It became obvious that tackling global climate change was one of the key issues of the recent G-8 summit in Germany with talk of emission targets and new global treaties, although the final agreement fell short of expectations. The issue of environmental control is no longer a subject that affects far away people and countries as the recent devastating Tropical Cyclone Gonu demonstrated in Oman. Mercifully the number of deaths was low due to the excellent Omani emergency response and preparation before the storm hit Oman. The region had not seen such an event since 1945. Coming on the heels of Katrina and other climatic related events, the time has now come to sit up and assess what actions local industries can take to combat global climate change.
We owe it to the rest of the world, for the Gulf is the largest exporter of fossil fuel, and economic development to date in much of the world has entailed burning fossil fuels on an industrial scale. The large hydrocarbons based industries mushrooming in Saudi Arabia and elsewhere in the Gulf are also producing their share of carbon dioxide — CO2 — emissions, which is adding to the so-called “carbon footprint”. By “carbon footprint” we mean the total amount of CO2 emitted through a process or in a product’s lifetime - from the sourcing of raw materials to production, delivery, consumption and disposal. All nations are then involved, and we cannot argue in the Gulf that we only sell fossil fuel and others are pollutants. Scientific evidence, despite earlier skepticism, suggests that unless we all dramatically reduce our greenhouse gas emissions, the world would face irreversible damaging climate change. Tropical cyclone Gonu is only one such warning.
Hurricanes are more powerful than any passionate campaigners’ words and hurricane Katrina seemed to have blown open US minds on climate change, and even President George W. Bush could no longer ignore this. He agreed in the end to long-term compromises after a series of pre G-8 statements that discussed compromises. The final communiqué talked about “considering” at least halving of global emissions by 2050. Whatever compromise has been achieved should not be sneezed at — the US accounts for about one quarter of global emissions. Unless the world’s biggest economy is committed on this issue, then other developing economies like India and China will not oblige to reduce their own pace of economic growth to reduce domestic poverty and catch up.
While these might have been some foot dragging on the part of the US administration on global warning reduction measures, across the US a growing “coalition of the converted” has been calling for more specific action. Individual states and cities in America have taken measures to address climate change. California has been among the most innovative, voting for a statewide cap- and -trade system for greenhouse gas emissions from major industries and targeting a 25 percent reduction by 2020. The state has also been in the forefront on raising vehicle emissions standards and mandating the use of renewable energy. The California moves have been copied by other states across the US, and this in turn, has got business leaders to think hard about how they do business and their manufacturing processes in particular. Some international blue-chip companies have joined the effort, such as General Electric, which has joined the US Climate Action Partnership calling for binding targets of 30 percent reductions in the next 15 years, backed by a carbon trading system.
How do we price greenhouse emissions? Two different models have been developed, namely carbon tax and cap-and-trade system. As usual, with anything new and controversial, there are disagreements over which model is the most effective. Carbon tax seems the most simple and elegant on the surface — impose a levy on polluters based on the amount of emissions they release. Money raised from such taxes would be used for research and development of low-carbon technologies and clean energy. Given that the level of taxation is known, both firms and potential investors in such companies can plan ahead. While the plan is simple, the application is different — pressure groups, industry lobbying, potential reduction in output by companies to cut on their tax burden, and producers passing on the tax burden to consumers than actually reducing emissions, are just a few of the problems that might arise.
The cap-and-trade system is whereby polluting firms either opt to reduce their emissions directly, or they can buy the right to keep on polluting.
Today there is a European scheme monitoring this model — the European Trading Scheme (ETS) which started in January 2005 that obliges firms in selected sectors to meet binding carbon emission targets. It is an encouraging start, as some 40 percent of the European Union’s total CO2 emissions are covered by this scheme, from industries such as power generation, iron and steel, to glass and cement. Soon commercial airline flights within the EU will be added from 2011, and all flights to and from the EU will be added in 2012. Gulf based airlines beware — even if no such system might be in force in the GCC, by 2012 all GCC airlines will be bound by the EU measures.
The problem with the cap-and-trade system is that unless all sectors of industry and nations are included, its impact will be limited, especially if the emission limits initially set by the ETS was found to be too lax. EU governments, it seemed, had distributed permits free of charge, allowing recipients to keep polluting or selling their surplus of pollution credits for a profit. If permits become cheap, then there will be no incentive for companies to reduce emissions, because pollution can still be profitable.
What is hopeful arising form the G-8 meeting, is that this could be the first stage for getting a multilateral United Nations deal that covers all nations. Between them, the G-8 countries plus the five big developing nations that attended, account for 70 percent of world greenhouse emissions. If these 13 countries can agree, then the stage is set for a UN deal. This is where the GCC comes in, as a UN mandated deal will embrace all nations and local businesses will now have to take notice. Whether a GCC carbon tax or a more stringent cap-and-trade system is adopted, the days of easy polluting for Gulf industries are numbered, and, as Cyclone Gonu reminded us, it can only be to our benefit.
(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)
