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PolicyResearchWorkingPaper10685

JustTransition

IssuesforCentralBanksandFinancialRegulators

PietroCalice

DimitriG.Demekas

WORLDBANKGROUP

Finance,CompetitivenessandInnovationGlobalPractice

January2024

PolicyResearchWorkingPaper10685

Abstract

Recentcallsoncentralbanksandfinancialregulatorstousethetoolsattheirdisposaltohelpmitigatethenegativeeconomicandsocialimpactsofclimatepoliciesarebasedonseveralfalseanalogiesbetweentheenergytransitionandthe“just”energytransition.Thesamefalseanalogiesexplainwhyvoluntaryeffortstoincorporatejusttransitionconsiderationsintoprivatefinancialdecisionsandprod-uctscopyingapproachesfromclimatefinancehavesofarfailedtogaintraction.Noneoftheaboveinvalidatesthejusttransitionasapoliticalaspiration.However,onlythegovernmenthasthelegitimacyandauthoritytoidentifytheregionsorsectorswherethenegativeimpactsoftheenergytransitionaretobemitigated,determinetheextent

andinstrumentsforthismitigation,andadjustthemovertimeinlinewithshiftingsocialpreferences.Thisisanessen-tiallypoliticaltaskthatcannotbedelegatedtotechnocraticagencies.Nevertheless,withintheparametersestablishedbythegovernment,centralbanksandfinancialregulatorscanplayasupportingrolebyensuringaccuratedataonthesocialimpactoftheenergytransition,enforcingdisclosurerequirements,sensitizingfinancialfirmstojusttransition–relatedrisks,andraisingawarenessamongfinancialfirms.However,theymustbecautiousnottooversteptheirman-date,andremainmindfulofthelimitationsoftheirtoolkitandoftherisksandpotentialunintendedconsequencesoftheiractions.

ThispaperisaproductoftheFinance,CompetitivenessandInnovationGlobalPractice.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebat

/prwp.Theauthorsmay

becontactedatpcalice@.

ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.

ProducedbytheResearchSupportTeam

JustTransition:IssuesforCentralBanksand

FinancialRegulators

PietroCalice

†

andDimitriG.

Demekas††

JELClassificationNumbers:G28,G29,Q48,Q54

Keywords:justtransition;financialstability,financialregulation,climatechange.

Authors’E-MailAddress:pcalice@;ddemekas@lse.ac.uk.

†SeniorFinancialEconomist,FinanceCompetitivenessandInnovation,EuropeandCentralAsia,WorldBank.

††AdjunctProfessor,SchoolofInternationalandPublicAffairs,ColumbiaUniversity;VisitingSeniorFellow,SchoolofPublicPolicy,LondonSchoolofEconomics;andSpecialAdviser,BankofEngland.

TheauthorswouldliketothankPierreAudinet,IsabelleBui,MikiKhanhDoan,PhillipM.Hannam,RuthHill,andFionaStewartfortheircommentsonanearlierversionofthispaper.TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheWorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent,oroftheBankofEngland.

2

Contents

I.Introduction 3

II.Justtransition:keyconcepts 4

III.Justtransitioninitiatives 7

Publicpolicies 7

Privateinitiativesinjusttransitionfinance 11

IV.Isa“socialtaxonomy”necessary? 15

V.Istherearoleforfinancialregulationinthejusttransition? 19

Justtransitionandthecurrentregulatoryframework 20

Goingbeyondrisk:shouldregulatorspromotethejusttransition? 23

Risksandunintendedconsequences 24

VI.Thewayforward:arealisticagendaforfinancialregulation 26

Threefalseanalogies 26

Amodestproposal 28

AppendixI.Nationaljusttransitionpolicyinitiatives 32

AppendixII.Localandsectoraljusttransitionpolicyinitiatives 33

AppendixIII.Sustainability-relatedcapitalmarketinstruments 34

AppendixIV.Justtransition-focusedprivateinvestmentfunds 36

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I.Introduction

Astheadverseimpactofthetransitiontoalow-carboneconomyoncertainsectorsandlocaleconomiesisstartingtobefelt,governmentsarecomingunderpressuretoensurethatthisprocessis“just”orfair.Despitetheenvironmentalbenefitsandneweconomicopportunitiesitwillcreate,thetransitiontoalow-carboneconomywillalsocauselocalizedjobandincomelossesandbroadereconomicandsocialdisruption.Makingthisa“just”transitionmeanscompensatingfortheselossesandensuringthatthebenefitsoftheenergytransitionaresharedaswidelyaspossible.

