Kazakhstan: Inclusive and Sustainable Economic Growth Development Policy Operation

OBJECTIVE

To help the Government of Kazakhstan (GoK) implement crucial policy reforms to support the country’s transition to a greener economy.

DESCRIPTION

Kazakhstan is an upper-middle-income country and the largest economy in Central Asia. Kazakhstan is currently the 20th largest emitter worldwide of greenhouse gases (GHG) on a per capita basis, with electricity and heating accounting for 84 percent of overall emissions. Kazakhstan is among the top ten most energy-intensive economies, using three times as much energy per unit of output compared to the OECD average. Therefore, decarbonizing the economy is an urgent priority, and Kazakhstan has ambitious targets for addressing climate change, which require strong action. This includes scaling up the development of large-scale and distributed renewable energy, enabling the emission trading scheme to contribute to meeting the NDC, implementing tariff reforms in electricity and heating to remove energy subsidies, achieving full cost recovery, and strengthening energy efficiency.

The proposed Program supports the Government of Kazakhstan (GoK)’s reforms aimed at (i) facilitating a cleaner energy transition through developing small-scale distributed renewable energy, (ii) improving financial sustainability in electricity by enacting systematic electricity tariff adjustments in line with a new incentive-based methodology to achieve full cost recovery levels, (iii) reducing fossil-fuel subsidies in heating through tariff reforms, (iv) promoting energy efficiency to reduce the carbon footprint of the economy by implementing more stringent energy efficiency norms for the highest energy-intensive industrial enterprises, and (v) strengthening emissions monitoring, reporting and verification to help meet the NDC. The Program will be co-financed in parallel with the World Bank (WB), as the lead financier. The Program is aligned with the goals of the Low Emissions Development Strategy (LEDS) of the Republic of Kazakhstan, which was adopted in February 2023 and aims to reduce greenhouse gas (GHG) emissions by 15 percent by 2030 and attain carbon neutrality by 2060, and the updated 2023 NDCs.

The Ministry of Finance of the Republic of Kazakhstan is the main executing agency and is coordinating the implementation of all policy actions supported by this operation with respective line ministries.

ENVIRONMENTAL AND SOCIAL INFORMATION

Applicable Policy and Categorization. AIIB's Environmental and Social Policy (ESP), including the Environmental and Social Exclusion List (ESEL) and provisions related to CPBF set forth in Section 16 of the ESP, are applicable to this Program. Therefore, the provisions on Environmental and Social (ES) categorization in the ESP do not apply to this Program. The assessment of ES impacts of the Program is largely informed by the analytical work of the World Bank (WB), the lead co-financier, including an ES impact analysis matrix that has been prepared covering the Program’s policy actions. This outlines the potential direct and indirect impacts of each prior action, along with corresponding mitigation measures. 

Environmental and Social Aspects. The policy actions constituting the Program are expected to generally result in net positive environmental impacts. Lowering the country’s reliance on fossil fuels through the implementation of strategies supporting decarbonization efforts, energy efficiency improvements, and the advancement of renewable energy technologies has wide-ranging cascading benefits to the environment and socioeconomic conditions. All PAs will help create an enabling environment to scale up the sourcing of renewable energy and promote efficient energy use. In turn, this will contribute to the overall reduction of GHG emissions, climate change mitigation, and improvement of air quality, leading to better public health and conservation of ecosystems. The overall social and poverty impact of the Program is expected to be positive, while negative distributional impacts are expected for policy actions supporting electricity and heating tariff adjustments, which can be mitigated through social protection programs. According to WB’s assessment, the government’s capacity for environmental management is deemed adequate, with recent developments such as a series of updates to the Environmental Code to mainstream environmental sustainability in projects.

Gender Aspect. The Program’s policy reforms are expected to yield broad socioeconomic benefits but have gender-differentiated impacts. In Kazakhstan, women often experience higher rates of energy poverty due to income disparities and traditional household roles, making them more vulnerable to tariff adjustments. To mitigate the adverse effects of tariff adjustments on poor and vulnerable households, there will be government reforms towards the existing social protection systems, such as the HU benefit program, which will provide targeted support. To promote a just transition, the Program will incorporate gender-sensitive measures into its implementation, utilizing opportunities in renewable energy expansion and energy efficiency retrofits to enhance women’s employment.

Information Disclosure and the Program Grievance Redress Mechanism (GRM). ES matrix prepared will be disclosed on the Bank’s website in a timely manner to inform the Member’s consultation. The final ES matrix will be disclosed prior to the approval of the CPBF. Individuals and communities who believe that they are adversely affected by the Program may submit complaints to the responsible government authorities and the appropriate local/national grievance mechanisms. The information of the GRM to be used and AIIB’s Project-affected People’s Mechanism (PPM) will be timely disclosed in the appropriate manner. 

Monitoring and Evaluation Arrangement. The Ministry of Finance (MOF) is the main executing agency and is coordinating the implementation of all policy actions supported by this operation with respective line ministries, including Ministry of National Economy, Ministry of Industry and Infrastructural Development, and others. AIIB and WB will jointly conduct regular policy dialogue and monitor implementation.