Challenges from Not Zero to Net-Zero

The Middle East is shifting gears and transforming from an obstructionist negotiation bloc to a group of countries with ambitious climate goals

The Middle East region’s presence on the global sustainability agenda continues to grow driven by the acceleration of climate action-related initiatives and increased international cooperation to mitigate the impact of climate change. The initiatives are part of Middle Eastern oil and gas exporters’ broader strategies to diversify and open their economies with a strong focus on sustainability.

The energy-exporting countries are shifting gears and transforming themselves from an obstructionist negotiation bloc to a group of countries with ambitious climate goals. Globally, governments and corporates are pledging to achieve net-zero carbon emissions by 2050 and limit global warming to 1.5°C but what would it take to achieve this ambitious target?

The hosting of the 28th Conference of the Parties (COP28) by the UAE later this year after COP27 in the Egyptian town of Sharm El-Sheikh last November is expected to translate into fiscal policies to fight against climate change.

While addressing world leaders at the COP27, the UN Secretary-General António Guterres warned that “we are on a highway to climate hell with our foot on the accelerator.” Guterres said that the planet is fast approaching tipping points that will make climate chaos irreversible.

Governments in the Middle East must balance the potentially profound impacts of climate change with the strategic role the region will play in energy transition, pioneering hydrogen and circular economies and developing sustainable destinations, said PwC.

Sustainable financing together with technological innovation and digitalisation in the financial services sector is instrumental to sustainable innovation and growth as well as the transition to a less carbon-intensive economy.

The World Bank said that sustainable finance has two major objectives; to manage sustainability-related risks for the financial industry and enable the shift of investments from unsustainable to sustainable economic activities. The financial system must be reoriented to meet the huge financing demands required to transition towards a 2050 net zero target.

Road to COP28

Playing host to two consecutive COPs is a landmark achievement in the climate sphere for the Middle East—the world’s hottest, driest and most water-scarce region. The COP27 climate talks in Egypt ended with an early-hours deal to create a fund to pay developing countries for the harm caused by climate change.

The UAE is determined to carry the climate talks forward and deliver meaningful progress at COP28. This year’s meeting, which will be hosted at Expo City Dubai, seeks to transform and urgently accelerate climate action to meet the commitments the world has made.

The climate talks will be the most significant event hosted by the UAE this year and the meeting marks the conclusion of the first global stocktake—a comprehensive assessment of the progress made in achieving the goals of the Paris Agreement.

“We must work closely with the UAE, which will host COP28, to ensure that the first global stocktake under the Paris Agreement produces a meaningful outcome setting the stage for even greater climate ambition in the years ahead,” US climate envoy John F. Kerry said in his COP27 closing statement.

Skepticism remains among climate activists that the hosting of COP in a Middle Eastern nation that relies on oil and gas sales for a second year in a row could stall the transition towards low-carbon economies. Kerry touted COP28 UAE saying the meeting would encourage fossil fuel economies to lead the transition to clean energy.

President Sheikh Mohamed bin Zayed Al Nahyan declared 2023 the “Year of Sustainability” while emphasizing that effective climate action requires a shared vision and collective will. The UAE appointed Sultan al-Jaber, the Minister of Industry and Technology and the country’s climate envoy, as president for the COP28 climate summit.

Ahead

Al Jaber is central to the UAE’s goal of reaching net-zero emissions by 2050. The UAE became the first Middle Eastern nation to ratify the Paris Agreement and unveiled a strategic initiative to achieve carbon neutrality by investing as much as $163 billion (AED 600 billion) in renewable energy.

Saudi Arabia, the world’s top oil exporter, said in October 2021 that it aims to cut its carbon emissions by 2060 by investing more than $186 billion (SAR 700 billion) into a green economy, in a way compatible with the Gulf state’s development plans.

Bahrain, Kuwait, Oman and Qatar also bolstered their pledges to cut their greenhouse gas emissions by 2030. The International Monetary Fund called on GCC governments to consider implementing fiscal reforms “geared towards economic diversification and inclusive growth while addressing intensifying vulnerabilities from climate change”. The wealthy oil-rich GCC countries should therefore ensure that this forms a significant part of their post-pandemic recovery plans.

Energy transition

The Middle East has embraced the vision of a climate-focused future, investing heavily in renewable energy and dynamic technologies centered around sustainable innovation. Central to these investments is a vision of a fully sustainable economy bolstered by effective regulatory oversight and contributions from all stakeholders.

The UAE is extensively investing in nuclear energy, solar plants and sustainable transport. The country operates three nuclear power reactors that feed energy to its grid and is home to three biggest solar plants in the world— the GW Noor Abu Dhabi solar park, the Mohammed bin Rashid Al Maktoum Solar Park which will produce 5,000MW of power by 2030 and Masdar City’s 17,500MWh solar plant.

Last month, the Emirates earmarked $15 billion for energy-transition projects over the rest of the decade as part of the country’s broader strategy to burnish its green credentials ahead of the key global climate summit. The UAE also reached an agreement with the US in November 2022 to invest $100 billion in clean energy projects to produce 100 GW by 2035.

