Why the latest EU push to achieve net zero matters to GCC oil producers
The European Commission showed that it meant business with its Green Deal and its stated ambition to turn Europe into the first carbon-neutral continent. To achieve this, the EU will have to reduce 55 percent of its CO2 emissions — measured from 1990 levels — by 2030. Only the UK’s stated goal — a reduction of 68 percent — is more ambitious. America has committed to a 40-43 percent reduction over the same time span. Compare that to China, which has so far committed to become carbon neutral by 2060 and where emissions are scheduled to peak in 2030.
On July 15, the EU Commission announced the measures which will need to be taken in order to meet its 55 percent target. New combustion engine cars will be banned by 2035 and the airline industry will have to mix kerosene with environmentally friendly synthetic fuels. Europe will also become a tougher place for shipowners, as cargo ships will need to meet the EU’s new fuel standards or face being blocked from entering its harbors. Heavy industry, including cement, steel or aluminum manufacturers, will face higher emission charges — indeed the cost of carbon credits have already risen and will continue to do so. Electricity producers are being encouraged to switch to wind and solar power and the EU wants to double the contribution of renewables to 40 percent by 2030.
In order to lessen the burden on domestic industry, the EU will introduce a carbon border adjustment tax, which would see a tariff placed on imports produced in countries with higher CO2 emissions than are permitted in the EU. That will likely spur disagreements with some of the EU’s major trading partners, including the US, China and Russia.
In order to soften the blow to its weaker economies, the EU has planned a fund worth €72 billion ($85 million).
The new policies also endanger jobs in Europe as affected industries may relocate elsewhere.
The new targets, policies and plans are controversial in many areas. While automakers work on new electric vehicles (EVs), they are not happy that, as of 2035, the new regulations will prevent them from selling any cars which include gasoline/diesel applications, such as hybrids, no matter how environmentally friendly the vehicles may be.
Several industry associations and think tanks criticize the rules-based approach, claiming that policies promoting innovation would be more productive in the long run.
The new policies also endanger jobs in Europe as affected industries may relocate elsewhere. No one has so far calculated the costs to EU consumers.
Not all countries are on board either, Hungary’s Prime Minister Victor Orban being among the most vociferous critics.
The Green Deal and its measures are in line with the ambitious roadmap to net zero which the IEA released in May and which foresees no new investments in upstream hydrocarbons. The roadmap is seen by many — especially by GCC oil-exporting nations — as unrealistic. It also fails to take into account developing nations which cannot supply their growing populations with sufficient energy unless they aggressively use gas as a transition fuel.
In other words, the EU is creating new realities, which may or may not backfire on the performance of its economies. These realities, however, will have a direct impact on where investors put their dollars. Last week, 115 money managers with a combined total of $4.2 trillion in assets under their management demanded that the 68 largest international banks adopted the IEA’s net-zero policies if they wished to continue to receive investment from the funds they manage.
So far, we do not know whether these words will actually result in action on the ground. However, these new realities matter to the GCC and its oil exporters. It will require continuous monitoring as well as adjusting of their messages.
The world will require hydrocarbons for the foreseeable future. And while the new guidelines still require plenty of work before they can be implemented, as Henry Kissinger pointed out, perception becomes reality.
In that sense, initiatives like the Saudi-led Middle East Green Initiative are incredibly important, as they prove that the region supports global targets to combat climate change, even while it may be at odds with the IEA’s roadmap
Going forward, the Kingdom and its OPEC friends have their work cut out to prove to the world how technologies like CCUS (carbon capture, utilization and storage) or frameworks like the circular carbon economy can support the road to net zero without foregoing oil and gas as fuel sources in the medium term. There are always more ways than one to achieve a goal.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.