Targets to promote energy savings in the Gulf Cooperation Council states

Energy Strategy Reviews 2 (2013) 19e30

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ANALYSIS

Targets to promote energy savings in the Gulf Cooperation Council states Glada Lahn*, Felix Preston Energy, Environment and Resources Department, Chatham House, Royal Institute of International Affairs, 10 St. James’s Square, London SW1Y 4LE, United Kingdom

A R T I C L E

I N F O

Article history: Received 2 December 2012 Received in revised form 11 March 2013 Accepted 14 March 2013 Available online 16 April 2013

A B S T R A C T

Several Gulf Cooperation Council (GCC) countries are adopting strategies to rationalize domestic energy consumption and thereby save resources vital to their economic sustainability. This paper considers whether national target setting - particularly in terms of energy use against outputs - could help. Intensity targets have proved a popular choice amongst emerging economies. GDP based targets may be more politically acceptable than absolute energy because they allow for periods of high economic growth. Drawbacks for the GCC countries include poor data and the impact of oil price volatility on GDP. Acknowledging the expedient nature of targeting where market reforms will be slow, the paper recommends that GCC countries consider adopting fossil fuels or CO2 intensity targets. For Qatar and Kuwait per capita goals might work best. Saudi Arabia, the United Arab Emirates and Oman could adopt a GDP based goal within a range of percentages to allow for changes in the terms of trade. Contributing to this would be sectoral energy intensity targets -particularly in power generation, space cooling, vehicles and industrial production, for which there is ample potential to set regional benchmarks. Ó 2013 Elsevier Ltd. All rights reserved.

1. Introduction In November 2012, the Saudi minister of petroleum, Dr Ali Al-Naimi spoke of the need to reduce wasted energy resources and increase value in the economy, noting that it takes more than double the amount of energy to generate $1000 of GDP in Saudi than the world average [1]. That sentiment is echoed by policy makers across the Gulf Cooperation Council (GCC), although not always publicly. Almost 100% of energy consumed in the region is generated through the combustion of oil and gas. Fuel and electricity sell at low fixed rates, reducing incentives for energy efficiency. Un-moderated energy consumption in turn increases the burden of costs on the government year by year as it pays for increased power generation capacity and absorbs the costs of regressive subsidies,1 the business transaction costs of congestion and health impacts of rising urban pollution. Meanwhile, CO2 emissions are soaring along with energy use and cement production. Between 1998 and 2008, total GCC CO2 emissions grew by over 90% in Saudi Arabia, Oman and Qatar [2]. * Corresponding author. E-mail addresses: [email protected] (G. Lahn), [email protected] (F. Preston). 1 Those that benefit the rich more than the poor. 2211-467X/$ e see front matter Ó 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.esr.2013.03.003

These challenges are not unique to the Gulf but several processes have compounded them: rapid rates of population growth, rising living standards expectations spurred by record oil export windfalls and depleting groundwater leading to increasing dependence on desalination, which in turn requires more energy. As yet, there are no overarching national energy or climate policies for any of the GCC states. But there is general recognition that cross-sectoral, integrated policy frameworks will be needed to implement national sustainability visions effectively. In several GCC countries, authorities are studying and proposing targets and standards aimed at fuel conservation. Given the rapidly growing populations and development strategies based on maximizing the hydrocarbons value chain, intensity targets have attracted particular interest. In the last decade several countries have national adopted energy intensity (energy/GDP) improvement targets. These have included several countries with an energy intensive exportoriented growth model, including China and India and hydrocarbons exporters Indonesia, Russia and South Africa. For specific sectors, energy intensity can be calculated per economic output; per unit of goods produced; or by the service performed (e.g. the energy required to shift a tonne of goods a km, or cool a typical building). At this early stage of energy policy making this paper looks at the options for national target setting. It draws on the findings of an 18

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Fig. 1. Energy intensities relative to population in GCC countries and selected country comparisons. Energy is total primary energy consumption whereas bubble size indicates per capita fossil fuel consumption. Data from Refs. [2,3].

month project in which Chatham House worked with energy sector stakeholders in the GCC. Section 1 sets out the linkages between unsustainable development and energy intensity in the region. Section 2 takes stock of the current state of development of strategies and targets to address this in the region. Section 3 considers whether national level aggregate targets e particularly energy intensity targets e would be a useful means of driving forward energy conservation in a GCC context. Section 4 considers the problems for using energy intensity as a measure of efficiency over time and proposes an alternative ‘basket of targets’ that might best fit development objectives. Section 5 considers what data would be required to help set conservation or energy intensity targets. 2. Energy intensity as an indicator of sustainability in the GCC All GCC countries have made ‘sustainability’ a key part of their development agendas. Increasing standards of living for the national population in ways that do not compromise those of future generations is central to the social contract and therefore, government legitimacy. Current patterns of resource use and incentives for resource use in the region run counter to this objective. Energy is a clear case because oil and gas are valuable export commodities. With consumption growth averaging at 6e7% over the last decade, these inefficiencies equate to ‘foregone opportunities’ to create more value for society. One conventional measure of the value a country generates is gross domestic product (GDP) and energy consumed per unit of GDP is a popular indicator of energy and economic efficiency. Fig. 1 shows that GCC countries exhibit high energy use compared with other states with similar levels of GDP per capita (the G7 countries with respect to UAE and Kuwait for example), suggesting that energy resources could be deployed more efficiently. These intensity indicators have limitations as comparators of efficiency. Aggregate measures of energy intensity are only simplistic indicators and there are several caveats to bear in mind. The GDP/energy intensity indicator is blind to the type of energy used. Iceland for example ranks higher than all the GCC states in terms of energy/GDP intensity and energy/capita but over 80% of its energy (and 100% of its electricity) come from renewable sources e geothermal and hydropower. If these are considered neither exhaustible nor with negative environmental impact, there may be less concern about maximizing the efficiency with which it is used.

