## clnea2024001

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### Projected fossil fuel contraction for a 2050 net-zero scenario
- Global coal use declines by 90 percent between 2021 and 2050 in a 2050 net-zero scenario.
- Oil declines by around 80 percent between 2021 and 2050.
- Natural gas declines by over 70 percent between 2021 and 2050.
- Coal demand is expected to decline more rapidly than oil and natural gas.
- Natural gas may endure longer and its demand may even increase in the near to medium term if used as a transition fuel, particularly substituting for coal.

### Key uncertainties and determinants of the transition
- Global demand for fossil fuels expected to permanently decline long term, but relative demand and supply movements during the transition are difficult to predict.
- Key determinants:
  - Pace of policy commitments and implementation worldwide; carbon dioxide emissions reached historic highs in 2022, and 2023 is set to become the warmest year on record.
  - Investment in fossil fuel supply, influenced by investors’ demand projections and higher capital costs when climate and environmental risks are priced in.
  - Political decisions by large crude oil–, natural gas–, or coal-producing countries to limit or phase out extraction.
  - Technological change, including carbon capture technology and innovation in affordable clean technologies.

### Policy measures that reduce global fossil fuel demand (examples cited)
- Widespread downstream carbon pricing.
- Extensive adoption of clean technologies.
- Penalizing emission-intensive extraction processes.
- Banning polluting technologies such as new internal combustion engine vehicles.

### Fossil fuel price scenarios and implications
- IMF April 2022 World Economic Outlook Special Feature projects 2030 crude oil prices could plausibly range from $25/barrel to $135/barrel.
- IEA (2023a) projects $42/barrel by 2030 in a net-zero-emissions scenario.
- Low fossil fuel prices could result from faster-than-expected implementation of demand-led decarbonization measures, leaving producers with excess capacity.
- Current futures curves suggest prices would remain around current levels; other model simulations indicate prices could remain relatively high.
- Preemptive underinvestment in new production capacity could lead to temporary but large fossil fuel price spikes.

### Impacts on fossil fuel exporters
- Market-share dynamics:
  - Low production-cost exporters may capture a larger share of the global market and may not experience exceptionally large long-term demand declines.
  - Countries with less emission-intensive extraction processes or that minimize environmental damages during extraction may fare relatively better.
- Emerging markets and developing economies (EMDEs) with higher fossil fuel dependency and production costs will be significantly impacted—particularly those unable to rapidly diversify exports or develop alternative engines of growth.
- Largest exporters will also be adversely impacted; those with more diversified economies are likely less so.
- Risk of stranded assets:
  - If fossil fuel prices fall short of production costs for prolonged periods, exporters with significant and often debt-financed investments in extractive infrastructure risk stranded assets.
  - Some extraction-related infrastructure could be repurposed for zero or low-emission hydrogen production or related products.
  - Global stranded assets (as a present value of future lost profits) in the upstream oil and gas sector could exceed $1 trillion under plausible expectation changes, with most market risk falling on private investors.

### Macroeconomic channels of impact
- Balance of payments:
  - Changes in net fossil fuel export receipts translate directly into the current account.
  - Changes in foreign investments in the fossil fuel sector affect financial account inflows.
  - Declining fossil fuel exports can raise sovereign risk premiums and increase financial outflows related to external debt service.
  - Effects on accumulation of foreign exchange reserves could be substantial.
  - In flexible exchange rate regimes, nominal depreciation could raise inflationary pressures and inflate private and public debt ratios.
- Economic growth and structural change:
  - Changes in exports or investment associated with the fossil fuel industry and related industries (for example, cement, fertilizers, petrochemicals, steel) directly impact growth and employment.
  - Variations in profitability can have multiplier effects across the economy through employment, incomes, and government revenues.
  - If perceived as lasting, resource reallocation (labor and capital) may shift toward other sectors.
  - Inflation may be affected by changes in domestic demand, domestic fossil fuel prices, and exchange rate movements.
- Fiscal sustainability:
  - Movements in fossil fuel export receipts are typically reflected in government revenues from state-owned enterprises and private fossil fuel companies (dividends, royalties, production sharing, tax payments).
  - Declines in exports and investment may require increased spending on retraining programs and cash transfers and financial support for fossil fuel–related state-owned enterprises.
  - Explicit or implicit government guarantees on state-owned enterprises’ debt could weigh on government balance sheets.
  - Governments may need to draw down buffers (for example, sovereign wealth funds) or adjust spending to maintain fiscal and debt sustainability.
- Financial sector risks:
  - Excessive volatility or lasting changes in fossil fuel sales will affect asset values and could produce negative net balance sheet effects.
  - Negative balance sheet effects can impair the financial sector’s ability to attract financing and intermediate funds to support the economy.

### Country characteristics that determine exposure and vulnerability
- Stronger effects for less diversified economies—especially countries with:
  - Fuels being phased out sooner (for example, coal).
  - Higher extraction costs.
  - Emission-intensive extraction processes net of any carbon capture schemes.
  - Extraction vulnerable to extreme weather events.
- A narrow export base can lead to stark balance of payments and fiscal effects.
- Mitigating factors include:
  - Significant foreign income earned on outstanding net foreign assets accumulated through historical fossil fuel sales.
  - Lower petrodollar recycling in response to lower revenues.
  - Greater use of fossil fuels in exports that do not involve combustion and generation of GHG emissions such as plastics.

### Box 1 — Quantitative impacts on fossil fuel producers

- Historical empirical evidence on extraction declines (local projections on 35 past episodes across 122 countries since 1950):
  - Episodes of large resource extraction declines can weaken growth by 10 percent on impact and 40 percent by the 10th year on average.
  - Private and public consumption, as well as investment, fall in line with the decline in GDP.
  - Consumption and the exchange rate have a delayed reaction, inconsistent with full anticipation of persistent falls in extraction and related revenues.
  - The real exchange rate depreciates eventually by about 20 percent, but not enough to stimulate reallocation toward other tradable sectors such as manufacturing.
  - Significant negative spillover effects onto both the manufacturing and services sectors.
  - Net exports fall in line with extraction.
  - Effects on low-income countries are significantly larger than on high-income countries.