Governmentsindifferentcountriesareimplementingvariouspublicpolicyinitiativestotacklethischallenge.Theseinitiativesarefocusedonindividualsectors(likecoalminingorfossilfuel-basedenergygeneration)andconsistoffiscalmeasures,suchastransfers,subsidies,publicinvestments,andpublicly-fundedre-trainingorearlyretirementforworkersintheaffectedindustries.Manyoftheseinitiativesalsoincludeincentivesforprivatefinanceinordertomagnifytheeconomicimpact.

Atthesametime,intheprivatesector,voluntaryinitiativesareattemptingtointroducejusttransitionconsiderationsintofinancialtransactionsbycopyingapproachesandinstrumentsusedinclimatefinance.Theseinitiativesareledmainlybytradeassociations,internationalorganizations,ornongovernmentalorganizations(NGOs)buthavehadlimitedsuccesssofar.

Morerecently,therehavebeencallsoncentralbanksandfinancialregulatorstoplayamoreactiveroleinthejusttransitionusingthepolicyandregulatorytoolsattheirdisposal.

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Thesecallsappeartobepredicatedonthreearguments:thatregulatoryinterventionisnecessarytoensuredisciplineinafieldcurrentlydominatedbyamultitudeofnon-transparentandoftencontradictoryenvironmental,socialandgovernance(ESG)ratings;thatignoringthenegativeemploymentandsocialimplicationsofclimate-relatedfinancialtransactionsorinvestmentscouldcreate“socialrisks”forthefinancialsystem,andmitigatingtheserisksfallswithinthemandateofregulators;andthat—somewhatincontradictiontothepreviousargument—centralbanksandfinancialregulators,regardlessoftheirmandate,haveadutytopromoteimportantsocietalambitions,suchasthetransitiontoalow-carboneconomyandtheUnitedNations(UN)SustainableDevelopmentGoals,andthejustenergytransitionagendaprovidesalinkbetweenthesetwo.Theseargumentshavetriggeredadebateonthepotentialroleoffinancialregulationinthejusttransition.

Thispapercontributestothisdebatebyexaminingtheemergingpolicyliteraturerigorously,assessingtheassociatedrisksandunintendedconsequencesoftheproposalsputforwardand,onthisbasis,outliningarealisticagendaforcentralbanksandfinancialregulators.The

1See,forexample,Robins,N.(2020),

“FinancingaJustTransition,

”in:Fisher,P.(ed.),MakingtheFinancialSystemSustainable,CambridgeUniversityPress;ILO(2022),

FinanceforaJustTransitionandtheRoleofTransition

Finance,

G20SustainableFinanceWorkingGroupInputPaper,May2022,Geneva:InternationalLaborOrganization;Monnin,P.andN.Robins(2022),

“Supportingthejusttransition:aroadmapforcentralbanksandfinancial

supervisors,

”PolicyBriefingPaper10,CentreforSustainableFinanceandGranthamResearchInstituteonClimateChangeandtheEnvironment,LSE,December2022.

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paperarguesthatmanyoftheargumentsadvancedtoincorporatejusttransitionconsiderationsincentralbanksandfinancialregulators’mandatearebasedonanumberofmisunderstandingsandfalseanalogiesbetweenthegoaloftheenergytransitionandthatofthejustenergytransition.Thisisalsooneofthereasonsbehindtheverylimitedsuccessoftheattemptstoincorporatejusttransitionconsiderationsintoprivatefinancialbusinessdecisionsbycopyinginstrumentsandapproachesusedinclimatefinance.Dispellingthisconfusionisnecessaryinordertoplacethedebateonthepotentialroleoffinancialpolicyandregulationinthejusttransitiononasoundeconomicbasis.

Thispaperconcludesthat,whilethejusttransitionisnottheresponsibilityofcentralbanksandfinancialregulators,theycanstillplayasupportingrole.Ensuringthattheprocessofclimatetransitioncorrespondstosocialnormsof“fairness”orjusticeisafundamentallypoliticaltaskthatmustbemediatedthroughthepoliticalprocess.Nevertheless,withintheboundariesofajusttransitionstrategysetbythegovernment,andmindfuloftherisksandpotentialunintendedconsequencesoftheiractions,centralbanksandfinancialregulatorscanplayasupportiverolebyensuringaccuratedataonthesocialimpactoftheenergytransition,enforcingdisclosurerequirements,sensitizingfinancialfirmstojusttransition-relatedrisks,andraisingawarenessamongfinancialfirms.

