Staff Climate Notes

Key Challenges Faced by Fossil Fuel Exporters during the Energy Transition

Author/Editor:

Diego Mesa Puyo ; Augustus J Panton ; Tarun Sridhar ; Martin Stuermer ; Christoph Ungerer ; Alice Tianbo Zhang

Publication Date:

March 27, 2024

Electronic Access:

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Summary:

The global energy transition is affecting fossil fuel exporters from multiple angles. It is adding to longstanding uncertainties on relative movements of fossil fuel demand and supply—which impact fossil fuel-related exports, fiscal flows, investment and subsequently external and fiscal accounts, economic growth, and employment. While policymakers are very familiar with these challenges, they now also face expectations of a permanent decline in the long-run global demand for fossil fuels. Key factors that could determine country-level impacts include (i) the type of fossil fuel a country exports (ii) extraction costs and (iii) country characteristics. The monitoring and mitigation of fiscal risks will need to be stepped up. Fiscal policy also has a role in reducing domestic emissions, encouraging adoption of low-carbon technologies, and helping those most vulnerable to changes from the transition. Broader macroeconomic risks can be reduced by accelerating ongoing structural reforms that support alternative engines of growth. Low- or zero-carbon emission energy industries could offer new avenues that build on existing fossil fuel knowledge and infrastructure. Concurrently, improved financial regulation and supervision could reduce financial sector exposures. Finally, international coordination on the design and implementation of climate policy as well as international transfer schemes (financing and capacity development) could reduce uncertainties surrounding the transition path and associated adverse economic consequences.

Series:

Staff Climate Note No 2024/001

Subject:

Commodities Economic sectors Environment Exports Financial crises International trade Non-renewable resources Oil Renewable energy

Frequency:

occasional