A Tale of Two Transitions : Iraq's Energy Sector and Macroeconomic Stability in a Climate-Constrained World

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