Azerbaijan’s economy is highly dependent on fossil-fuel exports, making its economic prospects vulnerable to rising emissions-cutting ambition around the world.
As decarbonisation reduces global fossil-fuel demand and prices, the country will not be able to earn as much money from its oil and gas resources.
In a recent study, we looked at the policy solutions Azerbaijan could implement, in order to shift towards cleaner energy and diversify its economy away from fossil fuels to benefit domestic consumers, while remaining competitive in global markets.
Our results suggest that, while being adversely impacted by decarbonisation efforts in countries around the world, it is in Azerbaijan’s self-interest to implement domestic mitigation policies.
With proper sequencing and design of such policies, including a combination of fossil-fuel subsidy reform, a price on carbon post-2030 and use of collected revenue to cut taxes elsewhere, the country could achieve nationally determined contribution (NDC) targets, boost income growth and increase economic diversification.
Moreover, ambitious mitigation efforts towards net-zero by 2060 would yield substantial health co-benefits that could almost fully outweigh the direct economic costs of cutting emissions.
Vulnerability of the status quo
Net fossil-fuel exporting economies, such as Azerbaijan, not only need to implement domestic decarbonisation policies, but also face the consequences of global mitigation efforts if global climate targets are to be met. The latter could substantially impact the country’s future revenue flows from fossil fuel exports.
During the early 2000s, Azerbaijan’s hydrocarbon-fueled economy contributed to rapidly rising incomes and the development of domestic infrastructure. Between 2000 and 2014, per-capita gross domestic product (GDP) in the country increased more than 10-fold, transitioning Azerbaijan from a low-income to an upper-middle-income economy, according to the World Bank.
However, over the past decade, GDP growth has slowed down, while the country’s diversification efforts have not led to major transformations in the structure of the domestic economy, with fossil-fuel activities still playing a central role. Fossil-fuel subsidies in the country remain large and they continue to distort domestic energy markets, according to the International Energy Agency.
Between 2016 and 2021, Azerbaijan ranked 115 out of 133 countries in terms of the “economic complexity” of its exports – a measure of how diverse a country’s export basket is – according to the Growth Lab at Harvard University.
The figure, below left, shows that its export basket is among the least complex in the world – even among oil and mineral exporting comparator countries, only Nigeria ranks lower than Azerbaijan.
In addition, the country is highly vulnerable to the future energy transition, being characterised by both high exposure and low resiliency, as shown in the figure below right.
Azerbaijan has the second least complex export basket in the world, leaving it highly vulnerable to an energy transition
Economic risks
Without pro-active domestic policies, our research suggests that Azerbaijan risks facing major economic losses from the global energy transition.
Mitigation efforts around the world can substantially reduce a country’s “resource rents” through declining global fossil-fuel demand and prices, as shown in the figure below.
Results from our study suggest that if countries around the world implement NDC-consistent climate policies, then GDP in Azerbaijan could decline by up to 3.3% in 2060, relative to a reference scenario, which reflects a continuation of the current trends, policies adopted by 2021 and the energy projects that are already in the pipeline.
Households’ welfare, a measure closely related to changes in real income, as well as their investments, might be impacted even more adversely – by 5.1% and 6.7%, respectively, in 2060.
The country would see significant and growing reductions in export earnings from fossil fuels, as shown in the second figure below. Resources such as labour and capital, freed by declining fossil-fuel extraction activities would be reallocated to cleaner sectors, such as services and manufactured goods, which would see a modest expansion in output and exports. However, this would only partly compensate for the reduction in fossil-fuel export revenues, as shown in the figure below.
Global climate action could significantly hit Azerbaijan’s economy
In our NDC mitigation scenario, most of the reduction in economic activity in Azerbaijan is associated with fossil-fuel extraction sectors, as shown in the lower two figures above. Supporting service activities, such as trade, are also impacted substantially. The construction sector would also see a contraction in value-added and investments, due to reduced volumes of investment in the economy overall.
In terms of the government balance sheet, if the rest of the world implements NDC-consistent mitigation policies, then Azerbaijan would see a decline in tax revenue of up to 4% in 2060.
Domestic mitigation is a win-win
Transitioning to a “green” economy is listed as one of the key pillars of the 2021 presidential order titled: “Azerbaijan 2030: National priorities for socio-economic development”.
The country has a target of reducing its greenhouse gas (GHG) emissions to 35% below 1990 levels by 2030 and 40% by 2050, based on its updated NDC from 2023. (Its emissions are currently around 5% above 1990 levels.)
