A climate-fiscal policy mix to achieve Türkiye’s net-zero ambition

A climate-fiscal policy mix to achieve Türkiye’s net-zero ambition

A climate-fiscal policy mix to achieve Türkiye’s net-zero ambition

As one of the top-20 emitters globally, Türkiye has taken significant steps in recent years to address its climate-related risks. The country’s renewable energy capacity has grown by over 50% since 2016, and in 2021, Türkiye ratified the Paris Agreement, pledging to reach net-zero emissions by 2053. However, achieving this goal will require a coordinated set of climate-fiscal policies that tackle Türkiye’s structural deficits, including weak rule of law, high costs of contract enforcement, and limited access to green finance.

Climate-Fiscal Policy Landscape

Turkey’s Net-Zero Emissions Target

Türkiye’s move towards net zero is driven by several factors. The country’s heavy reliance on fossil fuel imports, which account for 87% of its total primary energy supply, poses significant energy security risks, as the recent volatility in global oil and gas markets has shown. Moreover, the European Union’s ambitious low-carbon agenda will have considerable repercussions for Türkiye’s primary export market, as the Turkish manufacturing sector is more carbon-intensive than its European counterpart.

Integrating Climate and Fiscal Policies

To achieve its net-zero target while respecting critical feasibility constraints, such as fiscal consolidation, sovereign debt stability, and the compensation of low-income households, Türkiye needs to employ a dynamic policy mix. This includes a carbon tax, a renewable energy subsidy, transfer payments, public infrastructure investments, a bad bank for stranded fossil fuel assets, and the phase-out of fossil fuel subsidies and public investment in the sector.

Challenges in Policy Coordination

Implementing this integrated climate-fiscal policy framework is not without challenges. Türkiye’s structural deficits, such as low credibility of policy commitments, high costs of contract enforcement, and limited access to green finance, can constrain the effectiveness of climate policies in mobilizing private investment. Transparent policy communication and a credible commitment to the net-zero agenda are crucial to ensure an orderly transition and mitigate the risks of asset stranding and declining exports.

Emission-Reduction Strategies

Renewable Energy Deployment

At the core of Türkiye’s decarbonization strategy is the rapid expansion of renewable energy generation. The country’s policy mix aims to incentivize private investment in renewable energy projects through a combination of carbon pricing, renewable energy subsidies, and public infrastructure investments. This is expected to increase renewable energy consumption from around 20 million tonnes of oil equivalent (toe) in 2022 to 420 million toe by 2053 – a 460% increase compared to the baseline scenario.

Industrial Decarbonization

Beyond the power sector, Türkiye’s net-zero pathway also requires the decarbonization of its industrial base. This can be achieved through a mix of carbon pricing, energy efficiency measures, and targeted support for the adoption of low-carbon technologies, such as carbon capture and storage or green hydrogen.

Transportation Sector Transformation

The transportation sector, which accounts for a significant share of Türkiye’s emissions, will need to undergo a fundamental transformation towards electrification and the use of alternative fuels, such as biofuels and hydrogen. This transition will require investments in charging infrastructure, battery manufacturing, and the development of a domestic hydrogen production and distribution network.

Fiscal Policy Instruments

Carbon Pricing Mechanisms

The cornerstone of Türkiye’s climate-fiscal policy mix is the introduction of a carbon tax, which is expected to reach $70 per tonne of CO2 by 2027. This tax will generate revenues that can be used to finance renewable energy subsidies and transfer payments to low-income households, helping to mitigate the impact of higher energy prices on the most vulnerable segments of the population.

Green Taxation and Subsidies

In addition to the carbon tax, Türkiye’s policy mix includes the phase-out of fossil fuel subsidies and the introduction of targeted renewable energy subsidies, which can reach up to $1,400 per toe. These measures aim to level the playing field between fossil fuels and cleaner energy sources, incentivizing private investment in the renewable energy sector.

Public Investment and Financing

To support the low-carbon transition, the government will also increase public investment in renewable energy infrastructure and energy efficiency upgrades, while phasing out investment in fossil energy production and infrastructure. Furthermore, the establishment of a bad bank to purchase stranded fossil fuel assets will help to manage the risks associated with the energy transition.

Socioeconomic Impacts

Equity and Just Transition

The policy mix is designed to ensure a just transition, with transfer payments to low-income households increasing by 1 percentage point of trend GDP over the projection period to compensate for the impact of higher energy prices. This is crucial to maintain the public’s support for the net-zero agenda and avoid potential social unrest.

Employment and Skills Development

The transition to a low-carbon economy will also require significant changes in the labor market, with the need to reskill and upskill workers in sectors like fossil fuel extraction and traditional manufacturing. Türkiye’s policymakers will need to invest in vocational training and workforce development programs to ensure a smooth transition for affected workers.

Macroeconomic Implications

The overall macroeconomic impact of Türkiye’s climate-fiscal policy mix is projected to be moderate, with GDP declining by up to 0.7% during the fiscal consolidation phase before recovering and exceeding the baseline scenario in the following years. The transition risks, however, include declining exports and the potential for fossil asset stranding, which will need to be carefully managed.

The European Future Energy Forum provides a valuable platform for Türkiye to share its experiences and lessons learned in implementing this climate-fiscal policy mix. By showcasing its approach to integrating climate and fiscal policies, Türkiye can inspire other countries in the region to follow suit and contribute to the collective effort to achieve the Paris Agreement’s goals.

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