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

_IMF Blog, November 6, 2022_

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## Bibliographic details
- Authors: Jihad Azour, Gareth Anderson, Ling Zhu
- Published: November 6, 2022

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### Regional mitigation commitments and targets
- 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.

### Fiscal policy pathways analyzed
- 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.

### Raising fossil-fuel prices: design and trade-offs
- 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.

### Investing in renewable energy: costs, benefits, and fiscal impact
- 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.

### Policy recommendations and timing
- 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*

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## References

- [new study](https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2022/10/28/A-Low-Carbon-Future-for-the-Middle-East-and-Central-Asia-What-are-the-Options-523812)
- [early adoption](https://www.imf.org/en/Blogs/Articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth)

_Source: https://www.imf.org/en/blogs/articles/2022/11/06/how-fiscal-policy-can-help-middle-east-central-asia-reduce-emissions_