Therestofthepaperisorganizedasfollows.SectionIIdiscusseskeyconceptsofthejusttransition,includingthehistoryofthejusttransitionideaandtheassociatedconceptualandanalyticaldifficultiesintranslatingitintoapublicpolicygoal.SectionIIIprovidesanoverviewofjusttransitionpolicyinitiatives,includingchallengesandlessonslearned,andreviewsprivatesectorjusttransitionfinanceinitiatives.SectionIVdiscussesthetopicof“socialtaxonomies”,arguingthatdespitebeingpresentedastheinstrumentofchoiceforsignalingprioritiesandaligningincentivesforthejusttransition,socialtaxonomiesarenotnecessaryforajusttransitionpolicyframework.SectionVexaminescriticallytheargumentsputforwardforregulatoryactiontosupportajustenergytransition,aswellastheassociatedrisksandunintendedconsequences.Finally,sectionVIdiscussesthethreefalseanalogiesthathavesofarbeenhamperingthedebateonthepotentialroleoffinancialregulationandconcludeswithanoutlineofarealisticagendaforcentralbanksandfinancialregulatorsinthejusttransition.

II.Justtransition:Keyconcepts

Theconceptof“justtransition”referstomitigatingthedistributionalimpactofanytransitiontoanewtechnologicaloreconomicparadigm.Itdoesnotapplyexclusivelytotheprocessofmovingtowardalow-carboneconomy:concernsabouttheimplicationsofdigitalizationandartificialintelligence,forexample,havealsogeneratedcallstoensureajusttransition.

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2See,forexample,

“TheJustAITransition:WherearetheOpportunitiesandThreats?”

EuractivConference,March2,2021;Buhovskaya,A.(2017),

“TowardsaJustTransitionforInclusiveDigitalization,

”InstituteofDevelopment

5

Ajustenergytransitionwouldrequirethatthetransitionoutofcarbon-intensivesectorsandactivitiesbeaccompaniedbymeasurestominimizetheimpactontheworkersandcommunitiesthatarenegativelyaffected.Despitethebroaderenvironmentalbenefits,thetransitiontoalow-carboneconomywillinevitablycausestrandedassets,lostjobs,andsizeableshiftsinincomeandwealthacrossregionsandeconomicsectors.Whenacoalminecloses,forexample,carbonemissionsarereducedbutmineemployeesandtheirfamilieslosewagesandbenefits,thelocaleconomysuffersfromlowerspending,andlocalgovernmentslosetaxrevenue.Theseeffectscanbeverylong-lasting:fortyyearsaftertheabruptdeclineofthecoalminingindustryintheUnitedKingdom(UK),regionsthatwereonceeconomicpowerhousesstillbearthescarsoftheupheavalthatcomeswithrapidstructuralchange.Unemployment,illhealth,andsocialdisadvantagepersistinareasthatoncesupportedoveramillionminingfamilies.

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Inthiscontext,ajustenergytransitionwouldinvolvehelpingworkersandcommunitiesdevelopnewsourcesofemploymentandgrowthandpreventormitigatethedislocationsresultingfromthemineclosures.

Ajustenergytransitionwouldinprinciplealsorequireaddressingadverseconsequencesfromthetransitiontoalow-carboneconomythatgobeyondthelocaleconomiesthataredirectlyaffected,althoughthisdimensionisusuallyoverlooked.Forexample,landconversionsforrenewableenergyprojectscanexacerbatecompetitionforland,destroyareasofnaturalbeauty,ordamagebiodiversity.Theremovalofenergysubsidieswouldhavesignificanteconomicanddistributionalrepercussions.Higherenergypricesduetocarbontaxesandthecostsoftransitiongoodsandservices,suchaselectricvehiclesandenergy-efficientbuildingupgrades,maybeunaffordableforlow-incomehouseholdsorsmallandmediumenterprises(SMEs).Thesharpincreaseindemandfortransition-relatedmineralsandrawmaterialscanhaveprofoundenvironmental,social,andhumanrightsconsequences.Thesebroaderadverseconsequencesofclimatetransitionfallwithinthescopeofthejustenergytransitionbutarerarelyacknowledgedinpractice.