For this reason, we also include fossil fuel consumption per capita e another measure of energy intensity which avoids this problem. As the graph shows, the GCC countries vary significantly on the basis of GDP per capita yet their per capita levels of fossil fuel consumption are remarkably similar. This comparatively large consumption to population ratio suggests another threat to sustainable national value generation: a high health cost. Both indicators are indifferent to the distribution of energy and climatic and geographical conditions that might entail higher energy use. Arid conditions and economies founded on energy intensive export industries are often cited by GCC government officials as justification for high per capita consumption. GDP is also limited as a measure of national value. It does not represent natural capital, equality of standards of living, health or happiness for example. For GCC countries, however, where energy consumption is all fossil fuel and there is a need to stimulate the less energy intensive, nonhydrocarbon sectors, it would be desirable to see downward trends on both these measures of intensity over time. Not least because decoupling energy use from economic growth would be one important contributor to sustainability. 3. Current policy and targets to rationalize oil and gas consumption in the GCC Since mid-2011, Chatham House has been coordinating a project with regional partners to consider targets and strategies to reduce energy intensity in the GCC.2 Considering that governments showed little or no interest in addressing domestic energy consumption a decade ago, the speed with which the energy conservation has moved in the last four years is striking. Table 1 below gives a basic overview of targets and standards in place or under proposal in the GCC countries to date. The black dots represent targets and standards set at the national or Emirate level. These tend to have been introduced only in the last few years. Abu Dhabi being the first with its renewable energy target of 7% by 2020 in 2009. Several have been announced in the last three years. Dubai launched its ‘integrated energy strategy’ e the first in the region e

2 For more information about the project please see http://www.chathamhouse.org/ research/eedp/current-projects/gcc-energy. The project’s research has focused on main energy exporting countries so the current paper does not examine Bahrain.

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Table 1 Targets and standards affecting energy use in GCC countries.

GCC Energy Intensity Project, Chatham House [10]. Based on open source ministry and local press information and stakeholder workshop presentations to November 2012.

setting out specific diversification and efficiency targets for 2030 in 2011.3 Saudi Arabia set targets for renewable and nuclear generation capacity in 2012. Blue dots represent targets and standards applied to a specific part of the economy or a defined set of appliances. For example, it became mandatory for all new government and large private sector projects in Qatar to adhere to mandatory sustainable building criteria (the Qatar Sustainability Assessment System (QSAS)), in December 2011.4 Abu Dhabi is now pursuing a strategy to reduce the consumption of power in cooling which in Abu Dhabi typically represents over 60% of total load (similar across the GCC). The outlined dots show targets and standards at the study or proposal stage. For example, Saudi Arabia’s Electricity & Cogeneration Regulatory Authority (ECRA) has also proposed targets to reduce peak demand by 14% and overall electricity consumption by 8% against current projections by 2021 [4]. The Saudi Energy Efficiency Center (SEEC) is currently developing the Mandatory Energy Efficiency Plan for Saudi Arabia that will include energy conservation targets [5]. The outlined dots also show aspirational targets such as those announced in late 2012 for renewable energy deployment in Kuwait (1% by 2020, 15% by 2030) and Qatar (16% by 2018). Countries are taking different approaches and travelling at different speeds. The UAE is ahead in terms of renewable energy

deployment and demand-side management plans. However, at present there are no reported plans for UAE-wide energy or climate policies and responsibility for energy is decided at the Emirate level. The UAE Green Economy Initiative intends to address energy and environment across sectors but this appears to be at the conceptual stage. Abu Dhabi is considered ahead in the region in some areas such as planning for energy mix diversification and increasing efficiency in cooling. Dubai established the region’s first body mandated to develop Emirate wide energy policy (Dubai Supreme Council of Energy) in 2009 and has set energy diversification and conservation goals for the power sector and implemented electricity tariff reform. Saudi Arabia has signalled a high level of ambition to tackle domestic energy policy from three directions: power sector rationalization as led by ECRA, diversification into clean energy, led by the King Abdullah City for Atomic and Renewable Energy (K.A. CARE) established in 2010 and nation wide efficiency, coordinated by SEEC e established in 2010.5 Sustainability is a strong theme of Qatar’s Vision 2030 and the Qatar National Development Strategy aims at a reduction in the energy intensity of electricity consumption through awareness campaigns, standardization and seasonal shutdowns. The document stops short of a target, saying that the measures ‘can cut the total power generation by 7% by 2016’ [6].

3 Among its targets for 2030 are a reduction in power demand by 30% and a reduction in the share of gas in the primary energy mix from 99 to 71%. 4 QSAS was renamed in 2012 as the Global Sustainability Assessment System (GSAS).

5 SEEC grew out of the National Energy Efficiency Programme which began in 2002 but is not yet an independent authority e it sits under the King Abdulaziz City for Science & Technology.

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Kuwait Qatar UAE Net imports Saudi Arabia Oman Bahrain 0

20

40

60 Gas

80

100

120

140

Oil

Fig. 2. GCC domestic consumption as a percentage of production. Data from Refs. [3,7].

Given the priority of reducing energy demand for cooling and water in the region, most countries are pursuing or improving building standards which address these issues. At present, building standards and voluntary codes only apply to new buildings and sometimes only for certain sectors. The most progressive are in individual emirates: Since 2010 all new buildings in Abu Dhabi have had to comply with its ‘Pearl’ rating system, part of Abu Dhabi’s Estidama (‘sustainability’) programme. Kuwait was the earliest in the region to apply a code specifying minimum requirements for insulation and efficient appliance practice in all new and retrofitted buildings in 1983 (revised in 2010), although it remains behind its neighbours in introducing other energy targets and strategies. In 2012 there was agreement at the GCC Secretariat level to adopt a GCC-wide building standard, possibly marrying the aspects from both the Qatar and Abu Dhabi systems although it is not yet clear how this will translate into national legislation. This picture indicates a trend towards using incentives and regulation to drive down or replace domestic fossil fuel combustion. Countries differ in the level of government commitment to these aims. Most progress on institutional coordination and sectoral targets is evident where energy must be imported: the UAE e most specifically Dubai e and Oman, and where larger population to production ratios may impose stifling subsidy costs and limit ability to export in the foreseeable future: Saudi Arabia, the UAE and Oman. Figs. 2 and 3 illustrate these differences. Although Kuwait has been importing expensive LNG from Russia in the summer months, the high oil production to population ratio appears to have dampened the perception of urgency to

