Saudi Arabia is working on developing a carbon trading market by creating carbon credits that companies can buy to offset their emissions.

In October 2023, Saudi Arabia announced at the United Nations MENA Climate Week in Riyadh that it will launch in early 2024 the Kingdom’s Greenhouse Gas Crediting and Offsetting Mechanism (GCOM) “to incentivize the deployment of emission reduction and removal activities at scale to support and enable climate-related national strategies, policies, and programs.” The GCOM system is a greenhouse gas credit scheme that allows companies to offset their emissions by buying credits from projects that voluntarily cut or remove greenhouse gas emissions. Companies must adhere to a set number of carbon credits representing their permitted emissions. If companies produce more emissions, they must buy additional credits from other firms that produce lower emissions than their allocation.

Companies with eligible emission-reducing technologies or projects can register under the GCOM. Then, they can issue credits or certificates to monetize by selling or using them to offset their emissions. Participation in the GCOM will be voluntary, in compliance with Article 6 of the Paris Climate Agreement. It will be open to the public and private sectors and foreign companies’ subsidiaries.

A year earlier, in October 2022, Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), and the Saudi Stock Exchange, Tadāwul, established the Regional Voluntary Carbon Market Company (RVCMC), a voluntary carbon exchange for the trading of verified, approved, and high-quality carbon credit certificates. In June 2023, some 16 Saudi firms, including oil giant Aramco and the Saudi Electricity Company electric transmission monopoly, participated in the Middle East’s first carbon offset auction organized by RVCMC. They bought over 2.2 million tons of certified carbon credits from projects that avoid emissions by using sustainable technologies or removing carbon from the atmosphere. In April 2024, RVCMC announced a partnership with Xpansiv, a market infrastructure provider in the global energy transition, to provide technical infrastructure for its carbon credit market, which is set to launch later this year.

Specific details on the operational success or outcomes of Saudi Arabia’s ETS are limited. This is because the system is still in the planning and development stages. Implementing an ETS involves complex mechanisms like setting a cap on total emissions, allocating or auctioning emissions allowances, and establishing a market for companies to buy and sell them based on their needs and capacities to reduce emissions.

Although Saudi Arabi’s ETS is still in development, globally, the effectiveness of ETS has been mixed, and there have been many critical factors in the success of an ETS:

• Cap Stringency: The success of an ETS in reducing emissions hinges on how stringent the cap is. A cap that is too lenient might not result in significant emissions reductions.
• Market Dynamics: The supply and demand for carbon credits can influence the price of carbon. If allowances are too plentiful, the price might be too low to incentivize reduction efforts.
• Regulatory Oversight: Effective monitoring, reporting, and verification are crucial to prevent fraud and ensure compliance.
• Economic Context: The broader economic context, including oil prices and industrial activity, can affect the performance of an ETS, especially in an oil-dependent economy like Saudi Arabia’s.

This Post was submitted by Climate Scorecard Saudi Arabia Country Managers Abeer Abdulkareem and Amgad Ellaboudy.