Gulf states chart own investment course in climate finance

To:

Al-Monitor Pro Members

From:

Sebastian Castelier

Freelance journalist covering Gulf economies

Date:

Nov. 18, 2022

Bottom Line: 

Who should foot the bill for weather events caused by climate change? The United Nations estimated that between $1.6 and $3.7 trillion a year in total climate finance flows are needed to transition to a net-zero-emission and resilient global economy by 2050.  

The divisive issue took center stage at the 2022 UN climate summit (COP27) in Sharm El Sheikh, notably a 2009 commitment by developed countries, historically the world’s top polluters, to mobilize $100 billion per year to climate action in emerging economies. However, Gulf states have been charting their own course, historically via charities but increasingly via their sovereign wealth funds, to acquire assets across emerging economies. 

Background Facts:
  • “Gulf countries have a role to play, and they are playing that role,” Raidan Al Saqqaf, a Yemeni economist at the United Nations office in Abu Dhabi, told Al-Monitor. For decades, the fossil fuels-rich region has been providing “substantial aid” to emerging economies, said Sayeed Mohammed, a low-carbon transition expert based in Qatar who is preparing a research paper on the region’s contribution to climate finance. He told Al-Monitor that Gulf charitable organizations also contribute a “lot of money” in that regard. 
  • The Middle East Green Initiative, launched by Saudi Arabia in 2021, aims to be the region’s first climate platform to ensure “coordinated” climate action. Crown Prince Mohammed bin Salman said at COP27 the kingdom would contribute $2.5 billion to it over the next 10 years. In October, the Saudi Fund for Development, a government organization that provides soft loans and grants to developing countries, agreed to fund a solar energy-powered public lighting project in the Central African Republic. 
  • Still, Gulf states fall short of the UN target for countries to spend 0.7% of their Gross National Income (GNI) on Official Development Assistance (ODA). Kuwait, home to the Arab world’s first fund for Arab economic development, allocated 0.28% of its GNI to ODA in 2020. Only Qatar and the UAE provided roughly half of the UN target, respectively at 0.42% and 0.4% of GNI -- well above the United States’ 0.18%. The trend is slowing, though. Between 1974 and 1994, Arab countries had provided on average about 1.5% of their GNI as ODA to developing nations, research has found. 
  • Going forward, a shift toward transactional ties centered on renewable energies is likely to open doors for a new era of Gulf-emerging economies cooperation. The contribution of Gulf sovereign wealth funds (SWF) to climate finance is rising, supported by global pressure to decarbonise investment portfolios and integrate climate change risks. This would help to “mainstream climate resilience into pre-existing flows of finance,” Kishan Khoday, senior representative of the United Nations Development Programme (UNDP) for Arab States, told Al-Monitor. 
  • Emirati renewable energy firm Masdar, owned by Abu Dhabi’s sovereign wealth fund Mubadala, signed a deal at COP27 to build a 10 gigawatt onshore wind farm in Egypt, one of the world’s largest. In October 2022, Saudi PIF-owned ACWA Power signed a nonbinding agreement with a European multilateral development bank to jointly support sustainable energy transition projects in Uzbekistan, Azerbaijan and Egypt
  • Gulf states view climate finance as a “win-win move: a good investment and a way to help other countries green their economies,” said Moustafa Bayoumi, a research fellow on climate change and sustainable development at the Anwar Gargash Diplomatic Academy. Asked if PR gains are part of the picture, he said “it could be considered as a side benefit.” Such proactiveness helps Gulf states raise their profile on the global stage to be seen as "responsible" actors. The UAE hosting COP28 in 2023 is an opportunity to spotlight the Gulf's evolving approach on climate diplomacy as the region also continues to benefit from high oil revenues.  
  • “Climate finance is still a business investment; it is not necessarily for the sake of advancing climate goals; it is for the sake of being more profitable,” Al Saqqaf said. Gulf states' combined GDP is expected to reach $6 trillion by 2050, but if they embrace a green growth strategy it could exceed $13 trillion, according to the World Bank
  • Nevertheless, Gulf states do not need to search further afield to support climate action. The Arab States region is one of the most heavily affected by climate change. Temperatures rise faster than the world average, and are expected to increase by up to 4.5 °C by the end of the 21st century under the high emission scenario. The quantified climate finance need articulated by 13 Arab states is at $436-478 billion for up to 2030. Yet, as of now, climate finance flows into the region are estimated at only $5.1-7.4 billion a year. 
  • The level of fragility and vulnerability in the MENA is “rapidly escalating,” Khoday said. He called for collective action in the region to bridge the financing gap and build climate adaptation capacities to “prevent the prospect of a climate apartheid.” Beyond finance, he said the UNDP provides support to countries and communities across the MENA region to enhance the policy frameworks and develop institutional capacities, to de-risk the environment for scaled-up climate finance.
  • But the emphasis put on a transactional approach comes with its own limitations. Sovereign wealth funds’ investment thesis hardly matches with climate adaptation projects -- adjustments in ecological, social, or economic systems, like building flood defences, drought-resistant crops and protecting ecosystems. “Adaptation struggles more with attracting investments rather than mitigation,” Bayoumi told Al-Monitor. 
  • Gulf states should look beyond mitigation projects, like solar and wind farms, and put more emphasis on adaptation actions, such as restoring ecosystems that can strengthen the resilience of local communities, Mohammed said. “Mali’s per capita emissions, for example, is just 2% of US’ per capita emissions. So you cannot really ask such countries to even mitigate it; the focus should be on adaptation there,” he added. 
  • What is on the horizon is a two-pronged approach: Gulf sovereign wealth funds targeting profitable mitigation projects, like solar farms, while Gulf government and charitable organizations channel funds toward adaptation projects in the most vulnerable countries to enhance their climate resilience. For example, the Middle East Green Initiative ambitions to plant 50 billion trees across the MENA region. 
  • “There is this perception that investment in developing countries has a higher risk factor,” said Al Saqqaf. Gulf states have a “good learning curve” in investing in such markets, the economist added, and could become a prime gateway for global climate finance to flow into the Middle East region. In the likes of PIF raising $3 billion through a green bond in October, well-connected Gulf sovereign wealth funds are well-positioned vehicles to raise funds on behalf of the region via green bonds.  
  • Debt-for-climate swaps -- debt relief in return for climate action -- could also be a venue for closer Gulf-Middle East climate cooperation. In return, green projects across the Middle East can generate carbon credits the Gulf states need to meet their net-zero pledges -- PIF said in October 2022 it will launch a regional carbon market
Alternative Scenarios:

Scenario 1: The UN adds Gulf states to the list of developed country parties 

Developed country parties agreed at the COP15 in 2009 to mobilize $100 billion annually to climate action in emerging economies, only to fail to do so or use misleading accounting to inflate their contribution. The list comprises Western countries, and it would be unreasonable to compel Gulf states to follow suit as their direct contribution to global warming is limited, experts said. “Gulf countries are not among the top 10 most polluting countries today, and they never were. It is simply not the same magnitude of emissions,” Al Saqqaf said.

Scenario 2: Gulf states become accountable for scope 3 emissions 
 
The oil and gas sector hates to talk about scope 3 emissions, in other words, the pollution an oil exporter causes when its client burns it. The industry refuses to be accountable for scope 3 emissions, although it accounted for 88% of its total value chain carbon footprint in 2019, IHS Markit found. Mohammed said that the consumption-based emissions model makes “more sense” for export-driven economies, such as Gulf states. The Qatar-based expert questions the impact on the global economy if oil and gas exporting nations started to charge a premium or carbon tax on the product because they need to shoulder the scope 3 emissions.  

Conclusion - most likely scenario:

Scenario 1 is unlikely in short to medium term, and despite a greater emphasis on scope 3 emissions globally, climate diplomacy is a far cry from succeeding at turning scenario 2 into reality. The most likely scenario is Gulf states doubling down on charting their own investment-driven climate finance course. But, as Bayoumi concluded, “Gulf states are not going to move the needle alone. It should be a global effort; we need everyone on board.” 

Contributor Background:  

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.

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