Fig. 3. GCC Hydrocarbon exports per capita. This counts actual exports, the white dotted lines show the difference for UAE and Bahrain if only net exports are counted. Data from Refs. [2,3,8].

eliminate this unnecessary cost. Modernization and international reputation are also considerations, particularly for Abu Dhabi and Qatar with their ambitions as global innovation centres for clean energy technology. Targets are concentrated in the power sector e notably where there is an independent regulator (Saudi Arabia, Abu Dhabi, Dubai and Oman). These countries established independent regulators where there was a pressing need to increase power and water supply capacity and therefore the need to attract in the private sector and create a level playing field for investment. Mandated to both secure stable supplies for customers and ensure value for money for the government, the regulators have become champions of the conservation agenda. Development of policy on clean energy has also benefited from the delegation of authority to new agencies, namely Masdar in Abu Dhabi and K.A. CARE. There are as yet no targets or standards for retrofitting or replacing inefficient appliances. Both are clear areas where state investment could lead to significant fuel and cost savings over a relatively short time-frame without raising energy prices [9]. At the time of writing, no GCC countries had strategies to reduce fuel demand in transport or standards for vehicle efficiency. This is remarkable given the room for growth in car use and sprawling urbanization. Thinking on efficiency in transport is at a much earlier stage than in the power sector. Two factors may contribute: weak ministries of environment which would normally regulate on pollution and the incremental nature of increasing vehicle use which has not appeared to warrant scrutiny in contrast to large scale capital investments like new power generation capacity. There are, however, numerous municipal plans for increasing public transport in cities throughout the GCC which could be aligned with energy demand-side strategies. 4. Could adopting national level targets help? Evidence from entities and individuals supporting stronger action on energy conservation suggest that progress can be slow. Inhibiting factors include: i) The low price of fuels, electricity and water (given water’s energy intensive production and distribution) compared to average incomes and the perception of those goods as citizenship benefits or national competitive advantages. ii) Lack of joined up energy policy that would drive and coordinate savings in all sectors. iii) Lack of awareness of the value of resources being wasted and therefore lack of consensus over the desired objective. iv) Insufficient authority and/or capacity of agencies pursuing energy conservation objectives to demand the relevant data and coordination processes or to act without lengthy approvals. v) Lack of available, up to date and standardized data sets on which to assess and project energy consumption. Energy consumption data are often given only in aggregated form at the national level and publicly available sectoral data is partial. vi) Lack of coordination between agencies that will be needed to provide data as well as being necessary to the design and implementation of relevant strategies. vii) Weak monitoring and enforcement of existing efficiency regulations. As new and upgraded versions come into force, the challenge will be to create the regulatory capacity to ensure they are followed. For the GCC countries and many other energy exporters, the nature of the social contract with governments and entrenched vested interests in low energy prices present serious obstacles to price reform. They have chosen energy intensive development paths which focus on the oil and gas value chain so there is resistance to removing the ‘competitive advantage’. Until recently, energy price reform was an untouchable issue for GCC and many other oil exporting governments.

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That is changing, especially in utilities. Dubai successfully raised its electricity and water tariffs for all but the national residential sector in 2011, Oman is set to move to cost recoverable electricity tariffs for government, industry and commercial sectors and Saudi authorities are considering similar moves. Dubai’s socioeeconomic context as an energy ‘import dependent’ urban emirate with a majority expatriate population has undoubtedly facilitated faster movement on pricing. All evidence suggests that price reforms in the energy exporting countries of the GCC will move slowly, given the political risk of sudden change and the complexity of introducing more publicly acceptable solutions. In the meantime, there is both urgent need and great opportunities to reduce resource waste and generate more value for society. For this reason, the project considered the potential to set initial national targets for energy in a way that could address point ii above and sustain the political impetus to address points iiievii. As Table 1 shows, there are as yet no national targets for efficiency, energy conservation or GHG emissions reduction. Overarching national targets are not a panacea for these problems but they might offer a way to sustain political commitment and achieve greater savings through more coordinated strategy [11]. They would also enable countries to register contributions to the international climate change mitigation effort in ways that would capitalize on the pooled gains from energy conservation initiatives. Globally, there has been a resurgence in interest in targets for the energy sector e particularly in the last decade e to help overcome market failures with respect to the ‘public goods’ of energy security, air quality and climate stability. Some emerging economies have made remarkable progress on data improvement and institutional capacity building once a target has been set at the highest level. Indonesia, China (see box 1) and South Africa are examples of energy intensive economies taking this approach. In Europe, energy targets have often proved useful as signals to consumers and investors. By setting them, the government indicates to industry and investors the direction it will take. The policy levers which could be in terms of spending, regulation and market reforms flow from that. Table 2 outlines the main types of targets being pursued internationally and assesses the pros and cons that might be a consideration for GCC countries.