- Model-based evidence (IMF-ENV macro model; ICPF simulation with carbon price floors of $75, $50, and $25 for high-, middle-, and low-income countries respectively):
  - Average worldwide ICPF-related reduction of GDP by somewhat more than 1 percent of GDP by 2030 relative to a baseline without ICPF.
  - GDP reduction of 3 percent in Russia by 2030 relative to baseline.
  - GDP reduction of 1.5 percent in Saudi Arabia by 2030 relative to baseline.
  - GDP reduction of 1.5 percent on average for other oil exporters by 2030 relative to baseline.
  - Holistic reforms can materially lower apparent costs (example: Saudi Arabia phasing out domestic energy subsidies would reduce emissions by around 100 million tons of carbon dioxide equivalent, about a third of the NDC reduction target planned for 2030, and provide positive GDP gains).

- Public revenue scenarios using IEA “World Energy Outlook 2022” pathways:
  - Scenarios: stated policies (peak oil demand in 2035), announced pledges (peak oil demand in 2024), net zero (no new fossil fuel developments; warming limited to 1.5 degrees Celsius).
  - Under net zero: all producer groupings see rapid revenue drops from falling commodity prices and demand.
  - Under announced pledges: revenues relatively stable out to 2030 for most groups but grow for OPEC and advanced-country oil producers.
  - Under stated policies: revenue in 2030 exceeds 2019 levels for all groups (except low-income oil producers); longer term revenues decline to slightly below 2019 levels for most groups.
  - In general, oil producers see much larger revenue loss from a faster energy transition than gas producers.

### Policy challenges, investment, and fiscal frameworks
- Policy challenges and common considerations:
  - Each exporter faces a unique mix; tailored policy advice required.
  - Need hedging and adjustment mechanisms against uncertainties in exports and fiscal flows.
  - Need to invest in renewable energy to meet domestic needs and support vulnerable populations.
  - Central challenge: determine whether a country will be a long-term surviving producer to inform investment, fiscal, monetary, financial, and structural policies.
  - Ongoing reforms may need acceleration; evaluate country-level consequences under a broad range of transition scenarios.

- Investment considerations:
  - Choices on new operations or expansion have wide-ranging fiscal, monetary, financial, and structural implications.
  - Balance beliefs over decarbonization scenarios and export demand against stranded-asset risks (largest for coal exporters; smallest for large low-cost crude oil and natural gas exporters).
  - Consider government investment levels and public versus private sector roles; decarbonization may reduce private investors’ willingness to finance higher-cost exporters.
  - Reduce emission intensity of production (eliminate non-emergency flaring, electrify upstream facilities, equip processes with carbon capture, expand zero- and low-emissions hydrogen use).

- Fiscal policy challenges and recommended frameworks:
  - Procyclical spending pressures may rise with uncertain energy transition paths.
  - Prospect of permanently lower fossil fuel revenues raises concerns about maintaining infrastructure, wage bills, social spending, debt sustainability, fiscal risk, and balance sheet exposures.
  - Recommended fiscal discipline measures:
    - Adopt medium-term fiscal frameworks supported by formal fiscal rules and an independent fiscal council.
    - Build large buffers, including sovereign wealth funds, subject to country debt contexts (highly indebted countries may prefer debt reduction over buffer accumulation).
    - Gradually phase out untargeted fossil fuel subsidies and channel savings toward targeted social assistance.
    - Broaden the tax revenue base and strengthen efficient revenue administration as the economy diversifies.

### Different national approaches and examples
- Some countries (Beyond Oil and Gas Alliance members) agreed to stop issuing new licenses and set Paris-aligned end dates for oil and gas production and exploration; many core members (except Denmark) have declining, minimal, or nonexistent production levels.
- Colombia considered stopping issuance of new oil and gas exploration and production licenses (not yet legislated; new investments in existing contracts continue).
- Some countries continue to expand fossil-fuel sectors: Guyana, Suriname, Mauritania, Mozambique, Senegal, Tanzania, Kenya, Namibia, Uganda—new production and exploration activity is ongoing or expected.

### Decarbonization efforts in the Gulf Cooperation Council (highlights)
- United Arab Emirates:
  - “Phasing out of fossil fuel emissions” strategy combining new petroleum exploration with carbon capture, use and storage, measures to reduce extractive-process emissions (flaring, venting, fugitive emissions), expanding renewable energy and improving energy efficiency.
- Saudi Arabia:
  - Saudi Green Initiative and updated NDC (net zero greenhouse gas emissions by 2060); target to increase share of renewable energy in electricity generation up to 50 percent by 2030; deploy circular carbon economy technologies including carbon capture utilization and storage; Saudi Aramco aiming for net zero Scope 1 and Scope 2 emissions by 2050; joined Global Methane Pledge to cut methane emissions by 30 percent by 2030.
- Qatar:
  - National Environment and Climate Change Strategy and Climate Change Action Plan aiming to reduce greenhouse gas emissions by 25 percent by 2030; developed largest carbon storage plant in the region; ramping up installed solar power capacity and energy efficiency improvements.
- Bahrain:
  - Pledged to cut emissions by 30 percent by 2035 and reach net zero by 2060; implementing National Energy Efficiency Action Plan and National Renewable Energy Action Plan.

### Fiscal procyclicality, monitoring, and mitigation for fossil fuel producers
- Measurement notes:
  - Countries with net fossil fuel exports greater than 8 percent of GDP labeled as fossil fuel producer.
  - Country-level procyclicality measured as the 10-year trailing correlation between government expenditure and the oil price.
  - Time ranges referenced: 2005–22 and fiscal procyclicality (as of 2022).
- Monitoring and mitigation:
  - Step up monitoring and mitigation as governments may adjust fiscal regimes to shift transition risks to government.
  - Assess mix of production and profit-based fiscal instruments to balance rent capture and secure a reasonable minimum revenue share.
  - National oil companies should manage balance sheets and ensure investment decisions are commercially driven.
  - Adopt sovereign asset-liability management to monitor sovereign balance sheet exposures.
  - Regularly stress test fiscal frameworks under adverse and volatile fossil fuel price scenarios.
  - For sovereign wealth funds, shift portfolios away from fossil fuels toward cleaner energy investments to hedge rapid decarbonization risk.

