Saudi Arabia takes first step to mitigate carbon emissions

kasparakeraAs a signatory to the 2015 Paris Agreement on climate change, Saudi Arabia has developed its first nationally determined contribution (NDC), aiming to avoid up to 130mn tonnes of carbon dioxide (CO2) equivalent emissions per annum by 2030

In a discussion paper, King Abdullah Petroleum Studies and Research Center (KAPSARC) evaluates several supply-side policy approaches to mitigate CO2 emissions from Saudi Arabia’s power and water sectors, which together account for more than 40 per cent of the kingdom’s greenhouse gas emissions.

The paper further aims to help inform the policymaking process in the Kingdom ahead of the communication of its second NDC in 2020.

According to KAPSARC study, a continuation of current policies is expected to increase power sector emissions in 2030 by 70 per cent over 2015 levels. Rationalising costs of fuel inputs is critical to driving large CO2 emissions reductions and providing a net economic benefit to the Saudi Arabian economy.

The paper evaluates some alternative scenarios in terms of their practical implications on Saudi Arabia’s CO2 emissions, electricity production, fuel consumption, investments and cost-effectiveness, as well as on the kingdom’s oil exports and revenues.

Suggested policy approaches include:

· A portfolio standard that requires up to 50 GW of solar, wind and nuclear technology deployment

· A clean energy standard that simulates a set of national policies that reduce the carbon intensity of electricity and water production

· A partial fuel price reform, where fuel prices are gradually raised to about half of international price levels by 2030

· A full fuel price reform where fuel prices are raised to international levels

Portfolio standard

This study first considered a portfolio standard to diversify the technology mix through the deployment of low-carbon generation. It constructed a notional portfolio standard that feeds directly into Saudi Arabia’s strategy of economic diversification and the introduction of new, low-carbon sources of energy through mandated targets.

In the GCC region, Abu Dhabi has set a target of seven per cent renewable energy generation capacity by 2020, which is expected to be met by a combination of solar PV and concentrated solar power (CSP), wind and waste-to-energy projects. Dubai has a target to generate seven per cent of its energy from clean energy sources by 2020, rising to 25 per cent by 2030 and 57 per cent by 2050.

Under the Dubai Clean Energy Strategy 2050, solar energy is set to account for 25 per cent of the emirate's energy supply requirements, nuclear seven per cent, clean coal seven per cent and gas 61 per cent by 2030, with an extended goal to increase solar to 75 per cent by 2050.

Clean energy standard

A clean energy standard (CES) designed to achieve similar reductions could also deliver a positive net economic benefit of US$394bn, noted KAPSARC.

This study considered a regulatory response that limits the carbon intensity of economic activity, with carbon intensity defined as the quantity of carbon emitted per unit of electricity produced in tonnes CO2 per terawatt hour (TWh). The analysis used a stylised representation such as a set of policies that reduced the overall carbon intensity of the power and water sectors in the Saudi Arabian economy.

Fuel pricing reforms

Saudi Arabia is reforming its electricity sector in order to meet rising power demand, reduce its expenditure on energy subsidies and diversify its economy, supporting the objectives of Vision 2030 and the National Transformation Programme. The objective is to move away from a system based on regulated fuel prices to a system with fuel prices more closely aligned with international prices, through a series of fuel price reforms.

The kingdom introduced its first set of fuel price increases at the end of 2015. With prices still well below international benchmarks, Saudi Arabia’s 2018 budget set targets for the gradual alignment of domestic fuel prices with international prices by 2025.

In January 2018, all electricity prices except for industry and government were raised. At the same time, local gasoline prices rose by 126 per cent for 95 octanes and by 82 per cent for 91 octanes.

The paper has further analysed the climate impacts of fuel price deregulation for two implementation schedules. Starting in 2018, a gradual increase in industrial fuel prices reaches an international benchmark by 2030. This scenario is called partial FPR.

A potential scenario following a more gradual deregulation pathway, where prices gradually rise to half of the international benchmarks over the course of the projection period, examines what would happen if full price deregulation is not realised before 2030. This scenario is expected to remove price controls on fuel prices entirely with immediate effect from 2018 and allow prices to reach a level determined endogenously in the model by supply and demand. This scenario is called full FPR.

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