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Table 2 illustrates the usefulness of targets but demonstrates that any single indicator/incentive is inadequate. For example, in developing countries with expectations of high population growth and rising living standards an energy conservation target would have to be set against a projection for increasing energy demand (as Dubai has done for electricity demand) rather than an absolute reduction against a base year. The ‘energy’ targets in general would have to be in parallel with other policy and regulation to curb pollution and GHG emissions. Most countries adopt several targets, and there is an on-going process of adaptation based on experience. All entail a governance challenge, requiring coordination of sectoral, regional and municipal initiatives to meet the aggregate target e either through a set of sub national targets or incentive initiatives potentially including regional emissions trading, to allow for regional and sectoral diversity and flexibility. Not all potential drawbacks are equal. Resistance from key industry actors for example may derail the conservation targets. In this respect, energy intensity offers some clear advantages. In theory, an overall energy intensity target will incentivize choices that stimulate economic growth, avoiding measures that might lead to deindustrialization or deprivation [12]. Numerous scholars argue that intensity targets encourage greater economic growth than a cap or a tax, with no adverse impact on the business cycle [13e16]. In this sense, they can “alleviate developing countries’ concerns about constraining their development” by allowing some growth in emissions [13]. If the GCC countries expect to maintain high population growth and continue to pursue development strategies based on heavy industry, chiefly in construction materials and the oil and gas value chain, an energy intensity target would appear to be most politically acceptable. This could underpin measures to incentivize productive efficiency in existing sectors whilst driving diversification into low intensity, high value sectors over the long term. Energy intensity is one of the ways in which some GCC countries are already interested in mapping their current consumption patterns, making comparisons and measuring their progress. A ‘Master Plan study’ for energy conservation in the Saudi electricity sector commissioned by the Saudi Ministry of Water and Electricity [17] indicated that

Table 2 Popular national aggregate energy targets e benefits and potential drawbacks. Target [selected countries]

Benefits

Potential drawbacks

Energy conservation [EU, India, Israel, Mexico, Peru, Singapore, South Africa, South Korea, Ukraine, Vietnam]

Provides clear overall goal of future energy demand and an overall framework indicator Directly in line with oil and gas conservation objective in countries that have an oil and gas only energy mix Encourages efficiency through practice and infrastructure Potential climate/carbon finance opportunities Clear, direct contribution to climate mitigation agenda Incentivizes diversification into non-fossil fuel energy and efficiency through practice and infrastructure Supports growth in less CO2-intensive parts of the economy Potential climate/carbon finance opportunities Energy saving goal adjusts for periods of high or low economic growth Shows progress relative to high economic growth and increased productivity Incentivizes energy efficiency and increasing productivity Potential climate/carbon finance opportunities

Concerns about perception of measures leading to deprivation Does not incentivize energy diversification into non-fossil fuel energy or technological deployment to reduce pollutants

CO2 emissions reduction [EU, Australia, Brazil, Canada, Israel, Korea, Mexico, New Zealand, Singapore, United States]

Energy intensity improvement e based on energy/GDP (APEC), China, Indonesia, Russia, South Africa, South Korea, Sweden, Turkey]

Carbon Intensity CO2/GDP [China, India]

Easily comparable internationally Flexible about measures to achieve target Shows progress relative to high economic growth and increased productivity Rewards energy diversification into non-fossil fuel energy Rewards technological deployment to reduce CO2 emissions

Concerns that CO2-related measures could undermine the competitiveness of heavy industry

Where hydrocarbons exports account for a significant proportion of GDP, measure impacted by international price volatility Could allow unsustainable growth in energy demand Does not reward energy diversification into non-fossil fuel energy or technological deployment to reduce emissions/pollutants Where hydrocarbons exports account for a significant proportion of GDP, measure impacted by international price volatility Could allow unsustainable growth in emissions

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Energy/GDP Intensity was a plausible option for a national target for similar reasons but recommended an electricity/GDP intensity target because total energy consumption was beyond the scope of the study and executing authorities. SEEC is drawing up strategy that proposes to bring Saudi Arabia’s energy intensity in line with developed country averages [5] and the Dubai Supreme Council of Energy is developing an energy intensity map for Dubai [18].

Box 1. The Chinese experience of intensity targets. Evaluations of the efficacy of intensity targets in developing countries are at an early stage. China is one of the most commonly analyzed countries, given its six years of experience with explicit energy intensity targets. The Chinese government committed to a 20% nation-wide reduction in energy intensity by 2010 in the 11th Five-Year Plan (2006e2010). China narrowly missed this target e most recent figures estimate a reduction of 19.1%. There were great imbalances between regional reforms. Shanxi region is often presented as positive example of meeting the target, and Inner Mongolia used as the negative example of missing them. Nevertheless, several analysts observe that the ambitious 20% target provided strong motivation for action and recommended that China should continue imposing energy intensity target [19e22]. The government has set a new intensity target for the 12th FiveYear Plan (2011e2015) at 16%, together with a 40e45% carbon intensity improvement by 2020, based on 2005 levels.

4.1. Energy or carbon intensity? Whilst GCC countries have not registered much interest in commitments to reduce carbon emissions in the past, there is now a clear confluence of interests between domestic energy rationalization and the international climate agenda. CO2-related targets may offer several advantages. From a climate perspective, Philibert and Pershing propose that both energy and carbon intensity targets enable benefits from climate finance and carbon emissions trading [23]. As policy tools Nanduri finds energy intensity to be “very useful” for measuring energy efficiency e combined with decomposition analysis e but notes that CO2 intensity indicators are likely to be more useful as a climate policy tool since they identify CO2 intensity improvements from changes in types of energy consumption which energy intensity would not. Similarly, Marchinski and Edenhofer point out that energy intensity targets do not necessarily provide the stronger incentives for decarbonization or ‘for a lasting transformation of the energy system’ [24]. The latter is an important consideration for GCC states as all now intend some diversification to low carbon energy sources and acknowledge the potential for developing and applying carbon capture and storage (CCS). As the conventional energy/GDP intensity target is emissions-blind it will not reward the switch to low-carbon energy supplies. In theory it could disincentivize a technology like CCS which carries an energy penalty. Applying a carbon intensity (kg CO2/$ GDP) target would both incentivize a switch to low carbon and the application of CCS. Another option is to target fossil fuel intensity. This would have the advantage of being more specifically linked to the GCC countries’ objectives of reining in waste in domestically produced fossil fuels, and would incentivize diversification into alternative energy sources. The development of CCS using renewable energy could be incentivized under both carbon and fossil fuel intensity targets. Carbon or fossil fuel energy intensity measures will become more relevant as a country increases the share of renewable and nuclear fuel. This is likely to be an increasingly popular measure for high growth

emerging economies aiming at decarbonization e see the examples listed in Table 3. 5. How might intensity targets work in the GCC context and what are the challenges? Adopting an aggregate intensity target allows policy flexibility. Several areas can all help drive towards lower energy or energy and carbon intensity: -

