MACROECONOMICS, TRADE AND INVESTMENT MACROECONOMICS, TRADE AND INVESTMENT EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT A Tale of Two Transitions: Iraq’s Energy Sector and Macroeconomic Stability in a Climate-Constrained World Ali Ahmad, Thi Thanh Thanh Bui, Mohammed Qaradaghi, and Wael Mansour © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Photos: Bilal+Izaddin, Essam al-Sudani, and Zalupa / www.shutterstock.com; and evening-tau / www.freepik.com Cover design and layout: Diego Catto / www.diegocatto.com, typeset by Arsianti >>> Acknowledgments This paper has been authored by Ali Ahmad, a climate change specialist in the MENA Sustainable Development Department, Thi Thanh Thanh Bui, an economist at the macroeconomics, trade and investment global practice (MTIGP), Mohammed Qaradaghi, a senior energy specialist at the energy and extractives global practice (EEGP), and Wael Mansour, a senior economist at the macroeconomics, trade and investment global practice (MTI). The team is grateful for the support received from Waleed S. Alsuraih and Anthony Kubursy from the EEGP, Majid Kazemi, and Ashwaq Natiq Maseeh from the MTIGP. The authors also thanks the management of the Mashreq country management unit, Jean-Christophe Carret, country director and Richard Abdelnour, Iraq country manager, as well as Eric Le Borgne, practice manager for MTIGP, and Hussam Beides, practice manager for EEGP, for their guidance and support. The paper was originally conceived as a background paper for the Iraq Country Climate and Development Report (CCDR), a publication supported by the World Bank and published in December 2022. The findings, interpretations and conclusions expressed in this work belong to the authors and do not necessarily reflect the views or positions of either the World Bank Group, its Board of Executive Directors, and the government they represent. >>> Contents Acknowledgments 3 Abstract 5 1. Introduction 6 2. Iraq’s Macroeconomic and Power Sector Realities 7 2.1 Iraq’s Oil Dependency and Macroeconomic 7 Volatility 2.2 Iraq’s Energy Sector 8 3. Methodology and Data 10 4. Results 14 4.1 The Macroeconomic Implications of the Transition 14 Pathways Dolorer natemodit alis idusa 4.2 Sensitivity to Global Energy Transition Pathways 16 4.3 Contingency of Transition’s Success on Reforms 18 5. Discussion 20 5.1 Macroeconomic Tradeoffs 20 5.2 Reforms’ Timing 21 5.3 Fiscal rules and Sovereign Wealth Funds (SWFs) 21 6. Conclusion 24 References 25 Annex 26 >>> Abstract This paper assesses the costs and benefits of Iraq’s own energy transition from fossil fuel dependent power sector to one with a significantly higher share of renewables amid an accelerating global energy transition. The paper quantifies the returns of Iraq’s energy transition, its high exposure to the global energy transition due to the deep role of oil revenues in the provision of public finances, and the policy tradeoffs associated with moving towards a greener energy mix. The analysis finds that all decarbonization pathways of the electricity sector bring additional growth and productivity gains compared to maintaining the status-quo, albeit at different levels of cost effectiveness. However, all pathways (including existing GoI plans) are fiscally costly given the required upfront levels of capex and the subsidy. This cost could prove to be fiscally steep in deep decarbonization scenarios especially if the transition is fully financed by the public budget. Consequently, the success of the energy transition in Iraq will largely depend on the political context and on the ambition of a GoI-led reform process that can overcome any socio-political vested interest. It will also require popular understanding and support for the urgency of this transition. 1. >>> Introduction Iraq is one of the world’s largest oil producers. In 2021, Iraq ranked 6th by oil production volumes, producing 4.15 million barrels – around 4 percent of the global oil supply (EIA 2022). However, despite access to such vast oil resources, the country’s development status largely resembles that of a low-income country – Iraq is one of the worst performers in the Middle East and North Africa (MENA) in terms of human capital, female labor participation, and delivery of basic services to name a few (World Bank 2022). The issue of low quality of basic services provision, especially electricity, is particularly visible and relevant to Iraq’s growth. Iraqi households suffer six hours of power outages on average, with some areas, especially in the West, facing longer outages(Al-Oraibi 2022). The prevalence of power outages pushed Iraqis to rely on expensive and highly polluting diesel generators. Based on 2019 data, Iraq ranks fifth the world in the number of diesel generators per capita(IFC 2019). Within these realities, Iraq’s energy transition, propelled by the need to address existing inefficiencies, take advantage of the improving economics of renewables¹, and the global normative stance on fighting climate change and reducing emissions, is expected to occur over the next 20 years. However, Iraq’s energy transition will be taking place within a context of a global energy transition from fossil fuels, of which Iraq is heavily reliant on, to greener energy sources. Iraq’s energy transition’s costas and economic returns are tied to the reform process. This energy transition will come at a cost as it requires significant investments. This cost is amplified by global climatic conditions; by uncertainty over global commodities markets, making oil prices and production more volatile; and by a water shock that seems inevitable for Iraq and will result in a deeper scarcity and the need for more adaptation measures. Will this cost be prohibitive to undertake such transition? What are its macroeconomic returns? Can the Iraqi government bear the related fiscal and external impact? How do reforms linked to macroeconomic stability and diversification facilitate the adoption of this transition? This paper attempts to answer the above questions. It does so by simulating the macroeconomic and fiscal implications of the electricity sector transition under proposed decarbonization pathways adopted in the Iraq Country Climate and Development Report (CCDR). The paper also highlights a set of macroeconomic indicators, including the GDP growth and employment trajectory under each category, the fiscal costs resulting from investments and operational costs and the related implications in terms of debt accumulation, as well as the impact on the external position of the country. The objective is to show the economic returns from the transition and determine whether the related costs are prohibitive. The simulations also highlight the policy tradeoffs under each examined scenario with a sensitivity analysis to assess the role of reforms in the success of such transition. 1. In the power sector, addressing Iraq’s significant inefficiencies would serve to lower economic costs (i.e., the fiscal pressure of the sector) and end-user prices connected with the use of diesel generators, improve reliability and the business environment, and mitigate the public health effects due of having diesel generators close to population centers. Decarbonizing power generation will require an aggressive integration of renewable energy resources and, in the short to medium term, the displacement of higher-carbon, imported liquid fuel sources by domestic natural gas. