Additional public investments in renewable energy of $770 billion in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and $114 billion in the Caucasus and Central Asia (CCA) region - more than a fifth of the region’s current gross domestic product - between 2023 and 2030 could achieve the region’s emission reduction targets with fuel subsidies reduced only by two-thirds and without any carbon tax, reads a study of the International Monetary Fund (IMF) “How Fiscal Policy Can Help Middle East, Central Asia Reduce Emissions”.
Large-scale renewable projects are already taking off in the region. For example, Qatar developed the world’s largest solar plant, with an 800-megawatt capacity that can meet about a tenth of the country’s peak demand, while Dubai built a 5,000-megawatt single-site solar park that’s also the biggest project of its kind.
“This option has several advantages for the current generation. Families and businesses wouldn’t be as hard pressed to change energy consumption habits because of a smaller price increase. Moreover, targeted investments in renewable energy sources will create more jobs and faster growth, while improving the energy security of oil-importing countries.
But this approach also has some long-term costs. Remaining fuel subsidies are likely to keep distorting energy prices, limiting energy efficiency gains and leaving 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.
We estimate that net government debt in 2030 could rise by 12 percent of GDP in MENAP and 15 percent in the CCA. Thus, a smoother transition now could set future generations on a path of lower long-term growth,” the IMF noted.
Governments in the region face a difficult decision: how to share the economic burden of climate mitigation across generations. Other combinations of these fiscal strategies are also compatible with reaching countries’ emissions targets, according to the report.
Countries should choose an option that best suits their circumstances and the available budget resources. Regardless of the choice, early adoption of a fiscal strategy will help meet mitigation pledges on time while minimizing potential economic disruptions.
“Starting sooner would provide sufficient time for domestic public discourse, for the private sector to adjust to expected policy changes, and for the authorities to implement policies to address potential side effects, including improving social safety nets.
Finally, an early start will gear up other policies and structural reforms, helping countries in the region navigate a smoother path toward greener economies,” the IMF added.