Uzbekistan requires $400bn for green transformation by 2060 - CCDR

The Country Climate and Development Report (CCDR) for Uzbekistan outlines a critical juncture for the nation as it navigates transformative paths amid a growing population expected to surpass 50mn by 2050. The report released by World Bank, reflecting on the past seven years of sweeping reforms initiated in 2016, underscores the need for Uzbekistan to address pressing challenges in its pursuit of becoming an upper-middle-income country with a modern, private sector-led economy.

Uzbekistan faces the harsh realities of climate change, evident in the ecological disaster of the drying Aral Sea and increasing occurrences of droughts, extreme heat, rainfall volatility, and dust storms. The annual costs of health damage from pollution are alarming, reaching 6.5% of GDP. The looming climate risks are interlinked with water security, food security, and land degradation, threatening sustainable growth.

With 90% of water used for irrigated agriculture and projections of becoming one of the most water-stressed countries globally, Uzbekistan must adopt climate-smart agricultural practices and integrated water resource management to ensure sustainable growth. Estimates suggest an additional investment of $46.7bn to address and mitigate adverse climate impacts on various sectors.

Energy Security and Transition

Uzbekistan's heavy reliance on natural gas poses risks to energy security, compounded by depleting gas production and growing net imports. The report advocates for a shift away from natural gas, emphasizing the need for efficiency, diversification, and the acceleration of a transition to a green economy. A net-zero 2060 scenario is proposed, estimating a 40% decline in natural gas consumption.

The report highlights that pursuing carbon neutrality can enhance energy security, reduce import dependence, and boost economic growth. A green transition, supported by behavioral change and targeted policies, is projected to provide 70% of domestic energy supply from renewables by 2060. The net-zero transition is anticipated to bring economic benefits, improved productivity, and health advantages from reduced air pollution.

Challenges and Opportunities:

While the transition to net-zero will face challenges, including a temporary drop in economic efficiency during peak investment periods, the overall positive economic effects are expected to offset these challenges. The withdrawal of energy subsidies, a critical step in decarbonization, may temporarily impact growth but promises long-term air pollution benefits.

Ambitious Carbon Neutrality by 2060 is Achievable and Crucial

Setting a course for carbon neutrality by 2060 is both ambitious and attainable for Uzbekistan. Current policies, including the Nationally Determined Contribution (NDC), require greater ambition to decarbonize the growing economy. Key strategies involve deploying renewables, upgrading infrastructure, improving energy efficiency, and implementing cost-reflective pricing. Prioritizing natural gas for power and industry while transitioning away from its use in transport and heating is economically beneficial. Although initial costs are incurred, subsidy reforms and decarbonization yield substantial long-term benefits, including over $178bn in infrastructure sector benefits.

To achieve a net-zero transition by 2060, Uzbekistan must invest an additional $79bn (present value) between 2023 and 2060. These investments, largely carried out by the private sector, contribute to benefits such as a 5.4% reduction in GDP-equivalent air pollution costs. While higher investment costs are justified, the net economic benefits of decarbonization, even excluding additional advantages like reduced road congestion, remain positive.

Ongoing government programs in energy efficiency and emergency measures provide a foundation for enhancing energy security, especially during Central Asia's critical winter months. In the net-zero 2060 scenario, energy efficiency measures and technological advancements reduce end-use energy consumption by 16% by 2060, offering resilience against tariff reforms and benefiting consumers in residential buildings. Scaling up energy efficiency programs and reducing methane fugitive emissions are essential for achieving deeper decarbonization.

Water Security and Human Development are Cornerstones of Climate Action

Ensuring water security is pivotal for climate adaptation. Modernizing infrastructure, adopting a service-oriented approach, and investing in on-farm water-use efficiency are key interventions. While these measures reduce water-related risks, they may unintentionally impact workers and families, necessitating reskilling and adaptive social protection systems to navigate the short to medium-term challenges associated with the green transition.

Private Sector Development is Crucial for the Green Transition

Accelerating the growth of Uzbekistan's private sector is paramount to managing the costs and seizing the opportunities of the green transition. The emerging private sector and foreign direct investment (FDI) are pivotal for overall development and transitioning to a low-carbon economy. Uzbekistan's commitment to an innovative, competitive, and dynamic private sector necessitates ongoing reforms to facilitate increased FDI and improve the business environment. Private sector engagement is vital for the success of green markets, with potential annual exports exceeding $2bn. Addressing the challenges of attracting FDI, including privatizing state-owned enterprises and creating conducive regulatory environments, is essential.

Financial Strategies for Sustainable Green Transition

Balancing public and private financing is crucial to ensure the sustainability of Uzbekistan's green transition. The government's fiscal position could become unsustainable if it solely shoulders the transition costs. Adjusting prices, particularly through removing energy subsidies and introducing carbon pricing, is a key policy. These measures not only trigger a green transition but also generate fiscal space, potentially creating 5% of GDP worth of additional space. With the private sector as the primary financing source, fostering green finance through clear regulations, market-based incentives, and risk management instruments is critical.

The government's ambitious comprehensive reform program encompasses structural changes in the business environment, energy, water, agriculture, and various other sectors. The recently proposed Climate Change and Development Report (CCDR) outlines a set of urgent actions, focusing on policy and investment priorities to accelerate decarbonization and climate adaptation in the short term, with a vision for deeper reforms over the medium term.