Masdar/Handout via Reuters
- Emissions reporting by June 28
- Questions over carbon credits trading
- ‘Teething problems’ expected
UAE companies have less than six months to comply with the country’s new emissions laws, but experts warn that some details are still unclear and a proposed carbon credit trading system may not meet its goals.
The UAE introduced two pivotal pieces of environmental legislation last year.
Cabinet Resolution No 67 on carbon credits came into force on December 28, while a federal decree “on the reduction of climate change effects” was unveiled last August and will become law in May.
More legislation is expected at a federal level and from individual emirates as the UAE works to become climate neutral by 2050.
Under the Emirates’ new rules, public and private sector businesses that produce emissions of at least 500,000 metric tonnes of carbon dioxide equivalent (CO2e) each year – comparable to the annual emissions from more than 116,000 petrol-powered cars or roughly 67,000 homes – will be classified as “entities of huge carbon emissions”.
The law covers emissions created directly at a company’s facilities or through its transport fleet (known as scope 1) and indirectly such as from its electricity consumption (scope 2).
Adnoc’s scope 1 and 2 emissions, for example, totalled 24 million tonnes in 2023, according to its sustainability report. Emaar Properties had scope 2 emissions of 468,876 metric tonnes in 2023, but its annual report does not give a scope 1 figure.
The 500,000-metric-tonne threshold is high compared with similar schemes in other countries but Nicholas Howarth, a policy adviser at the International Energy Agency, says this is understandable when nearly 80 percent of the UAE’s CO2e emissions derive from the power, desalination and industrial sectors.
“This approach ensures that the highest emitters are addressed first, maximising the impact of the programme,” he says. Leaving out the smaller emitters for now will “reduce initial compliance costs for the scheme”.
The “entities of huge carbon emissions” must monitor and verify their annual emissions and report these to the federal government. Emissions cover CO2 and seven other greenhouse gases including methane, nitrous oxide and hydrofluorocarbons. The reporting deadline is June 28.
The Ministry of Climate Change and Environment, in turn, will create a national registry to authorise carbon credits eligible for trading inside and outside the UAE.
How will carbon trading work?
Emissions trading systems vary and it is as yet unclear how the UAE platform will work. In the European Union, for example, companies do not trade credits – they buy so-called allowances that permit them to exceed the emissions cap.
The UAE is planning to allow major emitters to buy carbon credits, according to a note from law firm Reed Smith.
Companies that have reduced their emissions to below the threshold (from a 2019 baseline) can register for emissions reporting voluntarily and receive carbon credits to sell on to major emitters. That should reward them for adopting green practices and encourage large emitters to take similar steps.
ShutterstockThe law will apply across the UAE, including free zones, and cover government-run as well as privately owned entities. Key details have yet to be published, however. These include the identity of third parties that will verify emissions reports.
“The challenges or uncertainties are over how fast the market will mature, how much clarity policymakers will provide to enable companies to invest, the cost of investing in technology to decarbonise and also policy support to help companies do so,” says Luyue Tan, a carbon research specialist at London Stock Exchange Group.
For companies in industries with large carbon footprints, such as property development, energy, construction, transportation and logistics, senior management “should be taking immediate action” to determine whether their organisation will be classified as an entity of huge carbon emissions, says Rhys Monahan, a lawyer at Reed Smith.
“It’s likely there will be teething problems, such as a limited pool of advisers and resources,” says Monahan.
“Family groups and conglomerates with multi-sector businesses will likely have more work to determine their carbon footprint across their business lines and establish an effective monitoring and reporting system.”
Companies should quantify the value of complying with the rules, according to Monahan.
“Part of that comes from educating businesses as to the benefits. By introducing more energy efficient technology, for example, entities would reduce their energy consumption and therefore their energy costs.”
Businesses will need time to comply
Companies are likely to need one to two years to become compliant, says carbon research specialist Tan.
She estimates that it takes five to 10 years to set up a fully operational and active emissions trading platform – based on the development of 75 schemes worldwide.
Shutterstock“Policymakers need to have an excellent understanding of how to build this for it to succeed and sufficient resources like experts for capacity building and training, exchange platforms, data collection platform, registry technical support,” Tan says.
“We expect to get further clarity on the design of the UAE carbon market in the coming months.”
The Securities and Commodities Authority will be involved as well as the environment ministry. It will have to license any domestic carbon credits trading platform.
In the EU, liable companies must pay about €100 ($103) per tonne of excess CO2 emissions, Tan says. In China, the fee for the same ranges from $64 to $128.
Loopholes are common, warns Herwig Schuster, a strategist at Greenpeace. Under the European Union system, launched in 2005, only flights within the bloc are liable. It is not yet known how the UAE’s rules will apply to Emirates and other major airlines.
Moreover, credit or allowance prices are “often too low” to spur emitters to change their ways, says Schuster.
“The price should be high enough for alternatives to become financially interesting to companies,” he says. “Prices should also increase over time. The more expensive a tonne of CO2 is, the more effective it is in changing companies’ behaviour.”
He adds, though, that “pricing should be similar within a region”. Significant price differentials among nearby countries could spur companies to shift their operations to lower-priced locations, so the source of emissions would move but their quantity remain unchanged.
Costs and risks
In the UAE, “companies with less sophisticated governance and structures, with little prior understanding or motivation to become green or carbon educated or ready, are likely to face the most challenges – and, ultimately, costs – to become compliant”, according to Reed Smith’s Monahan.
Implementing a monitoring and reporting system and buying carbon credits may lead to “significant new costs”, he says.
“To help avoid such costs being directly passed on to the public and consumers, there may be pressure on the UAE authorities to provide incentive schemes or stagger further obligations.”
Yet with its comparatively high threshold, the UAE law targets larger businesses where implementation costs will be relatively small as a percentage of total revenue, says Howarth of the International Energy Agency.
“For smaller operations, compliance costs can pose a greater financial burden. The costs of compliance can also vary depending on the complexity of the production process and the emissions monitoring required.
“Cement manufacturing, for instance, generates emissions from multiple sources.”
A cement maker producing 1 million tonnes of the material annually – enough to build around 3,000 medium-sized residential buildings – emits between 600,000 and 1 million tonnes of CO2 each year.
More guidance needed
The UAE authorities will probably provide further guidance on various aspects, including the carbon registry, registration procedures and a list of approved auditors to verify emissions data, says Monahan.
Similarly, the Securities and Commodities Authority will publish along with each emirate information on procedures and sanctions for non-compliance as well as additional penalties. The law states that failure to comply could result in fines up to AED6 million ($1.6 million).
UAE Ministry of Presidential Affairs/Handout via Reuters“Having a maximum penalty may not be the best strategy,” according to Tan. “Fines should be proportionate to the quantity of emissions above a specified threshold; otherwise, it might just be easier to pay the fine and avoid decarbonisation.”
Greenpeace’s Schuster also warns that the maximum fine is so low companies could simply price it into their business plan.
Brett Hillis, co-lead at Reed Smith’s global carbon credit working group, says policymakers need to keep penalties under review.
“Well-designed and enforced penalties regimes underpin compliance through making plain the bad consequences that flow from non-compliance.
“A badly designed regime can undo a country’s efforts by rendering breaching the rules financially beneficial.”
