An analysis of our findings from the case studies, with both case-specific and general insights into how
1.1 KEY FINDING I: DECARBONISATION CAN CONSTITUTE A KEY POLITICAL AND ECONOMIC CHALLENGE FOR FOSSIL FUEL EXPORTERS
The case studies demonstrate that the decarbonisation imperative constitutes a key political and economic challenge for exporters of fossil fuels and other carbon-intensive products. The economies and government budgets of these countries are, with some variations, highly dependent on the production and export of fossil fuels (and other carbon-intensive goods). As a result, and again to varying degrees, they are also exposed to fluctuations in the price of fossil fuels, and continuing investments in related infrastructure carry a high risk of creating stranded assets.
1.1.1 High dependence on fossil fuel production and export
The case studies illustrate that the economies and government budgets of a number of fossil fuel-exporting countries are highly dependent on the production and export of oil, gas, coal and/or other carbon-intensive goods.
Fossil fuel production and export account for significant shares of these countries’ economies, ranging from less than 10 percent to about half of GDP. In Azerbaijan, the oil and gas sectors have generally accounted for around half of the GDP, while in Qatar these sectors contributed one fifth of GDP in 2016.
While the share tends to be smaller in bigger countries and economies, it is still significant with more than 10 percent in Nigeria and close to 10 percent in Canada (including all energy sources). Colombia’s fossil fuel sector is relatively limited but sizeable at about 6 percent of GDP. In the case of Indonesia, carbon-intensive palm oil production is relevant as well, bringing the total contribution of fossil fuels and palm oil to well above 10 percent of GDP. Palm oil generates 4.5 percent of its GDP.
Fossil fuels account for even bigger shares of these countries’ exports (see Figure 1 below). For Azerbaijan, Nigeria and Qatar, these shares are even higher than 90 percent, illustrating extremely high levels of export earnings from fossil fuels and the significance of these goods for trade relations in general. More than two thirds of Colombian export earnings in 2018 can be attributed to fossil fuels. In Indonesia, fossil fuels and agricultural products (including palm oil) each provided around 40 percent of Indonesia’s foreign exchange earnings in 2017. That same year, palm oil was Indonesia’s second most valuable export commodity accounting for just over 20 percent of foreign exchange earnings from merchandise trade. In 2017, fossil fuels accounted for over 40 percent of Canadian goods exports.
Fossil fuels and fossil fuel exports, accordingly, also make major contributions to government budgets.
These contributions may come from direct foreign exchange earnings, royalties and taxes. The oil and gas industries have consistently accounted for more than 50 percent of Qatar’s state budget and for about 50 percent for Azerbaijan and Nigeria (fluctuating somewhat with the oil price). Fossil fuels contribute less than 10 percent to government budgets in Canada and Indonesia.
Overall, these countries’ economies and state budgets are either highly or still significantly dependent on fossil fuels and fossil fuel exports. While for all of them fossil fuels (and, in the case of Indonesia, carbon-intensive palm oil) are a very significant part of their economy, for some of them they are the main and even all-dominant sector. The selected countries also finance their public budgets to very significant extents from fossil fuel revenues, with some of them overwhelmingly dependent on related income.
Nigeria Azerbaijan Colombia Indonesia Qatar Canada
Fragility (2019) Alert Warning Warning Warning Stable Sustainable
Human
development (2018) Low High High Medium Very high Very high
Strength of
governance (2017) Low Medium Medium Medium High Very high
Climate change
vulnerability (2017) High Medium High High Medium Medium
Sustainable energy
development (2017) Medium High High Medium High Very high
Fossil fuel* trade with the EU and in general
Fossil fuels as % total exports**
Fossil fuel exports to the EU as % total fossil fuel exports
Fossil fuel exports to the EU as % total exports to the EU
Fossil fuel exports Other exports
* Indonesian trade in fossil fuels with the EU is not significant. In this case, the diagrams refer to EU-Indonesian trade in palm oil.
** In all cases, “total exports” refers to total commodities exports (Source: https://resourcetrade.earth/).
For data sources, please see the footnote beneath each country dashboard in Part II.
Figure 1: Overview of selected key characteristics of the case study countries
1.1.2 Exposure to price fluctuations
Fluctuations in the price of fossil fuels in international markets illustrate the high dependence on fossil fuel production and export, as could be seen in the fall of the international oil price between 2014 and 2016 (and is confirmed by the dramatic falls resulting from the COVID-19 pandemic in 2020). This fall had a major impact on the economic development and public budgets of the six countries studied, in some cases causing recessions. Although decarbonisation has not been a major driver of international fossil fuel markets to date, it could reinforce downward pressure on fossil fuel prices in future.
