By Thomas Cronin
October 26, 2023
In 2016, most of the world signed onto the Paris Climate Accord, a legally-binding agreement committing signatories to reducing greenhouse gas emissions to net zero levels by 2050, with the goal of limiting global warming to 1.5˚C above pre-industrial levels. This limit is both deliberate and consequential; there is broad scientific consensus that global warming above 2.0˚C would have catastrophic environmental and other consequences in the form of more frequent and extreme natural disasters, droughts, flooding, rising sea levels, and intolerably high temperatures in warmer areas of the world. The 1.5˚ limit by 2050, then, is needed to avoid the worst effects of climate change for the world.
Climate change will surely have disastrous and far-reaching economic consequences globally. It is likely for this reason that a quickly-growing number of international relations experts in the US identify climate change as a top issue to the country’s foreign policy in TRIP’s 2011, 2017, and 2022 Policymaker Surveys. Yet there is perhaps no group of nations more at risk of harm from it than those in the Middle East and North Africa (MENA) region with economies built around fossil fuel exports. As their economies stand now, economic collapse is near-certain regardless of how successful the world is in meeting the climate goals outlined in the Paris Climate Accord.
On one hand, the region’s extreme economic dependence on exporting fossil fuels means that the global transition away from fossil fuel use as countries aim to reduce their emissions levels would gradually eliminate their only major source of revenue. On the other hand, the MENA region is expected to experience the worst environmental damage from climate change, so even if the world’s fossil fuel use remained largely unchanged from current levels, fossil fuel exporters would face the likely insurmountable costs of adapting to extreme environmental circumstances brought on by the planet’s failing to meet the 1.5˚C limit on global warming. This blog will expand on the specifics of these challenges that fossil fuel exporters will face depending on the world’s collective level of fossil fuel consumption in the coming decades and offer recommendations for how these countries can restructure their economies to be resilient against these challenges.
Poor Outcomes Under Net Zero by 2050
According to a recent IEA analysis, the likeliest path towards achieving net zero emissions by 2050 (the NZE scenario) demands almost a 40% decrease in present carbon dioxide emissions, as well as a 90% drop in coal use, 75% less oil consumption, and 55% less natural gas use from present levels. By the same analysis, such a lofty target would result in dips to historic lows in per capita income from fossil fuel revenues in fossil fuel producer economies, even for countries with the lowest-cost oil and natural gas reserves.
However, lost revenue from declining exports is not the only way reduced global demand for fossil fuels will hurt producer economies. While the production of clean energy under NZE is projected to produce 14 million jobs globally by 2030, hydrocarbon industries would see a decline in 5 million jobs in the same time frame. Additionally, the jobs created would neither necessarily be available in the same areas nor require the same skills as those lost, potentially resulting in mass unemployment for those currently working in the fossil fuel sector. For fossil fuel exporters, government revenues are largely generated by taxes on fossil fuel exports, so these countries would see massive fiscal deficits on top of their private sector woes. Already, low oil prices from recent recessions have pushed many fossil fuel exporters’ fiscal balances negative, which greatly increases their public sector’s vulnerability to further price shocks. The scale of the precarious fiscal situation of the NZE scenario for fossil fuel exporters is such that even the wealthier, more developed fossil fuel exporters, such Qatar, Saudi Arabia, and Kuwait, that have had the luxury of putting excess hydrocarbon revenues towards Sovereign Wealth Funds could see those savings used up in the next 15 years. As a result, developed fossil fuel exporters’ governments will be forced to reign in their currently high levels of spending on social welfare programs and services such as education, healthcare, and government jobs with high wages and benefits, while developing fossil fuel exporters will be unable to increase social spending to aid their growing populations. Massive fiscal deficits will also likely decrease private investment by adding uncertainty about government solvency to the already high risks associated with climate change.
Worse Outcomes Under Business as Usual
As high as the fiscal costs of the NZE scenario would be for fossil fuel exporters that choose not to diversify their economies, the costs of adaptation to climate change in a world that does not accelerate reducing emissions should be equally worrisome, with estimates ranging as high as 3.3% of GDP for the typical country in the Middle East by 2030 alone. Under the business-as-usual scenario, in which the global transition from fossil fuels stalls at current levels, global warming would vastly exceed the 1.5˚C limit after which most scientists agree the consequences of climate change would be particularly devastating. For a region already struggling with adverse effects of climate change, adapting to the projected additional warming of up to 6˚C in global average temperatures in the business-as-usual scenario would be economically catastrophic.
