scenario for FFDCs (unilateral climate policies without border taxes), meeting the _maximax (highest gain)_ criterion. Even in the worst-case scenario (unilateral climate policies in the rest of the world with Nordhaus trade taxes), asset diversification is the only growth strategy that puts FFDCs back on a sustainable development path and pulls them out of what some economists call “the development trap” (Collier 2007).

_Figure 11: Discounted GDP over 2021-2050 in FFDCs as a percentage deviation from BAU_ <!-- Start of picture text -->
1.50<br>1.00<br>0.50<br>0.00<br>-0.50<br>-1.00<br>Tradiitonal Diversification Asset Diversification<br>Unilateral policies border tax on carbon content Unilateral policies Nordhaus tax<br>Cooperative carbon emissions taxes Cooperative carbon wellhead taxes<br>Discounted GDP as a% of BAU<br><!-- End of picture text -->

_Source:_ World Bank and Purdue University (ENVISAGE).

_Note:_ BAU = business as usual; FFDCs = fossil fuel–dependent countries; GDP = gross domestic product. The colored bars denote the difference between the cumulative discounted (with 6 percent discount rate) real GDP in FFDCs under different scenarios (over the period 2021–50) and the corresponding figures under the BAU scenario, expressed as a percentage of the BAU figures.

Even successful asset diversification and cooperative carbon taxes do not induce a major shift in FFDCs’ economic structures (figure 12). In none of the simulated scenarios could asset diversification significantly shift the comparative advantage of FFDCs away from fuel-related products and services. In cooperative scenarios shown in figure 12 the value added of services, consumer goods industry, and agriculture (“rest of the economy”) increase because the additional revenue generated by domestic carbon taxes increase households’ consumption and savings. This helps less carbon-intensive sectors producing final consumers’ goods (e.g. agriculture) and services. Higher households’ consumption does not help heavy industry which is producing mainly capital and energy intensive intermediate goods. Yet, despite helping the relatively knowledge-intensive “rest of the economy”, asset diversification in our simulations does not change the core specialization of FFDCs in the oil, gas, and coal product space. In three of the four FFDCs sub-groups in figure 12, fuel extractive sectors and carbon intensive heavy industry dominate exports even in 2050. The decline of the share of commodity exports is offset by the increase of the exports share of carbon intensive manufacturing, especially in traditional diversification scenarios. Only for the low-income countries with large unexploited fuel reserves (figure 12d), the two diversification strategy choices have a significant bearing on the future economic structure, because their “rest of the economy” sectors have played a major role already in the base year’s exports. Many of these countries are currently more dependent on exports of agricultural commodities than fossil fuels.<sup>7</sup>

> 7 These results can be partly attributed to the nature of the CGE models, which are not very good in simulating the rapid growth of new sectors, which are insignificant in the economy in the base year, for which the BAU was calibrated with input-output data for 2011.

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