At the same time, between 2010 and 2023 GHG emissions in the country have increased by more than 39%, complicating the ability to achieve the mitigation goals.
In addition, Azerbaijan’s 2050 commitment of cutting emissions by 40% relative to the 1990 level is not only conditional on international support, but could be also deemed as substantially less ambitious than the country’s fair contribution towards global climate goals. Recent research, separate from ours, suggests the latter would imply reducing emissions by around 65% by 2050.
Our research suggests that achieving the stated 2030 targets and further strengthening the country’s mitigation ambition in the long-run would bring important economic benefits.
Our estimates suggest that a combination of fossil-fuel subsidies reform, the introduction of a carbon price post-2030 and recycling of the additionally collected revenue via reduced taxes elsewhere – on labour, capital and land, for example – would allow the country to achieve domestic NDC targets while boosting economic growth and investment, as shown in the figure below.
If the country were to implement such policies, Azerbaijan’s GDP could increase by over 1% in 2040 and by over 2% in 2060, relative to the scenario where all countries achieve their NDCs, while Azerbaijan does not implement climate-mitigation policies, i.e. follows the baseline pathway. There would be an even more substantial increase in investment of almost 6% in 2060.
On the policy implementation side, our results suggest that the elimination of two-thirds of fossil-fuel subsidies in Azerbaijan would be sufficient to achieve the 2030 NDC target.
Additional mitigation efforts would be needed to comply with NDC targets post-2030, for example, carbon prices of around $40-$50 per tonne of carbon dioxide (/tCO2 post-2045).
Azerbaijan could boost its GDP through climate action
If additional revenue from energy-subsidy reform and carbon pricing were used to reduce taxes elsewhere, such as taxes on labour, capital and land, this would help to support non-fossil-fuel activities, contributing to the diversification of Azerbaijan’s economy, as shown in the third figure above.
The share of energy-intensive manufacturing in the country’s GDP would decline by around 0.6 percentage points starting from 2035, similar in magnitude to the reduction in the share of carbon-based electricity generation.
These two groups of activities would be primarily substituted by carbon-free electricity and service sectors, reducing Azerbaijan’s exposure to the global energy transition.
Importance of considering a bigger picture
Apart from reducing GHG emissions, domestic mitigation policies would also lead to changes in air pollution levels.
As suggested by earlier studies, reduced air pollution levels could result in lower mortality rates and reduce the overall costs of mitigation.
In addition to air pollution changes under the NDC and net-zero by 2060 mitigation scenarios, in our study we also consider a hypothetical case where, within a net-zero climate policy scenario, households reduce the use of wood biomass for domestic heating and cooking – by 50% and 60% respectively in 2030 and 2060, relative to business as usual. (In the figure below, we refer to this scenario as “NetZero with reduced wood burning by HHs”.)
Our results suggest that the improved air quality observed across mitigation scenarios allows for saving between 120 lives in Azerbaijan in 2030 (NDC scenario) and 1,300 in 2060 (net-zero scenario) lives in Azerbaijan.
When the case of reduced wood-burning by households is considered, the number of saved lives increases to 1,200 (net-zero in 2030) and 3,800 (net-zero in 2060).
When these mortality reductions are translated to monetary equivalents using the “value of statistical life” (VSL), the corresponding health co-benefits reach 0.2%-0.6% of households’ welfare in 2030 and 0.5%-2.2% of welfare in 2060, as shown in the figures below.
Health co-benefits could more than offset the cost of Azerbaijan reaching net-zero
Our findings show that households would be better off under the NDC scenario, with air pollution co-benefits increasing the boost to their welfare already generated by mitigation policies.
While there would be direct mitigation-related economic costs to households in the net-zero scenario, health co-benefits would offset 60% of this in 2030 and 80% in 2060.
Moreover, reaching net-zero in 2060 while reducing wood burning by households would bring additional health benefits, with substantially greater economic value than the costs of mitigation.
Policy implications
Several important policy insights follow from our analysis.
First, while being exposed to the declining global fossil-fuel demand and prices that are expected to accompany decarbonisation efforts in countries around the world, our research suggests it is in Azerbaijan’s self-interest to implement domestic mitigation policies.
Our findings support earlier studies that suggest lower risks of “stranded fossil-fuel assets” and overall economic costs for those that move to diversify their economy early, compared to latecomer countries in the context of climate mitigation.
Second, electricity and gas prices are currently well below their economic costs, due to the presence of implicit subsidies. Considering the current windfall earnings from energy sector revenues, Azerbaijan is well-positioned to proceed with the subsidies’ phase-out, as international experience shows that successful pricing reforms are often implemented when fiscal pressures are low.