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 2. >>> Iraq’s Macroeconomic and Power Sector Realities 2.1. Iraq’s Oil Dependency and Macroeconomic Volatility In 2021, Iraq’s oil production level was almost double that of 2010, thanks to nearly US$104 billion of investment in the oil sector. During that period, and despite fluctuations in global oil prices, Iraq’s hydrocarbon sector brought over US$834 billion in oil sale revenues. Those receipts have had a significant impact on the country’s GDP, propelling it to an upper middle income country status, and as a result raising GDP per capita from US$3,938 in 2010 to US$4,971 today. Historically, the ease with which oil income is generated and can be redistributed to maintain networks of power weakens the drive to pursue growth-enhancing reforms (World Bank 2020), further limiting Iraq’s ability to launch its transition, reduce carbon emissions and manage climate shocks. Additionally, this excessive dependence on oil acts as a powerful driver of macroeconomic fragility. The overdependence on oil has exposed the country to macroeconomic volatility (see Figure 1a), eroded the country’s competitiveness, reduced the need for taxation, weakened the accountability link between citizens and the state, and fueled corruption (World Bank 2020). Iraq did not manage to exploit its oil dividend to foster long-term growth, and the low diversification of the economy outside of the oil sector is one of the structural constraints weighting on Iraq’s future growth potential. Indeed, growth was primarily driven by capital (mainly in oil sector) and to a lower extent labor, rather than productivity gains. Moreover, the country has scored poorly on indicators related to quality of governance and institutions, public financial management, and corruption levels. All these combined have averted these windfalls away from investment in human and physical capital towards strong preference for recurrent spending (World Bank 2021). Additionally, public spending has been extremely biased towards non-discretionary spending leaving limited fiscal space for public investment in non-oil sectors. Rigid expenditures increased in tandem with the rising oil production capacity of the country. This was evident by a growing public wage bill and transfers (including subsidies), which together EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 went from constituting just over 50 percent of total spending in 2010 (25 percent of GDP) to a staggering 64 percent a decade later (21 percent of GDP) (Figure 1(b)). Consequently, the level of public investment remained insufficient to meet the human capital and infrastructure needs of the country. Moreover, a large share of this capital expenditures was dedicated to the oil economy at the cost of non-oil investment. In 2021, 60 percent of public investment was oil related compared to less than 17 percent in 2010. Additional efforts are needed to create fiscal space to meet the increased challenges posed by climate change and an expected long-term decline of demand for fossil fuels. > > > F I G U R E 1 ( A ) - Excessive dependence on oil for F I G U R E 1 ( B ) - and rigid expenditure limited the growth exposed the country to macroeconomic volatility fiscal space for public investment 120 60 15 100 80 40 10 60 Y/Y growth, percent, % 5 Percent of GDP 20 Percent of GDP 40 0 20 0 0 -5 -20 -20 -10 -40 -40 -15 -60 -80 -60 -20 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Non-oil investment expenditures (LHS) Oil investment expenditures (LHS) Agriculture Oil Recurrent expenditures (LHS) Non-oil industry Services, other Non-oil revenues (LHS) Oil revenues (LHS) Public sector services Overll GDP Fiscal balance (RHS) Source: Iraq COSIT; and WB staff calculations Source: Iraq COSIT; and WB staff calculations. 2.2. Iraq’s Energy Sector In tandem with oil production increase, Iraq’s carbon emissions have increased by around 40 percent over the last decade alone (IEA 2023). Although Iraq represented only 0.45 percent of global greenhouse gas (GHG) emissions, it ranked fourth in MENA in 20192. Further, Iraq has one of the highest carbon intensities (emissions per GDP) compared to its peers3, based on 2019 data. In fact, Iraq’s emissions growth has outpaced the rate of economic growth. This increase can be attributed to both a steep growth in population—which increased by 21 percent between 2012 and 20184—and the associated ramping up of internal oil and natural gas use, particularly in power generation and transport. Production of oil and gas itself also generates significant volumes of GHG emissions from combustion in operations, unabated flaring and venting of natural gas, and leakages of methane along the oil and gas value chain. Almost three-quarters of Iraq’s total carbon emissions are attributed to the energy sector. Power generation and fugitive emissions alone are responsible for more than 60 percent of the country’s emissions. In 2019, more than 98 percent of electricity in Iraq was generated by fossil 2. After Iraq, Saudi Arabia and Egypt 3. Iraq’s peers are Kazakhstan, Algeria, Angola, Azerbaijan, and Columbia. The selection of Iraq’s peers is based on a methodology outlined in the Iraq Economic Memorandum, September 2020 (World Bank 2020) 4. World Bank data EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 fuels (55 percent from natural gas and 53 percent from oil). Transport and oil and gas operations come in second place, with almost equal contributions to emissions. Critical to the issue of fast-growing electricity demand is the presence of deep subsidies. Energy prices are well below the cost-recovery level, particularly for electricity and liquid fuels. In the power sector, Iraq has one of the highest levels of subsidies and unbilled electricity rates in MENA. In 2019, of the 11.3 billion USD total annual operational cost of Iraq’s power system, direct fuel subsidies comprised half (5.6 billion USD), leaving the remaining 5.7 billion USD as MoE-related costs (see Figure 2). After accounting for structurally unrecovered losses and other associated commercial losses, 1.3 billion USD was billed to consumers, of which 0.8 billion USD was collected, representing revenues of just 7 percent of total annual system operational costs. After including the cost of fuel subsidies, commercial losses, and theft, around 90 percent of annual operational costs are currently not recovered in Iraq’s power system. > > > F I G U R E 2 - Operational economic burden on the electricity sector (USD Bn, 2019) 1.41 1.35 .6 7.6 EXCLUDES CAPITAL COSTS -86% 5.72 .7 3.0 1.7 0.3 0.2 1.4 0.4 0.5 0.8 Source: World Bank and Strategy & Data. