Azerbaijan: pathways for decarbonization in a global context

As economies around the world are increasing their mitigation ambitions, Azerbaijan’s lingering dependency on fossil fuel exports threatens its medium – and long-term economic development prospects. Global decarbonization is expected to directly impact the country’s resource rents through lower fossil fuel demand and prices. In this regard, it is crucial to understand the potential implications of the global mitigation efforts on the economy of Azerbaijan and evaluate the domestic mitigation policies. To address this gap in the literature, we use a global dynamic computable general equilibrium model and explore a set of forward-looking climate policy scenarios till 2060. Our results suggest that while being adversely impacted by decarbonization efforts in countries around the world, it is in Azerbaijan’s self-interest to implement domestic mitigation policies. With proper sequencing and design of such policies, including a combination of fossil-fuel subsidies reform, the introduction of carbon prices post-2030 and recycling of the additionally collected revenue via reduced factor taxes, the country could achieve NDC targets, boost economic growth and increase economic diversification. More ambitious mitigation efforts, consistent with reaching net-zero emissions by 2060 would result in substantial health co-benefits from improved air quality, which could almost fully outweigh the direct economic costs of such mitigation. While being exposed to the declining global fossil fuel demand and prices that accompany decarbonization efforts in countries around the world, it is in Azerbaijan’s self-interest to implement domestic mitigation policies.Achievement of the Nationally Determined Contributions (NDC) via the elimination of fossil fuel subsidies, the introduction of carbon prices post-2030 and recycling of the additionally collected revenue via reduced factor taxes is the most economically attractive option for Azerbaijan.Reduced levels of air pollution that accompany low-carbon transition result in substantial health-related co-benefits increasing the net welfare gains under NDC scenarios and compensating between 60% and 80% of the mitigation costs under the net-zero mitigation case in Azerbaijan.