For all their controversy, carbon markets appear increasingly indispensable to the energy transition. After decades of development they continue to offer a viable path to help finance it. The world simply cannot relinquish the idea of putting a price on carbon as a tradeable asset in order to reduce planet-warming gases.
Carbon is on track to become a trillion-dollar asset class by the mid-2030s, according to some estimates. As the expanding financial districts of Riyadh, Dubai and Abu Dhabi rise to the heights of the world’s financial centres, they will need to find their niche in this burgeoning part of global finance: the commodification of carbon.
However Saudi Arabia and the UAE are just in the early stages of creating carbon trading infrastructure. In fact, they are falling behind rising players including China, Brazil, India and others, which are building markets for carbon credits and setting up national compliance markets.
By falling behind in the commodification of carbon, the Gulf countries risk leaving money – a lot of money – on the table. Moreover, they relinquish sources of funding for new fuels and technologies to meet their climate goals.
Missed opportunity
A case in point is the loss last year of the world’s first fully-regulated carbon exchange. AirCarbon Exchange (ACX), which set up in the Abu Dhabi Global Market (ADGM) in 2023, was backed by Mubadala Investment Company’s strategic investment and licensed under ADGM’s own regulatory regime.
The expansion of ADGM in physical size, assets under management, and regulatory capacity, is truly remarkable. But the announcement that ACX was closing its doors, after just one year of trading there, came as a somber note.
The launch of this world-first exchange platform during the year of COP 28 was a missed opportunity to leverage the UAE’s presidency and the convening power of the conference.
The exchange platform deployed an innovative, connected liquidity model that could have connected the enormous emission reduction potential of the global south with demand from the global north.
This would have put ADGM at the center of global carbon trade, connecting buyers and sellers across Europe, Africa and Asia to a liquid market that offered easy access to UAE-based and international companies.
Lacking substance
Gulf countries have put some legal structure into place for future carbon markets. The UAE’s Federal Decree on climate change, coming into force this year, mandates monitoring and control of GHG emissions across sectors while encouraging companies to participate in emission trading schemes and carbon credit markets. The Emirates are also introducing carbon compliance regulations for eventual compliance markets.
And Dubai has established a National Register for Carbon Credits to ensure trade of high quality instruments. It has introduced a Measurement, Reporting, and Verification (MRV) programme, which will require entities producing large amounts of carbon emissions to submit annual reports that must be verified.
The emissions reporting will be the basis of price discovery and a future compliance market. It’s a first step but the legislation lacks detail, leaving unclear its intention and timeline.
Meanwhile, with the unfortunate loss of a promising trading platform, Abu Dhabi appears to have ceded the ground to Riyadh.
Saudi Arabia is working on a pilot phase of a national carbon emissions compliance system. The government is currently studying the EU’s emissions trading system (ETS) and other compliance regimes as it implements a twoto three year pilot phase.
In 2022, Saudi Arabia’s Public Investment Fund (PIF) and Tadawul Group, the stock exchange operator, established the Regional Voluntary Carbon Market Company (RVCMC). Late last year, RVCMC announced that it had established an exchange platform for regular auctions of ‘high quality’ carbon credits.
With the RVCMC, the Saudis appear to be taking the lead in the region. This work is still awaiting more substance (and transparency), particularly on the operation of its trading platform.
Compare this state of affairs with Brazil, where a national ETS is under development. Brazil has complementary markets for its ETS already in place, including a functioning spot power market that allows generators to price in the cost of carbon emissions when bidding into the market. This complements an active market for the trading of renewable energy credits and carbon credits, with the latter planned to be incorporated into the ETS scheme.
Light trading
Some carbon credit transactions are taking place, and voluntary carbon pricing exists through auctions and bilateral trade.
There were two pilot auctions hosted by RVCMC during 2022-23, with purchasers including Aramco, Saudi Electricity Company and ENOWA (subsidiary of NEOM). For its part, the Dubai Financial Market is now assessing its carbon credit trading pilot launched late last year.
While these efforts are useful, they are small and still lack the scale and substance seen in other young markets. A related concern is the 5 percent VAT imposed on carbon transactions, which is likely to negatively impact any carbon trading among UAE companies.
Private sector trading is also lagging. ADNOC set up a carbon trading desk but its activity has been light. With more active trading, ADNOC would likely generate hundreds of thousands of dollars annually in the EU’s mature and liquid compliance market. Sourcing and hedging European carbon allowances (EUAs) on behalf of its European subsidiaries is one possibility.
Finding the right model
The Gulf countries could follow Singapore’s example, where a carbon tax sets a ceiling for price for carbon credits and progressively increases. This pricing provides certainty for investment in climate mitigation projects.
Furthermore, through government involvement in determining which credits are eligible under the taxation regime/ETS, the reputational risk faced by firms purchasing these credits is removed.
Singapore is also embracing international carbon credits under Article 6. Leveraging the international market will allow its market to compel climate action more cost effectively until critical technologies, such as those for carbon capture and removal, mature.
The same advantages can be gained by the Gulf countries. Furthermore, by developing the investment infrastructure in carbon projects in the global south, they can sell services to other nations looking to leverage international credits to meet their nationally determined contributions (NDCs).
In fact, the Gulf countries, with their surfeit of capital, could make better returns through investment in mitigation outcomes abroad. The many successful investments of the Abu Dhabi Future Energy Company (Masdar) are a case in point.
Taking center stage
While the Gulf countries will find their own path, they can profit from the examples of ambitious countries such Singapore and Brazil. And they can leverage their unique geographic position into global influence.
As carbon markets continue moving toward centre stage in the energy transition, this region should rise to global leadership. Its financial centres will expand their global reach as they integrate carbon trading infrastructure.
The key for the Gulf countries is regional thinking. Their collaboration to commoditize carbon in a large liquid market will maximise potential gains. It is a prospect that aligns with ZETA’s mission to shape transparent markets for low-emission products across the MENA region.
(The author is CEO of UAE-based Zero Emissions Traders Alliance (ZETA). Any opinions expressed in this article are the author’s own)
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