Energy efficiency of heavy industry, power Efficiency/consumption on demand side (buildings, vehicles) Renewables (for carbon) Restructuring of the economy towards non-intensive sectors

Goals can then be pursued through state spending, market, regulatory and public education means as suits the individual country context. The hydrocarbons revenue dependent, state heavy economies of the GCC mean that rational policies to achieve energy objectives will look different from those of most OECD countries. For example, given that the state is the one shouldering the burden of low energy prices, there will be a strong case for state investment in alternative energy production and consumption infrastructure. The UAE and Saudi Arabia are already studying or pursuing this strategy in some key areas such as solar power and air conditioning unit replacement. Such investments will help to prepare people and industry for future price rises by lowering oil and gas based energy supply requirements. In this sense, an energy or carbon intensity target would not be an ‘alternative’ to market reforms to raise energy prices, but rather a potential overarching goal that could help to align national interests and drive forward multiple measures to use oil and gas more efficiently. Various lessons learned in Europe suggest that to ensure that targets are useful, there should be a clear articulation of: i) The policy objectives which the target is supposed to meet and how this fits in with other policy objectives. ii) The metrics that will be employed to measure the target. iii) The responsibilities and accountability mechanisms for meeting the target. This could include an independent body assigned to carry out regular evaluations and report on progress. iv) A mechanism to allow regular evaluations to feed back into the policy-making process to allow adaptation to maximize progress towards meeting the policy objectives behind the target. Point iii will be particularly crucial for success in the GCC countries. The Chinese experience (see Box 2) illustrates one way in which targets

Table 3 Countries with energy intensity and carbon intensity targets. Country

Energy intensity reduction target Carbon intensity reduction target

APEC 45% by 2035 (2005 baseline) countries China 16% between 2011 and 2016 (2010 baseline) India Indonesia 1% average each year until 2025 (2005 baseline) Russia 56% by 2030 (2005 baseline) South Africa 12% by 2015 e reference scenario baseline Sweden 20% by 2020 (2008 baseline) South Korea 11.3% between 2008 and 2012; 46% between 2007 and 2030 Turkey 20% by 2023 (2008 baseline)

40e45% by 2020 (2005 baseline) 20e25% by 2025 (2005 baseline)

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Fig. 4. A Normalization of historical and projected primary traded energy intensity curves. Adapted from Goldenberg & Reddy in Gales et al. [25].

set at the national level can translate into targets and incentives at the sub national levels.

Box 2. Allocating responsibility for meeting targets in China. The 20% energy intensity improvement target was set at national level, but all 30 mainland provinces (except Tibet) were given a target. Two thirds of these agreed to take on a 20% cut, while the others took on a higher or a lower cut depending on their circumstances. Jilin, one of the earliest industrial areas in China, took on a 30% target, for example while Guangxi, a rapidly industrializing region, adopted a 15% cut. In turn, provinces allocated targets to the cities and counties within their borders, so that political responsibility for achieving the cuts flowed vertically through each administrative level. While this placed emphasis on the spatial allocation of targets, a series of sectoral measures supported progress, such as the ‘Top 1000 industries’ programme to tackle efficiency in the largest industrial firms and targeted energy consumption programmes. The State Council had overall responsibility for delivery of the 20% target, while the top planning ministry NDRC was responsible for coordinating progress. In terms of measurement, the National Statistical Bureau was responsible for evaluating annual GDP and energy consumption of each province.

5.1. What improvement might be expected over time based on the experience of other countries? Fig. 4 shows the energy intensity bell-curve common to most economies, in which energy intensity rises with a phase of energy intensive industrialization and falls as efficiency increases. Based on the logic of this trajectory, the GCC countries, as developing countries which have advanced past their early period of industrialization and have similar per capita income to some EU countries should now be capable of converging towards advanced economy levels of modern energy intensity. Goldenberg and Reddy show that the peak of energy intensity is progressively lower in the later industrialisers with Japan’s peak at just two-fifths of the UK’s level 60 years later. This is attributed to global advancements in technology. It suggests that developing countries should be able to improve their energy intensity at faster rates than the advanced economies given the potential for technological leap-frogging [26]. Gales et al. (2007) dispute the shape

of the curve in a study of 4 European countries (Italy, Netherlands, Spain and Sweden) but also conclude that “energy intensity tends to decrease: except during the 1950s and 60s, a period of fast economic growth and very low energy prices” [25]. More recently Liddle’s study of OECD country intensity suggests that trends lower energy intensity are “not necessarily a natural part of the development process”. Liddle argues that “significant events e specifically events that involve (rather large) price increases (e.g. oil crises) e helped to spur lower energy intensity paths” [27]. This evidence flags the necessity of active polices to lower energy intensities, particularly those pushing up energy price relative to income. As Fig. 5 shows, the GCC average is out of sync with the OECD trend. Both are primarily based on modern energy and have roughly comparable levels of GDP per capita yet GCC energy intensities have risen over the last 20 year period albeit more slowly e or decreasing in the case of Qatar, Bahrain e in the last decade (see Fig. 6). Domestic energy pricing partially accounts for this divergence. The energy intensity trajectories of economies with fixed energy prices are less likely to converge with the general downward trend exhibited by importers because they will not be incentivized to replace inefficient technology or adapt methods to increase efficiency during periods of high prices. This is supported by the analysis of consumption trends. Two 2011 studies have pointed out that price-elasticity in energy demand in Saudi and Kuwait is historically low e particularly in transport fuels.6 This is likely to be due to the small incremental rises in the prices of fuel relative to income that have taken place (domestic energy prices have been declining in real terms in Kuwait since 1975 [28]) and the lack of reliable public transport [29]. Meanwhile, like many other countries holding prices low, GCC countries tend to exhibit ‘asymmetric’ responses to income changes. This means that consumption appears to be stimulated by rises in real income whilst showing no or little sensitivity to income declines [30,31]. This is because the costs of energy remain insignificant in the majority of personal budgets. As one respondent from Kuwait put it “a tank of fuel ¼ coffee for 2 at Starbucks”. 5.2. Would energy intensity improvement be a robust measure of progress on efficiency in the GCC? In order for a target to be a useful incentive it has to be set to a level that is ambitious compared to what would have happened in the

6 For example, Eltony & Al-Awadi (2011) between 1975 and 2005 the consumption of diesel in transport sector showed a price-demand elasticity of close to zero (p. 150).

