Fiscal Implications for Kazakhstan of Worldwide Transition to a Greener Global Economy

The fiscal implications for Kazakhstan of worldwide transition to a greener global economy The fiscal implications for Kazakhstan of worldwide transition to a greener global economy | 1 ACKNOWLEDGMENTS This publication was prepared in collaboration with PricewaterhouseCoopers by the European Bank for Reconstruction and Development (EBRD) for the Ministry of Finance of Kazakhstan. The report and background analysis were financed by the EBRD Shareholder Special Fund (SSF) and by a contribution from the government of Kazakhstan. Mattia Romani, Managing Director of the EBRD’s Economics, Policy and Governance Department, led the project. Amal Larhlid, Leader of PwC’s Global Fiscal Policy Advisory practice, led the PwC project team. The report was prepared by the EBRD’s Russell Bishop, Principal Economist, and Isabel Blanco, Lead Economist. The PwC project team were Andrew Wilson, Project Manager, Simon Carey, Lead Economist, and Tom Maitland, Lead Analyst. In addition, the report benefited from the support of other EBRD and PwC colleagues: Vanora Bennett, Giulia Branzi, Jonathan Bruce, Jacqueline Chow, Damin Chung, Benjamin Combes, Vincent Duijnhouwer, Elisabetta Falcetti, Jonathan Gillham, Philip Good, Vince Goode, Alisha Kapoor, Adam Kent, Leili Kokh, Hans Holzhacker, Seetal Patel, Alexander Plekhanov, Martin Pospisil, Agris Preimanis, Neokolis Rodoulis, Jan- Willem van de Ven, Marat Yelibayev, Jia Lin Yong and Dimitri Zenghelis. Comments and suggestions were also gratefully received from the Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF) and World Bank Group. ABSTRACT Fulfilling the energy and climate change commitments embodied the 2030s, suggesting that there is a window of opportunity in in the UN’s Sustainable Development Goals and the Paris which Kazakhstan could take action to address these impacts. Agreement will require a worldwide shift from fossil fuels to low- A number of policy responses could offset the negative fiscal carbon energy. impacts and all of them build on the government’s current With a focus on the oil and gas sectors, this paper analyses the priorities. These responses are (i) structural transformation of fiscal risks that a global transition of this kind could pose for Kazakhstan’s economy to manage exposure to oil-price shocks, Kazakhstan, a country where oil accounts for roughly 50 per cent as set out in the country’s development strategies for the periods of exports and is a major source of government revenue. to 2025 and 2050; (ii) effective management of oil revenues, building on recent announcements about limiting transfers In the period to 2040, a scenario in which there is worldwide from the National Fund of the Republic of Kazakhstan; (iii) fiscal adoption of greener energy practices in line with the SDGs consolidation to reduce the non-oil fiscal deficit to sustainable and the Paris Agreement (transition to a “green” global levels in the medium term; and (iv) the enhancement of medium economy) could lead to an overall drop of around 40 per cent and long-term fiscal planning. These four policy responses in Kazakhstan’s fiscal revenues, relative to a “business as are prudent, given that they make sense in all three scenarios usual” scenario. This “green” transition could also lead to modelled in this paper for future states of the global oil and gas unsustainable levels of debt and potentially to depletion of the markets. Furthermore, they would build fiscal resilience to lower country’s national savings from oil within the next decade. This oil prices even lower than those that have been modelled here could occur despite a rapid increase in oil production through the – which is important as the precise evolution of future global oil Kashagan and Tengiz oil fields and their relatively low marginal and gas markets is beset with uncertainty. costs of extraction. The most significant fiscal impacts of a transition to a greener global economy are projected to occur in The fiscal implications for Kazakhstan of worldwide transition to a greener global economy | 3 FOREWORD n the early 1990s the EBRD regions However, the highest cost of these market adjustments is likely had the highest levels of carbon to fall on the countries that rely most heavily on fossil fuels, Iintensity per unit of economic either due to their large fossil fuel reserves or their reliance on output in the world. This was a legacy energy-intensive industries. In a world where the future of fossil of central planning, with its polluting fuels is increasingly uncertain, as the latest International Energy industries, cheap energy and chronic Agency (IEA) World Energy Outlook indicates, governments environmental neglect. that own large reserves are particularly likely to face the risk of such assets becoming “stranded”. This will have substantial Since then, GHG emissions in these implications for their revenues and hence for their fiscal position. economies have fallen markedly but they remain above the levels seen in comparable emerging The “macro relevance” of this issue is well recognised and the