Assets Diversification and Development Challenges for Carbon Dependent countries

1. Assets Diversification and Development
Challenges for Carbon Dependent
Countries
ALEXANDER GOLUB, GRZEGORZ PESZKO

2. Development challenges for resource
rich countries
 Over several decades resource rent is an
important source of economic growth in FSU,
particularly in fossil fuel rich economies;
 Dependency on global markets of fossil fuels
and raw materials is a flip side of the
comparative advantage;
 Expansion of energy intensive and resource
oriented sectors considered as a response to
volatility of the global markets;
 Resource rich economies are facing
fundamental structural changes of the global
economy:
 Changes attributed to revolutionary
technological innovations;
 Changes induced by emerging global
climate policy.

3. Building development strategies for
carbon dependent countries
 The World Bank project “Climate
strategies of carbon dependent
countries: Diversification and
cooperation under uncertainty
about the impact of the climate
change response measures”:
 Studies exposure and vulnerabilities
 Examines coping strategies to
enhance resilience
 Identifies barriers for coping
strategies implementation
Albania
Argentina
Australia
Bangladesh
Bolivia
Botswana
Brazil
Cambodia
Cameroon
Canada
Chile
China
Colombia
Costa Rica
Cote d'Ivoire
Czech Republic
Ecuador
Egypt
France
Germany
Ghana
Honduras
Hungary
India
Indonesia
Israel
Italy Jamaica
Japan
Jordan
Kazakhstan
KenyaSouth Korea
Kuwait
Lithuania
Malawi
Malaysia
Mexico Mongolia
Morocco
Mozambique
Namibia
Nicaragua
Norway
Pakistan
Panama
Peru
Philippines
Poland
Qatar
Russia
Saudi Arabia
Singapore
South Africa
Spain
Sweden
Switzerland Tanzania
Thailand
Tunisia
Turkey Uganda
Ukraine
UK
USA
-
0.5
1.0
- 0.5 1.0
Highexposure
Low resilience
Very vulnerable
Potentially vulnerable
Least vulnerable
Lowexposure
High resilience

4. What if resource reach countries mistake structural
transformations for cyclical fluctuations?
 Overlook technological innovations
(0.30)
(0.25)
(0.20)
(0.15)
(0.10)
(0.05)
0.00
CDC OPECDRV OPECFOL MICCOAX LIWFFL Russia
%ofBAU

5. What If resource reach countries mistake structural
transformations for cyclical fluctuations?
 Overlook technological innovations
 Are not prepared for transformations
of the global markets in response to
emerging regional climate policies
(0.60)
(0.50)
(0.40)
(0.30)
(0.20)
(0.10)
0.00
CDC OPECDRV OPECFOL MICCOAX LIWFFL Russia
%ofGDP
HT HT and UCP

6. What If resource reach countries mistaken
structural transformations for cyclical fluctuations?
 Overlook technological innovations
 Are not prepared for transformations
of the global markets in response to
emerging regional climate policies
 Are “taken by surprise” when trading
partners introduce a border
adjustment policy
(2.50)
(2.00)
(1.50)
(1.00)
(0.50)
0.00
CDC OPECDRV OPECFOL MICCOAX LIWFFL Russia
%ofBAU
HT HT and UCP HT, UCP and BAP

7. Responding to technological transformations and
policy shocks
 Cooperation with the rest of the world
on the global climate policy alleviates
some costs…
 but not for middle-income countries
with large coal reserves
(2.50)
(2.00)
(1.50)
(1.00)
(0.50)
0.00
CDC OPECDRV OPECFOL MICCOAX LIWFFL Russia
%ofBAU
HT HT and UCP HT, UCP and BAP COOP

8. Responding to technological transformations and
policy shocks
 Cooperation with the rest of the
World on the global climate policy
alleviates some costs…
 but not for middle-income countries
with large coal reserves
 Cooperation on the global climate
policy with simultaneous
development of resource and carbon
intensive sectors (traditional
diversification) offsets cost of climate
policy. It looks like a natural response
by CDC
(2.50)
(2.00)
(1.50)
(1.00)
(0.50)
0.00
0.50
CDC OPECDRV OPECFOL MICCOAX LIWFFL Russia
%ofGDP
HT HT and UCP HT, UCP and BAP COOP COOP TD

9. Responding to technological transformations and
policy shocks
 Cooperation with the rest of the World
on the global climate policy alleviates
some costs…
 but not for middle-income countries
with large coal reserves
 Cooperation on the global climate
policy with simultaneous development
of resource and carbon intensive sectors
(traditional diversification) offsets cost
of climate policy. It looks like a natural
response by CDC
 But only a comprehensive assets’
diversification provides an actual relive
and ensures a long-term economic
growth (2.50)
(2.00)
(1.50)
(1.00)
(0.50)
0.00
0.50
1.00
1.50
2.00
CDC OPECDRV OPECFOL MICCOAX LIWFFL Russia
%ofBAU
HT HT and UCP HT, UCP and BAP COOP COOP TD COOP AD