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 3. >>> Methodology and Data The macroeconomic modelling of different transition scenarios relied on a different set of inputs. From the power sector, the World Bank’s Electricity Planning Model (EPM) was used to analyze energy mix trajectories in Iraq over the 2021–40 period. The EPM is a least-cost planning tool that is formulated in the General Algebraic Modeling System (GAMS) (Chattopadhyay, De Sisternes, and Oguah 2018). EPM minimizes the costs of expanding and operating a power system while meeting the model’s technical, economic, and environmental requirements. EPM is a long-term planning model, which means it optimizes the annual capacity additions based on system costs over multiple years, including fixed (annualized capital and fixed operation and maintenance (O&M)) costs and variable (fuel and variable O&M) costs. Moreover, EPM addresses the dispatch of the generators, decides on the activities per geographical zone and the exchange between them. Furthermore, the model suggests the allocation of spinning reserves among generators and allows for implementing different policies, e.g., emissions limits, fuel, and import limits, spinning reserve requirements, transmissions caps, ramp limits, or carbon prices. Three primary scenarios were designed to assess the most feasible decarbonization pathway for the electricity sector, first with the short-term goal of closing the significant supply-demand gap by 2024 and then exploring multiple carbon reduction pathways over the 2025–40 horizon. A cross-scenario modelling analysis was carried out to highlight key economic differences in planning outlook results. The examined scenarios are summarized in Table 1. Projections of oil and other oil derivatives prices and the EPM output data is listed in Annex A. Based on the EPM results, macro scenarios capturing the transition pathways for the electricity sector are developed. At a first stage, those scenarios have two overlapping assumptions: i) a water shock represented by a 20 percent reduction in water availability, which will impact the agriculture and food sectors as well as the overall productivity of the economy; ii) an oil price assumption based on market trends and WB commodities projections (see Table A.1 in Annex A). The scenarios are differentiated in terms of emissions reduction, usage of various fuel mix, investment needs for electricity generation (capex), and related operational costs (opex). Those parameters are extracted from the EPM model described in Table A2 in Annex A. Table 1 summarizes those scenarios. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 > > > T A B L E 1 - Description of Iraq’s local energy transition scenarios5 Scenario Electricity Transition Exogenous Assumptions Brief Description GoI current policies based 20% water reduction + oil - Cumulative investments: on committed plans to 2027, price assumptions from WB $32.7 Billion available fuel supply, minor commodities projections - Annual system costs excluding Brown Transition role for renewables. Very high (average $68/barrel over annualized CAPEX: $11.9 billion (baseline) annual emissions. 2019-2040) - Cumulative Emissions: 1,962 MT - Annual Emissions: 116.88 MT No regret scenario. 20% water reduction + oil - Cumulative investments: GoI meets the Nationally price assumptions from WB $43.2 Billion Determined Contributions commodities projections - Annual system costs excluding targets (15% emissions (average $68/barrel over annualized CAPEX: $10.3 billion NDC reduction by 2030 maintained 2022-2040) - Cumulative Emissions: out to 2040). 1,745 MT - Annual Emissions: 99.35 MT Cost-Effective 20% water reduction + oil - Cumulative investments: decarbonization pathway. price assumptions from WB $63.2 Billion Iraq achieves the highest commodities projections - Annual system costs excluding level of abatement without (average $68/barrel over annualized CAPEX: $9.3 billion increasing the levelized 2019-2040) - Cumulative Emissions: system cost of energy 1,528 MT Green Transition (LCOE). 42% emissions - Annual Emissions: 67.79 MT reduction by 2040. Marginal abatement costs for further reductions become expensive. Source: Authors’ calculation 5. The “Brown Transition” scenario is based on the Current Policies Scenario (CPS) scenario was first designed following numerous discussions with consultants, experts, and World Bank team CCDR team members to reflect plant and fuel supply commitments to the year 2027. It then takes a development trajectory that reflects current policies, which are based primarily on thermal gas expansions with some minor uptake of solar PV. The NDC scenario was designed to achieve equivalent power-sector reduction targets to Iraq’s Nationally Determined Contributions of 15 percent by 2030 and maintain that target out to 2040 (relative to the BASE). The “Green Transition” scenario is defined as the Cost-Effective Decarbonization Pathway, which was designed to meet the highest target of abatement without increasing system costs from an LCOE of generation standpoint. The model found this target to be an equivalent 42 percent reduction in annual emissions by 2040 (relative to the CPS). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 To capture the impacts of the global energy transition(s), manifested in different “climate worlds” and linked to different oil price projections, a sensitivity analysis has been conducted under four scenarios that are further explained in Section 4.2 (see Table 2). > > > T A B L E 2 - Iraq climate pathways under different global scenarios6 Global energy Crude oil price Iraq crude oil Scenario Description scenario (2022-2040 average) production volume3 GoI current policies 3.2 mbpd, 2022-2040 in a “good climate average world”: Iraq’s Brown (3.7 by 2025, 3.3 in Brown Transition scenario in 2030 and 2.5 mbpd Transition + IEA’s “Net-Zero US$35/bbl a Net-Zero policy world by 2040) Net Zero leading to less than 2 degrees warming (RCP 1.9) GoI current policies 4.5 mbpd, 2022-2040 in an “intermediate average climate world”: Iraq’s (4.4 by 2025, 4.6 in Brown Transition 2030 and 4.7 mbpd Brown scenario in a climate by 2040) Transition + IEA’s “NDCs” US$61/bbl world where other IEA NDC countries meet NDCs, leading to 2 degrees global warming (RCP 4.5) GoI current policies in 4.9 mbpd, 2022-2040, a “bad climate world”: average Iraq’s Brown Transition (4.5 by 2025, 4.9 in Brown scenario in a climate 2030 and 5.3 mbpd Transition world where other by 2040) IEA’s “Stated-Policies” US$71/bbl + Stated countries follow stated Policies policies, leading to 4 degrees global warming (RCP 8.5) Iraq decarbonizing 3.2 mbpd, 2022-2040 path in a “good climate average word”: Iraq’s Green (3.7 by 2025, 3.3 in Green Transition Scenario in 2030 and 2.5 mbpd Transition + IEA’s “Net Zero” US$35/bbl a Net-Zero policy world by 2040) IEA Net Zero leading to less than 2 degrees warming (RCP 1.9) Source: Authors’ calculation 6. Climate scenarios only consider the change in energy demand under the relevant global emission trajectory. Iraq’s crude oil production volumes are assumed to grow in line with projected OPEC production under each climate world. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 To assess the impact and affordability of the electricity transition scenarios, the paper uses a macro-structural model “The Macroeconomic and Fiscal Model for Iraq” (MFMod- IQ). MFMod-IQ is a country-specific structural econometric model of the Iraqi economy and is derived from the MFMod model framework of the World Bank (Burns et al. 2019). It corresponds to a standard macro structural, with customizations to reflect the characteristics of Iraq’s economy. Structural macro-econometric models are forecasting tools that can incorporate a detailed mix of economy wide transmission channels, tradeoffs, as well as judgment. This allows to analyze policy impacts on the broader economy, looking at a higher level of disaggregation than in other macroeconomic models, notably DSGE-type of models (Blanchard 2018). As such, MFMod-IQ is well suited to the Iraq case as it allows to model alternative energy investment paths (with both public and private financing), complex commodity windfalls revenues, and changing global conditions. All while accounting for distinctive features of Iraq. This includes issues like country-specific changes to productivity given the constrained fiscal space, as a result of subsidies and public sector wage bill, limited investment absorption capacity and fiscal multiplier, and sensitivity to global oil prices. Hence, MFMod-IQ includes a detailed and internally consistent description of national income