Climate Action Can Help Kazakhstan Diversify its Economy Away from Oil

Effective climate action to reduce carbon emissions could help Kazakhstan diversify its fossil fuel-dependent economy and open up new drivers of economic growth and prosperity for its people, says a pioneering World Bank report released today.

According to the Kazakhstan Country Climate and Development Report (CCDR), transitioning to a more sustainable economy can open up three potentially important areas of opportunity for Kazakhstan: (1) energy efficiency and clean energy production (2) extraction of minerals critical for the low carbon transition globally; and (3) greater participation in global trade value chains that are increasingly becoming ‘green.’

The cost of inaction would be significant. Climate shocks could shrink Kazakhstan’s economy by 1.6% by 2050, increase poverty by 3%, and decrease real wages by 2.1%. If the rest of the world decarbonizes and Kazakhstan does not, it could suffer a consistent long-term contraction in growth of 2-2.5% a year.

“In order to achieve its aspiration of becoming one of the world’s top economies by 2050, Kazakhstan needs a growth model that is less dependent on fossil fuels and more dependent on investment in new sectors and technologies over time,” said Anna Bjerde, World Bank Vice President for the Europe and Central Asia region. “We look forward to partnering with Kazakhstan on a green and people-centered transition to increase productivity and protect lives and livelihoods.”

The report calls for a deep decarbonization of the energy sector, which is responsible for over 80% of the country’s carbon emissions due to Kazakhstan’s near-complete dependence on fossil fuels, particularly coal for heating and power, and oil and gas for export revenues. It also emphasizes the need for a people-centered transition out of coal as well as climate-smart agriculture and careful management of water resources.

It identifies ways in which Kazakhstan can achieve its development objectives while transitioning to a greener, more resilient, and inclusive development pathway. It recommends policy reforms and investments in the following priority areas:

  • Power: Decarbonizing the energy system is key, as 90% of electricity is currently generated from coal and gas. Dramatically boosting electricity production from renewable sources, especially solar, wind, and energy storage are the main drivers of the energy transition combined with a planned phase-out of coal and improving energy efficiency across buildings, transport and industry.
  • Agriculture, water, rangelands: Rising temperatures and shifts in rainfall are exacerbating desertification and degradation of croplands and pastures. Climate-smart agricultural practices, such as modern greenhouses and more sustainable livestock practices, and measures to renew and modernize aging water supply systems will need to be part of an integrated strategy on adaptation.
  • People-centered transition out of coal: Coal regions, such as Pavlodar and Karaganda, and coal towns will face profound challenges in transforming to a very different socio-economic future. The transition out of coal will require measures to support a ‘just’ transition for affected workers and communities, to minimize the impact on jobs and income of poorer households by facilitating the development of new skills through vocational training; incentivizing entrepreneurship capabilities and adoption of greener technologies and practices by small and medium enterprises; and promoting inclusive finance and economic participation of women and youth.
  • Enabling environment: Decarbonization will require broader reforms to promote economic diversification and create an environment conducive to attracting investment. These would need to include reforms to promote competition, stimulate private sector participation, and build financial sector capacity for green finance.

Actions on these fronts are among major changes Kazakhstan needs to make to reverse course as the world’s 20th largest carbon emitter and to achieve its goals on a 15 percent reduction in greenhouse gas emissions by 2030, from 1990 levels, and carbon neutrality by 2060.

“Kazakhstan’s shift toward a greener, less resource-dependent economy is vital and will require the mobilization of large amounts of private capital. For that to happen, the country will need to undertake a number of actions,” said Hela Cheikhrouhou, International Finance Corporation’s Vice President for the Middle East, Central Asia, Türkiye, Afghanistan, and Pakistan. “Reducing the state’s role in the economy, developing a comprehensive climate policy, greening the financial sector, and implementing climate-smart infrastructure projects will help unlock investment, while putting the country on a low emission and climate resilient path.”

The economic risks of inaction could be considerable for Kazakhstan. For example, demand for Kazakh oil and gas will decline over time should countries act to meet their climate targets, and demand for goods produced using fossil fuel-intensive energy are at risk from global climate policies, such as the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM). According to World Bank estimates, Kazakhstan could lose over $250 million a year in export earnings due to CBAM, with the iron and steel sector at most risk. These losses could rise to $1.5 billion in the future if CBAM is extended to include oil.

“Kazakhstan has established a solid framework for tackling climate change. However, the country will need to substantially strengthen its policy ambition and implement concrete actions on mitigation and adaptation. Robust programs in water resources, agriculture, and decarbonization of the energy sector could provide the foundations for a broader economic base to ensure prosperity for the people of Kazakhstan,” said Tatiana Proskuryakova, World Bank Regional Director for Central Asia.

The country’s vast steppes have globally competitive wind and solar power resources. Clean renewable power could not only become Kazakhstan’s dominant domestic energy source, but a significant export commodity as well.

Kazakhstan is also well-placed to take advantage of the growing global demand for critical minerals needed for low carbon technologies. It has the world’s largest developed reserves of zinc, tungsten and baryte; it is second globally for copper and fluorite and has 10% of the world reserves of iron ore. Kazakhstan is also the largest uranium producer and exporter in the world, with 25% of the world’s uranium reserves, positioning it well as a supplier of highly valued rare earth elements.

The country has already started producing electric vehicles (EVs), building on strengths and opportunities in the EV value chain. The climate transition offers increased opportunities to participate in higher value-added sectors by tapping into emerging green global value chains.