Azerbaijan's new draft law on carbon tax ahead of COP29

A draft law concerning the implementation of a carbon tax is currently being prepared by Azerbaijan, as stated by Mukhtar Babayev, the President of COP29 and the nation's Minister of Ecology and Natural Resources, during the "Raising Ambition, Enabling Action: COP29 Sustainable Business Forum" event last week.

Babayev mentioned this while discussing the drafting of several laws aimed at addressing emerging climate-related challenges. He emphasized that in developed nations, a carbon emission tax is already in effect, and Azerbaijan is in the final stages of preparing similar legislation.

Additionally, he highlighted that the European Union plans to levy this tax on products originating from carbon-intensive industries, which Azerbaijani exporters of certain products should take into consideration.

Babayev expressed openness to suggestions from the private sector on aligning business practices and Azerbaijani laws with the global climate agenda. He also pledged to collaborate with legislators to swiftly review and approve the necessary laws.

Several questions arise: How do you forecast the potential impacts, both positive and negative, of this carbon tax on businesses and the economy?

Are there any precedents or examples from other countries regarding the effectiveness of implementing a carbon tax that could provide insights?

In addition to implementing a carbon tax, what strategies or measures should the government consider to ensure a transition to a low-carbon economy and reduce potential negative impacts on sensitive industries or sectors?

Azerbaijani economist Rashad Hasanov stated Azernews that the purpose of the carbon tax is part of a conceptual framework aimed at reducing carbon emissions and combating climate change measures.

“One objective is to decrease the efficiency of carbon emission activities on one hand and to increase the inclination towards other renewable energy sources by encouraging investments in this direction. Another goal involves the formulation of certain budgets to neutralize and balance the effects created for the general community, and in this context, it reflects the aspect of punishing detrimental actors, carbon-emitting individuals, and business entities, while rewarding others to some extent by mitigating the incurred damage. Such a perspective initially increases expenses for entrepreneurs, especially those who consume more coal, oil, or gas. This, in turn, may weaken their competitiveness compared to other alternatives. However, it depends on the elasticity of this direction of activity. In sectors with weak elasticity, conditioning price increases may form economic foundations for another drawback, namely inflation.”

According to him, one of the main objectives faced by governments is also the neutralization of corresponding negative effects through programs funded by revenues collected from the carbon tax.

“In other words, these funds can be utilized to compensate for effects arising from price increases in this or other manners. The positive aspects of this are numerous. Azerbaijan is one of the countries most affected by climate change, which prioritizes the respective issue for Azerbaijan, and the overall societal benefits of these measures are greater in this process.”

The economist added that this type of tax is implemented in various forms in many countries.

“For example, Canada can be cited as an example. The majority of European Union countries, and the United States, regulate this aspect through various tax types, and state policies are managed in this aspect. Naturally, there are also different variants of this. The issuance of licenses for carbon emissions and the formation of the carbon license market itself reduce interest in the field in one way or another by increasing carbon license costs in the market, causing price increases, and creating more favorable opportunities for the development of alternative energy sources and expansion of the market.”

“It is highly likely that Azerbaijan will embark on the transition path in this direction. Because there are objective factors here that indicate that the country's economy is dependent on fiscal revenues, and hydrocarbon resources, which are largely sources of carbon emissions. Therefore, despite the attempts to prioritize it in policy, we will see the opposite during its implementation. Azerbaijan will participate more slowly in initiatives like this. But as I said, this is also a very serious challenge for Azerbaijan,” R.Hasanov noted.

“I do not think there will be serious difficulties in the implementation of the carbon tax. Because this is a tax imposed on consumers. Although the relatively widespread prevalence of informal economic activities in Azerbaijan may pose certain challenges, I think that if models injected more into prices are applied, meaning that consumers using gas, oil, or coal face the corresponding tax within prices, then it is possible to implement the program, prevent emissions, and manage maneuvers to some extent in a fairer manner. For example, gasoline users pay two qepiks (coin) per liter of gasoline specifically in this direction. That is, the more fuel the citizen uses, the more tax they pay, conversely, fewer users pay less tax. By implementing similar approaches, this process can be managed,” the expert concluded.