Tackling climate change could result in negative short-run economic impacts unless accompanied by significant investment to develop the green energy sector. But failing to do so could have devastating longer-term repercussions globally and in the GCC region.
As a largely oil-dependent region, oil extraction contributes directly to GDP. Because of this, the region’s GDP is vulnerable to peak oil and subsequent decline in oil demand, especially as electric vehicles become mainstream and other sectors turn their back on fossil fuels. Moreover, much of industry such as refining, chemicals, metals sectors, and power generation capacity has now developed to take advantage of access to cheap oil and gas. Even travel and tourism in the region is heavily dependent on visitors from far afield – with over 50 percent of arrivals classified as long haul – which is, of course, very oil intensive. It seems likely that policies to tackle climate change such as carbon taxation and border carbon adjustments will hit GCC economies hard.
However, without a significantly expanded mitigation effort, the world is on course to warm by about 2°C above preindustrial levels by 2050. Global warming of this magnitude is likely to have major economic consequences that could have pronounced economic impacts by 2050 and beyond. And the MENA region, which already suffers from climate-related issues like water scarcity, will be particularly vulnerable to these rising temperatures.
Research by Oxford Economics finds evidence for a non-linear relationship between economic growth and risings temperatures, which is positive up to a point where the average temperature in a country is just under 15°C – the temperature-growth ‘sweet spot’ – but the relationship is negative as average temperatures rise above 15°C. This means that as the world warms in the years ahead, countries in Latin America, Africa, Asia, and the Middle East are expected to experience the largest declines in GDP growth. While northern hemisphere countries in Europe and North America experience positive increases in potential GDP.
Oxford Economics estimate that the economy of the GCC could be nearly 20 percent smaller by 2050 if temperatures rise by 2°C, compared with a scenario where temperatures remain at pre-industrial levels. However, if necessity is the mother of invention, the Middle East is responding to the challenge. This was highlighted by the US Climate Envoy’s recent visit to the UAE, where the two countries launched the Agriculture Innovation Mission for Climate and discussed the progress the UAE is making in developing vertical farming.
The GCC is well positioned to transition its power sector to solar, especially with the advent of new battery technology. There are also huge improvements that can be made in terms of efficiency, especially in buildings and transport. Green hydrogen also has potential given the availability of solar, and hydrogen technology is now being developed in the UAE and Saudi Arabia by ADNOC and Saudi Aramco.
The prospect of using the region’s natural gas resources for blue hydrogen requires developing technologies for carbon capture and storage. Given the region’s experience and skills in drilling, there is immense potential for geological carbon capture and carbon hubs – similar to what has been done in the Northern Lights project in Norway. This would also allow the region to maintain a competitive advantage in sectors that find it difficult to totally give up dependence on oil.
ADNOC is already seeking to be a leader in such technologies. Although the region faces significant climate challenges, countries also need to capture some of the opportunities presented by the world agreeing that climate change is, indeed, a problem that needs to be decisively tackled. Even if how to do this is yet to be agreed. Across the GCC, governments are embarking on reforms designed to diversify economies and accelerate them into the post-Covid era.
.@HHShkMohd launches 'Operation 300bn', a national industrial strategy aimed at raising the manufacturing sector’s contribution from AED 133 to AED 300 billion over the next 10 years. The strategy will be led by the #UAE Ministry of Industry and Advanced Technology. pic.twitter.com/Hz00jtTBpb
Whether this is Vision 2030 in Saudi Arabia, Operation 300bn in the UAE, or numerous reforms aimed at attracting foreign investment and talent by creating the right business environment for innovation – it is clear that GCC countries are actively working to reinvent their economies.
GCC economies will likely become more dynamic, with high levels of investment in new sectors compared to many parts of the world. This offers an opportunity for these countries to position themselves as leaders in the Green economy, in the same way that Asian countries were successful in the IT economy.
Scott Livermore, ICAEW Economic Advisor and Chief Economist at Oxford Economics
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The GCC region confronts the climate change quandary
If necessity is the mother of invention, the Middle East is responding to the challenge
Tackling climate change could result in negative short-run economic impacts unless accompanied by significant investment to develop the green energy sector. But failing to do so could have devastating longer-term repercussions globally and in the GCC region.
As a largely oil-dependent region, oil extraction contributes directly to GDP. Because of this, the region’s GDP is vulnerable to peak oil and subsequent decline in oil demand, especially as electric vehicles become mainstream and other sectors turn their back on fossil fuels. Moreover, much of industry such as refining, chemicals, metals sectors, and power generation capacity has now developed to take advantage of access to cheap oil and gas. Even travel and tourism in the region is heavily dependent on visitors from far afield – with over 50 percent of arrivals classified as long haul – which is, of course, very oil intensive. It seems likely that policies to tackle climate change such as carbon taxation and border carbon adjustments will hit GCC economies hard.
However, without a significantly expanded mitigation effort, the world is on course to warm by about 2°C above preindustrial levels by 2050. Global warming of this magnitude is likely to have major economic consequences that could have pronounced economic impacts by 2050 and beyond. And the MENA region, which already suffers from climate-related issues like water scarcity, will be particularly vulnerable to these rising temperatures.
Research by Oxford Economics finds evidence for a non-linear relationship between economic growth and risings temperatures, which is positive up to a point where the average temperature in a country is just under 15°C – the temperature-growth ‘sweet spot’ – but the relationship is negative as average temperatures rise above 15°C. This means that as the world warms in the years ahead, countries in Latin America, Africa, Asia, and the Middle East are expected to experience the largest declines in GDP growth. While northern hemisphere countries in Europe and North America experience positive increases in potential GDP.
Oxford Economics estimate that the economy of the GCC could be nearly 20 percent smaller by 2050 if temperatures rise by 2°C, compared with a scenario where temperatures remain at pre-industrial levels. However, if necessity is the mother of invention, the Middle East is responding to the challenge. This was highlighted by the US Climate Envoy’s recent visit to the UAE, where the two countries launched the Agriculture Innovation Mission for Climate and discussed the progress the UAE is making in developing vertical farming.
The GCC is well positioned to transition its power sector to solar, especially with the advent of new battery technology. There are also huge improvements that can be made in terms of efficiency, especially in buildings and transport. Green hydrogen also has potential given the availability of solar, and hydrogen technology is now being developed in the UAE and Saudi Arabia by ADNOC and Saudi Aramco.
The prospect of using the region’s natural gas resources for blue hydrogen requires developing technologies for carbon capture and storage. Given the region’s experience and skills in drilling, there is immense potential for geological carbon capture and carbon hubs – similar to what has been done in the Northern Lights project in Norway. This would also allow the region to maintain a competitive advantage in sectors that find it difficult to totally give up dependence on oil.
ADNOC is already seeking to be a leader in such technologies. Although the region faces significant climate challenges, countries also need to capture some of the opportunities presented by the world agreeing that climate change is, indeed, a problem that needs to be decisively tackled. Even if how to do this is yet to be agreed. Across the GCC, governments are embarking on reforms designed to diversify economies and accelerate them into the post-Covid era.
Whether this is Vision 2030 in Saudi Arabia, Operation 300bn in the UAE, or numerous reforms aimed at attracting foreign investment and talent by creating the right business environment for innovation – it is clear that GCC countries are actively working to reinvent their economies.
GCC economies will likely become more dynamic, with high levels of investment in new sectors compared to many parts of the world. This offers an opportunity for these countries to position themselves as leaders in the Green economy, in the same way that Asian countries were successful in the IT economy.
Scott Livermore, ICAEW Economic Advisor and Chief Economist at Oxford Economics
Follow us on
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