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GlobalDecarbonizationinFossilFuelExport-DependentEconomies

Fiscalandeconomictransitioncosts

byLarsJensen

UNDPGLOBALPOLICYNETWORK

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GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS1

GlobalDecarbonizationinFossilFuelExport-DependentEconomies

FiscalandEconomicTransitionCosts

byLarsJensen(

lars.jensen@

)1

1LarsJensenisaSeniorEconomistinUNDP’sGlobalpolicyUnit,BureauforPolicyandProgrammeSupport.Acknowledgements:Theauthorisgratefulforcomments,feedbackand/orguidancefromYanchunZhang,DegolHailu,EduardoOrtiz-JuarezandGeorgeGrayMolinafromUNDP.PeterNaglefromtheWorldBank.ÒscarJordàfromtheFederalReserveBankofSanFrancisco.MarceloLaFleurfromUNDESA.Allmistakesaremyown.

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GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS

Figures

Figure1:Fossilfueldependence–rents,exportsandgovernmentrevenue(avg.values2015-2019)......7

Figure2:Oildemandunderdifferentdecarbonizationscenarios,(Mb/d)

11

Figure3:Oilprices(realterms,US$2023)*underdifferentdecarbonizationscenarios

12

Figure4:OilrentsforthegroupofFF-dependenteconomies,realterms(US$2023)*

15

Figure5:Nigeria–Revenuecompositionandoil-rents(2010-2019)

16

Figure6:OilpriceinUS$/barrelofcrude,1980-2022

17

Figure7:EMDEs-Averagechangefromoilpriceboom(2010-2014)tobust(2015-2019)

18

Figure8:EMDEs-GDP(constantprices)responsetoatenppincreasein(real)oilpriceinflation........19

Figure9:EMDEs-Revenueresponsetoatenppincreasein(real)oilpriceinflation

20

Figure10:EMDEs-Publicdebtresponsetoatenppincreasein(real)oilpriceinflation

20

Figure11:Fossilfueldependencyandhumandevelopment

23

FigureB1:Expenditureresponsetoatenppincreasein(real)oilpriceinflation

31

FigureB2:Fiscalbalanceresponsetoatenppincreasein(real)oilpriceinflation–fullsample

32

FigureB3:Fiscalbalanceresponsetoatenppincreasein(real)oilpriceinflation-

excludinghighincome

32

Boxes

Box1:Globaldecarbonizationscenarios

10

Box2:Assumptionsunderlyingthelossofrentestimates

14

Tables

Table1:NumberofcountrieswherefossilfuelrentsexceedthreepercentofGDP

8

TableA1:40mostfossilfuel-dependentproducercountries–indicatorsofdependency

27

TableB1:Countriesinexporterandimportersample

29

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GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS

Abstract

Thispaperidentifies40economiesthatdependheavilyontheextractionandexportsoffossilfuels(FF).Fortheaveragecountry,FFgenerate14.3percentofGDPinrentsannually,accountingformorethan60percentofexportsandlikelymorethanonethirdoftotalgovernmentrevenue.Asidefromahandfulofprimarilyhigh-incomecountries,mostcountrieshavelittleornosavingstohelpthemcushionthetransitorycostassociatedwithaninevitablesteepfallindemandandpricesfortheirresourcesunderanambitiousglobaldecarbonizationscenario,i.e.,anyscenariocompatiblewiththeParisAgreement.Itisestimatedthatthegroupof40willlosemorethan60percentorbetween(presentvalueadjusted)US$12-14trillioninoilrentsaloneduringtheperiod2023-2040underanet-zero2050globaldecarbonizationscenariocomparedtoa‘businessasusual’scenarioreflectingstatedpolicies.Thisrepresentsalossofrentsequivalentinsizetobetween120-142percentofcurrentGDP.Estimatingalocalprojectionmodelonpanelsofemergingmarketsanddevelopingeconomies(EMDE)oilexportersversusimporters,resultsfromfive-periodcumulativeimpulseresponsefunctionssuggestthatforexporters,atenpercentagepoint(pp)decreasein(real)oilpriceinflationisassociatedwithadeclineof1.58percentin(real)GDPfourperiodsaftertheshock,equivalenttoanaverageannualgrowthrateof-0.31percent;adecreaseinannualgovernmentrevenueasapercentageofGDPbybetween0.6and0.7ppand;anadditionofabout0.5pptogovernmentdebtasapercentageofGDPeveryyear,reachingatotalof2.5ppfourperiodsaftertheshock.Finally,thepaperdiscusseshowvulnerablecountriesaretotheeconomicimpactsofglobaldecarbonizationandthedomesticandinternationalpolicyoptionsthatcouldhelpmitigatetheirtransitioncosts.

