What would it take to green the private sector in Kazakhstan?

Kazakhstan has set ambitious objectives to achieve carbon neutrality by 2060, requiring fundamental changes to the country’s economy.

Achieving these green targets will be impossible without decarbonizing manufacturing, which accounts for 13.6% of direct emissions and represents 12.9% of the economy’s total value added and 7% of employment at formal legal entities. Greening manufacturing will require buy-in from private firms, which represent 79.7% of the sector’s total employment in 2020 and 80.4% of the sector’s value-added generated in 2019.

While adopting green-friendly solutions to abate greenhouse gas (GHG) emissions will likely generate positive returns economy-wide, the picture is mixed for individual firms. Environmentally friendly technologies can be costly and eventually hamper firm-level competitiveness. And adopting green-friendly solutions at the firm level is contingent on internal intrinsic characteristics and external factors, like how firms are exposed to climate policies or extreme weather events. Understanding how firms are perceiving and reacting to the green transition is, therefore, essential for designing better policy and meeting Kazakhstan’s climate goals. 

Identifying trends

Using firm level data, a background paper prepared for the World Bank’s Kazakhstan Country Climate and Development Report identified systematic barriers and opportunities for the private sector (specifically in manufacturing and services) to adopting green-friendly solutions. Here are six trends we found:  

1) Kazakh firms are less willing to engage in green managerial practices and invest in environmentally friendly solutions than regional peers. For instance, only 54.1% of private firms in Kazakhstan have management systems to monitor the consumption of water, energy, and CO2/other pollutant emissions. This share is higher in other Central Asian countries (Figure 1). Likewise, the proportion of firms investing in measures that reduce (directly or indirectly) their environmental footprint in the past three years has been lower in Kazakhstan (63.8% of total) than in other Central Asian countries (e.g. 88.4% in Uzbekistan).

2) Most firms that do not invest in green-friendly solutions do not see such investment as a priority or a profitable option. Among firms that do not invest in green friendly solutions, 55.8% reported this is not a priority relative to other types of investment. The second most cited reason was the unprofitability of such investment.

3)  The quality of green management practices and level of green investments vary widely across firms, even within sectors. This is especially true for two sectors: fabricated metal products and non-metallic mineral products, known for their significant CO2 emissions. This result calls for the need to design tailored interventions targeting the specific needs of low performers, which will then reduce the dispersion across firms, so the average green credentials are improved.

4)  Whether firms undertake green investments depend heavily on the strength of their green management practices. This holds especially for investments in machinery upgrading—a one standard deviation increase in the quality of green management practices increases the probability of investing in machinery upgrading by 48.3%. That suggest that the government should consider measures to strengthen green management practices to boost investment in green technologies, for instance, by implementing training programs – particularly among MSMEs – or conditioning credit concession for firms adopting better green management practices.

5)  Large, old, and export-oriented firms tend to have better green management practices and higher green investments. As firms mature, they are more likely to be pushed to manage their environmental footprint and invest in ways to reduce it. Likewise, competing in global markets is central for improving firms’ green credentials. Since young SMEs are the backbone of productivity growth and job creation in any economy, the fact that they are lagging in terms of green managerial practices suggests that any policy designed to promote SME and startup growth in Kazakhstan should also target the green angle.

6)  External factors, particularly environmental standards and customer pressure, prompt firms to reduce their environmental footprint. Only 10.3% of private firms are subject to energy performance standards and only 12.8% of firms report that their customers require adherence to environmental standards. Yet both groups, however small, on average perform much better in green management practices and higher level of green investments than firms that do not operate under such conditions.

Implications

Greening Kazakhstan’s private (manufacturing and services) sector will require specific interventions to change firms’ incentive structures to improve their environmental footprint, and these interventions should go beyond adjusting the relative prices of fossil versus non-fossil fuels. While Kazakhstan has a starting framework of mitigation policies in place –  including the new Environmental Code adopted in 2021 – more is needed to ensure the private sector contributes to reducing emissions cuts in the next decade. In this regard, leveraging green finance is a must, but a broader policy mix to green the private sector should also encompass measures to boost the demand for green technologies while supporting scale up and lowering the cost of learning by doing. They include:

• Reshaping business support programs – especially those targeting MSMEs – to prioritize integration into global markets and improvement of green managerial practices, so firms have the technical literacy and capabilities to adopt green technologies while also being prepared to operate in new market niches where payoffs are likely to be higher.
• Streamlining the design and implementation of green regulations already in place, like incorporating more stringent energy efficiency targets into industry standards and adopting already available technologies and software to digitize mandatory energy audits.
• Implementing awareness campaigns to address information gaps among private sector companies and customers on the needs, benefits, and available instruments to stimulate and offset the green transition’s cost.
• Introducing clear and verifiable climate-related criteria in public procurement decisions to change private sector incentives to green their activities while encouraging competition for lower emissions among suppliers and triggering industrial and business model innovation.