markets elsewhere in the world. This fall has been the result issue has been raised by the IEA, the IMF and the OECD. In of the restructuring that underpins the shift to open-market 2015, the EBRD also set out broadly the scale of these risks economies, price and regulatory reforms, greater economic and opportunities for its regions in a report titled “Government efficiency and improved environmental regulation. assets: risks and opportunities in a changing climate policy landscape”. Now, our new publication, “The fiscal implications In the context of the UN’s Sustainable Development Goals and for Kazakhstan of worldwide transition to a greener global the climate change commitments of the Paris Agreement, the economy”, we have built on the 2015 report to develop a EBRD regions will need to reduce GHGs even further. These deeper understanding of the fiscal risks and opportunities that economies will also need to deal with the impacts of climate Kazakhstan – a major fossil fuel exporter in the EBRD regions – change and overcome other environmental challenges. faces as the world move towards a greener global economy. Increasingly, countries acknowledge that it is in their long term This report shows that while a worldwide transition of this self-interest to act, realising that the benefits of addressing kind may present significant fiscal risks, the country has time climate change outweigh the economic costs. To support these to adapt. Indeed, the government has already prioritised aims, in 2015 the EBRD launched its Green Economy Transition many of the actions required to deal with these risks, – approach, which seeks to increase the Bank’s green financing to including supporting economic diversification, improving fiscal around 40 per cent of its total annual investment in the period to management and supporting Kazakhstan’s own transition to a 2020. green economy. As countries become greener, economic activity and global I would like to thank the Ministry of Finance of Kazakhstan, markets will change, including what we consume and the way which has supported us in the joint endeavour of examining we produce goods. This shift will present opportunities in clean these risks and exploring how the country could address them. energy, low-carbon transport and energy efficient manufacturing. Mattia Romani – Managing Director, Economics, Policy and Governance Department, EBRD 4| The fiscal implications for Kazakhstan of worldwide transition to a greener global economy CONTENTS Executive summary 6 Chapter 1 Why is transition to a greener global economy of concern to Kazakhstan? 10 1.1. Introduction 10 1.2. Potential implications of transition to a greener global economy 17 Chapter 2 What are the fiscal implications for Kazakhstan? 19 2.1. Analytical approach 19 2.2. Key assumptions 21 2.3. Main findings 24 2.4. Summary of results, by scenario 29 Chapter 3 How can Kazakhstan address the fiscal implications of a greener global economy? 32 3.1. Recommended fiscal policy reform 32 Endnotes 39 The fiscal implications for Kazakhstan of worldwide transition to a greener global economy | 5 ES EXECUTIVE SUMMARY Kazakhstan has experienced strong GDP growth stage. As part of its National Concept for Transition to a Green since the early 2000s. This growth and the related Economy, Kazakhstan is also committed to making the country’s increase in prosperity have largely been due to the economy greener, aiming to reduce domestic greenhouse gas country’s abundant natural resources, including oil, emissions and significantly increase the use of renewables. gas, uranium and copper. Oil, in particular, remains a However, Kazakhstan’s development will also need to factor critical component of Kazakhstan’s wealth, accounting in changing conditions that lie ahead in the global market for for more than 50 per cent of exports and a large fossil fuels. A number of factors will shape these markets in percentage of total government revenue. By the end the coming decades, including technological progress, global of 2017, these resources had allowed the country to economic conditions and the extent to which other countries accumulate in its sovereign wealth fund – the National realise the ambitions of moving to a green global economy Fund of the Republic of Kazakhstan (NFRK) – national as set out in the Paris Agreement and the UN’s Sustainable savings equivalent to around 40 per cent of GDP. Development Goals (SDGs). To build on this progress, the government recognises the need These developments are beyond Kazakhstan’s control and to develop a more diversified, competitive and sustainable difficult to predict. However, falling oil and gas prices in 2014 economy in its ambition to become one of the 30 most and 2015 and their subsequent rebound have shown that the developed countries in the world by 2050. This goal is aided extent to which Kazakhstan can adapt to future shifts in these by national strategies outlined in state publications such external conditions will have significant economic and fiscal as “Kazakhstan 2025” and “One Hundred Concrete Steps consequences.

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