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GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS

Introduction1

TolimitglobalwarmingtothegoalssetoutintheParisAgreement,globaldecarbonizationmustproceedrapidlyoverthenexttwodecades.2TheIntergovernmentalPanelonClimateChange(IPCC)estimatedtheremainingglobalcarbonbudgetatthebeginningof2020toliebetween300-900gigatonnesofCO2(GtCO2)foran83percentchanceofstayingwithina1.5°C-2.0°Criseinglobaltemperature(overpre-industrialtemperature)bytheendofthiscentury(IPCC,2021).3Ifweassumethatannualaverageemissionswillstayatthe2019levelof40GtCO2goingforward,the1.5°Cbudgetwould,therefore,beexpendedbeforetheendof2027andthe2.0°C-budgetbefore2042.Estimatessuggestthatannualemissionsarenowbackatpre-pandemiclevelsandexpectedtorisefurther,whilereachingnet-zeroemissionsby2050wouldrequireanaverageemissionsreductionofabout1.4billiontonnesperyear(GCP,2022).4Currentpoliciesdonotlendmuchoptimismtolimitingglobalwarming.TheClimateActionTrackerinitiativehasestimatedthatundercurrentpolicies,theendofcenturywarmingwouldbe2.7°C.Evenunderall2030nationallydeterminedcontribution(NDC)targets,theworldwouldemitroughlytwiceasmanygreenhousegasses(GHGs)in2030asrequiredtostayona1.5°Ccompatiblepathway(CAT,2022).Similarly,initslatestassessmentreport,theIPCCconcludesthatifconsideringonlythosecountriesthathavealreadyimplementedmitigationpolicies,projectedemissionswouldleadtoawarmingof3.2°C,andwhenaccountingforNDCtargets,2.8°C(IPCC,2023).TheIPCCreportalsoconcludesthatglobalsurfacetemperatureisalreadyhigherby1.1°Cdegreesandthatstayingwithin1.5°Cofwarmingby2100willrequirea60percentfallinGHGemissionsby2035.

Whateverourlikelihoodoflimitingwarmingto1.5°C,anymajorglobaldecarbonizationeffortwillunequivocallyrequireamajorreductionintheuseoffossilfuels(FF),theburningofwhichaccountsforabout85percentofhuman-causedannualCO2emissionsand65percentoftotalGHGs.5TheInternationalEnergyAgency(IEA)estimatesthattohavea50percentchanceofstayingwithin1.5°C,theglobalenergysectorwillhavetoreachnet-zeroemissionsby2050(IEA,2021a).Achievingthisobjectiveisbelievedtorequireafallindemandfromthecurrentlevelsof90percent,75percentand55percentforcoal,oilandgas,respectively,by2050.

Whilelimitingglobalwarmingwillundoubtedlymakeeveryonebetteroffinthelong-run,decarbonizationwillbeapainfuladjustmentforsomecountries.Identifyingthepotentialwinnersandlosersofthetransitionisfraughtwithuncertaintyandisparticularlysensitivetonationalandinternationalpolicychoicesandcooperation,technologicaldevelopments,naturalresourceendowments,etc.However,thegroupofdevelopingeconomiesthatrelyheavilyonextractingandexportingFFcanbeconsideredamongthemostvulnerable.

FF-dependentcountriesrelyonFF,andmostlyoil,tosupporteconomicactivity,earnforeignexchange,fundpublicspendingandinvestments,etc.Evendisregardingtheireffortstodecarbonize,thesecountriesarelikelytosufferthehardestfiscalandeconomicconsequencesfromglobaldecarbonization,whichinmanycasescouldspillovertoalreadyfragilesocio-economicfundamentals.Managingthe‘exogenousimpact’fromglobaldecarbonizationincountrieswithalreadylowpercapitaearningsandsavings,lowlevelsofhumancapitalandstrainedpublicfinances,willbenearlyimpossiblewithoutmuchmoreinternationalsupportaccompaniedbyurgentdomesticfiscalandeconomicreform.

2Article2(a)ofthe2015ParisAgreementreads:“Holdingtheincreaseintheglobalaveragetemperaturetowellbelow2°Cabovepre-industriallevelsandpursuingeffortstolimitthetemperatureincreaseto1.5°C…’’(UnitedNations,2015).

