UAE can loom large on climate change

The UAE was not a big player in the global climate change talks in New York last week, where heavyweights China and the US took centre stage, but the Emirates’ economic future has a massive stake in whatever agreement emerges.

The final treaty that is expected to take shape in December in Copenhagen will have far-reaching and opposing effects on the economy, from boosting key industries to sapping global demand for oil, experts say.

And a failure to reach agreement, with potential corresponding climate change this century, would have extreme, if less certain, long-term effects on the UAE’s way of life.

OPEC states have historically played an “obstructionist” role in climate change talks, resisting both the argument behind global warming and efforts to cap emissions, but the UAE now has an economic rationale to weigh in, says Mari Luomi, an expert on Gulf climate change policy at the Finnish Institute of International Affairs in Helsinki.

“The GCC states have a vested interest,” she says. “By playing both a supporting and visible role in the negotiations, the UAE would attract a lot of positive attention, which would then add international interest in the new alternative energy and technology taking place in Abu Dhabi and the other emirates.”

After a successful diplomatic effort to bring the International Renewable Energy Agency (IRENA) to the emirate earlier this year, she thinks Abu Dhabi should want “… to play a more visible and proactive role in the [process]”.

The UAE dispatched a high-level delegation to this week’s summit, led by Sheikh Abdullah bin Zayed, the Minister of Foreign Affairs, and Sultan al Jaber, the chief executive of Masdar, the Abu Dhabi Government’s clean energy firm.

The talks were an opportunity for the government to showcase its clean energy projects and to lobby behind the scenes on three issues likely to top its list: carbon capture and storage (CCS), heavy industry and oil.

A key priority for the UAE and other oil producers is a proposal that would offer UN-led financing to CCS projects that redirect carbon pollution from smoke stacks to underground storage.

If implemented at a reasonable cost, the technology would allow the world to continue burning coal, oil and natural gas without harming the environment.

Masdar wants to construct a network of CCS projects to collect emissions from industrial sites across the emirate and inject them into ageing oil wells. The scheme is designed to reduce the country’s carbon footprint while increasing output of oil and freeing up valuable natural gas that is pumped into wells to maintain reservoir pressure.

The main hurdle is the high cost, which the company is hoping to defray in part through the sale of carbon credits on the international market.

Under the UN-monitored Clean Development Mechanism (CDM), a financing scheme created by the Kyoto Protocol on climate change, firms in developing countries can sell credits on the market for every tonne of carbon they keep out of the atmosphere through clean energy projects.

The framework creates an economic incentive for emissions reductions in developing countries, including the UAE, which are not bound by hard targets.

CCS is currently excluded from the CDM, as are nuclear power plants, which produce no carbon. But the UAE and others are pushing to change that in the treaty that will replace Kyoto by 2012. The sale of carbon credits from CCS and nuclear power projects is a potential revenue stream worth billions of dirhams to the Government.

A Masdar official confirmed this week that the Government-owned company would join officials in Copenhagen to lobby for the inclusion of CCS in the CDM. The proposal received the backing of the International Energy Agency (IEA), a Paris-based group of energy consuming nations, which also endorsed including nuclear plants in the framework.

But it faces significant opposition from environmental groups such as Greenpeace, which fear it would encourage greater combustion of fossil fuels and construction of nuclear reactors, and also from large current recipients of CDM funds, such as Brazil. They say it would divert limited international funds from their own efforts to preserve forests.

The Government’s proposal came under fire this week from Helene Pelosse, the director general of IRENA, who described CCS as a “fata morgana”, a reference to an Italian legend symbolising a mirage.

Federica Bietta, the deputy director of the Coalition for Rainforest Nations, an intergovernmental group of 40 developing countries, said the group’s member states, which include Brazil, could support the proposal in return for support from the UAE and other oil producers for forestry projects.

Besides CCS, the UAE has a stake in broader questions about how new limits on carbon emissions will affect heavy industry and aviation in industrialised countries. Experts say the UAE, which is investing billions of dollars into expanding both sectors, could benefit from new high costs that will make firms in Europe and the US less competitive.

Energy-intensive industry such as oil refining and metals smelting is likely to grow more quickly in the Middle East and Asia because of emissions limits that speed up industrial decline in the West, experts say.

In aviation, new rules will come into effect in Europe by 2012 that require airlines using European airports to offset their carbon emissions, the cost of which will be reflected in ticket prices.

For passengers flying through Europe on to other destinations, the new rules will make those routes more expensive, which will probably divert traffic to the Middle East, said Quentin Browell, an assistant director for environment at the International Air Transport Association (IATA), an industry trade group.

“It may well be that some airlines or some passengers choose to hub outside of Europe,” he said. “We don’t believe you can have regional schemes such as this because it does cause those competitive distortions.”

The potential for new limits to hasten the shift of industry and aviation from the West to the Middle East and Asia is called “carbon leakage” and has not been lost on politicians in the US and Europe.

Last week, the European Commission approved a list of industries that are vulnerable to leakage and will be exempt from requirements that they buy allowances to release carbon into the atmosphere. In the US, members of Congress have proposed free allowances for key industries in the country’s inaugural emissions trading scheme and considered imposing import duties on goods produced overseas in countries without emissions limits.

Separately, IATA introduced a proposal to implement worldwide carbon emissions limits on airlines to create a fair playing field in the hope of obviating the new EU regulations.

The outcome of each of these proposals will determine the extent to which aviation and industry in the UAE benefit from the windfall of carbon leakage.

As an oil exporter, the most difficult question for the UAE at Copenhagen will be the treaty’s effect on global oil consumption.

In its long-term energy outlook released earlier this year, OPEC estimated that a successful effort to reduce carbon emissions to a medium-level scenario would reduce world oil demand in 2020 by 5 per cent. Assuming efforts to capture and store carbon underground are unsuccessful, OPEC said the impact on demand “is likely to be significant”.

The forecast 5 per cent decrease is significant: this year’s demand drop of 2.2 per cent was a leading cause of a 75 per cent collapse in oil prices.

The lead Saudi climate negotiator, Mohammed al Sabban, told Reuters this year that carbon limits threatened the Saudi economy, and the kingdom would seek international aid to help it adapt to a future without fossil fuels.

But no independent expert has put forward a forecast for what climate change limits mean for the Gulf’s oil industry. John Mitchell, an energy security expert at the Oxford Institute of Energy Studies, said the effect on oil consumption could be significant, but without sufficient data “it would perhaps be easy to exaggerate such considerations”.

Ultimately, the UAE and other Gulf oil exporters will benefit from the fact that their production costs are among the lowest in the world, he said. Oil will play a part in the energy mix for decades and will continue to be the preferred feedstock for plastics and chemicals for the next century.

With nearly all world leaders now agreeing that some sort of large emissions cut is necessary, the UAE has moral, strategic and economic reasons to participate in shaping a climate change treaty, Ms Luomi said.

“If the post-2012 treaty gets watered down and we don’t manage to stop global warming … runaway climate change will not leave any country untouched,” she said.

“The GCC states … are small actors and small emitters in the big picture, but they can also choose to play either a proactive, neutral or even a negative role in the forthcoming talks.”