Theconceptofajusttransition

4

wasfirstarticulatedbytheInternationalLabourOrganization(ILO)andhasgainedpoliticalmomentumsincethen.

.Inits2015GuidelinesforaJustTransition,

5

theILOdefinedthejusttransitionas“greeningtheeconomyinawaythatisasfairandinclusiveaspossibletoeveryoneconcerned,creatingdecentworkopportunitiesandleavingnoonebehind,[…]maximizingthesocialandeconomicopportunitiesofclimateactionwhileminimizingandcarefully

Studies;and

“’Goingdigital?—Goinclusive!’

TradeUnionAdvisoryCommittee(TUAC)sendsaclearmessagetotheOECDMinisterialConsultationMeeting,”April3,2019.

3Beatty,C.,S.Fothergill,andT.Gore(2019),

TheStateoftheCoalfields2019:EconomicandSocialConditionsin

theFormerCoalfieldsofEngland,ScotlandandWales,

CentreforRegionalEconomicandSocialResearch,SheffieldHallamUniversity.

4Intherestofthispaper,theterm“justtransition”willrefertothejustenergytransition.

5ILO(2015)

,GuidelinesforaJustTransitionTowardsEnvironmentallySustainableEconomiesandSocietiesforAll,

Geneva:InternationalLabourOrganization.

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managinganychallenges,includingthrougheffectivesocialdialogueamongallgroupsimpacted,andrespectforfundamentallaborprinciplesandpractices.”

.TheconceptofthejusttransitionwasincorporatedintheParisAgreementin2015,whichcalledfor“takingintoaccounttheimperativesofajusttransitionintheworkforceandthecreationofdecentworkandqualityjobsinaccordancewithnationallydefinedpriorities.”

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.Itwasreinforcedatthe24thConferenceofthePartiesoftheClimateChangeConvention(COP24)throughthe

SolidarityandJustTransitionSilesiaDeclaration;

atCOP25in2019throughtheinitiative

ClimateActionforJobs;

atCOP26in2021throughthe

Declaration

onSupportingtheConditionsforaJustTransitionInternationally,

signedbythegovernmentsof17countriesplustheEU;andatCOP27in2022throughthe

Sharmel-

SheikhImplementationPlan.

Theconceptofajusttransitionisbasedonsocialnormsoffairnessorjustice.Thesenormsincludeproceduraljustice(ensuringatransparentandinclusivedecision-makingprocessforenergytransitionpolicies);distributivejustice(sharingfairlythecostsandopportunitiesofthetransition);andrestorativejustice(ensuringthatpast,present,andfuturenegativeimpactsofthetransitionareproperlyrectified).

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Needlesstosay,thesenormsarecontext-dependentandvariableacrosscountriesandovertime.

Translatingthesesocialnormsintopracticalpoliciesfacesdauntingconceptualandoperationalchallenges.

.Afundamentalchallengeiscomingtoanagreementonapolicygoal:exactlyhowmuchjusttransitiondowewant?Sincethejusttransitionreflectssocialnorms,definingandagreeingonagoalinvolvesjudgmentsonthebalanceofinterestsofdifferentgroups,onthedesirabledegreeofremediationforprivatedamagesincurredasaresultofenergytransitionpolicies,andontheappropriatetimehorizonforsuchremediation.Therearenoobjective,science-basedyardsticksformakingthesejudgments.

.Arelatedchallengeismeasuringthecontributionofvariouseconomicactivitiestothegoalofajusttransition.TheoriginalILOdefinition,aswellasallotherattemptstodescribethejusttransition,frameitinverybroadandvagueterms(“leavingno-onebehind,”“minimizinganychallengesfromclimatetransition,”“creatingdecentworkandqualityjobs,”etc.).Giventhatalleconomicactivitieshavesociallybeneficialeffects,suchasjobcreation,theproductionofsociallydesirablegoodsandservices,andincomegeneration,almostanythingcouldcontributetothejusttransition.Moreover,themagnitudeofitsimpactwoulddependonwhetheronechoosestofocusonitseffectsonemployment,onincomedistribution,oronotherenvironmental,developmental,andbroadersocial

6UNFCCC(2015),

TheParisAgreement,

UnitedNations.

