Green Growth: Mirage or Reality for Azerbaijan's Future?

In the past 30 years, Azerbaijan has achieved remarkable economic growth and welfare gains, transforming from a low-income to an upper-middle-income country that helps the poorest countries through contributions to the World Bank's International Development Association.

As we look at Azerbaijan's prospects for prosperity in light of emerging global economic trends, it is evident that the economic growth of the past decades has been largely driven by the country’s  oil and gas sector, which represented more than 50% of the country’s exports and contributed 30% to its gross domestic product (GDP) in 2018. This fossil-fuel driven growth model has come at a cost: the country’s land, soil, and air are affected by pollution and the development of human capital and other sectors of the economy is lagging. Furthermore, this economic model is not aligned with Azerbaijan’s climate commitments under the Paris Agreement and the 2030 Agenda for Sustainable Development. Based on current estimates, the country’s oil reserves are expected to be depleted within the next 25 years.

The government of Azerbaijan recognizes that sustaining strong growth will require a greener model. It has prioritized an agenda that aims to pivot the country towards a more sustainable and resilient economy, enabling it to meet its international environmental commitments and its pledge to reduce GHG emissions set in its Nationally Determined Contributions (NDC) under the Paris Agreement.

Azerbaijan's 2030: National Priorities for Socio-Economic Development, the vision for the country's development for the next decade adopted last year, and the Socio-Economic Development Strategy, recently approved by Azerbaijan's President, place green growth and clean environment among the five strategic pillars underpinning Azerbaijan’s future development.

So, what steps will the country take as it shifts toward a greener and more sustainable growth model? 

Stepping into a Green Future

A recent World Bank report, “Azerbaijan: Towards Green Growth,”—part of a climate and environmental assessment—aims to answer these questions. Prepared in collaboration with the government and in consultation with national and international stakeholders, the study applied new analytical tools to the specific context of Azerbaijan to deliver rich data and analysis on risks and opportunities arising from the physical and transitional impacts of climate change, the potential for economic diversification from the development of new, greener sectors, as well as and policy recommendations on natural and human capital depletion. Among growth sectors with the potential to attract and boost sustainable green growth, contribute to decarbonization and climate resilience, and create jobs, the report identifies low-carbon hydrogen and off-shore renewable energy production, climate-smart agriculture and land use, and the development of a blue economy focusing on the exploitation and preservation of the Caspian Sea and coastline.

In addition to a country climate and development report (CCDR) currently under preparation, the World Bank aims to provide a blueprint for concrete near-, medium-, and long-term actions that promote the low-carbon transition, reduce GHG emissions, and boost climate adaptation—thus integrating climate change mitigation with development priorities.

To be globally and regionally competitive, the report suggests, Azerbaijan needs to focus on decarbonization, innovation, human capital, and diversification. Greening a number of sectors and increasing climate action can propel Azerbaijan's economy towards these objectives, reduce greenhouse (GHG) emissions and address the physical and transitional risks and vulnerabilities associated with climate change. A mix of green policies, measures, and areas for deeper research can jump start the transition and have an immediate positive impact on Azerbaijan's economy and environment. These include:

• Adopting a whole-of-economy strategy and roadmap at national level to create opportunities for green growth and build a framework for mobilizing green finance;

• Accelerating exploration of the country’s competitive advantage for the development of a low-carbon hydrogen industry;

• Cutting fugitive GHG emissions from the oil and gas industry, and investing in resource efficiency;

• Improving land use, urban planning, water and waste management, and climate-smart agriculture;

• Harnessing cost-effective solar and offshore wind renewable energy potential;

• Conducting cross-country research to unlock the potential for blue economy development of the Caspian maritime space.

While the public sector can play a key role in driving green change, private capital investments can make a significant difference. By incentivizing green investments and green finance, public policy interventions can mobilize private enterprises to take the lead in shifting capital to green areas, nurture innovative and new technologies to help address pollution and GHG emissions, and accelerate the transition towards more renewable sources and increased energy efficiency and recycling.  

Engaging the private sector will create jobs in new sectors and contribute to a demand for skilled workers, which can be met through skills development, training, and reskilling of workers transitioning away from extractive sectors to strengthen human capital, sustainability, and inclusion. All of this will help Azerbaijan increase its competitiveness in a greener global marketplace and help the country reach its development goals.

Beginning now and with the help of public resources and revenues from fossil fuel exports, Azerbaijan can chart a new course towards a greener future — a future of prosperity, wellbeing, and a cleaner environment for its people now and for generations to come. The World Bank stands ready to support Azerbaijan on this course.