GREEN TAXES

As the global climate crisis escalates, nations are seeking innovative strategies to minimize carbon emissions. Carbon pricing has emerged as a vital tool that can mobilize economies toward the adoption of green technologies and sustainable development. Azerbaijan, actively engaged in international climate initiatives, has signalled its commitment to implementing mechanisms that foster the shift to a low-carbon economy. The potential for introducing a carbon tax, cap-and-trade system, and other climate mitigation strategies were key topics at an international forum held in Baku.

Global Trends

Two primary carbon pricing mechanisms currently dominate global practices: the carbon tax and the cap-and-trade system. Alix Perignon De Troy, Executive Secretary of the Intra-European Organisation of Tax Administrations (IOTA), stated, "To cultivate a green economy and foster a safer, healthier world, we must develop such mechanisms." However, Sandeep Bhattacharya from the Asian Development Bank (ADB) emphasized that carbon pricing alone is insufficient. Comprehensive measures are required, including strategic backing from international organizations and governments. "While carbon pricing is effective, additional policy instruments are essential... Countries grappling with the impacts of climate change need targeted support," he added.

Looking at successful global examples, the European Union's Emissions Trading System (ETS) stands out as one of the largest and oldest frameworks worldwide, encompassing a wide array of industries and enabling companies to trade emission allowances. Additionally, the EU employs the Carbon Border Adjustment Mechanism (CBAM) to prevent 'carbon leakage' and ensure fair competition between European and foreign producers. Some regions in the US have adopted cap-and-trade systems or carbon taxes, while China has initiated one of the world’s largest cap-and-trade systems focused on the energy sector. Various regions within China are also experimenting with different carbon pricing mechanisms. Other countries like Canada, Australia, and Mexico have begun to implement new financial control tools to manage emissions from fossil fuel combustion.

Financial Mechanisms

For Azerbaijan, carbon pricing represents more than just an environmental and economic strategy; it offers an opportunity for integration into global efforts against climate change. Orkhan Nazarli, head of the State Tax Service under the Ministry of Economy, remarked that Azerbaijan is actively considering the implementation of a carbon tax: "We are assessing the feasibility of introducing a 'carbon tax' or similar financial instruments aimed at reducing carbon emissions, as seen in international practices." Nazarli highlighted the significance of leveraging international experiences and collaboration in this endeavour, which will facilitate the effective development of an emissions measurement system and the adaptation of best global practices.

Currently, Azerbaijan accounts for only 0.13 percent of global carbon dioxide emissions and has set an ambitious target to reduce emissions by 40 percent by 2040. Achieving this necessitates a strategic approach that encompasses fiscal policies alongside the promotion of renewable energy sources. "In light of our goals, our national tax system will focus on supporting initiatives aimed at investing in renewable energy and decreasing the carbon footprint of productive sectors," Nazarli emphasized.

Minister of Economy Mikayil Jabbarov noted that "the decarbonization process and transition to alternative energy sources in Azerbaijan will be bolstered by all available means, including tax policy." He pointed out that within the framework of carbon pricing, reinvesting funds generated from carbon taxes into small and medium-sized businesses plays a crucial role. Consequently, tax policy serves not only as a means to protect the environment but also as a catalyst for economic growth within green technology sectors.

Azerbaijan is also actively engaging in international climate finance initiatives. One notable effort is the establishment of the Climate Finance Action Fund at the upcoming 29th session of the Conference of the Parties to the UN Framework Convention on Climate Change (COP29), taking place in Baku this November. "This fund is pivotal in addressing existing gaps in climate finance," Jabbarov stated.

Currently, "green" projects led by entrepreneurs are receiving support through soft loans, grants, and startup certificates that offer tax incentives.

Potential Economic Effects

Azerbaijan's pursuit of economic diversification and reduced reliance on hydrocarbons has prompted an exploration of carbon pricing initiatives. However, successful implementation necessitates careful consideration of the specificities of the national economy and a comprehensive set of measures aimed at mitigating any adverse social or economic impacts.

To introduce a carbon tax effectively, it is imperative to establish a transparent and efficient system for monitoring greenhouse gas emissions. Given that this fiscal measure may lead to increased energy and commodity prices—potentially affecting low-income populations—it is essential to devise social support mechanisms to alleviate such repercussions.

Support measures must be tailored for businesses, particularly small and medium enterprises (SMEs), that could encounter challenges when transitioning to low-carbon technologies. Conversely, the rising cost of emissions may incentivize businesses to adopt cleaner technologies and seek ways to minimize energy consumption. By producing goods with a low carbon footprint, Azerbaijan could enhance its competitive edge in global markets. Additionally, developing green industries can create new job opportunities, with extra revenue streams directed towards financing environmental projects, supporting SMEs, and funding other socially significant programs.

The state is prepared to facilitate this transition towards sustainable economic development and promote a climate-oriented green economy through regulatory measures. As emphasized by Nazarli, this includes encouraging renewable energy usage and adopting green technologies. "Our country has enacted legislative measures that incentivize low-emission products and industries. These include incentives for electric and hybrid vehicles, charging stations for electric cars, and revenues from renewable energy fed into the electricity grid by active domestic consumers within specified limits. Economic incentives for green energy producers remain a top priority for us," Nazarli added.

What changes might the introduction of a carbon tax bring to Azerbaijan's economic structure? We can begin by analysing its impact on the energy sector. The oil and gas industry will likely face the greatest pressure as it accounts for a significant portion of greenhouse gas emissions. Companies will need to explore methods to reduce emissions, such as adopting carbon capture and storage technologies or transitioning to cleaner fuels while investing in renewable energy sources.

Traditional thermal power plants powered by coal or gas will experience rising costs which may drive further development of renewable energy options like solar and wind power. The steel and aluminium sectors are among those most vulnerable to energy- and carbon-intensive practices; thus, implementing a carbon tax may elevate product prices from these industries, negatively impacting their global competitiveness.

Since many chemical production processes generate substantial greenhouse gas emissions, companies will be compelled to pursue cleaner technologies or reevaluate their production methodologies. In construction, cement—one of the primary building materials—contributes significantly to CO2 emissions; therefore, introducing a carbon tax may prompt exploration into alternative materials and construction methods.

In transportation, owners of petrol- or diesel-fueled vehicles will face higher fuel expenses, potentially accelerating a shift toward electric vehicles and other environmentally friendly transport options. Both aviation and shipping are also considerable sources of greenhouse gas emissions; thus, implementing a carbon tax will likely raise costs associated with air travel and shipping services.

In agriculture, methane emissions from livestock contribute notably to overall greenhouse gas emissions; hence, farmers may need to adopt more sustainable animal husbandry practices. The production and use of mineral fertilizers also result in greenhouse gas emissions; therefore, farmers will need to find alternative ways to enhance soil fertility.

All these factors indicate that transitioning to a low-carbon economy will require substantial investment and adaptation of current production processes. Consequently, it is advisable to introduce the tax gradually so businesses have sufficient time to adjust to the new operational landscape.

"For successful implementation of this strategy, it is essential to foster a conducive economic environment while evaluating it from an environmental standpoint. Initially, we must identify emissions sources across various sectors. This necessitates thorough assessments in order to choose optimal scenarios and set clear objectives on our path toward achieving sustainable development," stated Huseyn Huseynov, head of department at the Ministry of Economy.

Thus, Azerbaijan stands at the precipice of significant transformations related to its transition toward a low-carbon economy and integration into global climate initiatives. The introduction of carbon pricing alongside the expansion of renewable energy sources will be instrumental in realizing sustainable development goals while enhancing Azerbaijan's standing on the international stage.