7McCauley,D.andR.Heffron(2018),

“JustTransition:Integratingclimate,energy,andenvironmentaljustice,

”EnergyPolicy,119:1-7.

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aspirations(suchashumanrightsorqualityoflife);onthetimehorizonoverwhichoneexpectstheseeffectstomaterialize;andonthescale(local,national,orglobal)atwhichtheseeffectsaretobemeasured.Therearenogenerallyacceptedapproachestoansweringthesequestions.Thisbecomesamajorhindrancewhentherearetrade-offsbetweenconflictingobjectives(orbetweenobjectivesapplyingtodifferenttimeframes)thatrequirebalancingoneagainstanotherandarrivingatanestimateofthenetimpact,whichwouldthenneedtobemeasuredagainstthecostofthepolicy.

.Whenitcomesspecificallytofinance,thefocusontheimpactofclimatetransitionprojectsonlocaleconomiesandcommunitiesisanotherchallenge.Financialtransactionstypicallyinvolvethesupplier(s)ofafinancialservice(suchasfunding,riskcoverage,ormaturitytransformation)andasingleclient(suchasanindividualorcorporateborrower,aclientpurchasinginsurance,oranentityissuingequityordebt).Takingintoaccountjusttransitionconsiderationspotentiallyexpandsthesetofstakeholderswhoseinterestsmightneedtobeconsideredbeyondthepartiesdirectlyinvolvedinthetransaction.

Deliveringajusttransitionisthereforeapoliticalproject.Makingtheseessentiallyarbitraryjudgmentsinawaythatcorrespondstoshiftingsocialnormsoffairnessorjusticeisfundamentallyapoliticalprioritythatshouldbemediatedthroughthepoliticalprocess.Inaddition,thejusttransitionisapoliticalprojectinanothersense:asidefromanyinherentmeritsintermsofprocedural,distributive,orrestorativejustice,thejusttransitionisprimarilyseenbyitsadvocatesasakeyinstrumentformaintainingvotersupportforclimateaction.

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Thesepointshaveimportantimplicationsforthedebateonthepotentialroleofcentralbanksandfinancialregulatorsinthejusttransition,discussedinsectionV

III.Justtransitioninitiatives

Publicpolicies

AsgovernmentsstartedimplementingclimatetransitionpoliciesbyphasingoutthemostGHG-intensiveformsofenergygenerationandassociatedeconomicactivities—notablycoalmining—therewerepoliticalpressuresforrectifyingthenegativeimpactonthedirectlyaffectedsectorsandregions.Thesepressuresessentiallyreflecteddemandforrestorativejusticeandspurredtheemergenceofavarietyofpublicpolicyinterventionsforthejusttransition—althoughtheydidnotalwaysusethislabel.

Mostofthegovernmentinterventionshavesofarbeenpiecemeal,focusingonspecificregionsorsectors,andusingmainlyfiscalinstrumentstorectifytheimpact.Asillustratedby

8Thereisevidencethatperceivedfairnessisoneofthestrongestpredictorsofbothsupportforclimateactionandbehaviorchange.See,forexampleDrews,S.andJ.vandenBerg(2016),

“WhatExplainsPublicSupportforClimate

Policies?AReviewofEmpiricalandExperimentalStudies,

”ClimatePolicy16(7):855–876.

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theexamplesinAppendixI,theseinitiativesareessentiallyfiscalpackagesfocusedmainlyoncoalminingorfossilfuel-basedenergygeneration.

.Theyconsistofacombinationofpublictransfers,subsidies,infrastructureinvestments,earlyretirementschemes,workerre-trainingorrelocationassistance,etc.aimedatcompensatingworkersforlossesandprovidingthemwithnewemploymentopportunities.

.Theirimpactislocalizedbydesign.Noneoftheseinitiativesincludemeasuresthataddresssociety-wideeffectsfromtheenergytransition(e.g.,onlow-incomeconsumers).

.Althoughtheyincorporate,tovaryingdegrees,anelementofpublic-privatesectorcollaboration,inallcasestheyareledandfundedbythe(nationalorregional)government.