10. Protecting assets value in extractive
industries
 Extractive industries will experience
equity value losses resulting from
transformations of the global
economy
 Earlier correction of the market value
is a better choice:
 Cooperate with the rest of the world
on climate policy and avoid a
catastrophic double-digit plunge in
assets’ value
(18.00)
(16.00)
(14.00)
(12.00)
(10.00)
(8.00)
(6.00)
(4.00)
(2.00)
0.00
ND TD AD
%ofBAU
CDC Decide to cooperate in 2020
CDC decide not to cooperate and hit by UCP BT-N in 2025
Losses of equity
value in extractive
industries (coal, oil
and natural gas)
relative to BAU (in
% of BAU)

11. Tragedy of horizon
 Cooperation and assets
diversification (AD) is a
dominant strategy for a long-
term economic growth
(3.00)
(2.00)
(1.00)
0.00
1.00
2.00
3.00
4.00
5.00
2011 2015 2020 2025 2030 2035 2040 2045 2050
%ofBAU
BT-N BT-N TD BT-N AD
COOP COOP TD COOP AD
Real GDP as % of
BAU

12. Tragedy of horizon
 Between 2015 and 2025 cooperation
and AD look like the worst choice
(3.00)
(2.00)
(1.00)
0.00
1.00
2.00
3.00
4.00
5.00
2011 2015 2020 2025 2030 2035 2040 2045 2050
%ofBAU
BT-N BT-N TD BT-N AD
COOP COOP TD COOP AD
Real GDP as % of
BAU
(1.50)
(1.00)
(0.50)
0.00
0.50
2015 2020 2025 2030
%ofGDP
BT-N BT-N TD BT-N AD
COOP COOP TD COOP AD

13. Barriers
 Surge in an implementation cost
between 2015 and 2025
 Resistance of extractive and carbon
intensive industries:
 Cooperation preserves oil rent but
destroys coal value
 Traditional diversification (TD)
enhances the value of all reserves
 Coal losses are smaller under the
unilateral scenario even with a border
adjustment policy
 Carbon intensive sectors are better-
off under TD
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
UCP UCP
TD
UCP
AD
UCP
BT-N
UCP
BT-N
TD
UCP
BT-N
AD
COOP COOP
TD
COOP
AD
%ofBAU
Coal Oil Gas
Losses of discounted resource rent relative to BAU

14. Transition to knowledge based green
economy
 Only cooperation stimulates an
emissions reduction in CDC
 Assets diversification amplifies long-
term benefits of greener development
 Assets diversification requires good
governance and better institutions:
 Investment into human capital
 Favorable investment climate since
benefits are scattered across all
sectors
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2011 2015 2020 2025 2030 2035 2040 2045 2050GtCO2
CDC CO2 emissions
BAU UCP UCP and BT-B
UCP and BT-A UCP and BAP COOP
Reduction of
“hidden costs” of
fossil fuels
combustion (PM2.5
emissions)*
Current mortality
attributed to PM2.5:
• Kazakhstan up to 25 000
deaths per year
• Russia 90 000 deaths per
year
• Ukraine up to 27 000
deaths per year
*)Kenessariev et al (2013), Golub et al (2008), Strukova et al (2006)

15. Assets diversification provides better
quality of live
Higher labor productivity and
higher consumption
(8.00)
(6.00)
(4.00)
(2.00)
0.00
2.00
4.00
2011 2015 2020 2025 2030 2035 2040 2045 2050
%ofBAU
UCP BT-N ND UCP BT-N TD UCP BT-N AD
COOP ND COOP TD COOP AD
Robustness of a total
discounted consumption
across different scenarios
(2.00)
(1.50)
(1.00)
(0.50)
0.00
0.50
1.00
ND TD AD
%ofBAU
Min Midpoint Max
Real adjusted
consumption:
• Left panel -
annual
dynamics
• Right panel -
discounted
over the period
2021-2050

16. Assets diversification In Kazakhstan:
The Pilot Study (scope and motivations)
 This double dependency on fossil fuels (for export and
domestic consumption) makes Kazakhstan exposed to
 unexpected events on the global natural resource market,
 future development of global climate policy,
 clean technology transformations,
 shifts in external consumers’ and investors’ preferences .
 Latest decline of oil prices again demonstrated dependency
of Kazakhstan on revenues from natural resources.
 The pilot study focus on application of the methodology
for quantification of benefits of a carbon intensive
economy diversification
 Provide a preliminary answer to the following questions:
 How to assess vulnerability of the economy of Kazakhstan to
shocks in fossil fuel markets, international climate policies and
transformational technology trends.
 How to enhance resilience of Kazakhstan to external shocks

17. Assets diversification in Kazakhstan
Total discounted
GDP
Total discounted
investments
Total discounted
consumption
• Modeling
period 2011-
2050
• Discount rate
3%
• Number of
Monte-Carlo
simulations
3000

18. Assets diversification is the best strategy for
Kazakhstan to cope with development challenges
 Cooperation is the best choice in case of
border adjustment policy threat
 Human capital crowds out a conventional
investment and leave more “space” in GDP for
a disposable income
 Investments into human capital generate an
increasing returns, investment in natural
resources and carbon intensive sectors exhibit
decreasing returns
 Over time asset diversification generates a
better expected outcome and has a higher
option value, but Kazakhstan faces the same
“Tragedy of Horizon” as all other CDCs
0
20
40
60
80
100
120
BAU Cooperation BAP Cooperation
and TD
Cooperation
and AD
%ofBAU
Expected value Option value
Expected value
and option value
calculated for
discounted GDP
as % of BAU
Option value =
economic value
of irreversible
losses attributed
to rejection of
the strategy in
question