### Choices for using remaining fossil fuel revenues
- Key allocation options:
  - Building financial assets for future use.
  - Repaying government debt.
  - Lowering taxes.
  - Raising public spending.
- Less diversified exporters may:
  - Focus revenues on developing other economic sectors to diversify future revenue base.
  - Support vulnerable populations during transitions (for example, infrastructure spending if agricultural growth is part of diversification).
  - Repay government debt to create fiscal space for future infrastructure and maintenance spending.
- Active labor market policies (job search assistance and training programs) can help fossil fuel workers transition.

### Fiscal instruments to support domestic emissions reduction
- No-regret measures:
  - Gradual phase out of fossil fuel subsidies.
  - Introduction of carbon taxes, where politically feasible.
  - Develop basic emissions monitoring and verification systems and account for revenue recycling, emissions coverage, offsets, and interactions with other energy policies.
- Other fees and taxes:
  - Methane fees to encourage cleaner extraction and reduce venting, flaring, and fugitive emissions.
  - Carbon tax on the carbon content of fossil fuels collected at extraction could be considered if carbon taxes and border carbon adjustment mechanisms are widely implemented in importing countries.
  - Combined upstream and consumption carbon taxes could distribute revenue between net importers and exporters, requiring domestic and international political coordination.
- Promotion of domestic innovation, adoption, and production of low-carbon technologies:
  - Tax incentives and green subsidies (for example, feed-in tariffs or contracts-for-difference for clean power projects).
  - Time-bound, transparent, and monitored policies under strong governance; complement with carbon pricing; avoid distorting trade and investment flows.
  - Direct government investment in cleaner energy (such as solar or wind) and green investment portfolios.

### Exchange rate, monetary, and financial sector policies
- Diversified economies with exchange rate flexibility (examples: Australia, Canada):
  - Can absorb swings in external position; exchange rate adjustment supports rebalancing.
  - Inflationary impact contained through effective monetary policy; fiscal policy can partially offset adverse interest rate consequences.
  - Well-developed financial markets support financial stability.
- Less diversified exporters with less flexible or fixed exchange rates (examples: most GCC countries; some Central African Economic and Monetary Community currency union countries):
  - Would benefit from greater exchange rate flexibility in the long term, but pace depends on imminence of lasting shifts in export revenues, inflation pass-through, and time to develop hedging tools and monetary frameworks.
  - Need to strengthen financial sector frameworks, deepen foreign exchange markets, and design sequenced capital flow liberalization strategies.
  - Political and adjustment costs may be large when abandoning a peg abruptly.
- Financial regulation and supervision:
  - Limit financial sector exposures to international fossil fuel market developments via interagency collaboration and strengthened safety and soundness.
  - Incorporate transition challenges into financial sector risk analysis and perform regular stress tests for sudden repricing and climate policy changes.
  - Regulators can request vulnerable institutions reduce exposures and build capital and liquidity buffers.
  - Strengthen data collection and develop a climate information architecture and capacity for stress testing; scale testing ambition progressively.
  - Adoption of green regulations and incentives can create opportunities for portfolio flows.

### Structural reforms and economic diversification
- Accelerate structural reforms to diversify export bases and develop alternative engines of growth to reduce macroeconomic effects from the energy transition.
- Reforms are most challenging for less diversified exporters whose non–fossil fuel exports may be globally less competitive.
- Examples of gradual reforms:
  - Expand availability and types of education.
  - Facilitate greater labor force participation and modernize labor market institutions.
  - Broaden access to finance by liberalizing financial markets and increasing bankability of projects.
  - Support product markets by strengthening judicial systems, encouraging fair competition, reducing red tape, and closing infrastructure gaps.
- Opportunity to develop low- or zero-carbon energy industries leveraging existing fossil fuel knowledge and infrastructure:
  - Create new jobs and facilitate retraining and technology adoption.
  - Shift petroleum producers and power generation companies, including national oil companies, toward renewable energy for diversification and development (for example, rural electrification in many EMDEs).
  - Expand zero-carbon emission petrochemicals and switch terminals and petrochemical companies to low- or zero-carbon hydrogen or ammonia.
  - IEA (2022b) projection: low-carbon emissions hydrogen production rising from very low levels in 2022 to over 30 million tons per year in 2030 (equivalent to over 100 billion cubic meters of natural gas).
  - Low- and zero-carbon hydrogen-based liquid fuels and synthetic liquid hydrocarbons can substitute oil in aviation and shipping and can use existing infrastructure and combustion equipment.
  - Hydrogen can provide seasonal energy storage and facilitate global energy transport from production sites.

### Economic diversification in the Gulf Cooperation Council (Box 4 highlights)
- Diversification index measures trade, output, and revenue; an increase indicates increased diversification.
- Saudi Arabia:
  - Non-oil sector growth reached 4.8 percent in 2022.
  - Non-oil revenue doubled since 2017.
  - Non-oil exports reached $84.4 billion in 2022.
  - Share of high-skilled jobs increased to more than 40 percent in 2022.
  - Female labor force participation doubled in four years to reach 37 percent in 2022.
  - New investment deals and licenses grew by 267 percent in 2022.
- United Arab Emirates:
  - Non-hydrocarbon GDP growth expected to reach 5.3 percent in 2022.
- Qatar:
  - Non-hydrocarbon sector growth accelerated to 6.8 percent in 2022.
  - Non-hydrocarbon GDP accounts for about two-thirds of total GDP; non-hydrocarbon revenue accounts for about 20 percent of total government revenue.
- Bahrain:
  - Non-oil sector growth rose to 6.2 percent in 2022.
  - Financial sector represented 17.5 percent of real GDP in 2022; hydrocarbon sector 16.9 percent.
  - Non-hydrocarbon exports reached 34 percent of GDP in 2022.
  - Non-oil revenue mobilization reached 6.4 percent of GDP after VAT introduction in 2019.
- Oman:
  - Non-hydrocarbon exports reached 20 percent of GDP in 2022.
  - Tax revenues more than doubled from their 2013 levels.
  - Share of non-hydrocarbon activity reached close to 60 percent of GDP.
  - Vision 2040 focuses on attracting FDI, developing sector interlinkages, fostering clusters, integrating SMEs into value chains, and positioning Oman in green hydrogen.

