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Gulf must ease fossil fuel subsidies to be climate pioneers

An incentive structure to move away from fossil fuel dependence is missing

Acwa Power profit Shutterstock/ultramansk
Saudi-listed Acwa Power reported a net profit of SAR1.08 billion for the first nine months of 2023

The presence of representatives from the oil sector at the Cop28 climate conference in November and December remains a thorny issue among green lobbyists.

Last year’s Cop27 in the Egyptian resort of Sharm el-Sheikh surprised onlookers with the large number of fossil fuel objectors in attendance. They bristled at the 29 countries with oil and gas representatives in their delegations. 

The appointment of Sultan Al Jaber, CEO of Abu Dhabi National Oil Company (Adnoc), as Cop28 president has aroused similar emotions. This further cements the strong vein of fossil fuel interest running through the deliberations. 

Some critics are concerned that oil producers’ interests are not aligned with the need for an energy transition. This perception has not been helped by the fact that both the UAE and Saudi Arabia are investing to increase oil production capacity.

However this is to overlook the Gulf states’ commitment to net zero targets and the growing share of renewables in electricity generation in the region, as well as their significant investments in clean energy.

As Cop28 approaches, all eyes will be on the Gulf states, assessing how they plan to reconcile their climate goals with heavy reliance on fossil fuel receipts.

Given the scale of the changes necessary to achieve stated climate targets, the role of oil and gas in a low-carbon world is uncertain. 

There appears to be consensus that new oil, gas or coal developments are inconsistent with keeping the rise in global temperatures to 1.5C above pre-Industrial levels. 

Some even argue that allowing fossil fuel assets to continue operating until the end of their design lives is not compatible with the 1.5C goal. 

This raises the question of whether there is a future that includes hydrocarbons in the energy mix, and if a fossil fuel phaseout will finally make it into the Cop28 agenda.

Make no mistake, this question could spark an existential crisis for Gulf countries given their dependence on hydrocarbons.

Facing the challenge

However, there are clear signs that the oil producers are starting to embrace the challenge and are seeking to be leaders in the transition.

The UAE has committed $163bn in investment to achieve net zero emissions by 2050, with $54bn of this amount allocated to boost renewable usage by 2030. Meanwhile, Saudi Arabia has followed with a green initiative worth $190bn and aims to generate half of its electricity from renewable sources by 2030.

The energy transition has also been publicly reframed as “phasing out fossil fuel emissions” – giving countries leeway to continue using fossil fuels on the condition that emissions are captured. This ensures a net neutral impact.

This technology is still being developed but Adnoc and Saudi Aramco are increasing investment in carbon capture technology.

The region looks set to adopt a “carbo circular” approach, harnessing solar and wind energy while also developing technologies for carbon capture, use, and storage, and direct air capture.

Saudi Arabia and the UAE are also looking to develop their capabilities in blue and green hydrogen

As it stands, fossil fuel energy has been generously subsidised (as is evident from low fossil-fuel energy prices) and an incentive structure to move away from dependence is missing. This can be achieved by Gulf states reducing subsidies and pricing carbon. 

The GCC can survive – and capitalise – on new opportunities and technologies in a world which does not rely so heavily on fossil fuels. The six states have the potential to produce energy from wind and solar and the means to invest in economic diversification and the energy transition. 

The GCC is best off with a managed phase-out of fossil fuels – similar to the Glasgow Financial Alliance for Net Zero proposal for high-emitting assets – rather than seeing the world pivot abruptly away. It is likely the speed of transition will be an important component of discussions at Cop28.

A coordinated effort to reduce dependencies on fossil fuel will be required – retiring high-carbon assets early if possible – while increasing the rollout of low-carbon alternatives.

This may involve re-development, such as transforming coal sites to solar farms, or investing in research in hydrogen that can re-purpose gas assets.

This will not be easy and will require time, coordination and planning, and must take into account how gaps in energy supply can be filled by alternatives. 

At Cop28, the UAE and other oil producers will not conspire against the energy transition – this is not a case of “fox guarding the henhouse”.

Instead, they are likely to be at the forefront of efforts to achieve net-zero and will use their oil windfalls to support this. 

Scott Livermore is chief economist at Oxford Economics Middle East

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