Georgia’s Climate Change Opportunity

By George Welton, Executive Director of AmCham, Georgia

Georgia has long aspired to be at the heart of Europe. As the EU’s ambitious goals on climate change have given Georgia a great opportunity. By pledging to achieve carbon neutrality by 2040, or 10 years ahead of the rest of Europe, Georgia could assume a leadership role, demonstrate the business case for climate-reform, stimulate investment, growth and jobs, increase the country’s security and create a rallying-point for national renewal.

How would Georgia set out to achieve the goal of carbon neutrality?

For a start, the country should aim to produce enough electricity from renewable sources to cover 100% of its own consumption within the next five years. This is achievable. As recently as 2010, the country produced more hydropower than its entire electricity consumption for the year.

It now depends on more non-renewable production due to expanded demand. But there are ample opportunities for energy efficiency. According to the World Bank, Georgia consumes about three times the electricity per capita of other countries of a similar income level. This reflects historical inefficiencies that could easily be improved, and bitcoin mining, which accounts for at least 10-15% of consumption.

There is lots of scope for state supported efficiency raising and local production. Solar City, a company started by Elon Musk, was able to massively expand home-solar use in California by offering free solar-cell installation, charging for the electricity that was produced, but reducing electricity bills overall. The Georgian state could do something similar with solar cells and insulation cladding.

Renewable electricity production would also have to go up. Georgia’s hydro-production opportunities are well known, but there are also opportunities in solar and wind. These have not developed so far, because of the challenges of grid-management for renewables, and because the Georgian government has been concerned about the cost of providing the support needed to make these projects viable. Both problems would be alleviated by efforts to increase efficiency and to grow household-level electricity production.

Commitments to green-energy production could be a huge stimulus for FDI in other sectors. This will be particularly important for exports oriented to the EU. One of the key components of the EU’s new climate change agenda will be a new carbon tax on imports. Therefore, a carbon-neutral country with an EU Deep and Comprehensive Free Trade Agreement could be a natural place to open EU-oriented production facilities.

Independence in electricity generation would also be good for security. While Georgia is no longer significantly dependent on Russia, around one-third of Georgia’s electricity production comes from the Enguri dam, which is vulnerable as it straddles the boundary of Russian-occupied Abkhazia.

The next step in achieving carbon neutrality should be a push to increase the efficiency of transportation with the aim of full electrification. In cars, this is already happening. Tbilisi’s dramatic increase in the use of Toyota Priuses results from a 2017 change in the customs code that gave hybrid cars a 60% reduction in import taxes. That same year, imports of hybrid cars went from zero to $84 million, increasing again to $138 million, or a quarter or all car imports, in 2018 with similar volumes in 2019.

This is great for the Georgian environment, but also shows that in this price sensitive market, price signals work.

If taxes were increased on car imports, Georgia could shift to importing almost entirely hybrid/fully electric cars a decade from now, with the aim at fully electric cars a decade after that. This would, of course, push up electricity consumption and thus the need for more green-energy production, but would reduce carbon output and improve air quality across the country.

The other crucial element of low-carbon transport is to get vehicles off the roads by providing better public transportation and a strong push to get freight transport onto trains. This is clearly the future anyway. Georgia will never be a transit route for goods to/from China, if that transit occurs on trucks, since it is too slow and too expensive.

If Georgia could offer a low-carbon tourist experience, it could also stimulate interest from high-end tourists looking for a guilt-free holiday. For the most diligent environmentalist, a voluntary ‘green-tax’ paid at the point of entry could be used by the government to offset the carbon footprint of the flight by planting trees, or increasing conservation areas.

A sustainability agenda would create multiple paths for job creation and economic growth. Infrastructure improvements, increases in the insulation of houses, installation of solar panels and new equipment would all create direct short-term economic stimulus. Increases in FDI towards EU export-oriented investment and increases in green tourism would have a more long-term positive impact.

But, perhaps most interestingly, it would put Georgia at the forefront of a range of key new industries.

We could call these industries ‘Carbon Neutral – on the Cheap’. Georgia used to be a major import/export country for second-hand cars. These weren’t just transit goods, but included considerable value-addition, since Georgians would often import damaged cars, before repairing and exporting them. This took advantage of Georgia’s lower labor costs to fix vehicles that would be too maintenance-intensive for the West.

One could imagine similar opportunities in green technology, from renewal of battery systems for electric cars, to insulation, to solar maintenance. If Georgia could become expert in the development, repair and maintenance of second-hand or low-cost renewable and low-carbon technology, that could be a huge niche market.

The costs of this strategy would be considerable, but would mostly take the form of long-term investments and could be financed cheaply from international sources. The risk-sharing involved in encouraging large-scale electricity production would require subsidies or price-guarantees from the government. This can only be justified if the electricity produced is being used to support local industry that creates jobs in the country. It would also be crucial to make sure that low value-added activity like Bitcoin mining (if allowed at all) should not consume subsidized electricity and should pay taxes.

Modifications to the national grid to make it smarter and more capable of dealing with fluctuating renewable supply, incentives to encourage insulation and energy efficiency, government-supported solar and a push to hybrid/electric car use would also have potentially high costs.

However, not only would all of these costs generate economic benefit, they should be easy to cheaply finance. The International Financial Institutions (IFIs) are all keen to be heavily involved in renewable energy investment. The European Investment Bank has recently announced a new climate strategy and Energy Lending Policy which plans to ‘unlock EUR 1 trillion of climate action and sustainable investment in the decade to 2030’. The EBRD, similarly, plans to have 40% of its portfolio in green investments. The World Bank and Asian Development Bank both have large green funds.

Georgian leadership in this area could also be important because developing countries are going to be the key to resolving the climate change emergency in the long-term. Around 5 billion people, or 70% of the world’s population live in middle-income countries, compared to only 16% in high-income countries. It is therefore critically important that middle-income countries develop strategies to cut emissions in ways that benefit their populations. By taking a leadership role and showing how positive these changes can be for economic development, Georgia could have a disproportionate global impact.

Perhaps most importantly, this would be a project around which Georgia could regain its reputation and pride as a global leader in business-oriented reform. Georgia’s self-perception is not just as a place for hospitality and wine, but for unspoiled nature, natural produce and pristine water.

Building on this image to clean-up the country and to cement it in the international consciousness as a center for green rejuvenation would have a whole host of positive knock-on effects. It would create jobs and make people richer. But perhaps best of all, it would make Georgia a nicer place to live.

The unabridged version of this article is available at investor.ge