- Common policy levers:
  - Mobilize non-oil revenue via implementation of value-added tax and a global minimum corporate income tax.
  - Enhance spending efficiency through subsidy reforms.
  - Increase public and private investments in human capital, green infrastructure, and digitalization.
  - Pursue trade and investment agreements to boost trade, attract FDI, and integrate with global value chains.
  - Strengthen regulatory, governance, and business environment reforms to promote entrepreneurship and investor protection.

*IMF | Staff Climate Notes — clnea2024001*

### 1.5 degrees Celsius, nearly 60 percent of proven reserves for oil and natural gas and 90 percent for coal must

### 1.5 degrees Celsius, nearly 60 percent of proven reserves for oil and natural gas and 90 percent for coal must

### Projected fossil fuel contraction for a 2050 net-zero scenario
- For a 2050 net-zero scenario to materialize, global coal use declines by 90 percent, oil around 80 percent, and natural gas by over 70 percent between 2021 and 2050 (IEA 2022a).
- In line with its high carbon content, demand for coal is expected to decline more rapidly than for oil and natural gas.
- Natural gas, with the lowest carbon content, may endure longer and its demand may even increase in the near to medium term if it is used as a transition fuel, particularly substituting for coal.

### Key uncertainties and determinants of the transition
- The path of the energy transition remains highly uncertain; while global demand for fossil fuels is expected to permanently decline over the long term, relative fossil fuel demand and supply movements during the transition are difficult to predict.
- Key factors that will influence outcomes:
  - The pace of policy commitments and implementation around the globe. Carbon dioxide emissions reached historic highs in 2022, and 2023 is set to become the warmest year on record.
  - Investment in fossil fuel supply, influenced by investors’ projections of demand and higher capital costs as climate and environmental risks are factored into investment decisions.
  - Political decisions by large crude oil–, natural gas–, or coal-producing countries to limit or phase out extraction.
  - Technological change, including carbon capture technology and innovation in affordable clean technologies.

### Policy measures that reduce global fossil fuel demand (examples cited)
- Widespread downstream carbon pricing.
- Extensive adoption of clean technologies.
- Penalizing emission-intensive extraction processes.
- Banning polluting technologies such as new internal combustion engine vehicles.

### Fossil fuel price scenarios and implications
- The IMF’s April 2022 World Economic Outlook Special Feature projects 2030 crude oil prices could plausibly range anywhere from $25/barrel to $135/barrel.
- IEA (2023a) projects $42/barrel by 2030 in a net-zero-emissions scenario.
- Low fossil fuel prices could result from faster-than-expected implementation of demand-led decarbonization measures, leaving producers with excess capacity.
- Current futures curves suggest prices would remain around current levels; other model simulations indicate prices could remain relatively high.
- Preemptive underinvestment in new production capacity could lead to temporary but large fossil fuel price spikes.

### Impacts on fossil fuel exporters
- Market-share dynamics:
  - The largest of the less diversified crude oil and natural gas exporters may not experience exceptionally large declines in long-term demand because their low production costs may allow them to capture a larger share of the global market.
  - Countries with less emission-intensive extraction processes or that minimize environmental damages during extraction may fare relatively better.
- Emerging markets and developing economies (EMDEs) with higher fossil fuel dependency and production costs will be significantly impacted—particularly those unable to rapidly diversify their export base or develop alternative engines of economic growth.
- The world’s largest exporters will also be adversely impacted, although those with more diversified economies are likely less so.
- Risk of stranded assets:
  - If fossil fuel prices fall short of production costs for prolonged periods, exporters that made significant and often debt-financed investments in extractive infrastructure risk ending up with stranded assets.
  - Some extraction-related infrastructure could be repurposed for other uses, such as zero or low-emission hydrogen production or related products.
  - Global stranded assets (as a present value of future lost profits) in the upstream oil and gas sector could exceed $1 trillion under plausible changes in expectations about the effects of climate policy, with most market risk falling on private investors.

### Macroeconomic channels of impact
- Balance of payments:
  - Changes in net fossil fuel export receipts translate directly into the current account.
  - Changes in foreign investments in the fossil fuel sector affect financial account inflows.
  - Declining fossil fuel exports can raise sovereign risk premiums and increase financial outflows related to external debt service.
  - Effects on the accumulation of foreign exchange reserves could be substantial.
  - In flexible exchange rate regimes, nominal depreciation could raise inflationary pressures and inflate private and public debt ratios.
- Economic growth and structural change:
  - Changes in exports or investment associated with the fossil fuel industry and related industries (for example, cement, fertilizers, petrochemicals, steel) directly impact growth and employment.
  - Variations in profitability can have multiplier effects across the economy through employment, incomes, and government revenues.
  - If perceived as lasting, resource reallocation (labor and capital) may shift toward other sectors.
  - Inflation may be affected by changes in domestic demand, domestic fossil fuel prices, and exchange rate movements.
- Fiscal sustainability:
  - Movements in fossil fuel export receipts are typically reflected in government revenues from state-owned enterprises and private fossil fuel companies (dividends, royalties, production sharing, tax payments).
  - Declines in exports and investment may require increased spending on retraining programs and cash transfers and financial support for fossil fuel–related state-owned enterprises.
  - Explicit or implicit government guarantees on state-owned enterprises’ debt could weigh on government balance sheets.
  - Governments may need to draw down buffers (for example, sovereign wealth funds) or adjust spending to maintain fiscal and debt sustainability.
- Financial sector risks:
  - Excessive volatility or lasting changes in fossil fuel sales will affect asset values and could produce negative net balance sheet effects.
  - Negative balance sheet effects can impair the financial sector’s ability to attract financing and intermediate funds to support the economy.

### Country characteristics that determine exposure and vulnerability
- Effects will be stronger for less diversified economies—especially countries with:
  - Fuels being phased out sooner (for example, coal).
  - Higher extraction costs.
  - Emission-intensive extraction processes net of any carbon capture schemes.
  - Extraction vulnerable to extreme weather events.
- A narrow export base can lead to stark balance of payments and fiscal effects.
- A diversified tax base and broader economic drivers can contain spillovers to growth and financial stability.
- Other mitigating factors (noted in the text) include:
  - Significant foreign income some exporters earn on outstanding net foreign assets accumulated through historical fossil fuel sales.
  - Lower petrodollar recycling in response to lower revenues.
  - Greater use of fossil fuels in exports that do not involve combustion and generation of GHG emissions such as plastics.