3TheIPCCestimatesthatforevery1,000GtCO2emittedbyhumanactivity,globaltemperaturerisesby0.45°C.

4Theseincludeemissionsfromfossilfuels,industryandlandusechanges.In2020,anddespitewidespreadlockdowns,emissionsreached34.7GtCO2,grewto36.3GtCO2in2021andisestimatedtohavereached36.6GtCO2in2022and37.5GtCO2in2023.

5

/ghgemissions/global-greenhouse-gas-emissions-data

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GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS

Thenaturalresourceendowment‘flipside’ofalowerFFdemandisanexpectedincreaseinthedemandforso-calledtransitionminerals,broadlyunderstoodasthemineralsneededincleanerenergytechnologiesandelectrification(WorldBank,2020a).Bysomeestimates,demandfortransitionmineralscouldpushtheproductionvalueofjustfourkeymetals(cobalt,nickel,lithiumandcopper)closetoUS$13trillionoverthenexttwodecades(Boer,Pescatori,&Stuermer,2021).ButonlyfewoftheFF-dependentcountriescanhopetosubstituteFFrentlosseswithmineralrentgains,asmetalorereservesandproductionareconcentratedinfewercountriesrelativetoFFreservesandproduction,hereunderoil,whichisbyfarthelargestsourceofrent(WorldBank,2021a).Inaddition,mineralrentstendtobesmaller,andgovernmentsonaveragealsotakeasmallershareasrevenuecomparedtoFFrents(WorldBank,2021b).Anothermajorchallengeofglobaldecarbonizationisthatminingactivitiesareoftenriddledwithsocialandecologicalinjusticeslikelytointensifywithanincreasingdemand(Bainton,Kemp,Lèbre,Owen,&Marston,2021).Furthermore,miningisbothenergy-andemissions-intensivewithsomeestimatessuggestingthatGHGemissionsassociatedwithprimarymineralandmetalproductionaccountforabouttenpercentofglobalenergy-relatedGHGemissions(Axadi,Northey,Ali,&Edraki,2020).

BasedonestimatesofFFrents,thispaperidentifies40highlyFF-dependentcountries(31ofwhicharelow-andmiddle-incomecountries)thatonaveragehavegeneratedFFrents(fromoil,coalandgas)worthmorethanthreepercentofGDPannuallyfrom2015to2019.Theaverage/mediancountrygeneratedFFrentsof14.3/11.1percentofGDP;FFaccountedfor61.2/61.5percentofexports;andresourcerevenuerepresented38.6/33.8percentoftotalgovernmentrevenue.ItislikelythatFFrentsalonecontributedonethirdoftotalrevenue.Underthemostambitiousglobaldecarbonizationscenarioaimedatlimitingglobalwarmingto1.5°Cdegrees,thispaperestimatesthatthegroupcould,inpresentvalueadjustedterms(PV),losebetween$12-14trillionofoilrentsaloneintheperiod2023-2040comparedtoa‘businessasusualscenario’.Thisrepresentsalossofrentsofmorethan60percentandequivalentinsizetobetween120-142percentofthegroup’scurrentGDP.Econometricanalysisconfirmsthepossibilityofveryhigheconomicandfiscaltransitorycostsinoilexport-dependentemergingmarketsanddevelopingeconomies(EMDEs)fromfallingoilprices.Resultsfromfive-yearcumulativeimpulseresponsefunctionestimatessuggestthatatenppdecreasein(real)oilpriceinflationisassociatedwithanannualaveragecontractionin(real)GDPof0.31percentwithGDP1.58percentsmallerfourperiodsaftertheoilpriceshock;afallinannualgovernmentrevenueasapercentageofGDPbybetween0.6and0.7ppoverthefullprojectionhorizon,and;anadditionofabout0.5pptogovernmentdebtasapercentageofGDPeveryyearwiththedebtratio2.5pphigherfourperiodsaftertheshock.

