Exploring carbon market instruments for the Kingdom of Saudi Arabia (KSA).
Date: 2021-05-14
Institutions: European University Institute
Subjects: EU financial instrument, Saudi Arabia, carbon capture and storage, circular economy, energy market, energy technology, governance, soft energy

POLICY BRIEFEXPLORING CARBON MARKET INSTRUMENTS FOR THE KINGDOM OF SAUDI ARABIA (KSA)STG Policy PapersISSUE 2021/10MAY 2021Authors:Jos Delbeke and Rebecca LamasSchool of Transnational GovernanceSCHOOL OFTRANSNATIONALGOVERNANCEEXECUTIVE SUMMARY

As more and more countries prepare net-zero pledges under the 
Paris Agreement, the Kingdom of Saudi Arabia (KSA) has a specific 
concept:  the  Circular  Carbon  Economy  (CCE),  targeting  carbon 
circularity by building a competitive advantage on clean hydrogen 
and carbon capture utilisation and storage (CCUS) technologies. 
The concept is nationally endorsed and the next steps now need 
to  be  elaborated.  How  best  should  technological  and  financial 
efforts  be  designed?  This  policy  brief  analyses  the  different 
elements  of  a  potential  carbon  market  for  KSA,  considering  the 
country’s economic and competitive strengths, its plans to diversify 
its economy, and calls for a long-term low-carbon strategy for the 
country. 

Authors and acknowledgements:Jos Delbeke | EIB Professor of Climate Policy, EUI School of Transnational GovernanceRebeccca Lamas | Research Associate, EUI School of Transnational GovernanceWith thanks also to Jan Cornillie, Peter Vis and Robert Watt for their contributions. The opinions of the authors represent personal opinions and do not represent the position or opinion of the European University InstituteSCHOOL OFTRANSNATIONALGOVERNANCE1. INTRODUCTION 

In the past few years, nations and corporations 
are  joining  the  carbon  neutrality    pledge1, 
with  a  substantial  increase  in  carbon  neutral 
commitments  being  announced  in  the  past 
months,  where  more  than  60  countries  are 
aiming  to  reduce  carbon  emissions  to  net-
zero  by  2050  (or  by  2060),  corresponding  to 
approximately half of global emissions.2  Some 
may  still  be  doubtful  about  certain  roadmaps 
and  timelines  but  the  dynamic  that  the  Paris 
Agreement  has  set  in  motion  is  undeniable. 
The carbon neutrality era is here to stay. 

KSA,  the  largest  economy  in  the  Middle  East 
and member of the G20, is heavily dependent 
on a limited resource base: oil and gas, where 
the export of energy products constitutes over 
90% of all Saudi exports.3  

Carbon neutrality related policies, such as those 
of  the  European  Green  Deal,  are  changing 
oil  and  gas  producers’  markets.  Low-cost  oil 
producers, such as KSA, are better positioned 
to deal with declining global oil prices, but not 
indefinitely.  In  the  medium-term,  they  might 
even increase their market shares, as high-cost 
producers  will  be  pushed  out  of  the  market. 
However, even low-cost oil producers will feel 
the  impact  of  declining  prices.  Already,  at 
the  current  oil  price  of  USD  40/barrel,  KSA’s 
budget deficit is at 12% of GDP. This suggests 
that economic diversification away from oil is a 
must.4 

KSA,  like  other  economies,  is  now  facing  the 
challenge of how to diversify its economy and 
export markets away from reliance on oil and 
gas  while  encouraging  emerging  low-carbon 
energy technologies and markets.

invests 

and 
significant 
KSA 
development  (R&D)  sums  on  carbon  capture, 
storage, and use in enhanced oil recovery and in 

research 

materials, hoping to achieve breakthroughs in 
technology-driven solutions to climate change. 
If  commercially  scalable,  these  technologies 
could decouple the growth of demand for fossil 
fuels from the growth of emissions. KSA’s Saudi 
Arabian  Basic  Industry  Corporation  (SABIC) 
has  become  the  third-largest  petrochemical 
company  in  the  world  and  is  aggressively 
pursuing  research  and  development,  and  the 
commercialisation of new material technologies 
derived from recycled plastics, as well as those 
that can be produced from carbon dioxide by 
carbon capture and use.5 

is  committed 

to  developing  and 
KSA 
implementing 
the  Kingdom’s  concept  of 
Circular  Carbon  Economy.  The  concept  is 
built  on  the  concept  of  the  circular  economy, 
where operating systems are transformed from 
their existing linear structures to more circular 
systems.  KSA’s  Circular  Carbon  Economy 
specifically targets the circularity of carbon (in 
the form of CO2 or other greenhouse gases), 
guided  by  four  principles:  reduce,  reuse, 
recycle and remove (the so-called ‘4Rs’):