*IMF | Staff Climate Notes — clnea2024001*

### Box 1. What Will Be the Quantitative Impacts of Global Decarbonization on Fossil Fuel

### Box 1. What Will Be the Quantitative Impacts of Global Decarbonization on Fossil Fuel Producers?

### Historical empirical evidence on extraction declines and macroeconomic effects
- Study using local projections on 35 past episodes of sustained, exogenous declines in extraction for 13 minerals (oil, gas, coal, metals) and 122 countries since 1950 finds:
  - Episodes of large resource extraction declines can weaken growth by 10 percent on impact and 40 percent by the 10th year on average.
  - Private and public consumption, as well as investment, fall in line with the decline in GDP.
  - Consumption and the exchange rate have a delayed reaction, inconsistent with full anticipation of the persistent fall in extraction and related revenues.
  - The real exchange rate depreciates, eventually by about 20 percent, but not enough to stimulate a reallocation of economic activity toward other tradable sectors such as manufacturing.
  - Significant negative spillover effects onto both the manufacturing and services sectors.
  - Net exports fall in line with extraction.
  - Effects on low-income countries are significantly larger than on high-income countries.

### Model-based evidence (IMF-ENV macro model and ICPF simulation)
- Model: IMF-ENV macro model (global dynamic computable general equilibrium model).
- Simulation: IMF International Carbon Price Floor (ICPF) proposal (carbon price floors of $75, $50, and $25 for high-, middle-, and low-income countries respectively; countries implement the maximum of either their carbon price floor and the carbon price implicit in their Nationally Determined Contribution).
- Key modeled outcomes by 2030, relative to a baseline without ICPF:
  - Average worldwide ICPF-related reduction of GDP by somewhat more than 1 percent of GDP.
  - GDP reduction of 3 percent in Russia.
  - GDP reduction of 1.5 percent in Saudi Arabia.
  - GDP reduction of 1.5 percent on average for other oil exporters.
- Holistic considerations can materially lower apparent costs:
  - If Saudi Arabia phases out domestic energy subsidies, this will provide positive GDP gains while reducing emissions by around 100 million tons of carbon dioxide equivalent, which is about a third of the NDC reduction target planned for 2030.
  - Positive GDP effects and fiscal savings can considerably reduce overall costs for Saudi Arabia during the energy transition, including because oil prices are expected to remain relatively high even if all countries adopt their NDC plans.

### Public revenue scenarios under alternative global fossil-fuel pathways
- Framework: Country-level model accounting for dependence on national oil companies, government fiscal take, extraction costs, and fossil fuel production (with latter three varying by energy transition scenario).
- Energy transition scenarios from IEA “World Energy Outlook 2022”:
  - stated policies (only current policies implemented; peak oil demand in 2035),
  - announced pledges (government targets achieved; peak oil demand in 2024),
  - net zero (warming limited to 1.5 degrees Celsius and no new fossil fuel developments).
- Scenario outcomes:
  - Under net zero: all groupings of fossil fuel producers see rapid revenue drops due to falling commodity prices and demand.
  - Under announced pledges: revenues remain relatively stable out to 2030 for most groups but grow for OPEC and advanced-country oil producers due to higher oil prices combined with stable or increasing market share.
  - Under stated policies: revenue in 2030 exceeds 2019 levels for all groups (except low-income oil producers) as demand has not yet peaked and prices are elevated.
  - Longer term under stated policies: revenue for all fossil fuel producers declines to slightly below 2019 levels, except OPEC and low-income gas producers.
  - In general, oil producers see a much larger revenue loss from a faster energy transition than gas producers.

### Policy challenges and cross-cutting considerations
- Each fossil fuel exporter faces unique combination of policy challenges; tailored policy advice required.
- Common policy considerations:
  - Historical policy challenges from uncertainties around fossil fuel–related exports and fiscal flows will continue; need hedging and adjustment mechanisms.
  - Need to invest in renewable energy to meet domestic energy needs and support vulnerable populations during structural adjustment.
  - Central challenge: determine whether a country will be a long-term surviving producer to inform investment, fiscal, monetary, financial, and structural policy decisions.
  - Ongoing reforms may need acceleration; policy responses should examine country-level consequences under a broad range of transition scenarios and alternative plausible assumptions.

### Investment considerations
- Investment choices in fossil fuel extraction (new operations or continuation/expansion of existing operations) have wide-ranging implications across fiscal, monetary, financial, and structural policies.
- Energy security and geopolitical tensions should inform decisions on investments in fossil fuel infrastructure.
- Key investment considerations to balance:
  - Beliefs over the most likely decarbonization scenario and a country’s fossil fuel export demand; persistent downward deviations in demand or price relative to a country’s investment and production choices could result in stranded assets. These risks likely largest for coal exporters and smallest for large low-cost crude oil and natural gas exporters.
  - Level of government investment and preferences for public versus private sector involvement (for example, public financing or granting licenses to national oil companies versus international oil companies). Global decarbonization may reduce private investors’ willingness to invest in higher-cost exporters, forcing governments to weigh self-financing benefits against risks of failure and debt sustainability concerns.
  - Emission intensity of the fossil fuel production process: incentives exist to reduce carbon footprint of extraction (tackling methane emissions including eliminating all non-emergency flaring; electrifying and greening upstream facilities; equipping oil and gas processes with carbon capture, utilization and storage technologies; expanding use of zero- and low-emissions hydrogen in refineries).

### Fiscal policy challenges and recommended fiscal frameworks
- Applying fiscal discipline to maintain macroeconomic stability may become even more challenging.
  - Historical pressures for procyclical spending may rise due to uncertain global energy transition path; procyclical fiscal policy can fuel inflation and depress competitiveness when revenues are high and result in recession when revenues decline.
  - Over the longer term, prospect of permanently lower or no fossil fuel revenues raises concerns about maintaining public infrastructure, wage bills, social spending, debt sustainability, fiscal risk, and balance sheet exposures.
- Fiscal discipline measures to prioritize:
  - Adopt medium-term fiscal frameworks supported by formal fiscal rules and an independent fiscal council.
  - Build large buffers, including in sovereign wealth funds, subject to country debt contexts (highly indebted countries may prefer debt reduction over buffer accumulation).
  - Gradually phase out untargeted fossil fuel subsidies and channel some savings toward more targeted social assistance to reduce spending volatility and help vulnerable groups adjust.
  - As the economy diversifies, broaden the tax revenue base and strengthen efficient revenue administration to ensure adequate collection from existing and new revenue sources.

