AZERBAIJAN
Launch Event Baku, November 29, 2023
Outline Objectives Headline messages Challenges Solutions Recommendations
Azerbaijan Country Climate and Development Report
2
o A new World Bank’s core diagnostic Country Climate and Development Reports (CCDRs) o Azerbaijan – among the first countries chosen o Starting point: Vision 2030 and the SES 2022-26 Key questions: How will climate impacts and global decarbonization shape Azerbaijan’s development trajectory? Can Azerbaijan deepen resilience and decarbonization to improve development outcomes? Can the country meet the financing gap for decarbonization and resilience investments? What is the role of the private and financial sector? What priority policies should the Government focus on? Azerbaijan Country Climate and Development Report
3
CCDR Headline Messages Azerbaijan is exposed to global decarbonization policies Decarbonizing the economy is in Azerbaijan's economic interest, regardless of the pace of global decarbonization efforts Future water security risks compound existing water sector challenges In the absence of adaptation action, losses from climate change could be substantial particularly in agriculture, but not only Achieving future prosperity in a changing climate is affordable and within reach
Azerbaijan Country Climate and Development Report
4
AZERBAIJAN
Challenges
Global decarbonization will shape Azerbaijan’s development future…
High exposure & low resilience to the global decarbonization transition
Source: Updated from Peszko et al. 2021. Note: Index calculated from 16 indicators including: fossil fuel export revenue as percentage of current GDP; Expected fossil fuel resource rents as percentage of GNI; carbon intensity of manufacturing exports; Committed power sector GHG emissions over current power generation; Macroeconomic stability; Quality of infrastructure; Financial market development; Technology absorption; Oil extraction costs Azerbaijan Country Climate and Development Report
6
…resulting in significant economic impacts. Change in GDP from global decarbonization and domestic inaction
Lack of action will lower growth and welfare
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
7
Climate change will compound existing water security challenges,… Projected regional and domestic water stress in 2040
Water Scarcity Index (WSI)
Water security will be compounded by impacts on neighbors and the adaptation measures they will take
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
8
…affecting the future of Azerbaijan’s agriculture… Agriculture productivity shock
The agriculture sector will be most affected, but impacts will extend beyond agriculture
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
9
…and the broader economy, Firms experiencing water access constraints
The agriculture sector will be most impacted, but the challenges reach beyond agriculture
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
10
…through multiple channels. Labor productivity loss from heat stress
The agriculture sector will be most impacted, but the challenges reach beyond agriculture GDP loss by 2060 could reach ~2% (only for the impacts considered in the analysis)
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
11
The private sector’s transition readiness is low Azerbaijan firms trail regionally and globally in perceptions of transition risks and climate action
Source: Updated from Peszko et al. 2021. Note: Index calculated from 16 indicators including: fossil fuel export revenue as percentage of current GDP; Expected fossil fuel resource rents as percentage of GNI; carbon intensity of manufacturing exports; Committed power sector GHG emissions over current power generation; Macroeconomic stability; Quality of infrastructure; Financial market development ; Technology absorption; Oil extraction costs.
Azerbaijan Country Climate and Development Report
12
AZERBAIJAN
Solutions
Regardless of the pace of global mitigation efforts, domestic decarbonization is in Azerbaijan’s self interest
Substantial economic cobenefits can further offset the costs of full decarbonization 1.4% of GDP annually only from reduced air pollution damages
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
14
Decarbonization will support economic diversification
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
1999
Economic Complexity Index: Azerbaijan and comparator countries
Azerbaijan’s carbon intensity of GDP reached 0.24 kgCO2 per USD in 2020, 25%– 50% lower than other oil and gas producing countries but more than 80% higher than EU-27
Country rank
50 100 150 200 250
Azerbaijan
Between 2016 - 2021, Azerbaijan ranked 115 out of 133 countries in terms of economic complexity (only Nigeria ranks lower among oil and mineral exporting countries )
Chile
Kazakhstan
Nigeria
Norway
Venezuela
Source: Updated from Peszko et al. 2021. Note: Index calculated from 16 indicators including: fossil fuel export revenue as percentage of current GDP; Expected fossil fuel resource rents as percentage of GNI; carbon intensity of manufacturing exports; Committed power sector GHG emissions over current power generation; Macroeconomic stability; Quality of infrastructure; Financial market development ; Technology absorption; Oil extraction costs Azerbaijan Country Climate and Development Report
Low diversification and high carbon intensity will limit Azerbaijan’s exporting prospects 15
Azerbaijan however needs to accelerate the achievement of its NDC targets
[MtCO2e]
Historic GHG emissions and the NDC target pathway
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
Policies announced so far will not be sufficient to achieve the 2030 and 2050 targets (-35% and -40% vs. 1990).