Our research suggests that a gradual but steady phaseout of fossil-fuel subsidies by 2030, followed by the introduction of economy-wide carbon pricing of at least $25/tCO2 by 2035 is the economically most efficient path to incentivise a clean-energy transition and improve energy efficiency.
From the policy perspective, such a transition would entail a gradual deregulation of gas, electricity and fuel prices, as well as a strengthening of regulators and market mechanisms in price setting – areas where Azerbaijan has achieved limited progress in recent years.
Third, our results support the important role of decisions on the use of revenues collected during the implementation of mitigation policies, either through the elimination of fossil-fuel subsidies or carbon-pricing.
We find that recycling revenue through a reduction in other taxes, rather than direct transfers to households or subsidies to renewable energy, is more economically efficient.
Finally, our results suggest that broader environmental impacts and co-benefits from decarbonisation are an important part of the equation when weighing the economic impact of mitigation policies. This includes reductions in air pollutant emissions, which further lead to improved air quality and declining mortality.
When properly accounted for, such co-benefits could substantially reduce the overall cost of mitigation and even result in net welfare gains in Azerbaijan. Complementary policies on the reduction of wood-burning in the country could result in even more substantial health co-benefits.
The post Guest post: How COP29 host Azerbaijan could boost growth through climate action appeared first on Carbon Brief.
Guest post: How COP29 host Azerbaijan could boost growth through climate action
After witnessing the effects of sea-level rise in the low-lying island nation of Tuvalu, Pacific leaders on Tuesday used the pre-COP31 summit in Fiji to voice their frustration at the difficulties they have experienced in tapping the global climate finance system.
A small group of government leaders, climate negotiators and heads of development banks and climate funds took a trip to Tuvalu’s Funafuti atoll on Tuesday morning, travelling by road over land just 10-20 metres wide to visit a project that is building barriers to keep the sea from the land.
They then flew to Fiji for the pre-COP summit, where several Pacific leaders said they had been let down by the insufficient quantity, bad terms and slow speed of international finance to help them adapt to a warming climate that is bringing higher oceans, drought and more powerful storms to their shores.
“Right now, our islands are like a canoe that has been rammed by a massive foreign ship. Our canoe is taking on water, we are sinking, and what is the world’s response?” asked Palau’s President Surangel Whipps Jr.
“They hand us a tiny patch to cover a gaping hole,” he continued, “but the bureaucratic process just to receive that patch is so slow that the water fills the hole while we wait. Then to rebuild the vessel so that we can survive the next storm, we are offered loans, debt that adds weight to a sinking boat packaged in red tape so thick we can barely access it. And while we wait, the water continues to fill.”
Pacific leaders and Australia called again on governments to invest in the new Pacific Resilience Facility (PRF), which has been designed by the Pacific Islands Forum and is seeking $500 million in investments by COP31 in November.
It has around $180 million so far, but did not receive additional pledges during the UN General Assembly in New York. The PRF aims to invest to generate annual returns which it can give to projects like water tanks for drought-hit communities.
Witnessing sea level rise
The annual pre-COP gathering is usually a low-profile technical meeting of climate negotiators. But this year, Australia – which is the president of negotiations at COP31 – partnered with the Pacific to introduce a “leaders segment” in an attempt to shine a spotlight on climate issues affecting the region.
Fourteen government leaders – from Australia, Timor-Leste, Mauritius and the Pacific – made the trip. They were joined by the European Union’s climate commissioner Wopke Hoekstra, the heads of the Green Climate Fund and the Asian Development Bank and former Australian prime minister Julia Gillard.
On their return to Fiji, Solomon Islands Prime Minister Matthew Wale told the pre-COP leaders roundtable that the sea level rise they had witnessed was personal for him.
“Tuvalu was not just a site visit for me. I saw the story of my own saltwater people,” he said, adding that he, his daughter and his grandfather had lost their houses to sea level rise and that three-quarters of his electorate live on land that will be underwater in the next 30 years.
From the other side of the world, Antigua and Barbuda’s environment minister Michael Joseph said Tuvalu’s problems felt similar to those of his own Caribbean islands. “I saw vulnerable communities… just metres from the sea and people determined to remain on their land, preserve their culture and way of life,” he said.
A group of Fijian schoolchildren told the leaders it was not just sea level rise the Pacific struggles with but also heatwaves, droughts and storms, which worry their families and prevent them from learning.
Climate finance red-tape
Several Pacific leaders criticised the world’s leaders for not doing enough to combat climate change. Cook Islands Prime Minister Mark Brown expressed disappointment that only two non-Pacific leaders had come to the pre-COP, a fact Australian media widely picked up on to label the event a flop and question its A$20 million (US$14m) price tag.
