The fiscal implications of a Green Economy Transition - recommendations from fossil fuel rich countries

1. The Fiscal Implications of a Green Economy Transition –
recommendations for fossil fuel rich countries
Isabel Blanco, Associate Director
Unlocking Private Finance for Energy Efficiency and a Low-Carbon Growth
June 30th 2017, Brussels

2. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
2

3. 3
Who we are
• Supranational Institution founded in 1991 owned by 65 countries, plus
the European Union and the European Investment Bank
Our mission
• To promote transition to open, market-based economies in our
countries of operation – we work in 36 countries from central Europe to
central Asia and the southern and eastern Mediterranean
What we do
• Support projects, mainly carried out by private sector clients, in areas
that are of interest and within the scope of the Bank. Annual Business
Volume of the EBRD in 2016 was EUR 9,390 million, 378 projects signed,
76 per cent with private clients.
What EBRD does

4. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
4

5. 5
Historically, the oil and gas sectors have been a key driver of
economic growth and public finances in fossil rich countries
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
2013 2014 2015 2016
PercentageofGDP%
Overall fiscal balance Non-oil fiscal balance
Economic growth and global oil prices 2000-2016 Fiscal balance 2013-2016 in
Kazakhstan
0
20
40
60
80
100
120
0
50
100
150
200
250
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
US$perbarrel
US$billions
Real GDP Oil price
Source: IMF, 2017 Source: IMF, 2017

6. 6
Approximately 70 per cent of fossil fuel reserves and related assets are
owned and controlled by Governments.
Fiscal revenues from oil and gas sectors can be up to 50 per cent in
fossil fuel rich countries.
A green economy transition in line with the Paris Agreement could mean
renewables make up 80 per cent of new power generation investment by
2030.
Relevant also in countries that are not fossil fuel rich, because:
• Different types of investments will be affected (e.g. power generation,
transmission and distribution lines, roads and ports, cement and steel
industry)
• Energy subsidies for consumers will change (fiscal space?)
• Revenue-raising opportunities (e.g, through carbon tax)
Green Economy Transition will change relative prices of
many energy-related assets and infrastructure

7. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
7

8. 8
EBRD is developing a framework for thinking about
the fiscal implications of a green economy transition
About the methodology
Prepare fiscal policy
recommendations
Analyse fiscal implications
Identify and assess impact on
material sectors
Construct scenarios1
2
3
4
About the project
• At the intersection of several issues –
fiscal policy, climate change, economic
policy
• Looks at direct impact of climate change
policies on national budgets, not taking
into account indirect effects through the
fiscal multiplier
• Up to 2040
• Focus on recommendations around
fiscal and budgetary practices
• Initially developed in Kazakhstan and
Egypt, with potential to be replicated in
many other countries.

9. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy
transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
9

10. 10
Global oil and gas prices will evolve –decrease is expected
in the price of oil
Source: IEA, 2016 Source: IEA, 2016
Forecast global oil prices 2015-2040 Forecast global gas prices 2015-
2040
-
20
40
60
80
100
120
140
160
US$perbarrel
WEO Current Policies WEO New Policies
WEO 450 Scenario
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
US$perMbtu
WEO Current Policies WEO New Policies
WEO 450 Scenario

11. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
11

12. 12
Sector-level impacts will affect the national budget
through a number of transmission channels
Direct
subsidies
Other
Production
sharing
agreements
Royalties and
taxes
National Budget
Oil and gas
state owned
companies
National
wealth fund
Dividend
distributions
Annual
disbursement
Hydrocarbon
revenues
Fiscal transmission channels

13. 13
The green economy transition will generate fiscal
opportunities, as well as risks
National Budget
Fiscal risks Fiscal opportunities
Government revenue losses
Expenditure and debt impacts
Consumer-side gains
Consumer-side gains arising from
changes in fossil fuel prices can
create fiscal space for additional
revenue raising or can act as an
economic stimulus.
Opportunities for tax reform
Government revenue losses can
generate the political will for tax
reform to rebalance government
revenues and support the growth
of the non-hydrocarbon economy.
Opportunities for subsidy reform
Changes in fossil fuel prices can
also create a window of
opportunity for fuel subsidy
reform by reducing potential
political resistance.

14. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
14

15. 15
There are a number of options for addressing the fiscal
implications
Subsidy reform
Investment
Sovereign Wealth
Fund policy
Reforming ownership
structures
Revenue raising
External oversight
Accounting &
reporting
Budget execution
Budget planning
Addressing the
fiscal
implications of
the green
economy
transition
Fiscal policy options Budget process options

16. 16
A number of countries are already dealing with this
type of issues
Norway
Management of
natural resource
rents
Saudi Arabia
Using state
investment as a
natural hedging
Indonesia
Climate finance
tracking and
reporting
Morocco
Reform of fossil
fuel subsidies
Kazakhstan
Addressing the
fiscal implications
of the green
economy transition

17. 17
There is a window of opportunity to secure a long-term
economic vision compatible with a green economy transition
Diversified economy
and resilient public
finances
Addressing the fiscal
implications of the green
economy transition
Capitalising on
international
momentum
Alignment with
broader reforms
Preliminary quantification shows that there is a period of around 10 years to
implement measures before the fiscal impacts are fully felt.

18. Contents
1. What EBRD does
2. Why is this topic important?
3. Framework for analysing the fiscal implications
4. How are the sectors projected to change in a green economy transition?
5. How will the sectors affect the national budget?
6. How to mitigate fiscal risks?
7. Contacts
18

19. Dr. Isabel Blanco
Associate Director
Economics, Policy and Governance
Email: blancoi@ebrd.com
EBRD
One Exchange Square
London, EC2A 2JN
United Kingdom
www.ebrd.com
Related document:
Government Assets: Risks and
Opportunities in a Changing Climate Policy
Landscape. Methodology for Calculating
Exposure under Alternative Policy
Scenarios
http://www.ebrd.com/publications/governm
ent-assets-climate-policy
Contacts
19