Section2identifiestheworld’smostFF-dependenteconomiesbasedonthreekeymeasuresofdependency:rents,exportsandgovernmentrevenue.Section3estimatesthelossofoilrent(thelargestsourceofnon-renewableresourcerents)from2023to2040underanambitious1.5°Ccompatiblescenarioversusanon-ambitious(‘business-as-usual’)referencescenariorepresenting‘statedpolicies’wherewarmingisexpectedtoreach2.6°Cby2100andcontinuetorise.Section4estimatescumulativeimpulseresponsefunctionsforgrowth,governmentrevenue,expenditureanddebtfrom(real)oilpriceshocksonpanelsofoilexportingversusimportingEMDEsusingalocalprojectionsmodel.Section5presentsanddiscussesthedifferentpolicychallengesandoptionsavailablebothinternationallyanddomesticallyforhighlyFF-dependenteconomiesunderglobaldecarbonization.Finally,Section6concludesthestudy.

GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS7

Fossilfuelexports(%oftotalexports)2

100

90

Income

HIC

O

NQ

LICLMIC

UMIC

CD

80

70

60

50

40

30

20

10

0

TLS

CO

S

Fossilfuelrents(%ofGDP)3

G

O

ARE

10

20

30

40

50

NEGY

MYS

SUR

Fossilfuelexport-dependentcountries

2

ThissectionlooksatFFdependencyusingavailabledataonFFrentasapercentageofGDP,fuelexportsasapercentageoftotalexportsandresourcerevenueasapercentageoftotalgovernmentrevenue.6ThemainselectionvariableisFFrent,andhere40countriesextractannualrentshigherthanthreepercentofGDP,whichisusedasthecut-offlevel.7

Availabledataon35oftheidentified40highlyFFdependentcountriesshowthatonaverageFFgeneraterentsashighas14.3percentofGDPannually,makeup61.2percentoftotalexports,andrevenuesfromnaturalresourcescontribute38.6percentoftotalgovernmentrevenue(Figure1).InFigure1,thedottedlinesdenotetheaveragevaluesacrosscountriesforthenaturalresourceshareofgovernmentrevenuesonthex-axisandtheFFshareofexportsonthey-axis.ThesizeofFFrents(asapercentageofGDP)isdenotedbythesizeofthebubbles,whicharecoloredbasedonfourincomegroups:high(HIC),upper-middle(UMIC),lower-middle(LMIC)andlow(LIC).

Figure1:Fossilfueldependence–rents,exportsandgovernmentrevenue(avg.values2015-2019)

DZ

A

SS

ID

RQ

NG

A

AG

AZ

E

BRN

KW

T

L

BY

VE

N

QA

T

G

T

SA

U

KAZ

GIR

AB

N

NO

R

L

RU

TT

CO

Y

EM

P

NG

MO

Z

CM

M

NRG

BO

L

GH

ASD

0102030405060708090100

Resourcerevenues(%ofgovernmentrevenue)1

Source:AuthorbasedondatafromWDI,GRD,EITI,BACI,CEICandWEO.Note:Thefigureincludes35ofthe40highlyfossilfuel-dependentcountries,asfivedonothaverecentdataonresourcerevenues(Bahrain,Ecuador,Oman,Turkmenistan,Uzbekistan).

1DatabasedonGRDexceptforColombiaandMozambique,wheredataisfromthelatestEITIreports.ForLibya,VenezuelaandYemen,thelatestGRDdataisfrom2012.Datapointsforthesecountriesareestimatesoftheir2019FFrevenuesharesobtainedbyscalingtheiroilproductiontimesglobalcrudepricein2012withtheiroilproductionandcrudepricein2019usingCEICdataforoilproductionandIMFWEOdataforrevenue.

2ExportsarebasedondatafromWDI.Forcountrieswithallormanymissingobservations,wereliedonexportdatafromtheBACIdatabasefromCEPII.3BasedonavailabledatapointsfromWDI.DataforVenezuelaisfrom2014andSouthSudan2015.Syriaisnotincluded,asthelatestdatapointisfrom2007.

6Rentsmeasurethedifferencebetweenaunit’smarketpriceandcostofextraction.Fordetailsonrents,seeSection3or(WorldBank,2021b).

7Latestdatapointusedis2019,exceptforIran(2018)SouthSudan(2015)andTurkmenistan(2018).Syriaisnotincludedasthelatestdatapointisfrom2007.

GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS8

Whilecomparablecross-countrydataongovernmentresourcerevenueisscarceandonlyletsonelookatthetotalresourcecomponent(UNU-WIDER,2021),rentsdatasuggestthatanoverwhelmingmajorityofresourcerevenuesmustcomefromFF,especiallyoil.Fortheaveragecountry,FFrentscomprise92.7percentoftotalnon-renewableresourcerents,andoilalonemakesup75.3percentoftotalFFrents.8Eightcountriesproducemorethan50percentoftheirFFrentsfromsourcesotherthanoil:Malaysia(gas),Mongolia(coal),Mozambique(coal),PapuaNewGuinea(gas),TrinidadandTobago(gas),Timor-Leste(gas),Turkmenistan(gas)andUzbekistan(gas).ToobtainanestimateoftheFFshareoftotalgovernmentrevenueonly,thetotalresourcerevenueshareisadjusteddownwardsbytheratioofFFrenttototalnaturalresourcerent,althoughthiswilllikelyresultinanunderestimation.9Doingso,theFFshareoftotalgovernmentrevenueisestimatedat35percentfortheaveragecountry.Inotherwords,itislikelythattheaveragecountryreceivesmorethanonethirdoftotalgovernmentrevenuefromFFrentsalone.

Table1liststhe40countriesgroupedonincomelevelandgeographicalregion.AnnexTableA.1includestheavailabledataandestimatesforeachofthethreechosenmeasuresdepictedinFigure1.NinecountriesareHICs,ofwhichsixarefromtheMiddleEastandNorthAfrica(MENA)region.FivecountriesareLICsandallarefromtheSSAregionexceptforYemen.Theremaining26aremiddle-incomecountriessplitevenlybetweenLMICsandUMICs.MENAhasthehighestnumberofcountries(12),followedbySSA(11),EACandLAC(each6)andfinallyEAP(5).

Table1:NumberofcountrieswherefossilfuelrentsexceedthreepercentofGDP

REGION/INCOME

LIC

LMIC

UMIC

HIC

Total

EastAsia&Pacific

Mongolia,Pap-

uaNewGuinea,

Timor-Leste

Malaysia

BruneiDarussalam

5

Europe&CentralAsia

Uzbekistan

Azerbaijan,

Kazakhstan,Russia,

Turkmenistan

Norway

6

LatinAmerica&Caribbean

Bolivia

Colombia,Ecuador,Surinam,Venezuela

Trinidadand

Tobago

6

MiddleEast&NorthAfrica

Yemen

Algeria,Egypt,Iran

Iraq,Libya

Bahrain,Kuwait,

Oman,Qatar,Saudi

Arabia,UnitedArab

Emirates

12

Sub-SaharanAfrica

Chad,

Mozambique,

SouthSudan,

Sudan

Angola,Cameroon,

Congo(Republicofthe),Ghana,Nigeria

EquatorialGuinea,Gabon

11

Total

5

13

13

9

40

Source:WorldDevelopmentIndicatorsdatabase.

Thirteenofthe40areontheWorldBank’slistof39‘FragileandConflict-affectedSituations’withYemeninthemostseverecategory,‘High-IntensityConflict’10WhileYemen’spositioninFigure1suggeststhatthecountryisnotamongthemostFFdependent,thisislikelyduetothewar,whichhascausedlargedisruptionstooilproduction,aneconomiccollapseandahumanitariancatastrophe11

8Non-renewablerentscoveroil,gas,coalandminerals,butexcludeforestrents.Amongourselectionof40highlyFF-dependentcountries,sevenalsogeneratelargerentsfromforests:Cameroon,Ghana,Malaysia,Mozambique,PapuaNewGuinea,SudanandSuriname.

9ThisadjustmentwouldlikelyunderestimatetheFFshareofgovernmentrevenueasFFrentsarenormallytaxedatahighereffectiveratethanotherresourcerents.Seeforinstance(WorldBank,2021b).

10Syriaisalsoa‘high-intensityconflict’country,butnotincludedinthegroupof40FF-dependentcountriesduetomissingdata.SeetheWorldBank’slisthere:

https://www

./en/topic/fragilityconflictviolence/brief/harmonized-list-of-fragile-situations

11BeforethewarFFrentsaccountedforaboutonethirdofGDP,90percentofexportsanditwasestimatedthatthehydrocarbonindustrygenerated50-60percentofgovernmentrevenue(WorldBank,2017).

GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS9

ItcanbenotedthatnewoilandgasfieldexplorationanddevelopmentcontinueinmanycountrieshopingtocashinontheirreservesbeforetheworldweansoffFF.SomeofthesecountriesalreadyextractsignificantFFrentsandarethusincludedinthispaper’sgroupofFF-dependentproducers.OthershavenohistoryofproducingFFandare,therefore,notincluded.Mozambique,includedhere,hashistoricallygeneratedmostofitsFFrentsfromcoal,butmorerecentdiscoveriesoflargegasreserveshaveraisedhopesofhugefuturewindfalls,althoughdevelopmentshavebeendisruptedbyconflict(Parker,2021).Beforethesedisruptions,theIMFestimatedthatfiscalrevenuesfromgasrentwouldstartaccruingtothegovernmentin2023andcouldaccountformorethan50percentoftotalfiscalrevenueby2030(IMF,2019b).GuyanaisanexampleofacountrywithnohistoryofFFproduction,andthusnotincludedinthispaper.However,largeoilfieldsstartedproducingforthefirsttimeinlate201912

ThesizeofFFrentsacountrycanhopetoreceiveoverthenextcoupleofdecadeswilldependonthespeedandscaleofglobaldecarbonizationandonwherethecountryranksintermsofcostcompetitivenessandthesizeofremainingreserves.Low-costproducers,withadequatereserves,arelikelytograbalargershareofashrinkingmarket,andhigh-costproducerswillloserentsfaster;somewilllikelyhavetoshutdownproductionentirelyasdemandandpricesfallsteeply.Thenextsectiontakesacloserlookatthesedynamicsthroughthesizeoffutureoilrentsforthe40countriesundera‘businessasusual’scenarioversusan‘ambitious’scenariothataimstolimitglobalwarmingto1.5°Cdegrees.

12AccordingtoWorldBankdata,Guyanageneratedoilrentsof12.3percentofGDPin2020.InIMF’slatestArticleIVconsultationfromSeptember2019(beforeCOVID),theIMFestimatedthatrealGDPgrowthin2020wouldbeashighas85.6percentbasedonoilsectorinvestmentsandproduction(IMF,2019a).

GLOBALDECARBONIZATIONINFOSSILFUELEXPORT-DEPENDENTECONOMIES-FISCALANDECONOMICTRANSITIONCOSTS10

Oilrentsandrevenueunderglobaldecarbonization

3

Conceptually,rentscanbethoughtofastheupperboundsofrevenuethatgovernmentscanhopetocollectfromtheownershipofnaturalresources13Inpractice,however,resourcerevenuesandrentscandifferextensively.Estimatessuggestthatgovernments,onaverage,took77percentofoilrentsbetween2010-2014(WorldBank,2021b),andtheIMFhasarguedthatareasonableachievablerangeofadiscountedaverageeffectivetaxrateonpetroleumrentsliesbetween65and85percent(IMF,2012).

Thissectionestimatesthepotentiallossofoilrentsforthe40countriesunderthemostambitiousversusanunambitious(‘business-as-usual’)globaldecarbonizationscenario.Morespecifically,therentlossisestimatedasthedifferenceintotaldiscountedoilrentsfrom2023to2040betweena‘net-zero2050scenario’(NZE)versusa‘statedpoliciesscenario’(STEPS).Theanalysisonlycoversoilrents,asthesearebyfarthelargestsourceofresourcerentsandbecauseoilisbyandlargeaglobalmarket(withoutputtradingatglobalprices)makingcross-countrycomparisonseasier.

FFrentshavebeenlargein2021and2022,aspricesforoil,coalandgashavebeenrelativelyhigh,andforecastssuggestthatpriceswillremainelevatedin2023.Regardlessofshortertermpriceforecasts,theuncertaintysurroundingglobaldecarbonizationleavesFFproducersinadilemma.Theyarereluctanttoleaveresourcesintheground,butalsotoundertakelargeinvestmentsthatriskbecomingidle.Inany1.5°Cor2°Ccompatiblepathwaysthereislittletonoroomfornewmajorinvestments.Underanassumed50percentchanceofstayingwithin1.5°C,onestudyconcludesthatoftheexisting(technicallyandeconomically)provenreserves,58,59and89percentofoil,gasandcoalreservesmustbeleftinthegroundby2050(Welsby,Price,Pye,&Ekins,2021).AUNstudyfoundthatundera1.5°Cpathway,FFproductionmustdecreasebyaboutsixpercenteachyearfrom2020-2030(TheProductionGap,2020).Similarly,inIEA’sNZEscenario(representinga50percentchanceofstayingwithina1.5°Cdegreesofwarming)demandforoil,gasandcoalwillneedtohavefallenby75,55and90percentby205014

Box1:Globaldecarbonizationscenarios

TheNZEscenarioisthemostambitiousintermsoflimitingglobalwarming;itistermed‘extremelyambitious’bytheIEAthemselves.BoththeNZEandthesustainabledevelopmentscen