Brief
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The proverbial alarm bell on swift action to reduce greenhouse gas emissions has long been sounding. While many hear its clang, clear and actionable direction on achieving net zero emissions can be complex, as it requires a combination of mature and early-stage solutions. Commitment to energy efficiency and renewable energy were, at one time, the standard in sustainability initiatives. But these actions alone are no longer sufficient to achieve climate ambitions aligned with the Paris Agreement. Success will require stakeholders to go beyond current efforts. In addition to the development and scale-up of new technologies (such as carbon capture and clean hydrogen use cases), access to mitigation projects outside their own value chain will be critical. Implementing a policy of carbon offsets (the reduction of emissions to make up for unavoidable emissions elsewhere) and carbon credits (permits that allow for a certain amount of emissions that can be traded if not used) enables the development of carbon removal levers (e.g., nature-based solutions [NBS] and technology development) (see Figure 1).
Figure 1
Leading economies in the Gulf Cooperation Council (GCC) like the Kingdom of Saudi Arabia (KSA), United Arab Emirates (UAE), and Oman have announced ambitions to reach net zero emissions by 2060 (KSA) and 2050 (UAE and Oman), with decarbonization strategies that rely on a mix of well-established levers (renewable energy, energy efficiency) and forward-looking carbon abatement solutions (hydrogen, carbon capture, and NBS). During the past year they also revised their 2030 nationally determined contributions (NDCs), national climate commitments submitted to the UN under the Paris Agreement, and announced that they will use a wide array of decarbonization levers to meet them (see Figure 2).
Figure 2
The value in voluntary carbon offset marketsA voluntary carbon market, which connects the supply of carbon credits with demand from investors and organizations wanting to reduce their carbon footprint, is experiencing rapid growth around the world. While we have seen several initiative examples in the region, such as establishing exchanges, the practice is still in its infancy in the GCC and there is limited demand and supply compared to other regions (see Figure 3 and Figure 4).
Figure 3
Figure 4
The GCC has already taken a few steps in the right direction to tailor the regional voluntary carbon market to regional needs and specificities while complying with upcoming international trade agreements:
Figure 5
Way forwardIt is imperative for governments to establish the infrastructure for the voluntary carbon market and clarify carbon ownership. This will be a critical prerequisite for GCC countries to ensure alignment between private sector efforts and their NDCs. In addition, there is currently a lack of clarity on how to issue certificates for select carbon abatement technologies, such as carbon capture, utilization and storage (CCUS). Providing clear certification guidelines will enable investors to make guided decisions (see Figure 6).
Figure 6
Lessons from a popular carbon offsetting project in the Philippines show that establishing a new regulatory structure, including a national projects registry, can help set up a market structure that attracts investors by playing on two dimensions:
Action levers for stakeholdersVoluntary carbon credits provide a possible pathway from private investment sources to climate-action projects that would not otherwise receive funding. Financiers: Financial institutions are instrumental in building scale in voluntary carbon markets. They can accelerate the transition to net zero by seizing opportunities from the carbon credit market. Unfortunately, there is currently a financing shortfall for high-quality carbon removal solutions. To lift the market off the ground, financial institutions and asset managers should develop the financial instruments necessary to structure the carbon market, including project financing, exchanges, direct investments, and advising. Hard-to abate-industries: There are currently few cost-efficient emission reduction solutions for energy-intensive sectors. These industries need to invest in research and development (R&D) to develop low-carbon technologies whose deployment and rollout will take time. In the intermediate state, voluntary carbon markets provide a solution for corporations to accelerate decarbonization beyond value chain mitigation. Participation in the voluntary carbon market is, therefore, inevitable for those operating in industries that are “hard to abate,” are governed by emission regulations, or have announced net zero operational ambitions. Hard-to-abate industries, such as utilities, aviation, and heavy industrials, face a dilemma. Despite several net zero announcements by GCC companies (e.g., Saudi Aramco) or industry alliances with GCC members (e.g., the International Air Transport Association [IATA], of which major GCC airlines are members), there are currently few cost-efficient emission reduction solutions. But participation in the voluntary carbon market will play a major role in accelerating progress on decarbonization efforts. Leading regional industrial players will ultimately be driven to operate in the voluntary carbon market. Even if the carbon market currently lacks maturity and transparency, it is the right time to start building internal capabilities. This includes developing the optimal operating model and strategic recruitment strategies to minimize the risk of misallocated capital. Global companies in various sectors, investment banks, and commodity trading professionals are reporting success with operating model archetypes varying from over-the-counter (OTC) trading to proprietary project development. Looking aheadMore than ever, organizations are in the position of looking beyond their ambitions and commitments to carbon offsets. As global policy becomes more prominent and complex, stakeholders can take these steps to be better positioned:
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