### Different national approaches and examples
- Box 2 summary (approaches to new hydrocarbon investments):
  - Some countries (Beyond Oil and Gas Alliance members) have agreed to stop issuing new licenses and set Paris-aligned end dates for oil and gas production and exploration; many core members (except Denmark) have declining, minimal, or nonexistent production levels.
  - Colombia considered stopping issuance of new oil and gas exploration and production licenses (not yet legislated; new investments in existing contracts continue).
  - Some countries continue to expand fossil-fuel sectors: Guyana, Suriname, Mauritania, Mozambique, Senegal, Tanzania, Kenya, Namibia, Uganda—new production and exploration activity is ongoing or expected.

### Decarbonization efforts in the Gulf Cooperation Council (Box 3)
- United Arab Emirates: “phasing out of fossil fuel emissions” strategy combining new petroleum exploration with carbon capture, use and storage, measures to reduce extractive-process emissions (flaring, venting, fugitive emissions), expanding renewable energy and improving energy efficiency.
- Saudi Arabia: Saudi Green Initiative and updated NDC (net zero greenhouse gas emissions by 2060); target to increase share of renewable energy in electricity generation up to 50 percent by 2030; deploy circular carbon economy technologies including carbon capture utilization and storage; Saudi Aramco aiming for net zero Scope 1 and Scope 2 emissions by 2050; joined Global Methane Pledge to cut methane emissions by 30 percent by 2030.
- Qatar: National Environment and Climate Change Strategy and Climate Change Action Plan aiming to reduce greenhouse gas emissions by 25 percent by 2030; developed largest carbon storage plant in the region; ramping up installed solar power capacity and energy efficiency improvements.
- Bahrain: pledged to cut emissions by 30 percent by 2035 and reach net zero by 2060; implementing National Energy Efficiency Action Plan and National Renewable Energy Action Plan.

*Source: IMF Staff Climate Note — Box 1 (clnea2024001).*

### 1. Difference in Average Procyclicality of Fiscal Policy between

### clnea2024001 - 1. Difference in Average Procyclicality of Fiscal Policy between

### Measurement and Data Notes
- Countries with net fossil fuel exports greater than 8 percent of GDP, subject to data availability, are labeled as fossil fuel producer.
- Country-level procyclicality of fiscal policy is measured as the 10-year trailing correlation between government expenditure and the oil price.
- Panel 1 includes 95 percent confidence intervals for annual cross-country regressions.
- Panel 2 area color coding: green = fiscal stance in 2022 is negatively correlated with oil prices; orange = fiscal procyclicality decreased since 2005; red = fiscal procyclicality increased since 2005.
- Data labels use International Organization for Standardization (ISO) country codes.
- Time ranges referenced: 2005–22 and fiscal procyclicality (as of 2022).

### Monitoring and Mitigating Fiscal Risks for Fossil Fuel Producers
- Monitoring and mitigation of fiscal risks may need to be stepped up as governments may adjust fiscal regimes for future extraction to shift energy transition risks from investors to government.
- Governments must weigh benefits against costs to the government, especially debt and stranded assets, should risks materialize.
- Authorities should assess the mix of production and profit-based fiscal instruments to balance capturing a fair share of rents and securing a reasonable minimum share of revenue from extractive projects.
- National oil companies should:
  - Manage balance sheets and associated fiscal risks carefully.
  - Ensure investment decisions are driven by commercial and market considerations.
- Adopt a sovereign asset-liability management framework to monitor sovereign balance sheet exposures in an integrated manner and manage risks more efficiently.
- Fiscal frameworks should be regularly stress tested, including under more adverse and volatile fossil fuel price scenarios.
- For countries with (or considering) sovereign wealth funds, shift portfolios away from fossil fuels toward cleaner energy investments to hedge risks from rapid decarbonization which would depress fossil fuel asset values.

### Choices for Using Remaining Fossil Fuel Revenues
- Key options for allocating remaining fossil fuel revenues:
  - Building financial assets for future use.
  - Repaying government debt.
  - Lowering taxes.
  - Raising public spending.
- Less economically diversified fossil fuel exporters may:
  - Focus revenues on developing other economic sectors to diversify the government’s future revenue base.
  - Support the most vulnerable during transitions (for example, infrastructure spending on irrigation and roads if agricultural growth is part of diversification).
  - Repay government debt to create fiscal space for future infrastructure and maintenance spending.
- Resulting reductions in sovereign risk premiums could support other sectors via reduced private sector borrowing costs.
- Active labor market policies (government-sponsored job search assistance and training programs) can help fossil fuel industry workers transition to other industries.

### Fiscal Instruments to Support Domestic Emissions Reduction
- No-regret measures:
  - Gradual phase out of fossil fuel subsidies.
  - Introduction of carbon taxes, where politically feasible.
  - Must develop basic emissions monitoring and verification systems.
  - Account for revenue recycling, emissions coverage, decisions on offsets, and interactions with other energy policy instruments.
- Other fees and taxes:
  - Methane fees to encourage cleaner extraction technologies and reduce venting, flaring, and fugitive emissions.
  - Carbon tax on the carbon content of fossil fuels collected at extraction could be considered if carbon taxes and border carbon adjustment mechanisms are implemented widely in importing countries.
  - A combined upstream carbon tax and carbon tax on consumption could distribute tax revenue between net importers and exporters while achieving similar price and production outcomes, requiring domestic and international political coordination.
  - Example coordination: upstream carbon tax as part of an international carbon price floor with importing countries adjusting import carbon taxes to rebate upstream carbon taxes paid.
- Promotion of domestic innovation, adoption, and production of low-carbon technologies:
  - Tax incentives and green subsidies (for example, feed-in tariffs or contracts-for-difference for clean power projects).
  - Time-bound, transparent, and monitored policies under a strong governance framework; complement with carbon pricing; avoid distorting trade and investment flows.
  - Governments can invest directly in cleaner energy (such as solar or wind) and ensure investment portfolios are green.