accounts, balance of payment, and fiscal accounts for Iraq. These are essential to assess the feasibility of the proposed energy investment plan in terms of fiscal space, private sector crowding out effect and availability of FX reserves to absorb the related capital imports. In contrast, a pure fiscal-focused model would omit key components of fiscal sustainability, such as the direct relationship between savings from oil revenues on capital accumulation and the country’s sustainable growth path. The presence of such feedback loops in MFM-IQ allows the model to capture the trade-offs between volatility of public revenues, reforms, and medium-term growth. In the MFMod framework, country-specific models are designed to reproduce the flow of funds across the whole economy by mapping out the main identities of the national accounts, balance of payments, labor markets and financial sectors. Burns et al., 2019 provides a detailed description of the model structure and equations. Structural relationships are consistent with both economic theory and the observed dynamics of the economy. The short- run dynamics are data-driven, with estimated parameters reflecting the actual behavior of the economy. Most equations are estimated using error-correcting models and parameters were estimated using, or calibrated to, Iraqi data. In the MFMod framework, the overall equilibrium growth path of the economy is determined by potential output, which is calculated using the production-function methodology. The latter is a function of total factor productivity, the level of capital and labor. Deviations from equilibrium, as well as convergence to equilibrium, are determined by the historical behavior of the Iraqi economy. The data used in MFMod-IQ were obtained from the World Bank world development indicators database and Iraq’s statistical agency (COSIT) for national accounts and domestic prices, the central bank of Iraq for balance of payments and foreign currency reserves, and ILO for labor market data. Details on the fiscal accounts were sourced from the Ministry of Finance, and include: Oil revenues, grants and other non-oil-related revenues; and expenditures on goods and services, public wages and compensations of employees, interest payments, transfers and capital expenditures. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 4. > > > are supportive of growth >>> Results 4.1 The Macroeconomic Implications of the Transition Pathways Three scenarios are modelled to capture the macro-fiscal characteristics of the transition pathways for Iraq’s electricity sector. The modelling has shown that investments in the decarbonization electricity transition pathways and the consequent emission reduction are expected to boost GDP growth. In addition to the direct impact on GDP from raising investment levels, meeting all the growing electricity demand in Iraq will have a positive effect on firms’ productivity and cost of operations in all sectors. It will also benefit households and consequently boost private consumption. Moreover, reduction in emissions will have implications on health and environmental degradation. The larger the investment and the deeper the decarbonization pathway, the more significant is the impact on growth. Simulations show that the Green Transition scenario will boost GDP by 1 percent by 2030 of the transition, while the NDC scenario will boost GDP by 0.1 percent, both relative to the Brown Transition scenario. Growth gains are realized at an accelerating pace over time (Figure 3a). More importantly, the transition (especially the Green Transition) is also expected to raise non-oil GDP growth. In 2030, the Green Transition and NDC scenarios are expected to raise non-oil-GDP by 1.15 and 0.52 percent, respectively (Figure 3b). This opens the door for Iraq to improve its economic return on capital, labor, and productivity, allowing economic activity to grow at a faster pace in the future. F I G U R E 3 ( A ) - Iraq’s decarbonization pathways F I G U R E 3 ( B ) - and raise the non-oil GDP potential of the country Real GDP compared to the Brown Transition Non-Oil Potential GDP compared to the Brown 1.5 scenarion (%) 2.0 Transition scenario (%) 1.0 NDC 1.5 Green Transition 0.5 1.0 0.0 NDC 0.5 -0.5 Green Transition -1.0 0.0 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 Source: Authors’ calculation Source: Authors’ calculation EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 The fiscal cost is expected to be elevated given the investment intensity of the transition and high subsidy in the absence of sectoral reforms that ensure cost recovery in the electricity sector. Simulations show that the transition, in all its pathways, is expected to be investment-intensive with the cumulative CAPEX required by 2040 ranging between $32.7 billion in the Brown Transition Scenario (GoI current plans- Base) to $63.16 billion for the Green Transition pathway (see Figure 4(a)). A notable share of the investment is frontloaded. In the Green Transition scenario 28 percent of total CAPEX is required by 2025. This is $17.8 billion, equivalent to a yearly average of 2.3 percent of GDP. Moreover, as discussed above, electricity utilities in Iraq currently have a cost recovery slightly below 10 percent as problems related to tariffs, billing, collection, and technical losses persist. As a result, operational costs are largely subsidized by the state whether directly through the central budget or through the state-owned oil companies. In the absence of cost recovery reforms, this raises the fiscal costs of the transition and brings the average total budgetary expenditures between 2022 and 2040 to 46.2 percent of GDP for the Brown Transition and 46.7 percent of GDP for Green Transition (see Figure 4(b)). The fiscal deficit and public debt will reach critical levels under all transition pathways, including the one aligned with current GoI plans (the Brown Transition). Simulations reveal that undertaking one of the electricity transition pathways under current conditions would raise the fiscal deficit to an average of between 10.9 to12 percent of GDP in the first 5 years, and between 3.8 to 5.7 percent of GDP by 2040 (Figure 5(a)), bringing public debt to critical levels (between 90.8 and 96.7 percent of GDP in year 5 and between 55.4 and 65.5 percent of GDP by 2040) (Figure 5(b)). In the absence of reforms, especially those linked to cost recovery in the electricity sector, the transition pathways’ fiscal implications are steep and could have detrimental implications for the economy. Those fiscal implications are also implied for the current government plans to meet the electricity demand gap (Brown Transition scenario). > > > F I G U R E 4 ( A ) - Capex requirements for electricity F I G U R E 4 ( B ) - Capex and opex from the transition transition pathways raises government spending steeply Capex Requirement for transition pathways 52 Govt. Expenditure (%GDP), in percent (5 years cumulative) 20 2025 2030 17.83 50 18 16.25 16.81 2035 16.12 16 2040 48 14 12.37 12.4 46 12 9.28 9.39 9.29 44 10 8.29 8 7 42 Brown Transition 6 4.07 40 NDC 4 Green Transition 38 2 0 36 Brown Transition NDC Green Transition 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Source: Authors’ calculation Source: Authors’ calculation EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 > > > F I G U R E 5 ( A ) - Capex requirements for electricity F I G U R E 5 ( B ) - Capex and opex from the transition transition pathways raises government spending steeply Budget Balance (%GDP), in percent 120 Govt. Debt (%GDP), in percent 0 -2 100 -4 80 -6 -8 60 -10 40 -12 Brown Transition Brown Transition NDC 20 NDC -14 Green Transition Green Transition -16 0 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Source: Authors’ calculation Source: Authors’ calculation 4.2 Sensitivity to Global Energy Transition Pathways The macroeconomic outcomes of Iraq’s own energy transition will heavily depend on the global energy transition and efforts towards reduction in carbon emissions. Due to the global nature of the climate change challenge and the interconnectedness of trade, Iraq’s economic prospects will not only be determined by its own policies but also by the efforts and carbon reduction policies pursued by other countries. Given the overdependence of the country on oil, such policies would influence global oil markets (through demand and prices) and in turn could impact Iraq’s growth (in oil and non-oil sectors), fiscal and external balances, and financial sector operations. These oil market dynamics could also have significant implications on Iraq’s welfare, social, and political prospects as previous cycles have shown. The macroeconomic modeling exercise is then extended to conduct a sensitivity analysis on different oil prices, representing different “climate worlds” as described in the Iraq CCDR. Iraq is a “climate-taker” given the small relative size of its economy,7 and emissions are counted towards the country’s domestic consumption (not exports of energy) in the framework. The interplay between local and global transition is reflected in four additional scenarios (see Table 2). Scenarios “Brown Transition+Net Zero”, “Brown Transition+IEA NDC” and “Brown Transition+Stated Policies” are broadly in line with the Intergovernmental Panel on Climate Change (IPCC) trajectories of greenhouse gases—Representative Concentration Pathway (RCP) 1.9, RCP 4.5, and RCP 8.5, which highlight IEA’s global assumptions related to international oil markets (prices and demand). As such, these scenarios can be thought of as a sensitivity analysis to oil price variations for measuring the outcome of the Iraqi transition. An additional scenario (Green Transition+IEA Net Zero) is defined to assess a more ambitious yet feasible quasi-cooperative scenario towards Net-Zero targets at both global and country levels. Under the “Green Transition+IEA Net Zero” scenario Iraq is assumed to follow the cost-effective decarbonization transition pathway (similar to the Green Transition scenario listed in Table 1) in conjunction with the global Net-Zero scenario. 7. Iraq accounts for 0.2 percent of world GDP and 0.6 percent of global CO2 emissions in 2020. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 Simulations based on the global scenarios described in Table 2 reveal the stark macroeconomic implications for Iraq in a decarbonizing world. Under the “Brown Transition+Net Zero”, “Brown Transition+IEA NDC” and “Brown Transition+Stated Policies” scenarios, average annual GDP growth in 2023–40 is estimated to be 1.2, 0.5, and 0.2 pp lower than the baseline (Brown Transition scenario), respectively. This effect cumulatively, would lead GDP to be 20.6 percent smaller by 2040 under “Brown Transition+Net Zero” (Figure 6(a)). In the fastest global transition path, a significant share of Iraqi oil infrastructure could become obsolete as stranded assets. Beyond this effective decline in the capital stock, the direct impact of the oil sector contraction will be limited due to its low labor intensity. However, the indirect impact of the global energy transition will be more significantly felt through the non-oil economy where most Iraqis are employed. The non-oil economy is primarily impacted through a decrease in consumption demand as higher savings are incentivized by a higher effective interest rate to meet the required investment needs (Figure 6(b)). This higher investment will be met with higher imports of machinery and equipment, which in turn increase pressures on the external balance at the same time as oil revenues plummet (Figure 7(a)). A global decarbonization path would significantly add to Iraq’s fiscal pressures and lead to ballooning public debt. The overall fiscal deficit-to-GDP ratio is expected to reach a staggering 65, 21, and 6 percent of GDP by 2040 under IEA’s Net-Zero, Stated Policy, and NDC scenarios, respectively (Figure 7(b)). The decline in government revenues through oil revenues in “Brown Transition+Net Zero” is the sharpest across the global climate scenarios. This outcome is reinforced with higher expenditures associated with the climate transition paths which results in the fastest transition scenarios to show the largest upward shift in the fiscal deficit. The debt- to-GDP ratio will also grow rapidly to well beyond sustainable levels (more than 300 percent of GDP in “Brown Transition+Net zero Policies”) due to the growing fiscal deficit and a denominator effect of nominal GDP contraction. Those scenarios remain illustrative though to showcase the sensitivity of the transition to oil outcomes. It does not incorporate external adjustments (at the level of OPEC and other oil producers who might change production profiles to keep oil prices higher) nor domestic adjustments (at a certain level of deficit and debt, markets will force convergence and hence other spending items will automatically adjust to new fiscal realities). > > > F I G U R E 6 ( A ) - The economic returns of the F I G U R E 6 ( B ) - The affordability of the investments transition in Iraq are highly sensitive to developments to be made in global oil markets Real GDP compared to baseline (Brown Transition) (%) 8 Total Investment compared to baseline, in percent 10 6 0 4 -10 2 0 -20 -2 -30 -4 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Brown Transition + IEA Net Zero Brown Transition + IEA Net Zero Brown Transition + IEA NDC Brown Transition + IEA NDC Brown Transition + IEA Stated Policies Brown Transition + IEA Stated Policies Green Transition + IEA Net Zero Green Transition + IEA Net Zero Source: Authors’ calculation Source: Authors’ calculation EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 > > > F I G U R E 7 ( A ) - External pressures mount with F I G U R E 7 ( B ) - so does the fiscal balance declining oil prices CAB (% of GDP) compared to baseline, in percent Budget Balance (%GDP), in percent 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 -50 -50 -60 -70 -60 -80 -70 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Brown Transition + IEA Net Zero Brown Transition + IEA Net Zero Brown Transition + IEA NDC Brown Transition + IEA NDC Brown Transition + IEA Stated Policies Brown Transition + IEA Stated Policies Green Transition + IEA Net Zero Green Transition + IEA Net Zero Source: Authors’ calculation Source: Authors’ calculation 4.3 Contingency of Transition’s Success on Reforms Calls for reforms in Iraq, particularly in the energy sector are not new. These reforms are short- to medium-term in nature and focus on improving cost recovery in the electricity sector, fiscal consolidation, and securing private investment. All these proposed reforms have been in the making for years and clearly articulated in the GoI white paper, which is yet to be implemented. To quantify the impact of applying reforms, the model simulates a comprehensive fiscal reforms scenario (Green Transition + Reforms). This scenario assumes (i) a rise in OPEX recovery from 10 to 50 percent through improved collection, reduction in nontechnical losses, and tariffs hikes; (ii) fiscal consolidation through wage bill controls as well as boosting domestic revenue mobilization by 2 percent of GDP