Do we need COP to make real changes?

The true success of the COP29 – and any future COP – is measured by whether it manages to deliver a feasible plan for out-phasing of fossil fuels, which right now seems very far away. But might there be a fast track to the same outcome - outside COP?

The pathway to this success can, especially in the light of the last years developments - very well be outside of COP. By harnessing the current windfall profits and introducing a ‘start and strengthen’ tax on the fossil fuel industry, a gradual, controlled phase-out can be achieved. Such a scheme is not only adjusting the market for the type of energy we actually need in the future - it is also will accommodate for a harmonious blend of economic stability, environmental stewardship, and social responsibility in the coming decades.

The why

A transition from fossils to renewables isn’t just a matter of avoiding the worst impacts of climate change, it’s also about avoiding a far-reaching economic collapse. The financial risk of continuing oil and gas expansion is approximately 1 trillion USD, mainly carried by the OECD states. Not accepting this fact, increasingly repeated by world leading analytic institutions, the UN, the World Bank and the IEA,is not only hindering environmental and social progress, it is also creating stranded assets that puts the world economy at great risk. The world is at a crossroads, transitioning from the fossil fuel era to a renewable energy future. This shift is essential to combat climate change and ensure a sustainable energy system. We know what we need to do, we know how to do it. Our barriers are not technical, nor economical - they are solely political.

The when

COP29 was seen as our last chance to use the COP-platform to grab the increasing greenhouse gas emissions by their roots and introduce a tax scheme that helps the fossil fuel industry transition to flexible, safe, and renewable energy production in a controlled manner. The 2,456 fossil fuel lobbyists at the COP28 and over 1700 at COP29 are working hard to hinder meaningful policy development around their industries, thus making it impossible to find a feasible solution towards phase out.

A key challenge hindering timely transition is the short-term profit-seeking of the oil and gas industry which not only reduces our chances of stabilizing the global temperature, but puts several national economies in risk – if, and when, the current war-induced profit bubble bursts.

To ensure a just and efficient transition to a global low-carbon economy, it's time to fully leverage on the movement around phasing out fossil fuels that is gaining speed. We have seen this through the G7, The United Nations, the sky-rocketing number of lawsuits against the fossil fuel industry, the grers of governments calling for a fossil fuel treaty, the global Plastics Treaty, and the financial opportunity created by windfall profits.

The how: using the power of the windfalls in fossil industries

The illegal invasion of Ukraine and the Israeli warfare in the middle east have disrupted resource markets and led to surges in energy prices. This, in turn, has spurred increased investments in fossil fuels, yielding short-term windfall profits for the oil, gas, and coal industries. These investments come with significant risks. A recent study points out that the stranded asset risk of these investments exceeds US$1 trillion due to the impending impacts of climate policies. Furthermore, companies that fail to account for the potential loss of asset value could face legal repercussions, as stakeholders demand transparency in financial risk reporting. 

The transition to a global net zero economy entails rapid structural changes and reallocation of capital assets and reserves in a speed not seen even in war times. The windfall principle can aid transition as it involves taxing or imposing additional requirements on extraordinary profits generated during times of crises or windfall gains. By taxing or exhibiting extra national and international requirements on extraordinary profits, capital can be effectively shifted by the respective countries seeing this profit being taken by the companies. And it could go fast.

Transforming power through taxation and redistribution nationally

The windfall principle could redirect excessive profits toward the urgent need to transition to a fair, net-zero global economy and can effectively drive capital shifts Global leaders and economists are increasingly advocating for the use of windfall taxes to harness war profits for the greater good. The U.N. Secretary-General António Guterres urged oil and gas nations to levy taxes on these windfall profits and channel the funds toward supporting vulnerable populations.  A majority of European economists support the idea that taxation is the way forward and the European Commission has advised members to collect windfall taxes from energy companies. Windfall taxes are implemented in several European countries and global oil and gas companies could introduce a similar tax to avoid wartime profiteering and to steer away from stranded assets risks.

Such an approach could, if meaningfully distributed, be instrumental in addressing both short-term humanitarian needs and mid- to long-term stranded asset risks, and could ensure fostering resilience and investing in net-zero industries at the same time.

Designing systems for a smooth transition within the energy sector

The implementation of a windfall tax across major fossil fuel producers mitigates the long-term risks associated with stranded assets, risks which can destabilize financial markets in especially OECD countries with cascading negative effects on pensions and government finances. By reallocating profits, OECD economies can play a pivotal role in steering the fossil fuel sectors toward a more sustainable economic trajectory and safeguard their state budgets.  

Now, windfall profits are being spent on company bonuses, shareholder payouts, and company paybacks. When the windfall principle is applied in major fossil fuel companies, the current, extraordinary profits will go directly into the rapid transformation of these energy companies towards renewables.

A call to action when COP continuously fails

Governments and industry leaders need to embrace the windfall principle as a tool for catalyzing the green transition and for de-risking economies. By directing windfall profits toward renewable energy development, resilience-building, and support for vulnerable populations, a stable and equitable energy future becomes attainable. The world's economies are no longer merely discussing the possibility of a phase-out of hydrocarbons; they are actively exploring pathways to make it a reality. The windfall principle can play a pivotal role in ensuring that this transition is smooth, just, and successful - and we are not dependent on a COP in Dubai, Azerbaijan nor Brazil to make governments move on this. On the contrary, the countries imposing this will be economically stronger, have more resilient and flexible energy supply, and will become more competitive and attractive for investors in the new era of renewables that has already begun.