Putting a price on a fossil fuel phase-out

To achieve the goals of the Paris Agreement, the energy transition must phase-in clean renewables technologies while phasing-out fossil fuels. This is a highly complex process and, for some countries, could come at a considerable cost to avoid a range of economic, social and political risks. A new University College London (UCL) briefing from Greg Muttitt, of the UCL Energy Institute, and Paola Yanguas Parra, of the ZHAW Institute for Sustainable Development, seeks to answer a perennial question: how much will a fossil fuel phase-out cost?

As the COP29 climate change summit enters its second week, negotiating teams  are labouring to deliver a new agreement on finance to support climate action and deliver a just energy transition. 

During the conference, some governments have submitted their next round of Nationally Determined Contributions (NDCs) under the Paris Agreement, with those that haven’t expected to do so in the next few weeks. These NDCs should be informed by the Global Stocktake, finalised at the previous COP28 summit in Dubai last year, which concluded with an agreement from governments to “transition away” from fossil fuels in energy systems, “in a just, orderly and equitable manner”. 

But how much will the process of “transitioning away” from fossil fuels cost? Putting a price tag on this process is central to understanding the scale of the challenge and raising the necessary funds to deliver on it.

Our new policy brief proposes a framework for assessing the cost of a fossil fuel phase-out, which hinges on the scale of three types of investments:

• Clean energy investment to build a new energy system to replace the fossil fuel-based one. This category of expenditure includes the whole power system, from generation and transmission infrastructures, to technological adoption that drives efficiency and cuts energy demand. 

• Investment into alternative sectors to diversify and eventually transform the economy away from dependencies on fossil fuel production and consumption. Countries heavily dependent on fossil fuel production will need investments to build sources of government revenues and new sectors to drive development. 

• Investment to ensure a just transition that supports workers, such as through retraining and through providing social protection for them during the transition, and enabling a reorienting of energy value chains. These investments would also cover those required to clean up the pollution and environmental degradation created by fossil fuel infrastructures.

For each type of investment, our brief analyses what is known from top-down and bottom-up assessments, and what approaches are required to fill the gaps in our current knowledge. While bottom-up assessments are needed to estimate specific needs in a country’s circumstances, they are usually not available. Some top-down estimates, derived from modelling of the energy system and international estimates, can provide initial guidance on the scale of those costs to provide a global system-wide view. 

Bottom-up estimates are much-needed and could provide opportunities for countries to include information into the new NDCs and engage in international and regional processes to raise the capital required to fund the phase-out. Those estimates are important because they allow countries to reflect the geographical and technological specifics of their future energy system, and the preferred policy choices to increase the social acceptance of certain technologies, protect the value of certain ecosystems, strengthen existing institutional capacities, and meet the country’s unique energy needs; all of which will determine the ultimate cost of the fossil fuel phase-out. 

Top-down estimates, however, provide an initial, approximate guide. For instance, the International Energy Agency (IEA) estimates that global investment into clean energy must increase to $4.5 trillion per year by 2030, with $1 trillion per year directed towards emerging and developing economies (excluding China). From the initial estimates outlined in the briefing, the combined cost of clean energy investments is in the trillions, of economic transition in the hundreds of billions, and of just transition in the tens of billions of USD per year. The main variables in estimates like these are economic and technological, while some may capture the dynamics of geopolitical risk or supply-chain bottlenecks that will raise the cost of the energy transition. 

While these costs are considerable, it is important to put them in context. Public support for fossil fuels remains gigantic, totaling $1.7 trillion globally in 2022. The USA’s military budget in 2024 was over $900 billion. And investing in energy transition remains cheaper than choosing not to, with global climate damages expected to reach $38 trillion per year by 2049, escalating significantly thereafter if emissions are not restrained.

Depending on countries’ circumstances, meeting the three expenditures listed above will entail different shares of domestic resources and international finance. Shifting investment of fossil fuels would be an important milestone for the transition since considerable amounts of investment continues to support the expansion of global fossil fuel production. In 2023, the oil and gas industry invested $538 billion in exploration and production, of which $255 billion was in emerging and developing economies. 

In wealthy economies of the Global North, paying for a fossil fuel phaseout is complex, but achievable given their diversified economies and lesser reliance on fossil fuel profits to fund public services and provide employment. In poorer countries, however, there will clearly be a need for external finance to supplement more limited domestic resources and a high dependency on fossil fuels to support jobs, public services and access to dollars to service debt repayments. Given the higher cost of capital in poorer countries, and already unsustainable levels of sovereign debt, a significant portion of the investments will need to be covered by concessional and grant-based finance from wealthy nations in the Global North, rather than simply leaving it to private sector investment. Unfortunately, very little grant-based or highly concessional funding has been provided to date. 

Our briefing also highlights the importance of complementing the much-needed finance, with technical support, capacity building, technology transfer and other forms of international cooperation, which are required for the implementation of transition plans and the just phase-out of fossil fuels. Some of these factors go beyond the financial and aim to develop the institutional and human capacities to manage the new system and the process of getting there, and removing political and structural barriers to the transition. 

Phasing out fossil fuels, in a rapid and just manner, is a mammoth task that will require new finance, institutions and capacities. Not only are these required to manage the new energy system that will eventually replace fossil fuels, but also to navigate the process of getting there.