THE GREEN CHALLENGE OF THE PRESENT

This year, the most prevalent colour in Azerbaijan is green, symbolizing the primary initiatives of recent months. This emphasis is well-founded: 2024 has been designated as the "Year of Solidarity for a Green World," which makes it logical for the "green" climate theme to feature prominently in all significant initiatives. This focus is particularly pertinent as the pinnacle of these events will be the UN Climate Conference (COP29), set to take place in November in Baku.

Addressing environmental issues cannot occur without the engagement of industrial and other enterprises, which are responsible for nearly the majority of environmental pollution. More than 90 percent of businesses globally are small and medium-sized enterprises (SMEs). Although the individual contribution of SMEs to environmental degradation is relatively minor, they collectively account for 50 percent of greenhouse gas emissions and 30-60 percent of total energy consumption in the business sector.

Plans regarding the green transition of Azerbaijani businesses were discussed at the conference titled "The Role of SMEs in the Green Economy," organized by the Small and Medium Business Development Agency (KOBİA).

For Quick Adaptation

Facilitating the transition to a green economy significantly hinges on the environmental transformation of SMEs, which encompass about 99 percent of enterprises in Azerbaijan. Many of these businesses are concentrated in sectors such as construction, transport, industry, energy, and agriculture, where they contribute substantially to emissions of heat-trapping gases. Consequently, it is understandable that these sectors are receiving heightened attention from organizations advocating for the green agenda, necessitating stricter oversight regarding environmental standards in production processes. "Global experience indicates that SMEs frequently lead in clean technologies and innovative business models; their adaptability enables them to swiftly respond to new trends and innovate. SMEs can quickly adjust to market changes and shifts in consumer preferences, which is a vital aspect of a green economy," stated Minister of Economy Mikayil Jabbarov.

What specific actions can SMEs take to enhance environmental conditions? They can begin by focusing on energy efficiency through the implementation of energy-saving technologies and the utilization of renewable energy sources. Additionally, investing in human resource development and staff training is crucial since innovations can only be effectively executed by employees equipped with current knowledge and skills. Measures that involve recycling, reducing waste, and utilizing environmentally friendly materials are also essential. "Regularly incorporating environmental considerations into business practices and engaging in social projects should become fundamental principles for entrepreneurs in this new era," asserted Jabbarov.

COP29 President Minister of Ecology and Natural Resources Mukhtar Babayev further emphasized that the "National Priorities of Socio-Economic Development of Azerbaijan until 2030" identify sustainable development and environmental protection as primary goals. "This document specifies concrete environmental objectives, including expediting our country's transition to a green economy, effectively managing natural resources, lowering carbon emissions, adapting to climate change, and enhancing energy efficiency," Babayev explained.

He also expressed that SMEs are uniquely positioned to innovate due to their greater flexibility in adopting new technologies and business models. The transition to a green economy should leverage this adaptability to bolster investments in clean energy, energy efficiency technologies, and waste reduction. "Establishing resource centres for green SMEs will aid them in transitioning to more sustainable practices while providing essential knowledge, guidance, and technology," states the President of COP29.

According to him, climate finance represents a primary focus of COP29. The Baku conference aims to achieve an agreement on a "New Collective Quantitative Objective" for combating climate change. "During this event, the Azerbaijani Presidency has proposed 14 initiatives. Our goal is to introduce new approaches and innovative solutions on a global scale while further solidifying our position as a reliable and responsible partner," Babayev noted.

Support Measures

Simultaneously, the Azerbaijani government acknowledges that merely urging compliance with environmental standards falls short. This call must be backed by tangible actions that instill confidence in businesses that this transition will not be painful or unprofitable. In this context, recent tax policies have incorporated legislative initiatives aimed at supporting the green economy. These measures include tax incentives for environmental protection, restrictions on importing older vehicles into the country, vehicle recycling initiatives, benefits for importing electric and hybrid cars, and support for alternative energy projects. As a result, it appears that fiscal policies supporting green energy in Azerbaijan will persist in the medium term. "To combat climate change and broaden the use of green technologies, efforts are underway to define the scope of environmental and green taxes. We are examining international best practices while considering the feasibility of implementing a 'carbon tax' or similar measures aimed at reducing carbon dioxide emissions," Jabbarov stated.

