Analysis - Economic Trends

Post-Pandemic Economies

The need for Green Recovery in the GCC
Wednesday، January 26، 2022
Post-Pandemic Economies

COVID–19 pandemic created a massive global shock that brought both an economic and a health crisis. The pandemic had far-reaching consequences on the global political, social, and financial structures. Most governments have imposed different degrees of lockdown to contain the infection rates, which harmed business activities globally. Such worldwide disruption, caused by the pandemic, calls for a system redesign that balances economic, social, and environmental factors to save our planet.

Plummeting oil prices

The reduction in transportation and production significantly affected the global oil demand and created a surplus in the oil market. The drop in road transport activity accounted for 50% of the decline in global oil demand and the slump in the aviation sector for around 35% (IEA, 2020). As, the GCC states are highly dependant on oil revenues as a significant source of income, they faced two simultaneous shocks; the Covid-19 outbreak and the oil price decline, which weakened their fiscal positions. 

In 2020, the coronavirus crisis was devastating for the petroleum industry (Harper, 2021). The oil prices have tumbled by more than 70%, falling to around USD 20 per barrel by the end of April (El Mahmah and Kandil, 2020). The lower oil prices have led to an immediate impact on economic fortunes in the produces economies (i.e., Saudi Arabia oil revenue fell by 24% year-on-year in 2020 first quarter) (OECD, 2020)

Consequently, the Gulf States have put a range of actions and measures to mitigate the effects of the shocks on human health, businesses, and government budget. The countries own large reserves that provide fiscal cushion to support domestic economies. GCC governments took several business-friendly and households supporting policies and measures including, cutting interest rates, providing liquidity, and allow borrowers to defer loan payments (Hamaizia and Callen, 2021). However, no country could avoid Covid-19's consequences; the GCC combined economic output contracts by 6% in 2020 (Cullinan and Filocca, 2020). With the expected infections decline and removal of travel restriction, the IMF expects the GCC countries to rebound by 2.3%  in 2021, buoyed by a 2.9%surge in non-oil growth, which is slightly higher than the anticipated overall GDP growth because oil production is likely to remain subdued under the OPEC+ agreement (Hamaizia and Callen, 2021).

The GCC countries need to focus on non-oil growth by diversifying away from oil revenues' dependency to secure sustainable development (Kapur, 2020). However, GCC oil revenues peak is predicted in a couple of decades, but it may occur sooner if a 'green' global recovery emerges (Hamaizia and Callen, 2021). The GCC recovery journey is an opportunity to ensure long-term sustainability and resilience. The Gulf countries need to adapt the green recovery by associating their economic recovery packages with measures focusing on safeguarding the environment and tackling climate change (Elmassah, 2021). Any economic recovery packages that do not consider green recovery will create unintended costly consequences and may lock out many economic, social, and environmental opportunities associated with climate-friendly investments (Al-Sarihi, 2021).

The Gulf Arab states have always had a challenging relationship with climate change (Luomi, 2020). They are in the top 25 countries of per capita CO2 emissions (Abou Ali et al., 2016), reaching 1.3GT in 2018 (CAIT, 2021). Power generation accounts for 27% to 55% of the GCC region's total emissions, is considered the highest-emitting sector in the area (Loumi, 2020). The per capita energy consumption in the region is around 2.5 times that in the EU (Alharbi and Csala, 2021). The six countries have addressed climate change in varying degrees of depth and breadth, reflecting the diversity of their political economies and broader policy priorities. 

Road to “green recovery”

The pandemic defined new energy and GHG emissions trends in 2020. The worldwide lockdown and the subsequent economic slowdowns have caused a decline in non-renewables demand by nearly 4%. Accordingly, CO2 emissions declined by 5.8% in 2020 (IEA, 2021), which is the most prominent annual percentage decline since World War II. The reduction in oil consumption accounted for more than half of the drop in global emissions. Low-carbon fuels and technologies, in particular, solar PV and wind, reached their highest ever annual share of the worldwide energy mix (IEA, 2021). Similar to other countries, the GCC region is likely to witness reductions in CO2 emissions. However, this decline resulted from the temporary energy demand reductions rather than structural changes. The recovery from the 2008-2009 financial crisis was accompanied by a quick resurge of CO2 emissions to their previous levels and beyond, recording the most significant increase in emissions ever (Carbon Brief, 2020). 

However, today's world is better positioned to recover sustainably as renewable technologies are far cheaper than they were a decade ago. The world could avoid 0.3C of global warming by the middle of the century if governments invest in a strong "green recovery" from coronavirus (Gabbatiss, 2020). Green stimulus spending could create energy-related jobs, boost economic growth, improve sustainability and build resilience to future shocks, laying out specific measures to implement between 2021 and 2023. Moreover, through focusing on renewable energy sources, roughly a third of the CO2 emissions cuts would save emissions while saving money (Gabbatiss, 2020). Ultimately, the Gulf Arab countries have so far not engaged actively in the global debates on green or sustainable recoveries that have emphasized the necessity to align coronavirus recovery strategies with the goals of the Paris Agreement and the 2030 Agenda for Sustainable Development (Loumi, 2020).

