Azerbaijan’s monetary system could be very relying on fossil-fuel exports, making its monetary prospects weak to rising emissions-cutting ambition world large.
As decarbonisation reduces world fossil-fuel demand and prices, the nation will likely be unable to earn as so much money from its oil and gasoline sources.
In a contemporary analysis, we appeared on the protection choices Azerbaijan might implement, with a goal to shift in route of cleaner energy and diversify its monetary system away from fossil fuels to study residence prospects, whereas remaining aggressive in world markets.
Our outcomes advocate that, whereas being adversely impacted by decarbonisation efforts in worldwide areas world large, it is in Azerbaijan’s self-interest to implement residence mitigation insurance coverage insurance policies.
With appropriate sequencing and design of such insurance coverage insurance policies, along with a mixture of fossil-fuel subsidy reform, a worth on carbon post-2030 and use of collected revenue to cut taxes elsewhere, the nation might receive nationally determined contribution (NDC) targets, improve earnings improvement and enhance monetary diversification.
Moreover, formidable mitigation efforts in route of net-zero by 2060 would yield substantial properly being co-benefits that may nearly completely outweigh the direct monetary costs of chopping emissions.
Vulnerability of the established order
Net fossil-fuel exporting economies, just like Azerbaijan, not solely should implement residence decarbonisation insurance coverage insurance policies, however as well as face the implications of worldwide mitigation efforts if world native climate targets are to be met. The latter might significantly impression the nation’s future revenue flows from fossil fuel exports.
By the early 2000s, Azerbaijan’s hydrocarbon-fueled monetary system contributed to rapidly rising incomes and the occasion of residence infrastructure. Between 2000 and 2014, per-capita gross residence product (GDP) throughout the nation elevated higher than 10-fold, transitioning Azerbaijan from a low-income to an upper-middle-income monetary system, in response to the World Monetary establishment.
Nonetheless, over the earlier decade, GDP improvement has slowed down, whereas the nation’s diversification efforts have not led to predominant transformations throughout the development of the house monetary system, with fossil-fuel actions nonetheless participating in a central operate. Fossil-fuel subsidies throughout the nation keep big they often proceed to distort residence energy markets, in response to the Worldwide Energy Firm.
Between 2016 and 2021, Azerbaijan ranked 115 out of 133 worldwide areas by the use of the “monetary complexity” of its exports – a measure of how quite a few a country’s export basket is – in response to the Improvement Lab at Harvard Faculty.
The decide, beneath left, displays that its export basket is among the many many least difficult on the planet – even amongst oil and mineral exporting comparator worldwide areas, solely Nigeria ranks lower than Azerbaijan.
In addition to, the nation could be very weak to the long term energy transition, being characterised by every extreme publicity and low resiliency, as confirmed throughout the decide beneath correct.
Azerbaijan has the second least difficult export basket on the planet, leaving it extraordinarily weak to an energy transition
Monetary risks
With out pro-active residence insurance coverage insurance policies, our evaluation implies that Azerbaijan risks coping with predominant monetary losses from the worldwide energy transition.
Mitigation efforts world large can significantly reduce a country’s “helpful useful resource rents” through declining world fossil-fuel demand and prices, as confirmed throughout the decide beneath.
Outcomes from our analysis advocate that if worldwide areas world large implement NDC-consistent native climate insurance coverage insurance policies, then GDP in Azerbaijan might decline by as a lot as 3.3% in 2060, relative to a reference state of affairs, which shows a continuation of the current developments, insurance coverage insurance policies adopted by 2021 and the ability duties which will be already throughout the pipeline.
Households’ welfare, a measure rigorously related to modifications in precise earnings, along with their investments, is prone to be impacted way more adversely – by 5.1% and 6.7%, respectively, in 2060.
The nation would see very important and rising reductions in export earnings from fossil fuels, as confirmed throughout the second decide beneath. Property just like labour and capital, freed by declining fossil-fuel extraction actions will be reallocated to cleaner sectors, just like suppliers and manufactured objects, which could see a modest development in output and exports. Nonetheless, this may occasionally solely partly compensate for the low cost in fossil-fuel export revenues, as confirmed throughout the decide beneath.
