How Fiscal Policy Can Help Middle East, Central Asia Reduce Emissions

IMF Blog, November 6, 2022

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Nearly all 32 countries in the Middle East and Central Asia have pledged to contain greenhouse gas emissions as part of the Paris Agreement.
Collective pledged reduction in annual GHG emissions in 2030 of 13 percent to 21 percent, relative to the current trend, depending on the availability of external support.
This implies the region will need to reduce its per capita emissions by as much as 7 percent over the next eight years.
Only a few countries have achieved such a reduction while maintaining economic growth.

Two main categories of fiscal policies to curb GHG emissions are emphasized:
- Measures that raise the effective price of fossil fuels.
- Public investments in renewable sources of energy.
Other combinations of these fiscal strategies are also compatible with reaching countries’ emissions targets; countries should choose options that best suit their circumstances and available budget resources.

Policy design example to meet 2030 mitigation targets:
- Gradual removal of fuel subsidies plus a phased introduction of a carbon tax of $8 per ton of CO2 emissions in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP).
- $4 per ton in the Caucasus and Central Asia (CCA).
Country examples of moves in this direction:
- Kazakhstan introduced an emissions trading scheme.
- Jordan has been steadily phasing out fuel subsidies.
- Saudi Arabia recently established a regional carbon credit market.
Near-term challenges:
- Current generation bears the burden of the energy transition.
- Vulnerable people and businesses that rely on cheap energy would be particularly affected.
- Though additional fiscal resources from tax revenues and reduced subsidies could ease side effects, economic growth could temporarily slow, and inflation could increase.
Long-term benefits:
- A cleaner, more energy efficient, and potentially more competitive economy with fewer distortions, stronger public finances, and a more efficient resource allocation for future generations.

Scale of investment required to achieve mitigation targets without a carbon tax and with fuel subsidies reduced only by two-thirds:
- Additional public investments of $770 billion in MENAP and $114 billion in the CCA between 2023 and 2030.
- This total is described as more than a fifth of the region’s current gross domestic product.
Existing large-scale projects:
- Qatar developed an 800-megawatt solar plant that can meet about a tenth of the country’s peak demand.
- Dubai built a 5,000-megawatt single-site solar park.
Advantages for the current generation:
- Families and businesses face a smaller price increase and are less pressured to change energy consumption habits.
- Targeted investments will create more jobs and faster growth.
- Improved energy security for oil-importing countries.
Long-term costs and fiscal risks:
- Remaining fuel subsidies may continue to distort energy prices, limit energy efficiency gains, and leave emissions in many parts of the economy largely unabated.
- Significant public spending to accelerate the energy transition could weaken fiscal positions and macroeconomic stability, leaving fewer resources available to future generations.
- Estimated rise in net government debt in 2030 of 12 percent of GDP in MENAP and 15 percent in the CCA.
- A smoother transition now could set future generations on a path of lower long-term growth.

Early adoption of a fiscal strategy is recommended to help meet mitigation pledges on time while minimizing potential economic disruptions.
Starting sooner provides:
- Sufficient time for domestic public discourse.
- Time for the private sector to adjust to expected policy changes.
- Time for authorities to implement policies to address potential side effects, including improving social safety nets.
An early start will also gear up other policies and structural reforms, helping countries in the region navigate a smoother path toward greener economies.

How Fiscal Policy Can Help Middle East, Central Asia Reduce Emissions — Jihad Azour, Gareth Anderson, Ling Zhu, November 6, 2022