An interesting fact emerged during the conference: currently, 24% of carbon units emitted worldwide are subject to some form of carbon pricing. While this statistic may seem low, it has risen from just 7% a decade ago. According to Samira Musayeva, deputy head of the State Tax Service, this trend indicates an increasing reliance on carbon pricing as countries seek to meet emission reduction targets. Furthermore, it is recognized as an essential tool for financing adaptation programs globally. Thus, according to the World Bank, over 100 countries that have declared national targets consider carbon pricing provisions a primary objective.

The Government of Azerbaijan believes that ensuring sustainable economic development and transitioning to a climate-oriented green economy can be achieved not only through aggressive tax policies or additional business taxation but also through tax incentives aimed at promoting renewable energy sources or green technologies. "Azerbaijan is striving for an ideal balance between tax regulation and business incentives to cultivate a green economy. International experience and expertise will guide the country in developing an effective taxation strategy for sustainable development," Musayeva remarked.

Industrial parks, especially Balakhani—which specializes in waste recycling—can also be highlighted as initiatives supporting the green economy. One defining feature of these parks is their emphasis on producing competitive industrial products utilizing high technologies aimed at improving the environmental conditions in the region.

"Green" projects also receive support from KOBIA through various tools such as grants, startup certificates, internal market research, training opportunities, access to exhibitions, and financial assistance. However, it is evident that the transition process is still in its infancy and faces numerous challenges.

According to Orhan Mammadov, Chairman of KOBIA's Board, these challenges can generally be classified into three categories: lack of information and knowledge; limited capacity and skills; and restricted access to financial resources. "The challenges faced by SMEs during their green transformation are universal in nature. In this regard, we wish to capitalize on this event's opportunity to launch a global initiative reflected in the Declaration of the Baku Coalition for SME Transition to a Green Climate. This document calls for establishing 'green' SME resource centres designed to provide a global network and an institutional coordination platform," Mammadov stated. He added that these centres could be established in each country to gather information on specific challenges faced by SMEs nationally, analyse them, and identify concrete steps based on global experience while providing technical support.

To effectively address these challenges, a Memorandum of Understanding regarding cooperation in green transition efforts was signed between KOBIA and ACWA Power Azerbaijan Renewable Energy LLC during the conference.

Proprietary Taxonomy

The UN High-Level Climate Leader at COP29, Nigar Arpadarai, also asserts that promoting collaboration between public and private financial resources significantly contributes to effective climate change mitigation efforts. "As part of the COP29 Presidency team, we prioritize private sector engagement in global climate action. In this context, we continuously discuss adaptation opportunities and challenges within the green economy with both large corporations and SMEs," she noted.

In this regard, it is crucial for business representatives to possess a clear understanding of standards pertaining to green transition. Particularly since the global agenda has already led to establishing a special framework for preferential financing targeting enterprises focused on environmental principles. In Azerbaijan, awareness surrounding so-called "green" loans has begun emerging in promotional materials from several commercial banks. However, there remains uncertainty regarding what specific requirements enterprises must fulfil to secure such financing.

It has been reported that the Central Bank of Azerbaijan is actively working on finalizing a "green" taxonomy that will classify economic activities based on "green" standards within the country; this will enable businesses to gain greater support for sustainable and environmentally friendly investments. According to Kanan Mammadov, a leading economist at CBA's Sustainable Finance Department, local and international experts along with representatives from relevant government agencies have contributed to developing this taxonomy.

It should be noted that approximately 50 countries currently have taxonomies related to green bonds and credits; however, these taxonomies are national in scope and lack interconnections. Consequently, an initiative has emerged within CBA suggesting that Azerbaijan should take the lead in creating a taxonomy framework that unites all participating countries. Currently, the Central Bank is collaborating with two international institutions on this matter, with plans for presenting the developed taxonomy at COP29 in November.

Banks operating in Azerbaijan will begin reporting on climate resilience over the coming years. This process involves integrating ESG risks (environmental, social, and governance) concerning climate change into their operations. "In this regard, risk management stress tests are being conducted while assessing risk factors; transparency and market discipline remain key focal points," K. Mammadov informed.

Thus, enhancing information access and knowledge regarding climate change finance for SMEs—alongside boosting relevant skills and capacities—will significantly contribute to increasing efficiency within the green economy. In this context, representatives from Azerbaijani SMEs will play an essential role in aligning with government economic policies by amplifying their use of green technologies while simultaneously enhancing their competitiveness and profitability.