Worldwide native climate movement might significantly hit Azerbaijan’s monetary system
In our NDC mitigation state of affairs, lots of the low cost in monetary train in Azerbaijan is said to fossil-fuel extraction sectors, as confirmed throughout the lower two figures above. Supporting service actions, just like commerce, are moreover impacted significantly. The event sector would moreover see a contraction in value-added and investments, ensuing from diminished volumes of funding throughout the monetary system common.
By the use of the federal authorities stability sheet, if the rest of the world implements NDC-consistent mitigation insurance coverage insurance policies, then Azerbaijan would see a decline in tax revenue of as a lot as 4% in 2060.
Dwelling mitigation is a win-win
Transitioning to a “inexperienced” monetary system is listed as one among many key pillars of the 2021 presidential order titled: “Azerbaijan 2030: Nationwide priorities for socio-economic development”.
The nation has a objective of lowering its greenhouse gasoline (GHG) emissions to 35% beneath 1990 ranges by 2030 and 40% by 2050, primarily based totally on its updated NDC from 2023. (Its emissions are in the meanwhile spherical 5% above 1990 ranges.)
On the similar time, between 2010 and 2023 GHG emissions throughout the nation have elevated by higher than 39%, complicating the pliability to realize the mitigation targets.
In addition to, Azerbaijan’s 2050 dedication of chopping emissions by 40% relative to the 1990 stage is simply not solely conditional on worldwide assist, nevertheless might very properly be moreover deemed as significantly a lot much less formidable than the nation’s truthful contribution in route of world native climate targets. Present evaluation, separate from ours, suggests the latter would recommend lowering emissions by spherical 65% by 2050.
Our evaluation implies that attaining the acknowledged 2030 targets and extra strengthening the nation’s mitigation ambition throughout the long-run would ship obligatory monetary benefits.
Our estimates advocate {{that a}} combination of fossil-fuel subsidies reform, the introduction of a carbon worth post-2030 and recycling of the furthermore collected revenue via diminished taxes elsewhere – on labour, capital and land, for example – would allow the nation to realize residence NDC targets whereas boosting monetary improvement and funding, as confirmed throughout the decide beneath.
If the nation have been to implement such insurance coverage insurance policies, Azerbaijan’s GDP might enhance by over 1% in 2040 and by over 2% in 2060, relative to the state of affairs the place all worldwide areas receive their NDCs, whereas Azerbaijan does not implement climate-mitigation insurance coverage insurance policies, i.e. follows the baseline pathway. There will be an way more substantial enhance in funding of nearly 6% in 2060.
On the protection implementation facet, our outcomes advocate that the elimination of two-thirds of fossil-fuel subsidies in Azerbaijan will be ample to realize the 2030 NDC objective.
Additional mitigation efforts will be wished to regulate to NDC targets post-2030, for example, carbon prices of spherical $40-$50 per tonne of carbon dioxide (/tCO2 post-2045).
Azerbaijan might improve its GDP through native climate movement
If additional revenue from energy-subsidy reform and carbon pricing have been used to reduce taxes elsewhere, just like taxes on labour, capital and land, this may occasionally help to assist non-fossil-fuel actions, contributing to the diversification of Azerbaijan’s monetary system, as confirmed throughout the third decide above.
The share of energy-intensive manufacturing throughout the nation’s GDP would decline by spherical 0.6 proportion components starting from 2035, associated in magnitude to the low cost throughout the share of carbon-based electrical vitality period.
These two groups of actions will be primarily substituted by carbon-free electrical vitality and restore sectors, lowering Azerbaijan’s publicity to the worldwide energy transition.
Significance of considering an excellent greater picture
Other than lowering GHG emissions, residence mitigation insurance coverage insurance policies would moreover lead to modifications in air air air pollution ranges.
