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Can two successive COPs in the MENA region galvanise a clean energy transition?

Expert Comment

Written by Ipek Gençsü, Shanta Devarajan

Image credit:Civil society action at COP27. UNFCCC/Flickr. Image license:CC BY-NC-SA 2.0

The goal of the Paris Agreement is to limit warming to well below 2°C, preferable to 1.5°C. COP26 reinforced this ambition. According to the International Energy Agency, achieving net-zero CO2 emissions by 2050 – required to keep to the 1.5°C warming limit – means there is no room for any new coal, oil or gas projects. This condition is an incredibly hard one for the world to meet, and one we are already breaking.

Countries in the Middle East and North Africa (MENA) face a particularly stark challenge in phasing out fossil fuels. The region relies heavily on oil and gas both for its own energy needs and export revenues. Currently, oil and gas account for almost 95% of electricity generation in the MENA region. North African producers are some of the least diversified economies in the world – for instance, oil and gas exports account for over 90% of total merchandise exports by Algeria and Libya.

Meanwhile, the climate change challenge is ever more present in the MENA region, which faces warming twice as fast as the global average. Countries in the Middle East such as Iraq and Iran face extreme heat temperatures intolerable to humans. There is severe water stress and droughts across the region, wildfires sweeping across countries such as Lebanon and Syria, and all of these impacts have knock-on effects on agriculture production and food security.

MENA countries have made strong commitments to scaling up renewables – and COP27 attendees can testify to how blessed the region is with sunshine. But progress on renewables is far below the levels necessary. Countries continue to weigh the trade-offs between scaling the oil and gas production that generates significant public revenues and a faster shift to increasingly cost-effective renewables. Some want to do both: export fossil fuels to finance renewable power at home. Yet, a faster energy transition in MENA will not only confer climate benefits but it will help the region address its many development challenges. We outline four key opportunities below:

1. Diversifying economies to create jobs and boost productivity

Reducing reliance on fossil fuel revenues and building more diversified economies is key to longer-term economic stability. A failure to diversify (especially in the face of carbon border taxes) would leave oil- and gas-rich countries with trillions of dollars’ worth of “stranded assets”.

But MENA countries will need help with their energy transitions. The Covid-19 health shock accompanied by a rapid decline in oil prices gave a flavour of what a future without fossil fuel revenues might mean without adequate support to build alternative revenue streams. This involves the development of sectors other than commodities, producing a variety of goods with higher value added, and developing the services sector. Previously resource-intensive countries such as Indonesia, Malaysia and Chile have successfully made this transition.

Initiatives such as the South Africa Just Energy Transitions Partnership (JETP), announced at COP26, offer an opportunity to align national development goals with international climate goals, securing the political will and mobilising the finance needed to drive system change. We must remember the differences between the “high-ambition, high-emission” countries (the countries of the Gulf Cooperation Council) and “low-ambition, low-emission” countries (North Africa and the Levant), and the different forms of support they need in the pursuit of low-carbon, climate-resilient development.

2. Strengthening governance

The MENA region performs more poorly than any other on many governance indicators. Some have suggested that this is because oil revenues accrue directly to the government, which then does not have to be accountable to citizens for spending the revenues as it might with income or corporate tax. If they move out of fossil fuels, resource-rich MENA countries will have to rely on taxation for government revenues, thereby making them more accountable to the citizens who pay those taxes.

The weak governance has contributed to the many macroeconomic challenges facing MENA countries, including pro-cyclical fiscal policies, a bloated public sector, untargeted and inefficient energy subsidies, and deep inequality. Climate-smart development plans, by reducing dependence on fossil fuels, could strengthen governance and improve economic and social prospects across the region.

3. Creating fiscal space for infrastructure and services

The MENA region is home to 5.5% of the world’s population, 3.3% of its GDP, and 48% of its fuel subsidies. As research by ODI, IISD and others has shown for years, fossil fuel subsidies incentivise higher levels of fossil fuel-based production and consumption in the region. While global energy efficiency has increased by 15% on average between 2001 and 2018, the MENA countries have become 8% less energy efficient during the same period. Fuel subsidies also contribute to local pollution and traffic congestion.

Renewable energy (excluding hydropower) accounts for less than 1.5% of all electricity generation in the MENA region, significantly below the world average of more than 10%. According to the Middle East Institute, reducing annual fossil fuel subsidies by only 5% will free adequate financial resources for the MENA governments to subsidise the minimum Feed-in-Tariffs (FiT) required for development of wind farms that could meet 10% of the region’s entire electricity demand. With the Sahara potentially offering a source of clean, reliable solar energy on Europe’s doorstep, Morocco, Algeria, and Tunisia in particular could supply European energy markets even as the continent imposes carbon border adjustments.

4. Tackling inequality

Who has benefited from the region’s fossil fuel wealth? According to the World Inequality Report, the MENA region is the most unequal in the world, with the income share of the top 10% amounting to 58% of the total in 2021 (in comparison to 36% in Europe, the region with the lowest levels of inequality), while the bottom 50% of the population captures less than 10%. The inequality has been exacerbated by the massive and untargeted fuel subsidies: 45-60% go to the richest quintile of the population, depending on the country. The subsidies in turn persist because they benefit elite interests. In Egypt, for instance, politically connected firms are also the most energy-intensive.

There have been recent signs of interest in more sustainable economic development in the region. Egypt has been a pioneer, offering the first sovereign green bond in the MENA region (worth $750 million). A faster shift away from fossil fuels to renewables could disrupt some of the vested interests, strengthen governance, permit greater private sector participation in the economy, while increasing competitiveness and inclusion.

In other words, there are strong political, economic and social reasons for citizens in the MENA region to demand a clean energy transition. Yet the compelling domestic case to move away from oil and gas has not been articulated by the Egyptian Presidency of COP27. It would be even more surprising if the COP28 Presidency – the UAE – champions an energy transition. Having two MENA COPs in a row have offered a chance to re-shape regional narratives and attract international support, but it will take a seismic shift in political vision for that opportunity to be realised.