Kazakhstan prepares for green transition

The issue of fiscal implications of green economic transition for some oil-dependent economies is in the air at the moment, especially in the days before the COP24 global climate gathering in Poland’s coal region of Katowice next month. The issue has been raised by the International Energy Agency (IEA), the IMF and the OECD. In 2015, the EBRD also explored the topic in a report Government assets: risks and opportunities in a changing climate policy landscape.

Financial Times reports in its article Kazakhstan has a decade to prepare for green transition that the scenario of a full global switch to low-carbon economic growth should mean that we warm the planet by well below the maximum of 2°C that the Paris Agreement calls for. As countries become greener, economic activity and global markets will change, including what we consume and the way we produce goods. This shift will create opportunities in clean energy, low-carbon transport and energy-efficient manufacturing.

However, countries that rely most heavily on fossil fuels are likely to face the highest risks of this transition, due either to their significant dependence on fossil fuel-related revenues or to their reliance on energy-intensive — and energy-emitting — industries. In a world where the future of fossil fuels is increasingly uncertain, as the latest IEA World Energy Outlook indicates, countries that own large reserves may face the risk of such assets becoming “stranded”.

This is a particular concern for national governments, for three reasons: many of the assets related to fossil fuels (such as oil and gas reserves but also related infrastructure) are in the hands of the state rather than the private sector; most nations that rely heavily on fossil fuels struggle to diversify their economies and hence their fiscal revenues (the so-called “Dutch disease”); and many political forces in those countries create pressure to continue investing in fossil fuels, worsening their dependence.

According to our simulations, a worldwide shift to a greener economy and the consequent decrease in demand for fossil fuels could lead to depletion of Kazakhstan’s national savings from oil as soon as a decade from now. If oil prices were about $65 over the course of the next 20 years or so, our simulations indicate that export revenues might fall — due to lower volume exports and lower prices — by up to 40 per cent over that period, potentially leading to unsustainable levels of public debt unless there is a change of course in public spending.

The EBRD report offers four recommendations, which are applicable to other emerging markets that find themselves in a similar predicament.

•Diversify revenue sources. Structural transformation that supports growth in the non-oil economy will reduce reliance on fossil fuels, building resilience to the fiscal risks of commodity price movements. But diversification is easier said than done, particularly when it comes to promoting stronger exports outside the energy sector. Resource-rich countries in Kazakhstan’s region need to spend more on built infrastructure and education to drive growth, as the World Bank has shown.

•Manage oil revenues more effectively. Kazakhstan has built up large savings from oil in its sovereign wealth fund, which the country should now avoid depleting through current consumption. It should follow examples (including those from Norway’s and Saudi Arabia’s sovereign wealth funds) of investment in sectors that are not correlated with oil prices.

•Explore opportunities to raise revenues through fiscal policies that can stimulate economic development and cut wasteful expenditure. As an example, distortionary fossil fuel subsidies could be reduced.

•Plan public finances over the medium and long term, rather than the short term. The government has already introduced legislation to allow for a medium-term budget framework, but could also consider developing tools to help manage its expenditure more effectively in the medium and long term.

The good news is that the most significant fiscal impacts are projected to occur in the late 2020s, leaving a window of opportunity of around a decade in which Kazakhstan could take action to address these impacts. As oil markets are notoriously volatile, taking action will be beneficial anyway, regardless of the worldwide transition to a green global economy — a point well understood in the long-term economic strategies of Kazakhstan. Indeed, the EBRD’s enhanced partnership with Kazakhstan focuses on this issue.

The fact that there will be some losers from decarbonisation of the global economy cannot deter us from this path: even those countries are already being hit by climate-related events (Kazakhstan, for example, is experiencing desertification and extreme weather). The recent report by the IPCC shows that we must continue to push for urgent action; and this week another report, by the Energy Transitions Commission, shows that even in hard-to-abate sectors decarbonisation is economically and technically possible. The new EBRD report makes clear that there are realistic ways to prepare the public finances of oil exporters for the global green transition.