As instructed by earlier analysis, diminished air air air pollution ranges might result in lower mortality costs and reduce the overall costs of mitigation.
Together with air air air pollution modifications beneath the NDC and net-zero by 2060 mitigation eventualities, in our analysis we moreover take into consideration a hypothetical case the place, inside a net-zero native climate protection state of affairs, households reduce utilizing wood biomass for residence heating and cooking – by 50% and 60% respectively in 2030 and 2060, relative to enterprise as customary. (Inside the decide beneath, we seek the advice of with this state of affairs as “NetZero with diminished wood burning by HHs”.)
Our outcomes advocate that the improved air prime quality seen all through mitigation eventualities permits for saving between 120 lives in Azerbaijan in 2030 (NDC state of affairs) and 1,300 in 2060 (net-zero state of affairs) lives in Azerbaijan.
When the case of diminished wood-burning by households is taken into consideration, the number of saved lives will enhance to 1,200 (net-zero in 2030) and three,800 (net-zero in 2060).
When these mortality reductions are translated to monetary equivalents using the “value of statistical life” (VSL), the corresponding properly being co-benefits attain 0.2%-0.6% of households’ welfare in 2030 and 0.5%-2.2% of welfare in 2060, as confirmed throughout the figures beneath.
Nicely being co-benefits might higher than offset the worth of Azerbaijan reaching net-zero
Our findings current that households will be greater off beneath the NDC state of affairs, with air air air pollution co-benefits rising the improve to their welfare already generated by mitigation insurance coverage insurance policies.
Whereas there will be direct mitigation-related monetary costs to households throughout the net-zero state of affairs, properly being co-benefits would offset 60% of this in 2030 and 80% in 2060.
Moreover, reaching net-zero in 2060 whereas lowering wood burning by households would ship additional properly being benefits, with significantly higher monetary value than the costs of mitigation.
Protection implications
A variety of obligatory protection insights observe from our analysis.
First, whereas being uncovered to the declining world fossil-fuel demand and prices which will be anticipated to accompany decarbonisation efforts in worldwide areas world large, our evaluation suggests it is in Azerbaijan’s self-interest to implement residence mitigation insurance coverage insurance policies.
Our findings assist earlier analysis that advocate lower risks of “stranded fossil-fuel belongings” and common monetary costs for many who switch to diversify their monetary system early, as compared with latecomer worldwide areas throughout the context of native climate mitigation.
Second, electrical vitality and gasoline prices are in the meanwhile successfully beneath their monetary 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 worldwide experience displays that worthwhile pricing reforms are typically utilized when fiscal pressures are low.
Our evaluation suggests {{that a}} gradual nevertheless common phaseout of fossil-fuel subsidies by 2030, adopted by the introduction of economy-wide carbon pricing of a minimal of $25/tCO2 by 2035 is the economically simplest path to incentivise a clean-energy transition and improve energy effectivity.
From the protection perspective, such a transition would entail a gradual deregulation of gasoline, electrical vitality and fuel prices, along with a strengthening of regulators and market mechanisms in worth setting – areas the place Azerbaijan has achieved restricted progress currently.
Third, our outcomes assist the required operate of selections on utilizing revenues collected in the middle of the implementation of mitigation insurance coverage insurance policies, each through the elimination of fossil-fuel subsidies or carbon-pricing.
We uncover that recycling revenue through a reduction in numerous taxes, comparatively than direct transfers to households or subsidies to renewable energy, is further economically setting pleasant.
Lastly, our outcomes advocate that broader environmental impacts and co-benefits from decarbonisation are an obligatory part of the equation when weighing the monetary impression of mitigation insurance coverage insurance policies. This incorporates reductions in air pollutant emissions, which further lead to improved air prime quality and declining mortality.
When accurately accounted for, such co-benefits might significantly reduce the overall worth of mitigation and even result in web welfare optimistic facets in Azerbaijan. Complementary insurance coverage insurance policies on the low cost of wood-burning throughout the nation might result in way more substantial properly being co-benefits.
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