over two years through customs and income tax reforms; and (iii) ensuring 20 percent in private financing for the required CAPEX, tapping into growing global interest in renewables’ investment as well as implementing the regulations linked to the unified gas framework to attract foreign direct investment. The simulations have shown that reforms are a necessary condition for Iraq to afford the energy transition and benefit from its economic returns. Fiscal reforms, through the modelled reforms’ scenario, allow the decarbonization pathway to raise the country’s growth potential further, contain external pressures and generate fiscal savings. The proposed bundle of fiscal reforms can make the cost-effective decarbonization transition pathway (Green Transition scenario) highly feasible. Reforms gradually reduce the fiscal deficit by 4.5 ppt in the first 5 years compared to a Green Transition with no reforms and turns it into a surplus thereafter; reducing as such the debt-GDP ratio (Figure 8a). In addition to bridging the country’s electricity demand gap, private investments would have a high multiplier effect. Therefore, energy transition coupled with reforms are projected to boost GDP by 0.3 percent in the first 5 years (and thereafter), as well as raise non-oil GDP potential by 0.35 ppt. Finally, reforms absorb external pressures coming from rising capital imports given additional inflows and reduction in public consumption. This raises the average current account deficit by only a mere 0.03 percent of GDP compared to the Base scenario. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 It is important to note that while reforms would bring fiscal and growth gains, they would not be enough to fully cushion the detrimental effects of the collapse in oil receipts under a net-zero climate world. If countries move globally on reducing GHG emissions and manage to achieve net-zero targets, the success of the Iraq energy decarbonization pathway would be questionable, regardless whether reforms are applied or not. Scenario “Green Transition+Reforms+IEA Net Zero” scenario shows widening fiscal and current account deficits by a staggering 53 and 71 ppt by 2040, respectively, compared to the baseline Brown Transition scenario and a 20 percent reduction in GDP growth (Figure 8b). This would also send public debt to GDP ratios well beyond sustainable levels. Growth and diversification focused reforms will boost the economic returns from the transition. The GoI has laid down a series of reforms that would help Iraq move along the economic diversification agenda. Implementing diversification related reforms would raise the GDP per capita for Iraq by 58 percent (World Bank 2020). It does so as reforms would lead to raising non-oil related capital accumulation, boosting human capital formation, and address labor force participation bottlenecks, especially amidst women, to levels at par with UMICs’ average.8 The model simulates the macroeconomic effects of the transition under such growth and diversification focused reform agenda (“Green Transition+Growth drivers” scenario) and finds significant economic gains. Indeed, simulations show a rise of 6.5 and 9.9 percent for GDP and non-oil GDP potential respectively for the “Green Transition+Growth drivers” scenario compared to the Base scenario by 20409. Such economic gains will make the energy transition more feasible. > > > F I G U R E 8 ( A ) - Reforms are needed to absorb the F I G U R E 8 ( B ) - but might not be enough in a net fiscal cost of the transition zero climate world CAB (% of GDP) compared to baseline, in percent CAB (% of GDP) compared to baseline, in percent 10 10 0 8 S10: Green Transition + Reforms S12: Green Transition + Growth Drivers -10 6 -20 4 -30 2 -40 -50 0 -60 -2 S11: Green Transition + Reforms + IEA Net Zero -70 S13: Green Transition + Growth Drivers + IEA Net Zero -4 -80 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Source: Authors’ calculation Source: Authors’ calculation 8. See Iraq CEM 2020 for a detailed description on reforms, impact, and methodology (World Bank 2020a). 9. The effect is 2.3 and 8 percent respectively by the end of year 5 of the transition. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 5. >>> Discussion 5.1 Macroeconomic Tradeoffs Macroeconomic tradeoffs are to be considered when the transition moves forward. Among the most significant are the low absorption capacity of Iraq for investments. The country currently suffers from public investment bottlenecks, weak business environment, and competitiveness constraints that have often delayed many infrastructure projects most notably in the energy sectors. Moreover, the size of these required CAPEX has the potential to crowd out private investments. This is the case if the Government of Iraq (GoI) decides to rely more heavily on budgetary financing from domestic sources to finance the transition; or if it is forced to reprioritize budget away from pro-growth or pro-poor programs to manage the growing fiscal deficit. The transition will also add pressure on external financing as notable capital imports will be required to meet those energy investments. This adds pressure on the central bank’s foreign currency reserves and on the exchange rate. Given those pressures on imports, simulations indicate that the transition could widen the current account balance by 0.8 percentage points of GDP (ppt) if the GoI prioritizes the Green Transition pathway over existing plans (Brown transition scenario). The associated growth and fiscal impacts could be marginally mitigated if Iraq embarks on the most efficient path of emission reduction. Comparing the results for the “Brown Transition+Net Zero” and the “Green Transition+IEA Net Zero” in the above figures reveals that, an active response to the climate reality and optimization of a least-cost energy transition can partially mitigate the negative impact of global transition away from carbon. This transition is necessary for Iraq to close the supply-demand gap in electricity. Thus, as the macrosimulations show that the Green Transition pathway for the electricity generation can also be a preferred path for Iraq’s macroeconomy under two climate world scenarios. In a net-zero emissions world, the magnitude of the collapse in oil receipts will make it unlikely that Iraq can invest in any of the transition pathways. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 5.2 Reforms’ Timing Given the role of reforms in mitigating the adverse fiscal effects of the transition, Iraq should seize the current moment of high oil prices to change its development model and move fast on its growth diversification agenda and energy transition. Frontloading reforms and investment will maximize the benefits for Iraq as the world moves gradually towards net- zero climate world. Delays in doing so will make it harder to afford and implement the transition. The cyclicality of the oil price merits a rethinking of the fiscal policy management framework in Iraq. This includes discussing the role of fiscal rules and sovereign wealth fund especially in this global transition toward less reliance on carbon intensive sources of energy and growth. Although this paper has examined the role of reforms in supporting Iraq’s energy transition, the proposed reforms can help also absorb costly adaptation measures in the face of a water scarcity shock as part of the transition. An adaptation package, on top of the energy transition, is proposed encompassing US$70 billion of investment and operational spending till 2040 related to critical hard infrastructure such as rehabilitation of dams, barrages, regulators, drains and canals, and reclamation and modernization of irrigation; as well as non- structural or soft investments/programs in water and agriculture such as farmer-led organizations capacity building, cost recovery policy reform, and water conservation programs. The package is mostly frontloaded given the nature of the problem face, but these adaptation measures are estimated to reduce water scarcity by half (down to 10 percent). Macro simulations reveal that introducing this package would add a significant 0.12 percent to GDP in the first 5 years on top of the gains from the Green Transition pathway and the accompanying fiscal reforms (0.87 percent by 2040). However, the fiscal costs would see the budget deficit averaging 11 percent of GDP in the first 5 years (with public debt reaching 94 percent of GDP) before declining to an average of 4.3 percent thereafter (with public debt dropping to 58 percent of GDP by 2040). Deeper fiscal reforms, growth enhancing structural reforms and availing private financing for investments would make the adaptation measures more affordable. 