Saudi Arabia has been going all out to commit itself to sustainable development and the country plans to rely on renewables for 50% of its electricity generation by 2030. The National Renewable Energy Program, which is part of the Gulf state’s ambition to secure a comfortable energy mix for producing electricity using sustainable means, will see ACWA Power producing 11.8 GW by 2025.

The Gulf state launched five new projects in September 2022 to produce electricity using renewable energy with a planned total capacity of 3,300 MW. The wind farms in Yanbu, Al-Ghat and Waad Al Shamal have a total production capacity of 1800 MW while two solar plants in Al Hinakiyah and Tabarjal will have a total production capacity of 1500 MW. GCC countries have been slowly moving away from fossil fuels in favour of clean energy.

Globally, many countries have ambitious plans for green hydrogen, but GCC states have unique advantages that could allow them to lead the transition to hydrogen. Hydrogen is a highly efficient energy carrier and upon combustion, the only by-product of this zero-emissions fuel is water—making it an ideal medium for electrification and substitution of fossil fuels.

GCC countries, including Saudi Arabia, the UAE and Oman are working on hydrogen projects with the kingdom’s $5 billion green-hydrogen plant in NEOM expected to be completed in the coming months. Saudi Arabia was the first country to debut a carbon offset auction in the region, offering one million credits in October 2022.

The auction follows the establishment of the Regional Voluntary Carbon Market Company by the Public Investment Fund in partnership with the Saudi Tadawul Group. Mubadala-backed AirCarbon Exchange is setting up the UAE’s first regulated carbon trading exchange and carbon clearing house in Abu Dhabi Global Market.

Countries in the Middle East are diversifying their economies away from heavy reliance on hydrocarbons by creating new sectors and revenues, including through a big push in renewable energy.

Sustainable finance

Governments in the Middle East have an especially important role to mobilise financing required for a transition towards carbon-neutral economies.

The Abu Dhabi Sustainable Week, the first sustainable event after COP27, underscored the role that is being played by the financial services sector to accelerate the development of the green growth sectors.

Abu Dhabi’s First Abu Dhabi Bank (FAB) facilitated over $7 billion (AED25.7 billion) for sustainable projects in 2022 across different sectors including energy and utilities, real estate, supply chain and the food industry.

“Regional banks also have an opportunity to benefit significantly from financing the transition of the oil and gas industry and other strategically important sectors to cleaner, more sustainable technologies,” said BCG.

Retail investors in growth regions are becoming more conscious about the sustainability issues facing their home markets and beyond. Standard Chartered projected that $8.2 trillion can be mobilised towards sustainable investments in 10 growth markets by 2030 across Asia, Africa and the Middle East.

JPMorgan Chase & Co. unveiled a $2.5 trillion funding package in 2021 to lend, invest and provide other financial services over the next decade to advance long-term solution projects that address climate change and social inequality. HSBC aims to provide between $750 billion and $1 trillion globally by 2030 to support its customers in their transition to a low-carbon economy.

However, optimism that the financial sector is stepping up to its responsibilities in tackling climate change has waned over the years due to a lack of transparency and mixed messages on how banks will provide the $200 trillion in financing to achieve net zero by 2050.

There is growing concern that members of the Net-Zero Banking Alliance (NZBA) are abandoning the group after the methodology set out by the UN’s Race to Zero initiative was made more stringent last summer, for the first time explicitly requiring members to “phase down and out of all unabated fossil fuels”. NZBA counts FAB, Commercial International Bank, National Bank of Egypt, Banque Misr as well as Banque Du Caire and Arab African International Bank among its members from the Middle East.

Transition risks

When it comes to transition risks, banks have an even more challenging job on their hands. Financial institutions could see their earnings decline, businesses disrupted, and funding costs increase due to policy action, technological changes as well as consumer and investor demands for alignment with sustainability policies.

“Financial watchdogs including the European Central Bank are stepping up their supervisory engagement with banks on climate-related efforts and this may result in punitive measures on those institutions that fail to meet expectations,” said S&P Global.

Despite the wider economic downturn last year, sustainable investments managed to weather the storm reasonably well driven by wealthy investors’ growing demand for sustainability. Capgemini said that asset and wealth managers are increasingly integrating ESG into their primary portfolios in response to growing client demand—a trend that can be attributed to a paradigm shift in client demography.

The world’s top banks including Credit Suisse, Goldman Sachs and HSBC are increasingly in the crosshairs of wealthy investors, shareholders and climate activists over their role in funding coal, oil and gas projects—the leading causes of man-made greenhouse gas emissions.

“Transition risks materialise on the asset side of financial institutions, which could incur losses on exposure to firms with business models not built around the economics of low carbon emissions,” said the International Monetary Fund.

However, the pivot toward sustainable investing has also led to greenwashing as companies and financial institutions are purporting to be environmentally conscious for marketing purposes but they are not making any notable sustainability efforts.

The Middle East is at the heart of the world’s ambitious decarbonisation agenda. The growing commitments to climate change and the hosting of two consecutive COPs in the region will provide an ideal platform for countries and corporates to reaffirm and accelerate their commitment toward a sustainable future.