# **1 Introduction**

T ̈urkiye faces several climate-related risks. Recent extreme weather events, including floods and wildfires, have exposed the country’s vulnerability to climate change. T ̈urkiye is highly dependent on fossil fuel imports which amount to 87% of its total primary energy supply.<sup>1</sup> This poses significant risks for energy security as the oil and gas market turmoils after the Russian invasion of Ukraine have forcefully illustrated. Moreover, the European Union’s ambitious low-carbon agenda will have considerable repercussions for the primary export market for Turkish manufacturing, which is more carbon-intensive than its European counterpart. In light of these climate-related risks, T ̈urkiye has increased its climate ambition in recent years. T ̈urkiye’s renewable energy capacity grew by more than 50% since 2016 (IEA 2021). As a top-20 emitter, T ̈urkiye submitted its Intended Nationally Determined Contribution in 2015, setting the target to reduce greenhouse gas emissions by 21% relative to the business-as-usual (BAU) benchmark by 2030. In 2021, the country ratified the Paris Agreement and announced the net-zero target of 2053.

T ̈urkiye’s development progress since the early 2000s has been remarkable. Per-capita GDP has more than tripled within 20 years, making T ̈urkiye the 19th largest economy in the world. Since 2015 the growth dynamics have cooled down considerably. Unemployment has exceeded the 10% mark ever since 2015 despite a low labor force participation rate, especially among women, and a significant informal sector (World Bank 2023). While formally independent, the central bank’s monetary policy is subject to severe government interference, which let inflation explode to a two-decade-high value of 85.5% in October 2022 (TurkStat 2022).

Addressing structural deficits is critical for the low-carbon transition as they constrain the effectiveness of climate policy in mobilizing private finance. Structural deficits of the Turkish economy include low credibility of policy commitments, high costs of contract enforcement combined with low business confidence in public institutions, and uneven access to bank finance (OECD 2021, G ̈urkaynak et al. 2022). Dechezleprˆetre et al. (2022) provide compelling evidence that transparency and commitment raise acceptance of climate policy. Regarding the business climate, a weak rule of law drives up equity risk premia making capital-intensive, productivity-enhancing technology less appealing than labor-intensive, low-value-added activities. Finance constraints further impede private investment in low-carbon technology and limit the power of market signals.

The present paper aims to project the paths of climate-fiscal policy interventions that allow T ̈urkiye to grow along the 2053 net-zero pathway while honoring significant feasibility constraints. The policy instruments include a carbon tax, a renewable energy subsidy, transfer payments, public infrastructure investment, a bad bank for stranded assets, and the phase-out of fossil fuel subsidies and public investment. To study the role of supporting structural policies in the low-carbon transition, we explore how the macroeconomic effects

> 1See release 055 of the GLORIA Global Environmentally-Extended Multi-Region Input-Output (MRIO) database constructed in the Global MRIO Lab (Lenzen et al. 2017, 2022).

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