Carbon tax could blunt Gulf nations’ competitive edge

Gulf countries are always nrevous when the issue of a carbon tax is discussed. The National reports why

Tom Ashby

Gulf oil exporters are often cast as the villain in the climate change debate, as the largest producers of the carbon-rich oil and gas that fuel the world’s industry.

But as talks progress towards developing a sequel to the Kyoto agreement this year, many of these nations are waking up to the fact that they may actually find themselves in a new role as victims of a tax on carbon, the principal cause of global warming.

Saudi Arabia has argued that oil exporters should have access to funds offered to victims of global warming to compensate for the hardship caused by climate change policies, and not just by rising sea levels and extreme weather events.

A multilateral carbon tax will lift the cost of fuels derived from crude oil, such as petrol and diesel. It will also penalise other goods, such as aluminium or steel, produced from plants powered by carbon-rich fuel such as coal or gas.

Such taxes will only increase.

In the absence of any global agreement, Europe has gone it alone in the past decade, imposing huge increases in fuel taxes and developing a system of carbon trading to control pollution from industry.

Britain, although an oil producer itself, has been at the forefront of these moves. It has more than met its targets to reduce carbon emissions under the Kyoto agreement, and is now pushing for a global carbon tax.

As the US had previously been the main obstacle to an agreement, the election of an environmentally conscious president in Barack Obama opens the way for such a levy to be formulated at the next round of UN climate talks, due to start in Copenhagen in December.

Such a tax reduces demand for hydrocarbons in the long term and hastens a switch to low-carbon alternatives such as nuclear power, wind, solar and biofuels.

When oil prices hit a record of US$147 a barrel last July, the peak was denounced in Washington and London as a damaging assault on the consumer, with the finger of blame pointed at OPEC.

Oil exporters are often painted by western politicians as ogres, conniving to form cartels and cheat consumers out of their hard-earned cash.

But across most of Europe it is those governments, not the resource holders, that are taking the lion’s share of the price of every barrel of Gulf oil sold on their markets.

And their share is growing steadily.

The $100 collapse in oil prices was welcomed by the International Energy Agency as a $1 trillion (Dh3.67tn) stimulus for the world economy. But quietly, governments of rich countries have pressed ahead with a long-term campaign to price oil out of the energy equation.

Motorists in Britain, for example, are now paying $223 a barrel (93 pence a litre) for petrol at the pumps, compared with $60 on the international market.

In the past six months, Britain added an extra $6 a barrel in taxes to the fuel price as revenues to Gulf exporters have dropped.

About three-quarters of the pump price in Britain is taxes and levies that go to fund the budget which, among other things, is now promising subsidies of up to £5,000 (Dh26,756) to motorists who are willing to switch to electric cars that require no fuel.

All this gives some weight to arguments voiced by oil exporters that the real future energy risks come not from a scarcity of supply, but the demolition of demand by public policy in consuming nations.

A multilateral carbon tax not only damages demand for the Gulf’s main export earner, it also threatens to remove the competitive advantage of Gulf nations as they seek to leverage low energy costs into aluminium and other industrial processes.

This is where one of the big advantages of the proposed UAE nuclear programme, a zero-carbon energy source, comes into play. If 10 reactors are built in Abu Dhabi over the next decade as expected, it will cut by half the carbon dioxide emissions of the power sector. From its current level of about 500 grams per kilowatt hour, on a par with Germany, the emirate’s emissions will be among the lowest in the world by 2020 – near 200 grams, on a par with France.

Projects now on the drawing board of Masdar, for example, also begin to make much more sense in the post-Kyoto world. A plan to produce hydrogen from natural gas will become economical, while the project to inject carbon dioxide emissions from gas-fired power plants underground may become indispensable.

Faced with this formidable challenge to the emirate’s economic mainstay, one response could be to argue, against all the evidence, that carbon dioxide is not responsible for climate change and do nothing.

A slightly more tenable response would be to examine the deficiencies of some alternatives to oil – questioning the real environmental benefits of biofuels, for example – or seek relief from the climate change mitigation funds.

But a far more progressive response is to accept that global warming presents a much greater challenge to the oil economy than the scarcity of hydrocarbons, and move ahead with low-carbon technologies, including carbon capture, which eliminate the pollution from burning fossil fuels.

There will be a limit to the volume of oil and gas that can be burnt for heat and mobility, and the world’s petroleum resources will increasingly be channelled towards plastics and pharmaceuticals, which are a much smarter use of the molecules anyway.