5.3 Fiscal rules and Sovereign Wealth Funds (SWFs) Like many resource-rich economies, high dependence on oil, procyclical fiscal policy and the absence of oil revenue management mechanism left Iraq vulnerable to volatility and exogenous commodity price shocks. Low savings rates and boom-bust cycles have plagued economic development in resource-rich Iraq. This condition was strongly illustrated in the aftermath of the 2014 commodity price shock and the most recent COVID-19 crisis. The large loss in oil revenues for the government forced important budget cuts notably in social and capital expenditures with severe impact on economic growth, human capital accumulations and service delivery. To leverage depleting oil wealth, building buffers for precautionary purposes and promote sustainable economic development, Iraq needs to establish fiscal rules10 aim at providing a credible commitment to fiscal discipline, such as a ceiling on the current primary spending of the central government. Such a rule would constrain spending on salaries and subsidies while creating space for investment. They can also help to correct inefficiencies in fiscal policy such as procyclicality, improve revenue collection efforts and curve overspending 10. Fiscal rules are institutional mechanisms that impose numerical limits on budgetary aggregates such as expenditure, revenue, the budget balance, and debt to ensure fiscal discipline and credibility. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 (World Bank 2020). During the past two decades, a growing number of countries across the world have adopted rules-based fiscal frameworks. As of end-2021, about 105 economies have adopted at least one fiscal rule (IMF 2022). Carneiro and Kouame (2019) argue that the use of fiscal rules in resource-rich countries has been associated with better fiscal/debt outcomes in the countries that have adopted them, and lower procyclical bias in fiscal policy. However, international experience highlights several lessons for the successful implementation of rules in resource-rich countries, these include: • Political commitment. • A clear and stable link between the numerical target and the ultimate objective, such as fiscal balance rule and annual borrowing to achieve debt sustainability. • Sufficient flexibility to respond to shocks, allows for course correction with clear escape clauses, in times of economic shocks; and • Supporting institutions that enhance fiscal transparency and accountability—such as fiscal councils, which governments establish to act as public watch dogs to evaluate fiscal policy. Having fiscal rules in place, two mechanisms can be established in short and medium to long run: The short-term view: Oil revenue stabilization fund. Many oil exporting countries established what so called oil revenue stabilization funds to mitigate the impact of the volatility of oil revenues on the budget. These funds act as a commitment device that accumulating reserves when oil revenues are high and allowing the government to draw down from it when oil revenues are low. It helps to mitigate the adverse macroeconomic effects associated with oil price volatility such as the recent crises brought by COVID-19. Saudi Arabia, Norway, and Chile are best examples for using the buffers from these funds to stabilize expenditure by adopting countercyclical fiscal policies. However, an oil revenue mechanism alone is not enough to bolster strong, sustainable, and balanced growth for country like Iraq. This is particularly true in the event of extreme price shocks such as illustrated by the COVID-related crisis. Prudent fiscal management as well as increased economic diversification remain key elements to face crises of this magnitude. The medium-long term: Sovereign Wealth Funds (SWFs). Developed and developing countries alike, particularly resource-rich ones, have established SWFs that channel windfalls during commodity booms and accumulate national savings. These saving funds are important tools to address risks posed by the depletion of oil by transforming the income generated from this commodity into permanent wealth in the form of a portfolio of financial assets and its investment income. They also serve as precautionary buffers to face the challenges from the shifts in the global energy landscape from fossil oil to renewables. SWFs could develop their green investment capacity through various structures and collaborations, including public-private partnerships, private-private partnerships, and joint investments in climate-friendly projects with multilateral development banks (World Bank 2017). Given the magnitude of Iraq’s public spending, it is critical that spending allocations get effectively translated into such productive assets. A sovereign wealth fund coupled with economic diversification can reduce the costs of external shocks and decouples the economy from oil dependence in the long run. Meanwhile, if well designed, adequately structured, and managed following best international practices, and adhere to strict regulatory framework, the SWF could indeed help the Iraqi government invest in longer-term stability (Kannan and Gordy 2020). The SWFs are becoming an important game changer in green investing. For example, EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 by using oil revenue, Norway built the largest SWF in the world (more than US$1.3 trillion), and also in other countries such as the GCC. According to S&P Global, oil-rich countries such as Qatar, the UAE, and Saudi Arabia are directing state funds towards renewable energy and in carbon capture, use, and storage (CCUS). The Wealth Fund of Singapore and UAE’s funds have invested in solar power projects in India in the last two years. The recent discussions of the Iraqi Cabinet to set a sovereign wealth fund to divert a one percent of oil sale on monthly basis to finance renewable energy projects and build up a cash reserve for future generations, is a step in the right direction, if materialized11. > > > T A B L E 3 - Sovereign Wealth Fund Functions Function Investment objectives Strategic Asset Allocation Inter-generational equity, national endowment, Long term investment horizon, meeting long-term liabilities or contingent liabilities diversification with moderate to high risk Saving (pensions) tolerance, and low liquidity requirement in short medium run Stabilize spending in the face of short-term and Liquidity, safety (capital preservation), medium-term volatility in resource income short to medium term investment Precautionary horizon Hold committed funds to pace disbursements in Safety (capital preservation), liquidity, line with absorptive capacity constraints short to medium term investment “Buffer” horizon Source: Sovereign Wealth Funds and Long-Term Development Finance, Risks and Opportunities, WB, WPS6776, February 2014. 