Urgent action on climate can help Azerbaijan minimise the risks emerging from the global low-carbon transition and protect the living standards of its people.
With existing oil reserves dwindling, comprehensive and effective decarbonisation efforts could play a key role in diversifying Azerbaijan’s economy and open up new drivers of growth, such as green hydrogen and agriculture.
The country’s economy remains heavily dependent on oil and gas, which account for a third of GDP and 90 per cent of exports.
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A new country climate and development report (CCDR), published this week by the World Bank Group, only the second prepared for a country in emerging Europe, says that urgent action on climate can help Azerbaijan minimise the risks emerging from the global low-carbon transition and protect the living standards of its people.
Azerbaijan faces considerable physical risks from climate change. Almost the entire country is prone to both droughts and water scarcity, which are expected to increase in frequency and intensity due to extreme weather events.
Meanwhile, its natural wealth is eroding as a result of soil degradation, desertification, and overgrazing, negatively impacting agriculture, while oil and gas extraction have also contributed to land degradation and contamination of water resources.
“Accelerating investments in decarbonization is in Azerbaijan’s interest, regardless of the pace of global decarbonization efforts. Such efforts would also be well aligned with national goals to diversify the economy,” says Rolande Pryce, World Bank Country Director for the South Caucasus.
“The CCDR provides a practical pathway for the country to move from setting targets to implementing actions which can protect Azerbaijan’s economy and people from the negative impacts of climate change.”
Although Azerbaijan is a signatory to the Paris Agreement on climate change, it has not yet committed to a domestic net zero target. However, the country has set national targets of reducing greenhouse gas (GHG) emissions by 35 per cent by 2030 and 40 per cent by 2050 from 1990 levels.
While stepping up its commitment to decarbonisation, Azerbaijan is not yet on track to achieve its national targets, says the report.
The challenges of decarbonisation in Azerbaijan are considerable, given the structure of the national economy. Sectors that are key to the green transition, including energy and water, are dominated by state-owned enterprises, which employ half of the country’s workforce. Charting and implementing a clear decarbonisation pathway will require economic diversification and a more vibrant private sector.
The decarbonisation and resilience actions outlined in the report will require large investments of an estimated 44 billion US dollars, or about 3.2 per cent of GDP, until 2060, when the global economy goes to net-zero. A significant share of this cost should be resourced from commercial and private sector financing.
“To drive a low-carbon transition, Azerbaijan will benefit from diversifying its economy away from fossil fuels and harnessing the capital and know-how of the private sector—but time is of the essence. Seizing the opportunities outlined in this report will help the country future-proof its economy and safeguard the population from climate change,” says Ivana Fernandes Duarte, the International Finance Regional Manager for the South Caucasus.
A gradual but steady phase-out of fossil fuel subsidies—a measure already contained in the government’s 2022-2026 strategy—will be key to achieving the transition, especially if accompanied by targeted social protection measures to protect the poorest.
Benefits outweigh investment costs
The report sets out a strategic roadmap for a resilient and net zero development pathway for Azerbaijan. Recommendations include making better use of clean energy, given that Azerbaijan has abundant renewable energy resources, wind and solar, which could be exploited to produce green hydrogen and electricity for exports and domestic use in power generation, industry, and transport.
This will require substantial public investment in enabling electricity infrastructure and private investment in renewable energy generation, which could be unlocked also through public-private partnerships (PPPs).
Energy efficiency is a government priority and efforts in this direction should include a programme of energy efficiency in public and private buildings as well as the transport sector, the report says.
Stricter fuel efficiency and emissions standards, use of electric vehicles, tax incentives and financial support programs should be part of an array of offerings to encourage energy efficiency by the public and commercial users.
Agriculture is also critical to Azerbaijan’s non-oil economy. The sector contributes less than eight per cent of GDP but accounts for 36 per cent of total employment.
However, the sector is highly vulnerable not only to extreme weather events but also to the existing water deficit in the country. Climate-proofing the sector to higher temperatures and lower water availability must include improved irrigation efficiency and the introduction of climate smart agricultural practices to improve productivity while building resilience to climate change and reducing emissions.
“Although they may appear large, the investments required to address the decarbonisation and resilience transition are manageable, particularly when assessed against their expected benefits—Azerbaijan’s future prosperity depends on setting the right policy framework for public and private investments to start flowing,” adds Andrea Liverani, lead author of the Azerbaijan CCDR.
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