Helping Middle-Income Energy Exporters Kick the Fossil-Fuel Habit

CAPE TOWN – The ongoing volatility in oil and gas markets has come as a shock to many people across the developed world. But its impact on developing countries that rely on producing fossil fuels has been far worse.

Over time, as the world increasingly shifts to cheaper and cleaner energy sources, fossil fuels will likely become less profitable, forcing energy-exporting countries to find other sources of income. What would that mean for “middle-income” developing countries which together account for 48% and 52% of global oil and gas output, respectively?

While oil and gas have propped up the economies of countries like Nigeria, Mexico, Ghana, and Argentina over the years, dependence on them has led to a host of problems, from environmental pollution that harms public health to overreliance on fossil-fuel exports at the expense of the development of other sectors.

But breaking free from the addiction to fossil fuels will not be easy. Middle-income energy exporters are poorer than their developed-country counterparts and therefore have fewer resources with which to support workers and communities through the clean-energy transition. Nearly half the world’s fossil-fuel workers live in Africa, Asia, or South America, and they would need to find new jobs – and the training to fill them. In addition, these countries’ oil and gas industries employ many more people indirectly, including contract workers who do not have the same protections as permanent and unionized workers.

But worker displacement is only one of the risks for which middle-income countries must plan if they are to kick their fossil-fuel habit. Given that the oil and gas industries are a major primary source of their tax revenue, many cash-strapped governments would be unable to fund essential services, such as health care and education, if those proceeds suddenly disappeared.

Price volatility has already devastated economies that grew too dependent on fossil fuels. Following the 2020 crash in oil prices, for example, Nigeria proposed cutting education spending by up to 55%. And in response to the 2014 oil-price crash, Mexico pared public spending by close to 0.7% of GDP. Although high prices may lead to economic booms, they inevitably fall – and often drag down the economy with them. Ultimately, relying on finite resources is no way to fund a twenty-first-century economy.

Developing and implementing the right strategies to shift away from fossil fuels will not happen overnight. But policymakers in middle-income energy-exporting countries can already take three immediate steps to ensure that the clean-energy transition does not harm their workers, communities, and economies – and that it lays the groundwork for a more prosperous future.

First, governments must engage in long-term planning, particularly when it comes to the economies of regions that would most likely be affected by the green transition. To that end, policymakers should consult various stakeholders, develop inclusive plans to help displaced workers and affected communities, and strengthen social safety nets. Closing data gaps regarding demographics, wages, and skills will be essential to assisting oil and gas workers, especially female workers.

Second, given that oil and gas revenues will most likely decline over the long term, middle-income exporters must double down on economic diversification. This would involve studying and developing other promising sectors, such as agricultural processing, manufactured goods, and business services.

By developing domestic clean-energy sectors, policymakers could complement their diversification strategies. Given the changing geopolitical landscape and growing demand for energy, renewables could stabilize prices, revenues, and employment. To support these efforts, governments should harness the power of civil society and the private sector, including oil companies.

Lastly, governments must provide the funding necessary to complete the clean-energy transition. In the near term, they could use income from fossil-fuel production to diversify their economies and invest in green projects. They could also reallocate funds currently used for subsidy programs and require the oil and gas industries, especially multinationals, to help cover the costs of environmental remediation and support programs for affected workers and communities.

But while middle-income countries could fund some of these measures by mobilizing internal resources, developed countries and international financial institutions must also offer the financing and technical assistance that these countries need to pursue their diversification strategies.

Shifting away from fossil fuels is not only necessary to avert a climate catastrophe, but also represents an opportunity to build a healthier and more equitable future for all. But developed countries must not expect middle-income fossil-fuel exporters to give up their main revenue source without international assistance. Ensuring that the net-zero transition does not leave anyone behind is a moral imperative. It is also smart climate policy.

Carlos Lopes, a professor at the Nelson Mandela School of Public Governance at the University of Cape Town, is a member of World Resources Institute’s Board.

Copyright: Project Syndicate, 2023.
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