© adelphi
The drop in international oil and coal prices from 2014 to 2016 left a clear mark on the economies of the fossil fuel exporters investigated, in some cases leading to economic crises. For example, Nigeria experienced its first full year of recession in 25 years in 2015, with real GDP contracting 1.5 percent. In Azerbaijan and Qatar, the fall in oil prices from 2014 to 2016 also left a clear mark on economic development. In Azerbaijan GDP declined sharply from US$ 75.2 billion in 2014 to US$ 37.9 billion in 2016, and in Qatar from US$ 206 billion in 2014 to US$ 152.5 billion in 2016 (all in current US$). In Colombia, GDP growth fell from 4.9 percent in 2013 to 2.0 percent in 2016 and the contribution of fuel exports to GDP decreased from 11 percent in 2013 to 6 percent in 2016. Canada also experienced a decline of the growth rate from 2.9 percent in 2014 to 1 percent in 2015. In Indonesia, the economic impact was somewhat balanced by a decrease of fossil fuel subsidies that were facilitated by the price drop.
The price drop also had major knock-on effects for public budgets. While crude oil had generated 58 percent of government revenues in Nigeria in 2014, this figure fell to 42 percent in 2017. Public debt rose from 12 percent of GDP in 2013 to 21 percent in 2017. Azerbaijan and Qatar experienced even greater increases in public debt between 2014 and 2016, from little more than 14 percent to more than 50 percent and from around 32 percent to over 56 percent, respectively. Colombia saw a decrease of the extractives sector’s contribution to national fiscal income from 19 percent in 2013 to 5 percent in 2016. Canada saw its public debt ratio increase from 85.7 percent of GDP in 2014 to nearly 92 percent in 2016.
Although the economies and public budgets of fossil fuel exporters were all hit by the fall of fossil fuel prices (depending on the overall dependence on fossil fuel exports), the effects also depended on the instruments available to cushion the impacts. For example, the State Oil Fund of Azerbaijan was created to support the development of the country’s non-oil sectors, but has in reality served to balance price and resulting revenue fluctuations. In a more ad-hoc fashion, the Indonesian government has managed the effects of price decreases to some extent by reducing fossil fuel subsidies. Canada has generally been less vulnerable to price fluctuations due to the advanced diversification and development of its overall economy, including non-oil sectors.
1.1.3 High risk of stranded assets and insufficient diversification
The countries investigated have continued to invest heavily in fossil fuels and related high-carbon infrastructure, entailing a high risk of stranded assets under decarbonisation. This has contrasted with lower investment in non-fossil fuel sectors, and at times even undermined progress towards economic diversification.
Fossil fuel assets at risk from stranding range from as yet untapped hydrocarbons reserves to fossil fuel sector infrastructure. Fossil fuel assets at risk from stranding range from as yet untapped hydrocarbons reserves to fossil-fuel sector infrastructure. In all the countries studied, proven reserves could support fossil fuel production well beyond 2050. For example, proven reserves could support current Nigerian oil production for another 50 years and current Indonesian gas and coal production for up to 30 and 60 years, respectively. Azerbaijan’s oil reserves are forecast to last for another 20 to 30 years, and the country could maintain current levels of gas production until 2090. Colombia could maintain current levels of coal production yet longer until the end of the century, and in Canada and Qatar existing reserves would support production of oil and coal, and gas respectively for more than 100 years. Other important carbon-intensive infrastructure highlighted in the case studies includes oil and gas extraction facilities, networks of pipelines and other fossil fuel transport infrastructure (especially in Qatar, Azerbaijan, Canada) and fossil fuel-based power stations (especially coal, Indonesia). Major investment in fracking and oil exploration is also looking more likely in Colombia. In Qatar, US$ 12 billion in investments in the oil and gas sectors were announced in 2018, out of a total of new investments of US$ 85 billion in different sectors. Canada is also continuing to make considerable investments into fossil fuels (especially oil sands). In 2014, total Canadian energy assets amounted to CAN$ 543.9 billion. The major share of a total of foreign direct investment of nearly US$ 15 billion in Azerbaijan in 2017 went to oil and gas.
Progress toward economic diversification has been varied but has generally remained insufficient/slow, also as a result of a continuing focus on fossil fuels. The aforementioned State Oil Fund of Azerbaijan has aimed to support economic diversification – with very limited results. The Qatar Investment Authority set up in 2005 has a similar purpose, but has in fact diversified to some extent the fossil fuel sector itself (from oil to gas) and has still left the overall economy hugely dependent on oil and gas. Efforts at economic diversification in Nigeria have also faced major obstacles, including the so-called ‘Dutch disease’: an appreciating exchange rate due to the oil-based foreign currency earnings that hinders the development of other sectors. Other key economic sectors, most importantly agriculture, had been neglected for decades. Industry and services also remain highly dependent on imports of inputs and raw materials, so that the oil price collapse in 2014-16 had serious knock-on effects on these sectors.
The Canadian and Colombian economies are more diversified, making diversification somewhat less of an issue at a national level. However, particular regions within these countries are heavily dependent on fossil fuel production and face particular challenges in transitioning towards decarbonisation. In Colombia, the Departments of Cesar and La Guajira would be most vulnerable, as they produce and export 90 percent of Colombian coal production. In 2015, coal accounted for around 40 percent of GDP and 30,000 direct jobs in these two departments. In Canada, while overall the fossil fuel industry only accounts for a smaller part of the economy, it is of greater importance for the provinces of Alberta, Saskatchewan and, partially, British Columbia.