x Abu Dhabi, UAEThursday 20 July 2017

Climate change and the region's role

Solving the threat of climate change is not isolated to the developed world. The Middle East will play a pivotal role in determining its success.

The UN's upcoming Climate Change Conference in Copenhagen will attempt to use market-based economics to reduce greenhouse gases.
The UN's upcoming Climate Change Conference in Copenhagen will attempt to use market-based economics to reduce greenhouse gases.

Climate change is arguably the greatest challenge we face, threatening the trend towards increasing global prosperity that has lifted hundreds of millions of people from poverty. There are doubters and special-interest pleaders but the overwhelming body of scientific evidence is that we have to act now. I won't rehearse the evidence; others are better qualified. But let me make one small anecdote: last year in Uganda, the Daily Monitor started printing a daily weather map for the first time ever, for the simple reason that the weather there was no longer predictable.

The climate is a classic example of "the commons", the public good that is free to everyone. Greenhouse gases are an externality; our emissions affect other people. And when people do not pay for the consequences of their actions, then we have "market failure". The solution to market failure is regulation. And by definition climate change is a supranational issue. We cannot solve this unilaterally or bilaterally. We need international co-operation and leadership.

This is why the UN's Climate Change Conference in Copenhagen, which will try to reach agreement on action to reduce greenhouse gas emissions, at the end of the year is so vitally important. Gaining agreement and then acting successfully is far from straightforward. In essence, we are trying to use the power of the market to restrain the output of carbon dioxide. First, this needs to be informed by international agreement on an effective framework for reducing carbon emissions, backing this up with workable national regulation and factoring the real costs into economies.

National and regional regulation needs to be harmonised, so however the debate plays out it means adopting the "polluter pays" principle in some form, whether that be a cap-and-trade solution or a carbon tax. The actions required will involve five things: improving our energy efficiency from average to best; decarbonising energy; accelerating new technologies, especially solar; changing consumer behaviour; and preserving the world's largest stores of carbon, notably forests.

We will have to act globally, and across the board. A big ask. But the message is fundamentally optimistic: that sustainable growth and the transition to a low-carbon economy can be achieved at a reasonable cost. These changes have serious political implications. As developing countries develop, their carbon intensity increases for two main reasons. One is the straightforward effect of increased economic activity, with more manufacturing, more transport, more infrastructure.

The second is cultural. People's expectations increase: from a bicycle to a car; from rice to meat; and from a fan to air-conditioners. And we must set this against the historical context, where the most economically developed countries have had decades of free use of the commons and, today, are among the highest per-capita producers of carbon emissions. I have heard it characterised as the developing countries being invited to join the rich world in time for dessert at an expensive dinner, and then being asked to split the bill.

For those parts of the world whose economies are heavily reliant on the production of oil and gas, adapting to the concept of a low-carbon future is a bigger challenge than for most. As well as the economic challenge of changes in the world's consumption of hydrocarbons, there is the immediate impact of a changing climate. This is an inexact science but it is likely that the Middle East will become even hotter, and that sea levels will rise. It was interesting earlier this year to see Saudi Arabia pull out of domestic wheat production, in part to conserve non-renewable water supplies.

In terms of their own emissions on a per-capita basis, although generally low in absolute terms, the countries of the Middle East sit high on the table, alongside the US and European countries, with Qatar, the UAE, Kuwait and Bahrain in the top 10. This is no surprise. The production of energy is an energy-intensive business and much of the Middle East's industry is based on the easy availability of low-cost petrocarbons.

As a region, the Middle East has considerable resources and, unlike some other developing economies, it has the ability through its reserves and sovereign wealth funds to make investments that essentially convert petrodollars into more sustainable industries. There is clearly a long-term strategic necessity to diversify away from hydrocarbons as the main source of wealth creation. The construction in Abu Dhabi of the world's first eco-city, Masdar City, seems to me to be a far-sighted and bold step - a multibillion-dollar project that aims to build a carbon-neutral, zero-waste and car-free city with 40,000 residents, and creating up to 50,000 jobs around environmental technologies.

Masdar Institute of Science and Technology also aims to carve out a niche as a global centre of research, development and commercialisation of new green technologies. In the long run, it may create business opportunities for the development of technologies that can be deployed everywhere. This a fascinating response from a country that has massive energy wealth and reserves. It indicates a desire to invest its wealth rather than to spend it, and to seek to diversify its economic base.

If an eco-city can be successfully built in Abu Dhabi's challenging climate, the possibilities elsewhere in the world are surely endless. Throughout the region there is now recognition that environmental considerations must be factored in to energy production and efficiency projects. Qatar has responded by becoming the first GCC country to join the World Bank's Global Gas Flaring Reduction project, which aims to exercise tight control on gas flaring to try to reduce carbon dioxide emissions. And it has embarked on a US$70 million (Dh257m), 10-year research project with Shell and Britain's Imperial College to investigate carbon capture and sequestration technologies.

These projects give me cause for optimism as we look to the future. In the Middle East, as elsewhere, there is understanding that change must come. It is clearly in the self-interest of economies and businesses everywhere to start adjusting to the new realities now. For us to meet the challenge of climate change, we will have to change the way we use energy; we will have to reshape our economies over the next generation.

For countries, for individuals and for businesses, there will be winners and losers. It is our responsibility to start taking action now to maximise the benefits of this change and to mitigate the losses. The Middle East, as the world's energy supplier, will play a pivotal role in determining our collective success. Stephen Green is group chairman of HSBC Holdings. This article is adapted from a speech given on May 28 at the London Business School