Carbon could evolve into a trillion-dollar asset class by the mid-2030s, as governments and companies adopt market-based approaches to control greenhouse gas (GHG) emissions. The Middle East, a key player in global energy markets, is increasingly focused on carbon markets as a way to meet environmental goals and transform its economies.
Carbon Markets Gaining Momentum
Currently, carbon is traded in both compliance markets and voluntary markets. In compliance markets, companies must buy allowances to meet emissions limits, while voluntary markets allow companies to buy credits to offset their emissions. These credits come from verified carbon reduction or avoidance projects.
According to Bloomberg New Energy Finance (BNEF), there are currently 30 compliance markets trading carbon allowances worth over $800 billion annually, covering about 20% of global emissions. In contrast, the voluntary market is much smaller, with carbon credit prices peaking at over $2 billion in 2022 before declining due to concerns over the authenticity of some credits.
Despite the downturn, carbon credit trading remains significant, with $723 million in traded credits last year. Companies are still investing in carbon credits, particularly from technological and nature-based projects, but are waiting for stronger regulatory frameworks to ensure their effectiveness.
Global Developments in Carbon Markets
The international community made a significant step forward at COP29, where countries agreed on rules for a new global carbon credit market with stringent quality standards. This could pave the way for a UN-backed market, aimed at funding GHG reduction projects globally.
Growth projections for carbon markets are optimistic. The Boston Consulting Group estimates the voluntary market could reach $10 billion by 2030, while Morgan Stanley forecasts it could grow to $100 billion by 2030 and $250 billion by 2050. BNEF predicts the voluntary market could hit nearly $1 trillion in value by 2037.
Middle East Preparing for Carbon Border Adjustments
The Middle East is increasingly focused on carbon markets, driven in part by the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will impose a tax on carbon-intensive imports starting in 2026. This tax will affect products like cement, steel, and aluminum, potentially raising the cost of goods exported to the EU by an average of 10%. It could even extend to oil and gas in the future.
In response, Gulf nations are embracing carbon pricing mechanisms to capture and reinvest carbon revenues. Countries like Saudi Arabia, the UAE, and Oman are developing infrastructure for carbon markets, which will help them meet future emissions reduction targets and avoid tariffs on exports to Europe.
Middle Eastern Carbon Market Initiatives
Saudi Arabia, the UAE, and other Gulf Cooperation Council (GCC) members are setting up regulated voluntary carbon markets to offset emissions. In 2022, Saudi Arabia’s Public Investment Fund and Tadawul Group launched the Regional Voluntary Carbon Market Company (RVCMC), which has since started auctioning high-quality carbon credits. Companies like Aramco and Saudi Electricity have participated in these auctions.
The UAE is also taking steps to regulate emissions. The UAE’s new climate change law, set to take effect in May 2025, will require companies to monitor and control their emissions. The Dubai Financial Market has already launched a carbon credit trading pilot, with companies like ADNOC, Etihad, and Emirates NBD making carbon trading a key part of their business strategies.
Egypt has launched the African Voluntary Carbon Market
(AFRICARBONX), aiming to become a hub for carbon credit trading across Africa. The Egyptian Exchange (EGX) supports the platform, which connects carbon reduction projects with a marketplace for trading certificates.
Transition to Compliance Markets
While voluntary markets are growing, countries in the Middle East are also preparing for compliance markets, which mandate emissions reductions. Saudi Arabia is exploring a national carbon emissions compliance model, and Dubai has set up a National Register for Carbon Credits to ensure high-quality trading.
Andrew Cullen, Vice President at AirCarbon Exchange (ACX) in Abu Dhabi, says the region is taking significant steps toward scaling carbon markets. ACX, the world’s first fully regulated carbon exchange, has focused its efforts in Singapore but is bullish on the Middle East’s potential.
Cullen predicts significant opportunities in the region as compliance schemes become more established. However, Jan Haizmann, CEO of Zero Emissions Traders Alliance, argues that the key to success in the Middle East will be regional cooperation. Haizmann stresses that carbon markets should not be limited to national borders but should instead be integrated across the GCC to allow for easier trading of credits.
The Road Ahead
As the Middle East works to diversify its energy sources and meet emissions targets, carbon markets will play a crucial role in the region’s economic transformation. By developing robust carbon trading infrastructure and embracing carbon pricing mechanisms, the region is positioning itself as a key player in the emerging trillion-dollar carbon market.
As global standards evolve and regional markets mature, the Middle East is preparing to become a central hub for carbon trading, helping drive the global energy transition while avoiding carbon tariffs from the EU. With strong leadership and strategic investments in carbon reduction projects, the region is well on its way to becoming a major force in the future of carbon markets.
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