Carbon credits could be a $2bn industry in the Middle East, despite lingering questions about their effectiveness.
Golden opportunities amid the push to go green
As the spectre of climate change grows in the public's imagination, carbon credits, a potentially lucrative way to tackle the problem, are grabbing the attention of business minds in the Gulf. In the Middle East, there are 76 different projects currently seeking certification to sell credits, which reward companies in the developing world for reducing their output of greenhouse gases to compensate for excess emissions from industrialised countries. Twelve of those projects are located in the UAE.
"We see more of a focus on the region by companies on the market," said Will Greene, a senior analyst at Point Carbon, a Norwegian consultancy. "We'll see the number of projects increase dramatically." Energy companies, in particular, are hoping to cash in on emissions reductions, which could represent a US$2 billion (Dh7.3bn) market in the Middle East, in spite of questions over the system's efficiency and credibility.
Subsidiaries of Abu Dhabi National Oil Company (Adnoc) are pursuing five separate efforts to get credits. In Ruwais, the Abu Dhabi Refining Company (Takreer) is implementing technology to recover flared gas, which previously added to the refinery's emissions of carbon dioxide. Next door, Abu Dhabi Fertiliser Company (Fertil) will capture carbon dioxide from flue gas and combine it with ammonia to produce urea, a fertiliser compound.
The projects in the UAE are not limited to the oil and gas industry. At the Taweelah A2 power station in Abu Dhabi, CMS Power Company plans to recover wasted heat from the power generation process to desalinate water. In Ras al Khaimah, Ceres, a landfill operator, will capture emissions of methane gas - a potent greenhouse gas produced by decomposing rubbish - and use it to produce several megawatts of electricity.
But by far the biggest client for carbon credits in the country will be Abu Dhabi Future Energy Company (Masdar), which has indicated it will seek credits for its alternative energy projects. The company said last week that it would help a petrochemical company in Bahrain capture carbon dioxide and turn those emissions cuts into a profit. Here at home, in addition to helping Adnoc with its efforts to reduce natural gas flaring, the company is seeking credits for a planned 100-megawatt solar thermal power plant.
A market for carbon credits emerged after the Kyoto Protocol, an international agreement on reducing greenhouse gases, came into force in 2005. The "cap and trade" system for credits works by setting limits of emissions for companies in developed countries, mostly in Europe. Companies in developing countries can sell those companies any credits they earn from reducing their own emissions. This way, developed nations can achieve the protocol's emission reduction targets while giving developing countries an incentive to reduce their own emissions without specific targets.
To get a project certified for the European market, a developer has to apply for certification through a designated agency within the country. In the UAE, the accreditation process is handled by the Environment Agency. Once the UN has verified that the emissions reduction is genuine, they award the credits, which can be sold to a buyer for between €10 (Dh57) and €12 per credit. When the emissions reduction project is completed, the buyer then can sell the credits at market price, which fluctuates significantly but last week hovered at around €20 a tonne.
A key part of the certification process is the rule of "additionality". According to the UN's requirements, a company can get credit for upgrades only if it can prove those upgrades would not have been economical without the income gained through the carbon trading programme. The process is time-consuming, which explains why, out of the 76 projects seeking credits in the Middle East, only six have been certified so far. For a large project, however, the monetary rewards can be significant.
In Qatar, the Al Shaheen Oil Field Gas Recovery and Utilisation programme will generate about 14 million tonnes of carbon dioxide reductions by 2012, which is worth more than €140 million per year at current prices. Still, the burgeoning market for carbon credits faces significant challenges, both for the players involved and the credibility of the enterprise as a whole. There is uncertainty about the future of the market after 2012, when the Kyoto Protocol expires. Most observers believe that the signatories will extend the agreement and include provisions for carbon credit trading, but the precise protocols that will regulate the market could be changed.
"There is a lack of clarity," said Samuel Fankhauser, a managing director of IDEAcarbon Strategic, a research company. "Some people might have to work in the dark, as it were, and try to anticipate what the new rules might be." Another problem is the market's reputation. There have been several examples recently of companies fraudulently obtaining carbon credits for projects. The BBC recently found three examples in India of companies earning carbon credits for improvements that they said they would have made without income from carbon credits. In one case, SRF, a chemical company, was earning $50m to $60m a year on credits for a project that it said it would have carried out without the credits.
There have been reports of companies producing trifluoromethane - a by-product of refrigeration gases - just to clean it up and earn credits. A report from the World Wildlife Fund calculated that as much as 20 per cent of carbon credits given out so far were achieved under false pretences. Mr Fankhauser said that the UN authorities were "clamping down" on additionality to maintain the market's reputation. "They are becoming stricter, adding more review, more tests," he said.
But each hurdle a company has to jump over to get certified represents added costs. Already, the certification process can run into six figures. Shibu Davis, the Middle East manager for TUEV, a consultancy firm on the certification process, said that the process cost as much as €72,000. His company is working with JBF Industries to certify two projects in Ras al Khaimah. "It can be expensive at the outset," said Mr Davis.
Mr Fankhauser said that most companies see the regulatory bottlenecks as the most expensive problem. Certifications can be delayed for more than a year, leaving projects without a year's worth of carbon credit income on capital improvements they have already made. "The market is a bit of a victim of its own success," he said. "A flood of projects are coming in and the system is trying to keep up."