Azerbaijan's transport sector could reduce carbon emissions by around 600,000 tonnes at a cost of approximately $18mn by 2030, the Asian Development Bank (ADB) said in a report titled "Assessing the Impact and Potential of Carbon Pricing in the Transport Sector in CAREC Countries".

The number of vehicles registered in Azerbaijan grew rapidly up to 2021, reaching more than 1.3mn passenger cars and over 160,000 trucks, the report said. Assuming 3,000 electric city buses are put into operation by 2030, along with 1% electrification of trucks and 5% of passenger cars, and that 30% of electricity is consumed at charging stations, these measures could deliver the estimated emissions cut, the ADB said.

Azerbaijan Railways (ADY) has already carried out a number of decarbonisation measures, including electrification of its rail network, ADB's analysts said. The company published its first sustainability report in 2024 and, with ADB support, has developed a decarbonisation strategy and framework. ADY is working, with ADB backing, to establish a corporate-level carbon trading desk aligned with international carbon market mechanisms, aiming to monetise carbon credits and support global emissions reduction targets, the report said.

The bulk of the emissions reduction potential lies in rail electrification, though modern diesel trains are already highly efficient, meaning electrification alone is not expected to have a major effect, ADB said. The larger impact will come from shifting freight and passenger traffic from other transport modes to rail, with the scale of the effect depending on the number of passengers carried, freight volumes and average trip distances. Greenhouse gas emissions per passenger-kilometre on trains are typically three to five times lower than on intercity buses, the report said, while emissions per tonne-kilometre for rail freight are three to seven times lower than for road transport, depending on cargo type.

ADB said emissions reductions in Azerbaijan's transport sector can be achieved through a combination of modal shift toward rail, the adoption of cleaner fuels and energy efficiency measures, with rail expected to play a growing role.

Under current trajectories, conventional fossil fuels are expected to be phased out entirely by 2060, the report said. Separate economic modelling examined potential carbon pricing scenarios alongside the phase-out of natural gas and oil subsidies as part of efforts to meet Nationally Determined Contribution (NDC) targets. Meeting the 2030 NDC target could require carbon prices reaching $25 per tonne of CO2 (tCO2) by 2035, $41/tCO2 by 2050 and $62/tCO2 by 2060, according to the report. Under a net-zero by 2060 scenario, prices could need to rise to $30/tCO2 by 2035 and as high as $280/tCO2 by 2060.

The World Bank has proposed that Azerbaijan's government introduce an upstream carbon tax applied to the carbon content of all fuels, whether imported or domestically produced, at the point they enter the economy, the ADB report said. Such a tax would cover an estimated 60% of total emissions generated, and the existing excise tax mechanism could be adapted or expanded to collect it.

A separate World Bank modelling exercise examined policy options available to Azerbaijan for meeting its NDC commitments under the Paris Agreement. The preferred option identified combines a tax policy phasing out fossil fuel subsidies with the gradual introduction of carbon pricing, according to the report. The modelling shows that eliminating two-thirds of existing fossil fuel subsidies would be sufficient to meet 2030 targets. The model also proposes considering the redistribution of carbon pricing revenue to households and reductions in taxes on factors of production, including capital, labour and land.