11. Iraq oil report, January 2022. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 6. >>> Conclusion All decarbonization pathways of the electricity sector bring additional growth and productivity gains compared to existing GoI plans and/or maintaining the status-quo. Hence, it pays off to go ahead with the investment program that would switch the electricity generation fuel mix towards natural gas and raise the contribution of renewables. The cost- efficient decarbonization pathway (Green Transition) would be the preferred option since it is the least-cost option in terms of cost of production (cent/KW) and opex. However, all pathways (including existing GoI plans) are fiscally costly given the required upfront levels of capex and the subsidy. This cost could prove to be fiscally steep in deep decarbonization scenarios especially if the transition is fully financed by the budget. Reforms are key to the success of the transition. A proposed reforms package includes i) ensuring cost recovery for the electricity sector, ii) improve targeting of the electricity subsidies, iii) fiscal consolidation through the public wage bill controls and boosting domestic revenue mobilization, and iv) ensuring private sector financing and participation in the transition. Despite the positive impacts of reforms on advancing the feasibility of the transition, the transition itself is highly susceptible to global oil markets given Iraq’s over-dependence on oil. The collapse in global oil markets, in a climate world where countries achieve net-zero emissions targets, would be detrimental and would prevent Iraq from investing in meeting its domestic energy needs. To mitigate for this effect, it will be important for Iraq to move forward with the economic diversification agenda, benefit from current high oil prices to accelerate the pace of investment in the energy transition, as well as adopt fiscal rules and create a sovereign wealth fund that would whether away the potential future losses from the global decarbonization trends. The success of the energy transition in Iraq will largely depend on the political context and on the ambition of a GoI-led reform process that can overcome any socio-political vested interest. It will also require popular understanding and support for the urgency of this transition. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 >>> References Al-Oraibi, Mina. 2022. “Iraq’s Oil Dysfunction.” Foreign Policy (blog). April 21, 2022. https://foreignpolicy. com/2022/04/21/iraq-oil-fuel-shortage-energy-crisis-electricity/. Blanchard, Olivier. 2018. “On the Future of Macroeconomic Models.” Oxford Review of Economic Policy 34 (1–2): 43–54. Burns, Andrew, Benoit Campagne, Charl Jooste, David Stephan, and Thi Thanh Bui. 2019. The World Bank Macro-Fiscal Model Technical Description. World Bank, Washington, DC. https://doi.org/10.1596/1813- 9450-8965. Chattopadhyay, D., F. De Sisternes, and S. K. W. Oguah. 2018. World Bank Electricity Planning Model (EPM): Mathematical Formulation World Bank Electricity Planning Model. Energy Sector Management Assistance Program (ESMAP), International Bank for Reconstruction and Development,. Washington D.C.: World Bank. EIA. 2022. “Energy Information Administration (EIA).” December 2022. https://www.eia.gov/tools/faqs/faq. php. IEA. 2023. “Iraq - Country Profile.” IEA. 2023. https://www.iea.org/countries/iraq. IFC. 2019. “The Dirty Footprint of the Broken Grid.” 2019. https://www.ifc.org/wps/wcm/connect/2cd3d83d- 4f00-4d42-9bdc-4afdc2f5dbc7/20190919-Full-Report-The-Dirty-Footprint-of-the-Broken-Grid. pdf?MOD=AJPERES&CVID=mR9UpXC. World Bank. 2020. “Breaking out of Fragility: How Iraq Can Turn Economic Diversification into Growth and Stability.” Washington D.C.: The World Bank. https://www.worldbank.org/en/news/press-release/2020/09/30/ breaking-out-of-fragility-how-iraq-can-turn-economic-diversification-into-growth-and-stability. ———. 2021. “Iraq Human Development Public Expenditure Review: Addressing the Human Capital Crisis – A Public Expenditure Review for Human Development Sectors in Iraq.” Washington D.C.: World Bank. https://www.worldbank.org/en/country/iraq/publication/iraq-human-development-public-expenditure- review-addressing-the-human-capital-crisis-a-public-expenditure-review-for-hum. ———. 2022. “Iraq Country Climate and Development Report.” Washington D.C.: The World Bank. https:// openknowledge.worldbank.org/handle/10986/38250. >>> Annex > > > T A B L E A 1 - Projection of oil prices until 2040 Electricity and fuels costs Base Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast year Unit 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 U.S. Dollar Electricity /Megawatt- 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 83.0 imports Hour U.S. Dollar/ Crude Oil Barrel of Oil 60.7 45.5 50.1 53.2 55.8 58.5 60.5 62.7 64.5 66.4 67.9 69.7 70.8 72.0 72.7 74.0 75.5 76.9 77.2 79.5 Equivalent U.S. Dollar/ Diesel Barrel of Oil 110.3 99.6 102.8 105.1 106.9 108.8 110.2 111.8 113.0 114.4 115.4 116.7 117.5 118.3 118.8 119.7 120.8 121.8 122.0 123.6 Equivalent U.S. Dollar/ Heavy Barrel of Oil 52.5 43.7 46.4 48.2 49.6 51.2 52.4 53.6 54.7 55.8 56.6 57.7 58.3 59.0 59.4 60.2 61.0 61.9 62.0 63.3 Fuel Oil Equivalent U.S. Dollar/ Natural Barrel of Oil 39.9 30.8 33.6 35.5 37.0 38.7 39.8 41.1 42.2 43.4 44.2 45.3 46.0 46.7 47.2 47.9 48.8 49.7 49.8 51.2 Gas Equivalent U.S. Dollar/ Crude Oil 11.0 8.2 9.1 9.6 10.1 10.6 11.0 11.4 11.7 12.0 12.3 12.6 12.8 13.1 13.2 13.4 13.7 13.9 14.0 14.4 mmbtu U.S. Dollar/ Diesel 20.0 18.1 18.6 19.1 19.4 19.7 20.0 20.3 20.5 20.7 20.9 21.2 21.3 21.4 21.5 21.7 21.9 22.1 22.1 22.4 mmbtu Heavy U.S. Dollar/ 9.5 7.9 8.4 8.7 9.0 9.3 9.5 9.7 9.9 10.1 10.3 10.5 10.6 10.7 10.8 10.9 11.1 11.2 11.2 11.5 Fuel Oil mmbtu Source: WB data EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 > > > T A B L E A 2 - Iraq’s power sector data and projections under five scenarios CPS (Brown Green Category Parameter Unit Base yr-2021 Timeframe NDC Transition) Transition Electricity TWh 208 2040 326 326 326 Demand Demand Unmet Demand TWh 63 2040 0 0 0 Peak Demand GW 30 2040 49 49 49 Thermal Cap GW 25.4 2040 35.7 31.1 22.3 CCUS-Thermal GW 0 2040 0 0 6.8 Cap RE Cap GW 0.5 2040 17 37.1 53.8 Capacity Storage Power GW 0 2040 0 0.7 2.2 Cap Storage Energy GWh 0 2040 0 2.8 8.9 Cap Total Cap GW 25.9 2040 52.7 69.0 85.1 Gas Fuel m mmbtu 722 2040 1388 1388 1399 Consum. Liquid Fuel m mmbtu 481 2040 437 218 0 Consum. Share of Gas % 56% 2040 67% 67% 54% Generation Gen. Share of Liquid F % 35% 2040 20% 10% 0 Gen. Share of CCUS % 0 2040 0 0 12% Gen Share of RE Gen % 1% 2040 10% 17% 22% PV of System billions N/A 2021-2040 251 247 246 Costs System Annual System billions 18 2040 14.9 14.3 15.2 Costs Cost Levelized Cost of $/MWh 124 2040 45.7 43.6 45.7 Gen Cumulative Invest billions N/A 2022-2040 33 43 63 PV of Cumul. Investment billions N/A 2022-2040 21 26 37 Invest Average Annual billions N/A 2022-2040 1.6 2.2 3.3 Invest Annual Emiss MT 80 2040 117 99 68 Cumulative Emissions MT N/A 2021-2040 1961 1745 1528 Emiss. Grid Emiss. tCO2/MWh 0.38 2040 0.36 0.30 0.20 Factor Source: World Bank Iraq Country Climate and Development Report 2022 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27