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Fig. 5. Energy intensity trends in the GCC and selected others. Data from Ref. [2].

absence of policies and strategies to achieve it. Likewise, as a measure, it should reflect as accurately as possible the progress of actions to meet it. This presents some issues for the energy intensity target, chiefly, discounting efficiency improvements that would have happened anyway, and controlling for oil price volatility. 5.2.1. Expected improvements in efficiency over time Firstly, some efficiency improvements are likely over time without policy. Once a country reaches a certain level of energy use per capita, some areas of energy use will reach saturation and some efficiency improvements are likely to take place even in the absence of specific policies to incentivize them [32]. For example, the World Resources Institute disparaged the Bush Administration’s target of a CO2 intensity improvement of 18% from 2002 to 2012 “because changes in U.S. economic structure would have the same result without the policy” [33]. In GCC countries there will be some efficiency improvements in the power sector as old open cycle power plants are retired and new, closed cycle plants built, particularly in Saudi Arabia. Fuller liberalization of the electricity and desalination sectors is also likely to improve other areas of generation and transmission efficiency. If alternative energy targets are met, this will also affect fossil fuel energy trends. Planned reductions in gas flaring will also contribute.

However, demographic trends, potential for increasing car ownership, plans for energy intensive industrial megaprojects and the lack of capability to enforce current efficiency standards suggest there is ample room for consumption growth under a ‘no new policies’ scenario. 5.2.2. Oil price volatility Fig. 4 shows that energy intensities in the GCC measured on a purchasing power parity (PPP) basis are high compared with both developed countries and middle income developing energy exporters. Over almost two decades, we can see a rise in the GCC average energy intensity level of 190% between 1980 and 2009 although it stayed relatively flat between 2000 and 2009. Since the end of the 1991 Gulf War, that rise has been led by the largest economy and most populous country in the Council, Saudi Arabia, where energy intensity rose by more than 200% between 1980 and 2009 and continues to exhibit an upward trend. Two observations are worth noting. Firstly, oil and gas export dependent countries exhibit higher volatility in energy intensity trends compared with the importing countries. Although this paper does not examine the reasons for these different trends, it is likely that the impact of oil price volatility on GDP and the cyclical nature of investment affecting energy use increases energy intensity trend volatility in exporting countries whilst the smoother downward trending lines in

Fig. 6. Energy intensity trends in the GCC (PPP). Data from Ref. [2].

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importing countries is attributable to the long term energy policies and effects of market prices for energy in locking in long term efficiency gains. Secondly, significant changes in the terms of trade for the GCC’s main export, oil (or LNG in Qatar’s case), will be reflected in the GDP denominator. Using constant $ or purchasing power parity (PPP) constant $ (as the World Bank does) will provide some insulation from the impacts of oil market volatility. However, many more GDP components in the GCC are hydrocarbon-linked e they depend on the government spending oil revenue or consumer spending of salaries paid using oil revenue. With windfall impacts on GDP related to the rising price of oil since 2003, had energy consumption growth remained constant, the energy intensity trend would have registered a significant reduction in the energy intensity of large oil exporters with no change in efficiency. In other words, the amount of energy used per unit of GDP would be expected to have come down because GDP grew faster than energy use. In fact, this did not happen. Energy consumption grew faster than GDP, thus increasing energy intensity in Oman and Saudi Arabia and rendering little change in the GCC average. The case of Qatar is interesting. In spite of overall energy consumption rising at an average of 8%, energy intensity has come down by 27% between 2000 and 2009. Although energy use per capita is still the highest in the world, it has been declining since 2005. Two processes are likely to have contributed to this: a reduction in gas flaring since 2006, which could be

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counted as an efficiency gain, and the rapid rises in immigration of manual and domestic workers who use less energy than higher income nationals and foreign workers. By contrast, the oil price jump may only have had a levelling impact on energy intensity for Saudi Arabia and the UAE. Export to population ratios as shown in Fig. 3 are key. For example, Qatar’s high hydrocarbons export income relative to population (1.7 m) and 13.5% per annum average growth based on LNG and oil revenues over the last 10 years mean that the impact of changes in oil and gas market prices will overwhelm incremental changes in energy use. The same is true for Kuwait. This means that the standard energy intensity measure will not be particularly useful in terms of indicating progress on efficiency over time for these countries. 5.3. What other options are there for measuring economy wide energy intensities? In terms of GDP, further work is needed to develop a better measure of national value creation for countries with high dependence on rent or single export commodities. For example, a GCC specific intensity measure could be developed to control for changes the terms of trade. This could make an adjustment every year after the baseline year for the þ or  in the oil/LNG and petrochemicals prices. A per capita measure for fossil fuels, final energy consumption or electricity would avoid the difficulties involved in GDP whilst still

Table 4 A basket of targets that could work in a GCC context. Target/indicator

Notes on numbers

Fossil fuel/GDP intensity or energy/ Using total fossil fuel consumption or CO2 emissions CO2 intensity divided by constant or constant local currency GDP. Aiming to reduce within a range of percentages over a 15e20 year period and to smooth the overall trend as GDP becomes less vulnerable to oil market volatility. Realistic no new policy growth projection required % Reduction of domestic energy use Reduction over projected growth set for stated date. (potentially excluding feedstock) Realistic no new policy growth projection required of exportable hydrocarbons produced Sectoral intensity targets Can take specific forms e.g. space cooling in buildings in (energy/output or value) kwh/m2/y; steel, aluminium and cement production in kgoe or Gj/tonne; desalinated water (Gj/tonne); chemical production in kgoe/volume or j/$ economic output; and vehicle fuel efficiency standards (fuel or CO2/km) Per cap CO2