Because of climate change’s multifaceted and unpredictable nature, it is difficult to predict which industries will be hardest hit and to what extent, but existing macroeconomic analyses are already producing statistically significant estimates of damages from temperature and precipitation shocks resulting from climate change to agriculture, utilities, service, hospitality, tourism, and finance sectors, among others (see Table 1). The same analyses have found similar changes in employment. Of note is that while temperature and precipitation shocks have minimal average effects on most sectors across the entire MENA region so far, this is because different countries respond very differently to the same shocks. Drier countries tend to be hurt far worse than the averages shown in Table 1 from decreased precipitation, for example, while countries with excessive rainfall benefit. Similarly, countries with higher average temperatures suffer far worse from hotter temperatures than countries with more tolerable average climates. Thus, some countries in the MENA region, especially warmer, coastal countries already prone to excessive heat and flooding, will see far more dramatic fiscal costs to climate damage, even in sectors that on average appear not to be hurt much by temperature or precipitation shocks.
Climate disasters are another area of increasing importance to the Middle East under the business-as-usual scenario, as an increase in their frequency and strength would be a consequence of the scenario’s dramatic increases in global warming. The financial effects of climate disasters primarily show up in the MENA region as disruptions to current account balances due to falling agricultural exports and a spike in imports of food, medical supplies, and construction materials. In the two years following major climate disasters, MENA countries see an average 2.5% decline in GDP from permanent lower tax revenues and debt deferral.
Structural & Macroeconomic Policy Recommendations
Because the energy sector accounts for approximately three quarters of global emissions, emissions reductions are predominately necessary in the energy sector to meet the world’s collective commitment to net zero emissions by 2050. Unfortunately, the energy sector accounts for the bulk of global demand for natural gas, so annual per capita income from oil producer economies is expected to decrease for fossil fuel exporters by around 75% by 2030 alone if the world makes the reforms needed to achieve net zero by 2050. Such a pronounced decrease in national income over such a short time frame would have staggering, across the board consequences for fossil fuel exporters that choose not to diversify their economies at all, from stranded assets from the 60% of known fossil fuel reserves that will need to be left in the ground, to insurmountable government deficits, and heightened economic volatility.
Fossil fuel reliance in a world predominately powered by clean energy, then, is clearly unsustainable, laying bare the need for economic diversification. To ensure the workforce is organized in a way that supports the country’s need for economic diversification, significant labor market reforms are needed. Many countries in the Middle East import enormous shares of foreign workers on contract; an estimated 85% of Qatar’s labor force, for example, is composed of non-citizens. In many countries, these workers’ right to remain in the country is tied to their current employer, preventing them from being able to change jobs and often leading to abusive workplace conditions as a result. Improving labor market conditions would help fossil fuel exporters to attract and keep the best talent for the nonhydrocarbon industries they will need to grow.
Furthermore, despite relatively high levels of human capital among females, many fossil fuel exporters employ women at some of the lowest rates in the world. Similarly low scores on the World Bank’s Women, Business, & the Law Index, a measure of workplace equality, suggests the reason for this may be poor worker protection laws and unfavorable labor workplace conditions for women. Besides alleviating basic human rights concerns, improving workplace circumstances for women will greatly expand fossil fuel exporters’ labor market and guarantee that nonhydrocarbon industries’ growth will not be limited by insufficient human capital.
Beyond labor market reforms, most fossil fuel exporters subsidize fossil fuel production and the energy sector at inordinately high rates. Basic economic theory indicates that lower fossil fuel subsidies are strongly correlated with higher prices, depressing demand for fossil fuels and therefore weakening the fossil fuel industry. Gradually phasing out fossil fuel subsidies would help to both reduce economic reliance on the industry in of itself and return a sizeable amount of revenue to governments for investment in non-energy sectors and green infrastructure to combat the symptoms of severe climate change.
In conclusion, fossil fuel exporters face an uphill battle to preserve their economic prosperity regardless of how the world progresses in its fight against climate change, but it is possible with a swift introduction of structural changes to their economies, including improving worker protections for women and expatriate workers, eliminating of fossil fuel subsidies, and investing in nonhydrocarbon industries and climate-resilient infrastructure.