The energy transition poses a serious challenge for oil and gas exporters, as it renders future demand and prices for oil and natural gas increasingly uncertain and threatens fiscal revenues from fossil fuels.
In this context, MoFs in fossil-fuel-dependent countries are reevaluating economic dependencies and fiscal strategies, and can help build more diversified, resilient economies by leveraging strategic analyses and learning from successful examples.
- Studies that examine how technology and climate policy can affect fossil fuel production warn of stranded assets but typically do not evaluate the associated fiscal consequences. Moreover, they typically provide numbers at the global or regional level rather than the country level, and they rely on a single scenario for fossil fuel demand without considering uncertainty around carbon budgets and technology choices.
- Recent studies employing a combination of models (TIAM-UCL, BUEGO, and GAPTAP) integrate global energy demand forecasts and economic and geological data at the project level and represent different tax regimes that apply to each field. They focus on Latin America and the Caribbean, providing results for the region as well as 12 individual countries.
- These studies find that stringent global climate action could reduce combined government revenue in Latin America and the Caribbean to US$1.3–2.6 trillion by 2035, compared with US$2.7–6.8 trillion if oil demand followed historical trends.
To develop robust fiscal strategies, Ministries of Finance in fossil-fuel-dependent countries should employ comprehensive scenario planning and modeling tools such as TIAM-UCL and BUEGO to help understand the potential impacts of different energy transition scenarios, or use alternative, simpler models. They can also draw inspiration from nations that have successfully diversified their economies, such as Dubai and Norway.
Keywords
energy pathwaysfiscal riskmodelstax basetransition