“We’ve heard a lot of numbers these last two days,” Brown said. “Let me share one of my own. More than 50 invitations extended to world leaders… to see for themselves what high emissions are doing to our nations and our ocean – an ocean that covers nearly one-third of the Earth’s surface.”
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He called for more climate finance for the Pacific, asking “if the world is prepared to assess our suitability for climate finance, why is it not equally prepared to scrutinise whether those responsible for delivering it are meeting their obligations?”
Like Palau’s president Whipps, Naoero’s President David Adeang criticised the red tape that is hindering access to climate finance as well as a lack of money, complaining especially about “complicated procedures, heavy reporting, delays in approval and disbursement”.
Adeang added that “the way we assess vulnerability matters”, adding that it should be measured by more than income. Naoero, for example, is classified by the World Bank as high-income, restricting which climate finance it is eligible for.
Action plan to improve access
On Thursday, the Australian government will present a statement and action plan on improving access to climate finance for small island developing states and least developed countries, which it is asking other countries and organisations to endorse.
The statement addresses some of these Pacific complaints as well as acknowledging that progress has already been made on simplifying access by multilateral development banks and climate funds.
In Fiji, Asian Development Bank head Masato Kanda said his institution is “tailoring our finance and operations to island realities” because “your children and their children should be able to grow old in the countries their ancestors have called home for millennia”.
The executive director of the Green Climate Fund (GCF), Mafalda Duarte, said that the GCF-backed coastal adaptation project leaders visited in Tuvalu shows that “climate finance works” although – as the project took eight years to implement – “it takes time, and therefore we have no time to waste”.
Australia calls for optimism
While Pacific leaders expressed concern that the world is set to blast past its agreed 1.5C warming limit, endangering their nations, Australia’s Prime Minister Anthony Albanese called for “optimism”. “If people think there is no hope, then they will not strive to get the change that we need,” he said.
He said that when he attended his first COP in 2005, Australia’s renewable energy target was 2%. Its target is now 82% renewable electricity by 2030.
While Albanese promoted Australia’s success at electrifying homes and businesses and rolling out renewables, he has been criticised by climate campaigners for extending the production of fossil fuels, including coal – largely for export.
France’s Minister for Ecological Transition Monique Barbut defended the European Union’s climate action at the pre-COP meeting. She said the continent was heating up and reducing emissions faster and providing more climate finance than anywhere else in the world.
“It is time for all major emitters to step up and do their fair share” on climate finance, she said. Most developing countries with large emissions have fiercely resisted joining the club of climate finance donors, arguing they have played a disproportionately small historic role in causing climate change.
Barbut, as well as Palau’s president Whipps, called for the next flagship scientific assessment report of the Intergovernmental Panel on Climate Change (IPCC) to be finished by COP33 in 2028, in time to inform the next global stocktake of national climate action.
This timeline has been opposed by countries like India, Saudi Arabia and China, who argue it would put an unfair burden on developing countries. Barbut said countries should “support the work of the IPCC rather than sabotage its calendar”.
Barbut said that governments should agree at COP31 to aim to raise the share of “clean electricity” in final energy consumption to 35% by 2035. The Turkish and Australian governments have pushed for this goal although without specifying that the electricity should be “clean”. Barbut added that COP31 should also agree to cut emissions of methane, a particularly potent greenhouse gas.
The post Pacific leaders rail at climate finance failures after pre-COP trip to Tuvalu appeared first on Climate Home News.
Pacific leaders rail at climate finance failures after pre-COP trip to Tuvalu
Jacynta Fa’amau is a Pacific campaigner at global grassroots climate movement 350.org and a secretariat member of Pacific Climate Warriors.
The first thing that struck me was the sheer size of Queensland’s Saraji coal mine. Standing at the edge of the enormous pit, my brain scrambled for words as I scanned the earth’s open wound – a whole island could probably fit inside it.
Looking down, I noticed footprints of an emu and a koala, pressed and dried in what was once a puddle – signs of how drought had driven animals in desperate search of water, so dangerously close to the coal trucks and heavy machinery ahead.
Earlier this year, I joined a small group of Pacific Islanders on a journey through the Bowen Basin to learn from First Nations communities battling Australia’s mammoth coal industry. Of the more than 40 coal mines operating in the area, BHP & Mitsubishi Alliance’s Saraji mine is one of the largest. So it came as a painful shock to us when in August, the Australian government approved the mine’s extension just months after our visit.