Deployment targets

Per capita electricity

Per capita final energy Peak demand reduction Energy per m2 of water consumption

Impact for domestic objectives Long term goal to increase efficient allocation and use of energy, in line with ambition to diversify sources of GDP Potential for benefiting from international carbon trading

In line with ensuring that consumption does not eat into capacity to export Exclusion of feedstock would not encourage shift to high value, low energy intensity industries Incentivizes technical energy efficiency and increased productivity in way that can clearly contribute to above overarching intensity targets. Shared local climate and industry conditions offer potential for regional benchmarking Sectoral targets could be introduced on own merits, but they could also contribute to a national Energy/GDP intensity target Reduction to target amount by specific date. Could be set in Targets overall emissions intensity of the economy but removes line with current clean energy plans uncertainty over future population levels Focussing on per capita levels places more emphasis on Would drive down target hydrocarbons consumption as well as individual/consumer behaviour, although policies to incentivizing new technologies for clean energy including carbon achieve the target could be applied by sector or region capture and storage Targets future levels of deployment of renewable energy Will encourage use of non-fossil fuel energy, displacing use of oil technology, nuclear power, electric vehicles, or solar water and gas for domestic consumption heaters for example. For example, 1 GW of solar power by Helps to support development of domestic manufacturing sectors a specified date for renewables Alternatively, can be a share of the energy mix. Achieving targets requires specific policy measures e.g. investment e.g. 10% from renewable energy by 2015 incentives; feed in tariffs especially due to low domestic rates. Also need to address third party access to the grid etc. The target is met via demand side (and transmission) measures Focuses on electricity consumption and efficiency levels. There is e it is blind to the power generation mix and to the efficiency large potential for short-medium term savings, particularly with of power plant large building/cooling inefficiencies The policy focus would fall on domestic buildings and government offices in the first instance As above but would also include transport fuels As above but would also encourage focus on behavioural change in driving, public transport solutions and urban planning Smoothing peak power demand both by time of day Large potential savings in terms of obviating the need for new peak and time of year. Could be benchmarked regionally generation capacity. Also avoids using inefficient plant at peak time This could be introduced alongside energy indicators as part Policies to support this goal would focus on both demand side of a coordinated energy-water strategy efficiency and driving down energy requirements for pumping, Would need more thorough accounting of energy use for water treating and distributing water. Would enable move towards Opportunities for regional benchmarking in comparable sectors exemplary water efficiency in arid conditions with transfer potential to other countries

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allowing for high population growth. Final energy consumption per capita (electricity plus transport fuels) would avoid the potential conflict with core export industry growth by excluding feedstock. It would also put the emphasis on individual responsibility for energy conservation. However, it would not capture improvements in refinery and electricity generation and transmission losses which are key areas of opportunity for energy savings. An alternative would be to count only fossil fuels used for energy, therefore excluding industry feedstock. This may be more politically feasible if growing the petrochemicals sector remains a long term strategy. Targeting intensity reduction on a total fossil fuels energy consumption basis would be more useful for countries wanting to diversify away from oil and gas dependence and grow high value, low energy intensive sectors such as services, light manufacturing and high technology engineering. In view of the issues discussed above, Table 4 suggests a selection of targets that would be fairly simple to measure and could contribute to stated objectives in conserving oil and gas. These are based on stakeholder suggestions and best combinations could vary from country to country. 6. How good does the data need to be to set national targets? National targets are often set in the absence of robust data and where great uncertainties exist. International experiences of energy target-setting suggest that once a target is set at the highest level, the quality and analysis of that data will improve rapidly as institutions develop capacity and incentives are gradually adjusted. China’s statistical system developed significantly during the 11th Five-Year Plan period, and detailed assessments of progress were used to set the 12th and 13th Plan goals. Europe began Phase I of its Emissions Trading Scheme in 2005 despite an absence of reliable emissions data in many countries. The GCC economies are fairly simple in terms of their economic structure and work has already been done in terms of identifying the highest growing and least efficient areas of energy consumption. To set a national target for energy conservation or efficiency, a country will need a baseline assessment of current and projected energy consumption. To compile this, analysts will need disaggregated data for each of the sectors as well as a methodology for projecting growth. A summary of the key categories of data needed is given in Table 5. Within these, further data or assumptions will be required e for example, within industry, it would be ideal to have the production numbers and national projections for production in each category of goods and the current use of different types of energy in each industry, e.g. the volume of each fuel and amount of electricity consumption for alumina production. In 2011/12 the Saudi Energy Efficiency Center and Chatham House attempted a baseline assessment and projection of this kind for Saudi Arabia. Obtaining the appropriate data was a major challenge, common across the GCC. When performed for Saudi Arabia based on available data, proxies and conservative assumptions about the potential impact of energy saving measures, the calculation clearly demonstrated key areas of opportunity for basic energy savings. These were buildings (increasing air-conditioning unit efficiency), the introduction of clean energy, the power sector (generation efficiency), transportation (vehicles efficiency). Industry also demonstrated significant gains to be made from upgrading to best available technology although this is the area best suited to a more in-depth case by case assessment given the production specificities. These findings tend to cohere with previous Saudi and international studies in identifying inefficiencies in these sectors which are leading to wasted resources [17,34e36]. When performed by in-country authorities, the exercise would quickly highlight gaps that should become priority areas for in country data collection or projection assessments. For example, the study drew attention to the lack of disaggregation of energy consumption data,

Table 5 Basic categories of data needed for an energy savings assessment. Total savings potential

Air-conditioning

Non-oil GDP 2010 ($m)