Therehavealsobeenjusttransitioninitiativesattheleveloflocalcommunitiesoreconomicsectors.Thesearetypicallytheresultofagreementsbetweencompanies,unions,andlocalNGOs.Whiletheyaresupportedbythegovernment,theyofteninvolvelittleornogovernmentfunding—andassuch,theymaynotqualifyas“policy”initiatives.Nevertheless,twosuchexamplesaresummarizedinAppendixII.

Whilenoneoftheseinitiativeshaveafinancialpolicyorregulatorycomponent,afewproposalsspecificallyaddressingjusttransitionfinancehaverecentlyemerged.These,however,arestilllargelyattheconceptstage,withlittleoperationalcontent.

.TheILOpreparedanoutlineofajusttransitionfinanceframeworkfortheG20SustainableFinanceWorkingGroupundertheIndonesianPresidencyin2022.

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Thepaperfocusesonwaystointegratesocialandemploymentdimensionsinclimatetransitionfinance.Itemphasizesitspreliminaryandexploratorynature:itsaimistoprovide“initialconsiderations,[…]identifybuildingblocksforsupportingalignmentoffinancialflows[withjusttransitiongoals],andhighlightselectedpotentialentrypointsrelevantforthedesignoftransitionfinanceframeworks.”Itsproposalsencompassseveralactors,includingfinancialfirms,multilateraldevelopmentbanks,internationalorganizationsandstandard-setters,andpolicymakers.Asregardsthelatter,itisproposedthatgovernmentsshould“promotetransparencyaroundthesocio-economicimpactsoflow-carbontransition”andcentralbanksandfinancialregulatorsshould“increasetheireffortstomanagetherisksposedbyclimatechange[…]andexploretheirroletowardsenablingthefinancialsystemtosupportthejusttransition.”

.BritishInternationalInvestment(BII),theUK’sdevelopmentfinanceinstitution(formerlytheCommonwealthDevelopmentCorporation—CDC),produceda“Roadmap”forjusttransitionfinanceinIndiaintworeports.

10

TheRoadmapsetsoutjusttransitionpriorities

9ILO(2022),

FinanceforaJustTransitionandtheRoleofTransitionFinance,

G20SustainableFinanceWorkingGroupInputPaper,May2022,Geneva:InternationalLaborOrganization.

10Tandon,S.etal.(2021),

TowardsaJustTransitionRoadmapforIndia:LayingtheFoundationsforPractical

Action,

CDCInsight,June2021,London:CommonwealthDevelopmentCorporation;andModak,P.etal.(2023),

9

forIndiaandprovidesexamplesofavailablemetricsthatcouldbeusedtomeasureimpact.Thepolicycontent,however,isvague.FortheReserveBankofIndia,inparticular,theRoadmapenvisagesthesameroleastheILOpaperdoesforcentralbanksingeneral(climateriskmanagementanddisclosure,greeningthecentralbankbalancesheet,etc.),withtheadditionalelementofsupportingthejusttransitionthroughprioritysectorcreditallocationschemesthatarespecifictoIndia.

.OneofthebackgroundpaperspreparedforSouthAfrica’sPresidentialClimateCommissionfocusesspecificallyonjusttransitionfinance.

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Oneofthemostsignificantobstaclesfacingjusttransitionfinance,accordingtothepaper,iscapacityconstraintsatalllevels:corporate,financialfirms,localcommunities,andgovernment.Asregardsfinancialpolicymakers,thepaperemphasizestheneedtoarriveata“sharedvisionofjusttransitiongoals”;ensurethesearealignedwiththeirrespectivemandates;andprovideconsistentsignalstothemarket.Thepaperfocusesonfiscalpolicytools(publicinvestment,incentivesforgreenprojects,risksharingschemes,andthecreationofaJustTransitionfund)andoninnovativefinancialinstruments(e.g.,socialbonds),butincludesnospecificproposalsforfinancialpolicyorregulation.

TheEuropeanUnion(EU)hasmademoreprogressthanotherjurisdictionsinintegratingthesepiecemealinterventionsintoanoverarchingpolicyframeworkandhastakensomestepstoreflectindirectlyjusttransitionconsiderationsinfinancialdecision-making(Box1).TheJustTransitionMechanism(JTM)incorporatesasystemfordeterminingjusttransitionprioritiesdelegated,withincertainparameters,tonationalgovernmentsthroughnationalTerritorialJustTransitionPlans;amechanismforfundingprojectsthatcombinespublicresourcesandblendedfinanceinstruments;andseveralinitiativestha