16
[Share of 1990 GHG Emissions]
Existing GHG emissions reduction targets for 2030 & 2050 are within reach, if fossil fuel subsidies are phased out, and…
Source: Azerbaijan CCDR Azerbaijan Country Climate and Development Report
Over 2016-2021, explicit energy subsidies have averaged $2.3 billion or 5.1% of GDP Phasing out natural gas and oil subsidies would allow Azerbaijan to close the gap to the targets by about half compared to a BAU scenario without subsidy removal. However, fossil fuel subsidies phase-out would need to be carefully managed to minimize the impacts on consumers and the economy 17
…through affordable actions on both energy generation and consumption.
Renewables Scale-Up
42% 7.7 GW
Electrification
Energy Efficiency
Azerbaijan Country Climate and Development Report
Share of power generation from RE (hydro, solar, wind) in 2050, compared to current target of 30% by 2030 Wind and solar capacity to be installed by 2050 (about 2.5x the BAU scenario)
31%
Share of electricity in final energy consumption in 2050 (vs. 23 percent in the BAU)
-15%
Reduction in final energy demand through energy efficiency in 2050 compared to the BAU
Total energy system costs would be about 18% higher in 2030 compared to BAU, decreasing to only 8% in 2050 • Only 11% increase in average electricity tariffs in 2050 vs. the BAU scenario with subsidy removal
18
Achieving Net Zero by 2060 is challenging, but feasible…
NZ pathway close to 2030 NDC, but accelerating thereafter Substantial decarbonization gains from Fugitive Emissions reductions Increase in carbon sinks likely required
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
19
…through an ambitious transformation of the energy system, stimulating green energy AND oil & gas exports … but decarbonization could bring attractive export opportunities
Achieving net zero by 2060 would require large-scale transformations across all sectors… • Emissions would reach near-zero by 2045 and become negative in 2060, thanks to: ‒ An accelerated deployment of cost-attractive renewable energy ‒ The use of carbon capture, utilization, and storage (CCUS) in biomass-fired power plants
Power
Transport
• By 2060, conventional fuels would be almost fully phased out and the fuel mix would be dominated by electricity, biofuels, and hydrogen • The sector would also have to achieve significant energy efficiency improvements
Industry
• Green hydrogen would be used to decarbonize hard-to-abate industries
Oil & gas
• In 2060, fugitive emissions would have to be about one third of the emissions in the BAU scenario
>90%
Share of power generation from RE (hydro, solar, wind) in 2060
>60%
Share of electricity in energy demand for passenger cars in 2060
Compared with the baseline scenario not including decarbonization objectives, Azerbaijan would need to invest in the energy system an additional US$7.9 billion over 2022–2030 and US$28.1 billion during 2022–2060 (expressed at present values) Azerbaijan Country Climate and Development Report
• Energy sector decarbonization would allow Azerbaijan to reduce domestic natural gas consumption and significantly increase exports, partially offsetting the projected decrease in oil exports
+35% +35%
Increase in natural gas exports from 2021 to 2060 (compared to a +2% increase in the BAU scenario)
• In addition, Azerbaijan could scale up the production and export of green hydrogen and electricity at competitive prices by leveraging its abundant domestic renewable energy resources
57 57TWh TWh
Additional potential for green hydrogen and electricity exports per year in an exportoriented scenario 20
Enhancing adaptation and resilience capacities will require a whole-of-government approach
Progress in some crosscutting areas, but lagging on adaptationspecific capacities
Two key measures: Reducing water losses Introducing Climate Smart Agriculture Practices
Two Priorities: • Introducing Climate Smart Agriculture technologies • Reducing water losses Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
21
