One of the many transformative ways in which the COVID-19 pandemic has changed the world is the increased focus on climate-related issues. The lockdowns offered a glimpse into a less-polluted world but also coincided with a slew of extreme weather events.
The sense of urgency around countering climate change has increased palpably. This has conditioned the political discourse around the world, fanned popular protest, and begun to markedly reshape the behavior of people and institutional investors. While the concrete progress around climate-related issues has been uneven and almost invariably slower than expected, the sense of purpose around the climate agenda is now greater than ever, as highlighted by the consensus at the UN Climate Change Conference (COP26).
Climate change is an issue of particular importance and sensitivity to the Gulf countries. On the one hand, the region is characterized by an extreme climate and multiple vulnerabilities in the face of rising temperatures and sea levels, not to mention depleting aquifers. Tackling these risks is of critical importance for the future well-being of the regional populations and economies. On the other hand, however, the Gulf region is one of the world’s leading sources of hydrocarbons, something that now comes with increasingly negative popular perceptions. The future of oil and gas matters a great deal for these countries, not simply because of the structure of the regional economies but also because of the pre-eminence of oil and gas within the range of known natural resources. The regional endowments are sufficient for several decades of production at current levels.
If the global discourse is shifting, so is the policy agenda in the Gulf. Renewable energy generation has been a key focus for some time and all the regional economies have set targets for their energy transition. Saudi Arabia is planning to generate half of its electricity from renewable sources by 2030. Bold visions for a different future have been unveiled through initiatives such as Masdar City and NEOM. In recent weeks, the ambitions have shifted further. Saudi Arabia announced a zero carbon emissions target of 2060 a week ahead of COP26, along with an ambitious SR700 billion ($186 billion) investment agenda to drive change. Similar pledges are being made across the region. Unquestionably necessary for countering the climate-related risks ahead, the evolving agenda also entails important opportunities to drive inclusive — and above all sustainable — economic activity.
Whatever the external perceptions, the Gulf countries face numerous important opportunities linked to countering climate change. First of all, in all scenarios, the global energy transition from hydrocarbons to renewables cannot be instantaneous and it may never totally replace fossil fuels. Oil and gas will be consumed for decades to come, which entails a growing premium on producing them efficiently and with as little adverse environmental impact as possible. Saudi Arabia and its peers are well positioned to excel in this endeavor, given their low cost of extraction, efficient infrastructure, and strategic location. A growing number of circular carbon economy initiatives can help counter the negative effects of hydrocarbons production through capture and sequestration by pumping carbon into oil fields or using it in chemical production.
The Gulf is no less well positioned in playing a leading role in the global energy transition than it did in supplying the world with oil.
Jarmo Kotilaine
Saudi Aramco has pledged carbon neutrality by 2050. Moreover, natural gas will for many consumers represent the first step toward reducing emissions and will likely play an important role in reducing the world’s reliance on more polluting energy sources.
The Gulf countries are also pursuing an energy transition at home both by repricing hydrocarbons by scaling back the generous subsidies of yesteryear, but also through investments in renewable and other clean energy. Most of the region is exceptionally well-suited for photovoltaic generation, and covering just 1 percent of the region through solar installations could deliver almost 500 GW of additional capacity.
The declining costs of installation have broken one global record after the other and local capacity through new funding mechanisms and innovative technology is rapidly improving. Solar energy is also central to the production of green hydrogen, which is increasingly viewed as necessary for reaching the global decarbonization targets. The Gulf is seen as well positioned to assume a position of global leadership and excellence in this area.
Other opportunities abound. Saudi Arabia has for years led in exploring and developing new ways of creating value out of the hydrocarbons by turning them into chemicals. Fertilizer production is likely to require hydrocarbons for a long time to come. Substantial future opportunities for innovation exist in this area and they may well open up new opportunities for future-proofing the region’s leading natural resources. Innovation is needed also in terms of developing materials and other solutions for a warmer world, an area of more immediate importance for the Gulf than for most others. All of this promises to translate into sustainable, productivity-led innovation that can allow the Gulf to build excellence in know-how and localized production. Green taxes can play a role in the fiscal overhaul of the regional economies. Apart from generating revenues and expanding the tax base, they can be used to incentivize sustainability and reduce waste.
The idea of the Gulf countries at the forefront of the efforts to counter climate change continues to attract skepticism. In truth, however, the region has every reason to take the bull by the horns. The economic interests and sustainability incentives are increasingly obviously aligned. The range of different initiatives already in place now promises multiple opportunities for non-linear growth. The Gulf is no less well positioned in playing a leading role in the global energy transition than it did in supplying the world with oil.
• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.