### Exchange Rate, Monetary, and Financial Sector Policies
- Diversified economies with exchange rate flexibility (examples: Australia, Canada):
  - Can absorb swings in external position.
  - Exchange rate adjustment supports rebalancing (competitiveness gains in non–fossil fuel sectors after depreciation).
  - Inflationary impact contained through effective monetary policy; fiscal policy can partially offset adverse interest rate consequences.
  - Well-developed financial markets support financial stability and avert weakening or large fluctuations in growth.
- Less diversified fossil fuel exporters with less flexible or fixed exchange rates (examples: most GCC countries; some Central African Economic and Monetary Community currency union countries):
  - Would benefit from greater exchange rate flexibility in the long term, but pace and timing depend on:
    - Imminence of lasting shifts in export revenues and international reserves.
    - Impact of sudden moves on inflation given high exchange rate pass-through.
    - Time needed to develop hedging tools, markets, and monetary policy frameworks.
  - Need to strengthen financial sector frameworks, deepen foreign exchange markets, and design a strategy for carefully sequenced liberalization of capital flows.
  - Political and adjustment costs may be large when abandoning a peg abruptly.
- Financial regulation and supervision:
  - Limit financial sector exposures to international fossil fuel market developments via interagency collaboration and strengthening safety and soundness.
  - Incorporate transition challenges into financial sector risk analysis and perform regular stress tests for sudden repricing of portfolios and changes in domestic/global climate policies.
  - Regulators can request vulnerable institutions reduce exposures to climate risks and build capital and liquidity buffers.
  - Start with strengthening data collection and developing a climate information architecture and capacity building for stress testing; scale testing ambition progressively.
  - Adoption of green regulations and incentives can create opportunities for portfolio flows (for example, from mutual funds).

### Structural Reforms and Economic Diversification
- Accelerate structural reforms to diversify export bases and develop alternative engines of growth to reduce adverse macroeconomic effects from the global energy transition.
- Reforms are most challenging for less economically diversified fossil fuel exporters whose non–fossil fuel exports could be globally less competitive.
- Examples of gradual structural reforms:
  - Expand availability and types of education.
  - Facilitate greater labor force participation and modernize labor market institutions.
  - Broaden access to finance by liberalizing financial markets and increasing bankability of projects.
  - Support product markets by strengthening judicial systems, encouraging fair competition, reducing red tape, and closing physical infrastructure gaps.
- Opportunity to develop low- or zero-carbon energy industries leveraging existing fossil fuel knowledge and infrastructure:
  - Create new jobs and facilitate retraining and technology adoption.
  - Shift petroleum producers and power generation companies, including national oil companies, toward renewable energy to advance diversification and development (for example, rural electrification in many EMDEs).
  - Expand zero-carbon emission petrochemicals and switch terminals and petrochemical companies to low- or zero-carbon hydrogen or ammonia.
  - IEA (2022b) projection referenced: low-carbon emissions hydrogen production rising from very low levels in 2022 to over 30 million tons per year in 2030 (equivalent to over 100 billion cubic meters of natural gas).
  - Low- and zero-carbon hydrogen-based liquid fuels and synthetic liquid hydrocarbons can substitute oil in aviation and shipping and can use existing infrastructure and combustion equipment.
  - Hydrogen can provide seasonal energy storage and facilitate global energy transport from production sites.

*IMF | Staff Climate Notes*

### Box 4. Economic Diversification in the Gulf Cooperation Council

### Box 4. Economic Diversification in the Gulf Cooperation Council

### Diversification index and overall trend
- The series referenced are based on a multidimensional index quantifying diversification across trade, output, and revenue, as well as an overall weighted index. An increase in the index indicates an increase in diversification for the relevant indicator.

### Saudi Arabia — progress and indicators
- Non-oil sector growth reached 4.8 percent in 2022, accelerated since 2021, driven by strong domestic demand in wholesale, retail trade, construction, and transport.
- Non-oil revenue doubled since 2017 due to value-added tax rate increases and high regulatory compliance.
- Non-oil exports reached a record $84.4 billion in 2022.
- Vision 2030 reforms have boosted the share of manufacturing and services in GDP, reducing oil reliance.
- Labor market and social indicators:
  - Share of high-skilled jobs increased to more than 40 percent in 2022.
  - Female labor force participation doubled in four years to reach 37 percent in 2022.
- Institutional and business environment progress:
  - Digitalization has improved government efficiency and financial sector resilience.
  - New laws to promote entrepreneurship, protect investor rights, and reduce cost of doing business.
  - New investment deals and licenses grew by 267 percent in 2022.

### United Arab Emirates, Qatar, Bahrain, and Oman — country snapshots
- United Arab Emirates:
  - Non-hydrocarbon GDP growth was expected to reach 5.3 percent in 2022, supported by tourism rebound from Dubai World Expo and spillovers from the FIFA World Cup in Qatar.
  - Progress on Comprehensive Economic Partnership Agreements, renewable energy infrastructure, and digitalization expected to further boost diversification, trade, and FDI.
- Qatar:
  - Non-hydrocarbon sector growth accelerated to 6.8 percent in 2022 driven by World Cup–related activities.
  - North Field expansion project boosts non-hydrocarbon activities during construction but will deepen fossil fuel reliance once completed.
  - Non-hydrocarbon GDP accounts for about two-thirds of total GDP; non-hydrocarbon revenue accounts for about 20 percent of total government revenue.
  - Recommended accelerations: implementation of value-added tax and global minimum corporate income tax; enhanced spending efficiencies through subsidy reforms; increased investments in human capital, green infrastructure, and digitalization.
- Bahrain:
  - Non-oil sector growth rose to 6.2 percent in 2022, driven by public, financial, hospitality, and manufacturing sectors.
  - Financial sector represented 17.5 percent of real GDP in 2022, ahead of the hydrocarbon sector at 16.9 percent.
  - Non-hydrocarbon exports reached a record 34 percent of GDP in 2022.
  - Non-oil revenue mobilization almost doubled and reached 6.4 percent of GDP after the introduction of value-added tax in 2019.
- Oman:
  - Non-hydrocarbon exports reached a record 20 percent of GDP in 2022.
  - Tax revenues more than doubled from their 2013 levels.
  - Share of non-hydrocarbon activity reached close to 60 percent of GDP.
  - Diversification agenda under Vision 2040 focuses on attracting foreign investments by streamlining business regulations; developing sector interlinkages; fostering economic clusters; integrating SMEs into industrial value chains around Special Economic Zones; and positioning Oman in green hydrogen.