Resilience priority #1: Reducing water losses • 2-3 BCM of water lost per year, or between 30 and 50 percent of the total water supplied is lost • Reaching average global water field efficiency levels would release the equivalent of 7-11 percent of current water withdrawals • Decarbonization would lead to 80% reduction in current Energy Sector’s use (11% of total) • Investments in Water Efficiency and Decarbonization would compensate for future water security risks
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
Win-Win Resilience from Decarbonization
22
Resilience priority #2: Climate Smart Agriculture • CSA adoption in AZ limited to commercial farms • SME face several institutional constraints • Redressing the imbalances between fiscal support to large-scale farms (5% of production and SME farmes (95% of production) • Investments in AKIS/extension
Source: Azerbaijan CCDR. Azerbaijan Country Climate and Development Report
Win-Win-Win Mitigation (as well as Competitiveness and Inclusive Growth) from Resilience
23
The investment gap is large, but filling it is feasible Additional Investment to BAU 2023-2060 discounted
Sector
Decarbonization Electricity Transport Residential Industry and Other Decarbonization total Resilience Water Efficiency Climate Smart Agriculture Resilience total Total
Azerbaijan Country Climate and Development Report
US$ Billion [13.8] 4.4 12 8.3 24.7 17.6 1.8 19.4 44.1
Average incremental investment is estimated to be US$1.35 bn/year Equal to about 4 percent of GDP less than total envelope to fossil fuel subsidies (5.1 percent of GDP Public / split in meeting the investment gap • Decarbonization: 30/70
• Resilience: 92/8 Source: Azerbaijan CCDR.
24
A large chunk of the investment gap can be filled by private investments
The low-carbon transition is creating investment opportunities, especially for the private sector De-risking instruments can catalyze private capital mobilization from local and foreign investors
Source: Updated from Peszko et al. 2021. Note: Index calculated from 16 indicators including: fossil fuel export revenue as percentage of current GDP; Expected fossil fuel resource rents as percentage of GNI; carbon intensity of manufacturing exports; Committed power sector GHG emissions over current power generation; Macroeconomic stability; Quality of infrastructure; Financial market development; Technology absorption; Oil extraction costs. Azerbaijan Country Climate and Development Report
25
AZERBAIJAN
Recommendations
Policy Package A
Strengthen institutions for economy-wide decarbonization and resilience planning Mainstream a climate perspective into the overall strategic and planning direction of the country’s development Further build capacity within key institutions, including Central Bank of Azerbaijan and MEF Implement structural reforms to ease private sector constraints, including access to skills, finance, promoting competition and improving the investment climate Consider the fiscal policy implications of energy subsidy phase-out to finance the transition Empower the State Commission on Climate Change to inform strategic documents Azerbaijan Country Climate and Development Report
27
Policy Package B
Accelerating the Clean Energy Transition Implement energy pricing reforms, while providing targeted protection to the vulnerable Invest in publicly funded enabling infrastructure and strengthen policy frameworks for private investment Develop programs to scale-up energy efficiency (EE) and electrification Upgrade natural gas infrastructure Pilot programs for clean gas and green hydrogen (power-to-X)
Azerbaijan Country Climate and Development Report
28
Policy Package C
Future-Proofing the Agriculture-Food-Water Nexus Reform agricultural subsidies and mainstream climate-smart agriculture (CSA) practices Invest in energy-efficient, water-efficient, and low-carbon solutions for agriculture and livestock Increase adaptation and resilience capabilities through disaster risk financing (DRF) instruments and insurance provision Rehabilitate and modernize hydraulic infrastructure Intensify regional coordination on transboundary catchments
Azerbaijan Country Climate and Development Report
29
Thank you
Scan Report
Andrea Liverani aliverani@worldbank.org