Saudi Arabia tapping into carbon credits economy

The Saudi sovereign Public Investment Fund, through its Regional Voluntary Carbon Market Company, last week announced a plan to launch a carbon credit exchange early next year. The company will also offer advisory services to companies looking to decarbonize their operations.

Purchasing carbon credits is one way for a company to address emissions it is unable to eliminate. Carbon credits are certificates representing quantities of greenhouse gases that have been kept out of the air or removed from it. They create a financial incentive for companies to reduce their carbon emissions. Companies can also purchase credits from landowners that represent the avoided emissions to compensate for their pollution. While carbon credits have been in use for decades, the voluntary market for carbon credits has grown significantly in recent years.

Carbon credits, also known as carbon offsets, permit the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit enables the emission of one ton of carbon dioxide or the equivalent of other greenhouse gases. The market for the financial instrument could be worth more than $50 billion by 2030.

The carbon credit is half of a so-called cap-and-trade program. Companies that pollute are awarded credits that allow them to continue to pollute up to a specific limit, which is reduced periodically. Meanwhile, the company may sell any unneeded credits to another company that needs them. Private companies are thus doubly incentivized to reduce greenhouse gas emissions. Firstly, they must spend money on extra credits if their emissions exceed the cap. Secondly, they can make money by reducing emissions and selling their excess allowances.

While carbon credits have been in use for decades, the voluntary market for carbon credits has grown significantly in recent years

Saudi companies last week bought more than 2.2 million tons of carbon credits at an auction, as global demand for offsets is expected to grow amid ambitions to meet net-zero targets. Aramco and Saudi Electricity Company were among the 16 firms that paid about $6.37 per ton of carbon credits.

The basket of credits in the auction included 18 projects representing a mix of carbon dioxide avoidance and removal, including improved clean cooking stoves and renewable energy projects. Three-quarters of the carbon credits originated from countries across the Middle East, North Africa and sub-Saharan Africa, including Kenya, Uganda, Burundi, Rwanda, Morocco, Egypt and South Africa. It is worth noting that, last year, Saudi Arabia conducted the Middle East’s first carbon offset auction. It announced the sale of more than 1.4 million tons of carbon credits, of which Aramco purchased 650,000..

Future energy projects will be carbon-free ones. A case in point is the multibillion-dollar NEOM Green Hydrogen Company, a joint venture between ACWA Power, Air Products and NEOM, which will produce 600 tons per day of carbon-free hydrogen by the end of 2026 using 4 gigawatts of solar energy.

Basil M.K. Al-Ghalayini is the chairman and CEO of BMG Financial Group.