### Common policy levers and recommendations noted
- Mobilize non-oil revenue through:
  - Implementation of value-added tax.
  - Implementation of a global minimum corporate income tax.
- Enhance spending efficiency by:
  - Subsidy reforms.
- Increase public and private investments in:
  - Human capital.
  - Green infrastructure.
  - Digitalization.
- Pursue trade and investment agreements (e.g., Comprehensive Economic Partnership Agreements) to boost trade, attract FDI, and integrate with global value chains.
- Strengthen regulatory, governance, and business environment reforms to promote entrepreneurship and investor protection.

*Source: Box 4. Economic Diversification in the Gulf Cooperation Council — IMF Staff Climate Notes*

### 2013. Energy Subsidy Reform : Lessons and Implications. Washington, DC: International Monetary Fund.

### Key Challenges Faced by Fossil Fuel Exporters during the Energy Transition (IMF Staff Climate Note 2024/001) — Excerpted References

### Content overview
- Excerpt is a bibliography and reference list associated with IMF STAFF CLIMATE NOTE 2024/001, titled "Key Challenges Faced by Fossil Fuel Exporters during the Energy Transition."
- Includes cited works spanning years such as 1987, 1999, 2001, 2012, 2013, 2014, 2016, 2018, 2019, 2020, 2021, 2022, and 2023.
- Major institutional sources cited: International Monetary Fund (IMF), International Energy Agency (IEA), Intergovernmental Panel on Climate Change (IPCC), Organization of the Petroleum Exporting Countries (OPEC), World Bank, Network for Greening the Financial System (NGFS), White House (Council of Economic Advisors), World Economic Forum, and various academic journals and working papers.

### Major thematic clusters in the references
- Energy sector scenarios, outlooks, and transition pathways
  - International Energy Agency (IEA) publications: “Net Zero by 2050: A Roadmap for the Global Energy Sector” (2021); “World Energy Outlook 2022” (2022a); “Global Hydrogen Review 2022” (2022b); “Global Energy and Climate Model” (2022c); “World Energy Outlook 2023” (2023a); “Emissions from Oil and Gas Operations in Net Zero Transitions…” (2023b).
  - OPEC: “World Oil Outlook” (2022).
- Fiscal, macroeconomic, and policy frameworks for resource-rich and fossil-fuel-dependent countries
  - Multiple IMF policy papers, working papers, country reports, and technical notes (examples include IMF 2012a; IMF 2012b; IMF 2014; IMF 2018; IMF 2019; IMF 2020; IMF 2021a–2021d; IMF 2022a–2022v; IMF 2023a–2023v).
  - Works on fiscal regimes, managing oil price uncertainty, and fiscal implications of climate policies.
- Transition risks, financial stability, and prudential responses
  - NGFS 2023; Dikau et al. 2022; Grippa and Mann 2020; Semieniuk et al. 2022; Harstad 2012.
- Just transition, labor, and diversification
  - References addressing jobs and labor transition: World Bank (Ruppert Bulmer et al. 2022); Hyman 2022; Saha et al. 2023; Peszko et al. 2020; UNFCCC 2023.
  - Studies on economic diversification and the natural resource curse: Frankel 2012; Lashitew et al. 2021; Mirzoev et al. 2020; Prasad et al. 2022.
- Emissions, methane, and extraction carbon intensity
  - Parry et al. 2021; Parry et al. 2022; Masnadi et al. 2018; Welsby et al. 2021; IEA special reports.
- Country-specific studies and Article IV consultations
  - Numerous IMF country reports cited (examples include Kuwait, Saudi Arabia, Algeria, Angola, Iraq, Nigeria, Colombia, Libya, Indonesia, UAE, Canada, Bahrain, Malaysia, Norway, Brunei Darussalam, Papua New Guinea, Bolivia, Kazakhstan, Mongolia, Equatorial Guinea, South Sudan, Republic of Congo, Turkmenistan, Trinidad and Tobago, Libya, Libya, Guyana-related press items).

### Observable emphases from referenced literature
- Cross-cutting focus on:
  - Managing oil price uncertainty and implications for fiscal sustainability.
  - Designing fiscal regimes for extractive industries and adjusting to commodity-price shocks.
  - Financial sector supervision and prudential approaches to transition plans and stranded-asset risks.
  - Policy measures for cutting methane emissions and proposals such as an international carbon price floor among large emitters.
  - Just transition frameworks and best practices for economic diversification in fossil-fuel-dependent countries.

### Key bibliographic details and examples of cited items (preserve exact citations as presented)
- 2013. Energy Subsidy Reform : Lessons and Implications. Washington, DC: International Monetary Fund.
- Climate Action Tracker. 2023. “Countdown to COP28: Time for World to Focus on Oil and Gas Phase-out, Renewables Target—Not Distractions like CCS.”
- Daniel, James. 2001. “Hedging Government Oil Price Risk.” IMF Working Paper 01/185, International Monetary Fund, Washington, DC.
- Intergovernmental Panel on Climate Change (IPCC). 2022. “Working Group III Contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change: Summary for Policymakers.” Sixth Assessment Report, Geneva.
- International Energy Agency (IEA). 2021. “Net Zero by 2050: A Roadmap for the Global Energy Sector.” Paris.
- International Monetary Fund (IMF). 2022a. “Managing Oil Price Uncertainty and the Energy Transition.” In Regional Economic Outlook: Sub-Saharan Africa—Living on the Edge, Washington, DC, October.
- Parry, Ian, Simon Black, and James Roaf. 2021. “Proposal for an International Carbon Price Floor among Large Emitters.” IMF Staff Climate Note 2021/001, International Monetary Fund, Washington, DC.

*Excerpted reference list from IMF STAFF CLIMATE NOTE 2024/001 — "Key Challenges Faced by Fossil Fuel Exporters during the Energy Transition."*

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_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2024/english/clnea2024001.pdf_