Almost all countries in the Middle East and Central Asia (ME&CA) region have joined the rest of the world in what is arguably the most ambitious and consequential global effort—the race to save the planet from the effects of climate change. To date, 31 out of the region’s 32 economies have published their nationally determined contributions (NDCs) as envisaged by the 2015 Paris Agreement. Of these, 29 spell out explicit commitments for reducing or containing greenhouse gas (GHG) emissions in the coming years. As part of a broader strategy by the IMF to help member countries address climate change related policy challenges, this paper examines two questions:
What do ME&CA countries emission reduction commitments amount to?
What will it take to achieve them?
Answering these questions is important both for the world and for the ME&CA countries themselves. Despite witnessing a rather rapid increase in emissions in recent decades, the ME&CA region is admittedly not the largest overall emitter of GHGs in the world, neither currently nor from a historical perspective. And reflecting its countries’ stage of development—the region is populated by emerging and developing economies (EMDEs) including several low-income and conflict-affected countries—their mitigation objectives can be expected to be more modest than those of the advanced economies (AEs). Nevertheless, for the global effort to succeed, achieving every region’s mitigation target is critical. Moreover, ME&CA is one of the most vulnerable regions to the continued rise in global temperatures and achieving the goals of the Paris Agreement is of paramount importance to containing the region’s climate adaptation costs and the habitability of many of its countries (Duenwald and others 2022).
The absence of explicit enforcement mechanisms in the Paris Agreement means that whether its goals will be achieved largely depends on the clarity of countries’ emission reduction commitments, credibility of their mitigation policy strategy, transparency when it comes to monitoring progress, and periodic revisions of mitigation ambitions to ensure that individual commitments are on aggregate compatible with the overall goal of limiting the rise in global temperatures to no more than 1.5°C–2°C relative to the preindustrial level by 2100. In any global coordinated effort, insufficient ambition or underperformance in some parts of the world would need to be compensated elsewhere for the overall numbers to add up. That is why it is important to understand what is entailed in each region’s pledges, what they imply for the future trajectory of emissions, and how they fit into global mitigation efforts.
Aggregation of the ME&CA countries’ mitigation commitments is a challenging task. Reflecting individual circumstances and priorities, countries have used a variety of definitions, methodologies, yardsticks, and reference points to specify their pledges. This paper attempts to aggregate them by using a common denominator in a unified framework with the help of the IMF-World Bank Climate Policy Assessment Tool (CPAT)—a country-specific climate model that projects fuel usage and emissions across different sectors (see Annex 1). It finds that achieving the region’s “conditional” climate mitigation pledges, that is those commitments that require some form of external support, would imply a level of GHG emissions in 2030 that is roughly equal to the volume of emissions expected to be produced by the region in 2022 and constitutes a 21 percent decline relative to the business-as-usual (BAU) baseline projection in 2030. By contrast, unconditional commitments, that is those that rely on countries’ own resources, amount to moderating the growth of GHG emissions to 16 percent between 2022 and 2030, relative to 32 percent in the BAU. Within the region, there is also significant variation in the degree of mitigation ambition. Some countries’ stated emissions reduction commitments could be met without additional mitigation efforts, while others will need to work hard to fulfil their pledges in the coming years.
Nevertheless, the region as a whole has a mountain to climb, and it would be inaccurate to interpret its collective mitigation commitment as unambitious because of the strong underlying currents. Much of the region’s recent growth in emissions owes to rapid expansion of populations which by far outpace the rest of the world, particularly in MENAP. This demographic trend is expected to continue and containing the region’s aggregate emissions at their current level would require a reduction in per capita terms by 7 percent over the next eight years. This will be no mean feat given that only a few EMDEs have been able to achieve a similar reduction in emissions while maintaining economic growth over the same period.
Therefore, crafting policies to meet countries’ mitigation commitments while carefully balancing the associated socioeconomic consequences will be critical. The paper discusses how climate mitigation policies can be integrated into the broader macroeconomic policy framework. To do so in a tractable way, it focuses on two broad categories of policies to curb GHG emissions: those that increase public investment in renewable energy and those that raise the effective carbon rate (ECR), defined as emissions-weighted tax revenue from fossil fuels net of subsidies. Such a dichotomy emphasizes substitutability, albeit up to a point, between two alternative fiscal policy approaches to climate change mitigation and captures the key medium-term macroeconomic and long-term intergenerational trade-off that is arguably the most pertinent for the ME&CA region where governments are likely to play a leading role in the low-carbon transition.
At one end of this trade-off, a sizable increase of the ECR could achieve ME&CA’s emissions reduction targets without any additional investment in renewables, for example, through a gradual removal of all fuel subsidies and, in addition, a phased introduction of a carbon tax of $8 per metric-tonne of CO2-equivalent in MENAP and $4 in the CCA over the next eight years. Such an approach would prioritize raising the price of energy and amounts to making the current generation bear the brunt of the adjustment burden. Vulnerable households and the economic sectors reliant on cheap sources of energy could be particularly at risk. Though the additional fiscal resources generated by ECR-raising measures could be used to alleviate these side effects, an adverse impact on economic growth—at least in the medium term—would be difficult to avoid, and real GDP per capita in 2030 could decline by 5 percent in both MENAP and CCA relative to the BAU baseline. In the long term, however, such a transition would leave to future generations an economy that is not only cleaner but also more energy efficient and potentially more competitive, with fewer distortions and a more efficient allocation of resources.
