well as workers and communities left behind by the global low-carbon transition.

Governments have mobilized enormous amounts of public resources to reactivate the economy and protect citizens in response to the economic crisis associated with the Covid-19 pandemic. These efforts include massive investments in new infrastructure and changes (temporary or permanent) to the institutions that govern economic activities. These investments and regulatory changes represent a significant risk of carbon lock-in. Indeed, if they promote carbon-intensive technologies or sectors, they will result in GHG emissions for decades. Moreover, these are resources that could have been invested in technologies and sectors with more potential to contribute to a global energy transition. Besides, regulatory changes can weaken existing safeguards meant to limit the negative social and environmental impacts of these activities and projects.

Ongoing economic recovery efforts also constitute an opportunity to redirect Latin American economies and institutions towards models that are more sustainable and allow the country to meet global climate goals. Because of its high levels of inequality, dependency on fossil fuel exports and the lack of decent jobs, the region is particularly vulnerable to the pandemic and climate change impacts. In this context, accelerating the use of fossil fuel alternatives has many advantages, such as improving air quality, reducing the impact of the global fossil fuel market’s volatility on the regional economy, generating new sources of employment, and increasing access to more efficient and affordable public transport systems. Furthermore, some renewable energy technologies are now cheaper than traditional fossil fuels for producing electricity in certain countries and they have the potential to provide better service, especially in rural areas.

While producing countries are prioritizing fossil fuels in their strategies for post-pandemic economic recovery and in response to high fossil fuel prices resulting from the war in Ukraine, it is very important that these countries change their current development model towards one that is more diversified and sustainable, to reduce their vulnerability to volatile international markets. If they fail to do so, they risk falling behind in the energy transition, as the demand for low-carbon products and services increases and as fossil fuels are increasingly excluded from international investment portfolios.

Historically, global crises with great economic repercussions have affected the consumption and production of fossil fuels. The oil crisis in 1973, the USSR collapse in 1991 and the 1997 Asian financial crisis all saw stagnation in global fossil fuel consumption and in GHG emissions. However, after a few years, the trends in fossil fuel consumption growth reappeared. Without strategic planning that accounts for issues such as price volatility and a long-term reduction in fossil fuel demand, fossil fuel production and use will continue dominating Latin American economies, with obvious consequences for the climate and humanity. Unexpected events, like Russia’s invasion of Ukraine, further highlight this dynamic. Nevertheless, certain efforts can help cities, regions and countries in Latin America take advantage of crises to reduce their fossil fuel dependence.

• Public support for low-carbon technological innovations: The progressive return to normality for economic, industrial and transport activities creates opportunities for making them less fossil fuel-dependent. However, public support is required to scale up low-carbon technologies and spur green innovation with substantial impact. Though many of the necessary investments and innovations could come from the private sector, alliances with the government are needed to improve regulatory and fiscal frameworks and generate success.
• Inclusion of a justice lens in energy transition strategies: A successful transition depends on recovery plans having the support of regions and communities dependent on fossil fuels production and other economic activities that emit large quantities of GHG. Ensuring that workers, infrastructure, services and economic futures are taken into account in recovery plans is essential for any effective transition plan. Examples of support to such communities include investments for economic diversification, remediation of environmental damages, and the inclusion of local populations, including disadvantaged groups, in transition planning.
• International coordination: One of the biggest barriers to the energy transition necessary to limit climate change impacts is unequal access to investment capital to transition to low-carbon energy sources, to support economic diversification efforts in carbon-intensive regions, and to maintain healthy public finances. Indeed, fossil fuel-dependent countries in Latin America, including Colombia, are financially pressured into continuing fossil fuel production. They also often lack capital to transform their fossil-fuel dependent infrastructure. Therefore, they require more support from developed countries in the form of capital and technology to overcome energy transition barriers.