The Economics of Phasing Out Fossil Fuels: Why a Just Transition Should Be Central

As the transition of energy systems - and the economy more broadly - to a low-carbon structure becomes unavoidable to slow down the climate crisis, the real issue is not merely phasing out fossil fuels, but how this transition will be carried out. This is because the transformation of economic structures reliant on coal, oil, and natural gas can affect workers, households, local communities, and fossil fuel-intensive regions in different ways. Therefore, the progressive phase-out of fossil fuels must be addressed through a just transition perspective that encompasses economic and environmental goals, as well as employment, social protection, financing, skills development, and local development.

The progressive phase-out of fossil fuels must be addressed through a just transition perspective that encompasses economic and environmental goals.

Within the framework of the United Arab Emirates Just Transition Work Programme, which was established at COP28, the Parties to the Paris Agreement emphasized that a just transition is multisectoral and multidimensional, and requires a whole-of-society and whole-of-economy approach. The decision highlighted elements such as the effective participation of workers and affected communities, social dialogue, labour rights, decent work, social protection, reskilling, and access to financing. It also noted that countries must develop just transition pathways tailored to their own circumstances and development priorities. The decisions adopted at COP30 in Belém reinforced this approach.

More importantly, at COP30, a decision was made to develop a just transition mechanism at the international level. This mechanism is expected to strengthen international cooperation, technical support, capacity building, and knowledge sharing, thereby enabling just and inclusive transitions. The process of operationalizing the mechanism is scheduled to be addressed at COP31. Thus, the just transition is moving beyond being merely a matter of national policies and is becoming more clearly institutionalized as an area of implementation requiring international cooperation and support.

Fossil Fuel Subsidies as a Lever for Structural Change

However, the discussion on the just transition extends beyond the reduction of fossil fuel use. How public subsidies for fossil fuels will be transformed is also a crucial part of this transition. Studies conducted on both Türkiye and other OECD countries show that energy subsidies are directed to a significant extent toward the petroleum products, natural gas, electricity, and coal sectors. By distorting energy prices, these subsidies can slow the development of cleaner and more sustainable energy sources as well as gains in energy efficiency. Investment incentives, tax breaks, and capacity mechanism payments directed toward the coal sector can also support a production structure characterized by high emissions intensity, low value-added, and limited job creation.

Therefore, the issue is not merely “eliminating fossil fuel subsidies”. The fundamental question is what kind of economic and social future public resources will be used to build. The findings indicate that redirecting these same resources toward renewable energy, energy efficiency, and low-carbon technologies could generate higher value-added, broader employment effects, and stronger sectoral linkages. Fossil fuel subsidy reform should therefore be viewed not merely as a fiscal policy adjustment but also as a policy of structural transformation.

Social Protection and Participation as Prerequisites

However, “justice” should be the defining concept here. The elimination of fossil fuel subsidies may result in short-term welfare losses, particularly for low-income households dependent on these fuels and groups with limited access to alternative energy sources. For this reason, reforms must be designed in conjunction with complementary policies such as social transfers, social security payments, targeted support, employment programs, and the strengthening of basic services. In fossil fuel-intensive regions, economic diversification, new employment opportunities, worker retraining, renewable energy investments, and long-term financing for local development are of critical importance.

Justice should be the defining concept.

This approach also requires transparency and social dialogue. As the World Bank emphasizes, the scope and magnitude of subsidies must first be assessed; the economic, environmental, and distributional impacts of the reforms must be analysed; and then a communication and participation framework must be established to ensure that companies, workers, households, and other stakeholders are involved in the process. Such an approach not only enables the phasing out of fossil fuel subsidies but also allows the resulting fiscal and social headroom to be used for a more equitable economic transition.

International Cooperation: COP30 and the Santa Marta Process

This discussion has taken on a new international dimension following COP30 through the Santa Marta Process. The first Conference on Transitioning Away from Fossil Fuels, hosted by Colombia and the Netherlands in April 2026, addressed the phase-out of fossil fuels as a separate international cooperation process proceeding alongside UNFCCC negotiations. Following the conference, it was decided to continue the process and hold the second conference in the Pacific region. The Santa Marta process thus creates a framework for developing international cooperation on how the phase-out of fossil fuels can be achieved in a more orderly, fair, and equitable manner.

Türkiye: Coal Dependence and Existing Support

As COP31 approaches, the key question for Türkiye is no longer merely when fossil fuel use will be reduced, but rather through which economic and social policies this transition will be carried out. There is a striking imbalance in Türkiye between the economic weight of coal and the employment it generates. While hard coal and lignite mining account for only 0.1% of GDP, employment in the sector fell from over 50,000 in 2009 to below 40,000 in 2022. The number of people employed in coal-fired electricity generation in 2022 is estimated to be approximately 45,000 (calculated using data from EUROSTAT [2025] and TEİAŞ [2023]). In contrast, the coal sector continues to be supported by investment incentives, tax exemptions, social security contribution reductions, and public guarantees. For example, in the same year, investment incentives for coal mining amounted to approximately 1.55 billion TL annually, while capacity mechanism payments to coal-fired power plants totalled 709 million TL. Thermal power plants fuelled by domestic coal were excluded from capacity mechanism support as of the beginning of 2026. However, direct and indirect incentives continue, such as tax advantages provided to power plants with investment incentive certificates and purchase guarantees for domestic coal-fired power plants.

Regional Experiences: Lessons from Ermenek and Muğla

Despite these incentives, the effects of the unplanned coal phase-out in Türkiye are already evident in some regions. The case of Ermenek demonstrates that the closure of mines without the creation of alternative employment opportunities and lasting social support mechanisms can leave workers and their families facing livelihood difficulties and pressure to migrate.

In contrast, the study by Kızılkaya, Acar, and Özenç (2026) on Muğla highlights that the coal phase-out should not be viewed solely in terms of the loss of employment. Instead, it is necessary to evaluate alternatives in which existing coal incentives are redirected toward renewable energy, circular economy activities, and sectors compatible with the region’s economic structure. The study examines activities such as waste management and recycling, as well as the repair of machinery and equipment, within the scope of circular economy investments; and sectors such as agriculture, forestry, fishing, tourism, and food processing within the scope of regional diversification. Modelling results indicate that these alternative investments have the potential to mitigate losses in economic activity and employment. Thus, the example of Muğla demonstrates that the financial resources freed up by phasing out coal, if redirected toward investments that strengthen local economic ties and create new livelihood opportunities, can serve as a concrete tool for a just transition.

Redirecting Public Funds Toward a Just Transition

To sum up, the reassessment of fossil fuel subsidies in Türkiye must be addressed in conjunction with long-term transformation plans, particularly in regions heavily reliant on coal and mining. Redirecting public resources toward renewable energy, energy efficiency, low-carbon technologies, new employment opportunities, and regional economic diversification; involving workers and local communities in the process through social dialogue; and establishing the necessary social protection mechanisms could be key elements of this transformation.

In conclusion, the phase-out of fossil fuels and a just transition are not two separate policy areas. When properly designed, the reform of fossil fuel subsidies can become a tool for a just transition that not only reduces emissions but also directs public resources toward a low-carbon economic structure that generates higher value-added and broader employment opportunities. As the international agenda of COP30’s just transition mechanism and the Santa Marta Process—which focuses on phasing out fossil fuels—is carried forward to COP31, the key issue is how these two tracks can be integrated at the national level through concrete policy, financing, and social dialogue mechanisms.