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publicationOctober 30, 2023

Greening Firms in Georgia

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The report explores key challenges and opportunities for Georgia’s businesses to accelerate their contribution to the country’s green transition, through efficiency and reduction in emissions. The analysis relies on a mix of novel firm-level data, based in information collected by GEOSTAT and qualitative interviews with more than 30 businesses in Georgia, as well as it incorporates feedback from consultations with national authorities and private sector stakeholders.

 

The report suggests an ambitious a detailed set of policy recommendations to support green transition in Georgia. 

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Key Highlights

  • Greenhouse gas (GHG) emissions per capita in Georgia are still below the European Union (EU) average, but are growing faster than those in the EU, which poses a risk for achieving the NDCs and increasing the competitiveness of the Georgian economy.
  • Georgian firms are on average using energy-inefficient methods and have increased their energy intensity in recent years, which will affect their competitiveness as energy prices increase, the demand from consumers change to products with greener footprints and new carbon trade measures are introduced in the EU and other large markets.
  • Greening the private sector is therefore a source of competitiveness advantage, that can facilitate access to global value chains and make the economy more resilient to climate shocks and geopolitical tensions in upcoming years. If no actions are taken, industry emissions are on a path to increase by 90 percent between 2015 and 2030.
  • Greening the private sector of Georgia is possible and feasible. Many developed and developing countries are decoupling economic growth from GHG emissions. In Georgia, emissions are growing not only due to GDP growth but also due to the reliance on outdated technologies, poor management and organization, inefficient energy use, and weak incentives to go green because of the institutional framework and relatively low energy prices.
  • But some positive green transitions are already happening: Since 2017, more efficient firms have been expanding their market shares. This change is partially explained by the fact that start-ups and new firms are greener and replace existing firms that typically have more outdated technologies and processes. This “green” reallocation process is, however, not enough to revert the decoupling trend, and there is ample room for cost-effective improvements in energy efficiency in all sectors.
  • Transitioning to a greener economy does not have to come at the expense of reducing output or changing the structure of the economy. On the contrary, enhancing the energy efficiency of most inefficient firms has the potential to produce positive private returns and large social benefits. Even modest increases in energy efficiency among inefficient firms could reduce aggregate energy expenses and carbon emissions by 50 percent, while increasing firms’ profitability due to savings in energy costs.
  • However, this transition will not come without a set of policy measures and private capital mobilization. Our simulation exercise suggests that 8 out of 10 inefficient firms would require upgrading or expanding their fixed assets to reach the median level of efficiency (median levels relative to firms of similar size and same sector) However, 2 out of 10 could improve their efficiency without additional capital investments and might require investments in training or consulting to improve their organization and increase their efficiency.
  • Greening the private sector starts with improving energy supply reliability and the quality of the electricity infrastructure. Georgian firms experience too frequent outages that combined with an underdeveloped framework for renewables, results in incentivizing investments in fuel generators instead than in renewables.
  • Low technology adoption (ICT and green technology) and management quality play a key role in explaining differences in energy efficiency and firms’ performance. But what is good for energy efficiency seems to be also good for productivity so there are no evident trade-offs between improving energy efficiency and enhancing productivity more broadly.
  • There are two necessary reform areas to unleash the green transition in Georgia. First, relatively low electricity and gas prices discourage the adoption of clean technologies and a more efficient use of energy in production. Second, despite some progress, the institutional setting and regulatory framework do not promote a more responsible approach to the environmental impact of production.
  • In addition to structural reforms, improving energy efficiency requires firm- and sector-specific interventions that target three set of issues: (i) information and awareness, (ii) skills of managers and workers, and (iii) access to finance. 

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