% of residential/commercial electricity used in air-con in 2009 % of res/comm electricity used in air-con Growth in number of units 2010e2025 Energy savings potential per unit relative to current technology Potential savings from improved maintenance % of market reached by maintenance programme Energy use per unit 2010 kWh/unit Energy use per unit 2025 kWh/unit Industry Fuel demand growth rate

Annual non-oil GDP growth 2025 Non-oil GDP ($m) 2009 Population (m) Population growth to 2025% 2025 population (m) Refinery Sector growth 2010e2025 Electricity Sector Electricity growth factor for non-air-con applications Implied efficiency of oil generation plant Implied efficiency of gas generation plant %-Point efficiency improvement of oil plant by 2025 %-Point efficiency improvement of gas plant by 2025 % of generation from oil in 2025 % of generation from gas in 2025 % of generation from nuclear in 2025 % of generation from renewables in 2025 Other transformation Sector growth 2010e2025 Total savings potential Buildings Average occupancy existing housing stock (person/home) Average floor space existing stock m2 Base case building energy use kWh/m2/year Retrofit improved energy usage kWh/m2/year % of existing stock retrofitted New homes efficient building energy use kWh/m2/year Growth in non-electricity fuel demand for buildings 2010e2025 Potential for non-electricity fuel savings

Electricity demand growth rate Average sector fuel savings potential Average sector electricity savings potential Transport Increase in oil consumption per capita for transport 2010e2025 Oil consumption per person 2010 (boe/year) Oil consumption per person 2025 (boe/year) Potential savings for new cars (Based on turnover of whole car parc) Typical replacement time for new cars (years) Behavioural change e reduction in energy consumption Non-energy Sector growth 2010e2025 Total savings potential Other Sector growth 2010e2025 Total savings potential

particularly in transportation, desalination and industries. Water pumping, treatment and delivery is one energy intensive area which could be addressed on both supply and demand sides but energy use in water is not currently accounted for separately.7 7. Conclusion This paper has considered the potential for introducing various forms of energy intensity improvement targets in the GCC countries given their twin objectives of industrial growth and efficiency. Given the real social and political impediments to raising the domestic price of oil and gas based energy sources, targets are examined as an

7 The methodology and findings from the ‘energy savings toolkit’ will be more thoroughly explained in a forthcoming Chatham House publication 2013.

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intermediary option that may help prepare for market reforms as well as driving urgent ‘quick win’ energy savings. Some GCC countries have demonstrated remarkable progress in putting domestic energy consumption on the policy agenda. However, without sustained political and an enabling governance framework, existing programmes will continue to suffer from a lack of resources and momentum. National level targets have worked in both developed and developing countries to galvanize action and coordination towards an overarching goal by providing a common focus under which existing initiatives and measures can be aligned. Targets can also be a powerful demonstration of progress internationally and register countries’ commitment to global climate change mitigation and potentially enable them to take advantage of carbon markets. We examined intensity targets because of the interest in them in the GCC and because they would appear to incentivize three objectives of GCC states: growth, value addition and rationalization of domestic fuel use. For these reasons, energy intensity may be less controversial to adopt as a target than absolute carbon or energy targets and therefore easier to gain domestic support for. One of the key advantages of the kgoe/GDP intensity measure is its simplicity. Once the measure of GDP is decided, it is internationally comparable and monitorable over time. It can also register countries’ commitment to climate change mitigation. For the GCC countries, high energy intensities suggest room for improving efficiency and thus generating more value for society. However, high dependence of GDP on oil revenue which is both volatile and does not reflect domestic productivity weakens the usefulness of energy intensity as a measure of progress on efficiency or conservation of oil and gas over time. Nevertheless, as governments in the GCC also aim to diversify their economies away from the hydrocarbons sector, it would be reasonable to aim to reduce energy intensity within a certain range to allow for changes in the terms of trade and also to smooth the trendline over time as income and spending became less cyclical. For these reasons, we conclude that where countries find energy intensity targets more palatable than say, carbon intensity or absolute CO2 emissions reduction, these could be a positive incentive for progress, so long as the caveats are understood. This would be the case for Saudi Arabia, the UAE, and Oman where the populations and industries absorb a significant amount of domestic energy production. For the smaller Gulf states with higher per capita exports of hydrocarbons (Kuwait and Qatar), the results of energy intensity are likely to be more seriously distorted. Here, fossil fuels or CO2 per capita targets would be more effective. Further research to develop aggregate intensity metrics that control for oil price volatility would be useful for all oil and gas export dependent countries. For all GCC countries, sector specific targets can be tailored to the individual sector: energy intensity e particularly unit of energy/volume of output e appears a decent measure for industries, particularly energy intensive ones such as steel, cement, petrochemicals, fertilizers and plastics which have lacked a price incentive for efficiency investments. The power sector will most likely target overall fuel conservation and peak demand reduction and the residential sector may target achieving regional best practice standard of energy use/ m2/year. There is urgent need for fuel efficiency standards in transport in all countries. In these areas there is potential for developing regional benchmarks and best practice standards. Weighted improvements in these sectors could feed into an aggregate intensity or oil and gas conservation targets. Over the longer term, carbon intensity targets and absolute emissions reductions for key sectors will make more sense for those GCC countries planning large increases in clean energy technologies as part of their energy mix. Given the high inefficiencies in the GCC economies, there is huge scope for reaping ‘low hanging fruit’. It is technically possible to set

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initial targets. But success in achieving targets will ultimately be a function of governance. As the examples of progress to date show, effectively delegation of authority is essential. Targets must be supported by legislative clarity on the accountability for meeting them and the reporting structure. Feed back mechanisms and flexibility will be key. There should be mid-point assessments of progress and a full evaluation of the practicality of target after two or three years. The long term target can then be revised and adjusted as better data and analysis becomes available. All the above are part of a much larger governance challenge that requires on going investment in building local institutional capacities. The paper acknowledges that energy targets will need to be assessed by each country according to its objectives, and tailored to individual contexts. We hope that the above discussion of energy intensity and the basket of potential targets will be helpful in that process. 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