An alternative way of reducing emissions is through public investments in renewable sources of energy. For example, additional investments of $770 billion in MENAP (20 percent of 2021 GDP) and 114 billion (27 percent of 2021 GDP) in the CCA between 2023 and 2030 would allow achieving the region’s emission reduction targets with fuel subsidies reduced by two-thirds and without any carbon tax. Such a strategy implies a smaller increase in energy prices and would create more jobs and faster growth, raising the 2030 real per capita GDP by 4 percent in MENAP and 7 percent in CCA relative to the BAU baseline. But it would also preserve the distortions in energy prices, limit energy efficiency gains, weaken fiscal positions and macroeconomic stability, and leave fewer resources available to future generations that would see the aggregate government debt in 2030 rise by 12 percent of GDP in MENAP and 15 percent of GDP in the CCA relative to the BAU baseline. Thus, a smoother transition for the current generation could set future generations on a path of slower long-term growth.
In between, other combinations of these fiscal options can be compatible with reaching the ME&CA region’s NDC targets. Countries would need to choose a suitable policy mix based on the available fiscal space, socioeconomic fragilities, and political economy constraints. Non-fiscal mitigation policies—such as environmental regulations or private climate finance initiatives—could play an important role in reducing the mitigation burden on fiscal policy, thereby improving the options outlined above. Global and regional initiatives to provide affordable financial support and technological assistance would be equally important in improving the ME&CA region’s economic trade-offs. For individual countries, deciding on and rolling out the appropriate policy mix early will be critical. Delays will make achieving the mitigation targets more difficult, thus worsening the fiscal trade-off over time. On the other hand, an early start will allow an orderly adjustment by the private sector and timely gearing of other regulatory, fiscal, monetary, and financial sector policies and structural reforms to tread a smoother path toward a greener economy in the ME&CA region.
This paper estimates that, under the Paris Agreement, countries in the ME&CA region have collectively committed to reduce annual GHG emissions in 2030 by 13 to 21 percent, depending on the availability of external support, relative to current trends. This means that the region’s per capita emissions would need to be reduced by 7 percent over the next eight years.
Fulfilling this commitment entails a significant economic challenge that is likely to grow over time as the deadline nears, while many other competing needs, such as meeting the SDGs and adapting to climate change, become more acute. Therefore, balancing the region’s priorities while ensuring an adequate contribution to the global climate mitigation effort requires full integration of emissions reduction policies into countries’ economic strategies.
The discussion above lays out a framework to help countries do so and outlines the magnitude of the required policy efforts at the regional level. It focuses on the choice between two broad categories of fiscal policies to curb GHG emissions: public investments in renewable sources of energy and measures that raise the effective carbon rate. Such a choice involves important medium-term macroeconomic and long-term intergenerational trade-offs that are arguably the most pertinent for the countries in the Middle East and Central Asia where governments are expected to play a key role in the low-carbon transition.
On the one hand, the region’s 2030 emissions reduction goals can be achieved through a gradual removal of all fuel subsidies and, in addition, a phased introduction of a carbon tax of $8 per metric-tonne of CO2-equivalent in MENAP and $4 in the CCA over the next eight years. Such an approach would set off a potentially challenging transition by the private sector toward a cleaner fuel mix and lower overall energy consumption that could temporarily weigh on economic growth. In the long term, however, such a transition would leave to future generations an economy with a stronger fiscal position, greater energy efficiency, and a more efficient overall allocation of resources.
Alternatively, additional public investments of close to $900 billion in renewable sources of energy between 2023 and 2030 would allow achieving the region’s emission reduction targets with fuel subsidies reduced by two-thirds and without any carbon tax. Such a greening strategy implies a smaller increase in energy prices, improved energy independence, and faster economic growth during the transition. But a smoother low-carbon transition for the current generation could set future generations on a path of lower long-term growth due to higher debt, persistent distortions in the energy sector, and unabated emissions in many parts of the economy.
In between, many other combinations of these fiscal options can be compatible with reaching the ME&CA region’s climate mitigation commitment, combined with other measures including regulations and sector-specific policies. How to share the economic burden of climate mitigation between current and future generations is arguably the most difficult and important decision that each government will need to make. Other mitigation policies could play an important role in alleviating the burden on fiscal policy and the trade-off outlined above. Examples of such policies include tightening building codes, mandating a transition to cleaner fuels and processes in manufacturing, reducing gas flaring from fossil fuel extraction, raising emissions standards in transportation, and mobilizing private investments in greening the economy.
A key takeaway from the discussion presented above is that, regardless of the choice, identifying the implied fiscal strategy and rolling it out early can help countries meet their mitigation pledges in time while minimizing potential economic dislocations. If action is delayed, the measures required to achieve a given commitment would become larger and the trade-off less favorable. This is especially pertinent for countries which, in addition to their 2030 commitments, also pledged to reach net zero in the following decades and would therefore need to progressively raise their policy ambition. Increased external financial support, particularly concessional financing, could be used to ease the fiscal and growth trade-offs associated with climate mitigation policies.
There are other benefits to early identification of the fiscal strategy in support of climate mitigation. It would help countries arrive at credible estimates of potential external financing needs to inform both their own economic planning and the international dialogue on the needed external financial support. It would also provide sufficient time for domestic public discourse to take place, for the private sector to adjust to the expected policy changes, and for the authorities to implement other policies toward addressing the potential side effects—for example, by introducing measures to soften the distributional impact of mitigation policies, improving social safety nets, accelerating structural reforms to support the energy transition and offset potential growth effects, and strengthening financial sector regulations (IMF 2022). Finally, an early start will allow timely gearing up of other regulatory, fiscal, monetary, and financial sector policies and reforms, helping countries in the ME&CA region tread a smoother path toward greener economies.
(Prepared by Gareth Anderson, Jiayi Ma, Tokhir Mirzoev, Ling Zhu, and Karlygash Zhunussova)
© IMF Departmental Paper