The coronavirus pandemic sheds light on the dynamic economic and sustainability challenges facing the GCC economies. Financial buffers and limited public resources would not be enough alone for sustainability and resilience because of COVID-19. The Private investor should work together with the government and community in a more harmonized and effective way to have an integrated impact on the ecosystem.

Countries must consider the climate change risks in the GCC economic recovery packages will help to minimize the harmful effects caused by climate change and simultaneously support their economic diversification ambitions. The global movements for more green recovery packages might change future market competitiveness beyond oil. The growing importance of global climate action will probably maintain low oil prices for the longer term. GCC countries have a serious rationale to adopt the green recovery to help the GCC countries meet their NDC climate mitigation and adaptation ambitions (Al-Sarihi, 2021). Precisely, environmental-friendly investments could support Gulf states in their efforts to reduce economic vulnerability to oil prices through diversifying their economies and expanding their production sector beyond hydrocarbon dependency.

A future built upon non-oil energies and non-energy industries can only truly flourish if countries have an enabling infrastructure, which is why it is good to see GCC states continue unabated in their drive to build (Kapur, 2020). UAE and Saudi Arabia governments are the pioneer GCC countries eyeing renewable energy and the green economy as the two main driving forces to lead their sustainable and green recovery. The UAE government targets 50% of its power from solar and nuclear energy by 2050. In July 2020, the Emirates Water and Electricity Co. awarded a consortium featuring France's EDF Renewables and China's JinkoPower a 2GW power project – the country's biggest solar project. Meanwhile, Sharjah is planning to turn a 47-hectare landfill into a solar energy project generating 42MW. Saudi Arabia collaborated with US-based Air Products to invest USD 5bn to build a green hydrogen-based ammonia production facility powered by renewable energy. 

The increasing pressure on public resources caused by COVID-19 makes it more valid to rely more on the private sector resources in financing the development agenda. The private sector must have a more fundamental role by moving from the corporate social responsibility behavior to mainstreaming sustainable development in their business models. Businesses need to link their core practices with the SDGs' national targets. Therefore, enabling the private investment sector in the GCC States into a greener recovery supported by digitalization and new technologies can improve the prospects and potentials towards developing a less government-dependent private sector, and this, in turn, enables the GCC governments to convert from being owner, producer, and distributor to being a facilitator for sustainable development (Elmassah, 2021).

References: 

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Al-Sarihi, A. (2021). Post COVID-19: A Potential for Green Recovery in the Arab Gulf States. Center for applied research in partnership with the orient. Retrieved from: https://carpo-bonn.org/en/post-covid-19-a-potential-for-green-recovery-in-the-arab-gulf-states/   

Alharbi, F and Csala, D. (2021). Gulf Cooperation Council Countries’ Climate Change Mitigation Challenges and Exploration of Solar and Wind Energy Resource Potential. Applied Sciences, Vol. 11, No. 6. 

Carbon Brief. (18 June 2020). IEA: ‘Green’ coronavirus recovery would keep global emissions below 2019 peak. Accessed (11-5-2021). Retrieved from: https://www.carbonbrief.org/iea-green-coronavirus-recovery-would-keep-global-emissions-below-2019-peak?utm_source=Web&utm_medium=contentbox&utm_campaign=Covid-box

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El Mahmah, A and Kandil, M. (2020). Economic challenges for the GCC countries after Covid-19. ERF. Retrieved from: https://theforum.erf.org.eg/2020/05/20/economic-challenges-gcc-countries-covid-19/

Elmassah, Suzanna (2021). Building Resilience through Sustainable Development. Towards a Common Agenda, EGIC Information Sesssion. 

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 Hamaizia, A and Callen, T.  (11February 2021). Why Gulf economies need a transformed role for the state. Accessed (10-5-2021). Retrieved from: https://www.weforum.org/agenda/2021/02/gulf-countries-economy-covid-19-pandemic-state-transform-role/

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Mohieldin, M and Neto, M. (23 April 2021). Investment for sustainable recovery. Accessed (11-5-2021). Retrieved from: https://www.undp.org/blogs/investment-sustainable-recovery    

OECD. (2020). COVID-19 crisis response in MENA countries. Retrieved from: https://read.oecd-ilibrary.org/view/?ref=129_129919-4li7bq8asv&title=COVID-19-Crisis-Response-in-MENA-Countries&_ga=2.99169308.321707768.1620965535-1793018077.1609057051

Keywords: GCCoilEnergyGreen Economy