•  Reduce:  Reduction  of  carbon  based 
the 

greenhouse  gases  emitted 
atmosphere; 

into 

•  Reuse:  Reusing 

carbon  based 
the 
greenhouse  gases  without  changing  its 
chemistry;

•  Recycle:  Recycling 

the  carbon  based 
greenhouse  gases  or  products  containing 
greenhouse  gases 
or 
different  products  with  different  chemical 
characteristics; 

similar 

into 

•  Remove:  Removal  of  carbon  based 
greenhouse gases from the system, partially 
or fully.

The  concept  has  been  nationally  endorsed, 
but precise policies still need to be elaborated. 

Carbon neutrality refers to achieving net-zero carbon dioxide emissions. This can be done by balancing emissions of carbon dioxide 

Which countries have a net zero carbon goal? (climatechangenews.com)
Saidi M. Ouassaf, King Faisal University - The Economic Diversification in Saudi Arabia Under the Strategic Vision 2030 (abacademies.

1 
with its removal
2 
3 
org)
4 
5 
A. Rogers, and Amelia Midgley, World Bank Diversification and Cooperation in a Decarbonizing World (worldbank.org)

Leonard, Pisani-Ferry, Shapiro, Tagliapietra and Wolff - The geopolitics of the European Green Deal (bruegel.org)
Grzegorz Peszko, Dominique van der Mensbrugghe, Alexander Golub, John Ward, Dimitri Zenghelis, Cor Marijs, Anne Schopp, John 

3

STG | Policy Papers Issue | 2021/10 | May 20212. THE KINGDOM’S ECONOMY 

economy.  GDP 

An oil price boom from 2003 to 2013 boosted 
prosperity  in  KSA,  which  became  the  world’s 
19th-largest 
doubled, 
household income rose by 75%, and 1.7 million 
jobs were created. The government invested in 
education, health, and infrastructure and built-
up reserves amounting to almost 100% of GDP 
in  2014.  Nevertheless,  KSA  will  struggle  to 
continue to grow based solely on oil revenue 
and public spending in the face of a changing 
global  energy  market  and  a  demographic 
transition that will lead to a bulge in the number 
of working-age Saudis by 2030.6 

This is where diversification plays an important 
is  undergoing  an  economic 
role.  KSA 
diversification  under 
the  strategic  Vision 
20307    to  avoid  market  vulnerability  due  to 
its high dependence on oil exports. By 2030, 
SMEs  are  projected  to  account  for  35%  of 
KSA’s  GDP  (currently  20%),  the  private  sector 
will  contribute  65%  of  GDP  (currently  40%), 
and the Vision aims to increase foreign direct 
investment from 3.8% to the international level 
of 5.7% of GDP. An important economic goal 
is raising the share of non-oil exports in non-oil 
GDP from 16% to 50% and increasing the non-
oil government revenues from USD 45 Billion 
to USD 267 Billion.8 

3.  SCALING  UP  LOW-CARBON 
INVESTMENT 

An  increasing  number  of  major  economies 
are  developing  a  net-zero  climate  strategy 
based on seven blocks: low carbon electricity, 
energy  efficiency,  clean  mobility,  industrial 
decarbonisation,  infrastructure,  bioeconomy, 
and  residual  emissions.  Each  country  weighs 

the importance of these in different ways when 
developing  national  plans  and  linking  them 
with national policies. For example, Japan has 
identified in its recent Green Growth Strategy9  
14  technologies  to  be  pursued  in  the  sectors 
transport,  manufacturing  and 
of  energy, 
buildings.  Under  its  new  Industrial  Strategy, 
10the EU has initiated a process to identify key 
value chains. Industrial alliances, for example, 
on  batteries,  hydrogen,  renewable  energy 
(offshore  wind), 
raw 
materials are emerging. 

low-carbon 

industry, 

In this context, two options are more likely to 
work  for  KSA:  1)  to  make  competitive  green 
hydrogen11 for export as a complement to oil 
and gas, and 2) to produce blue hydrogen.12 In 
KSA, there are ongoing high-level discussions 
about dedicated policies in the form of a long-
term  roadmap,  with  clean  hydrogen  (green 
and blue hydrogen) at its core. In early 2021, 
Energy  Minister  HRH  Abdulaziz  bin  Salman 
stated13 that Saudi Arabia aims to convert half 
of its power sector to gas and the other half to 
renewables by 2030 - though green hydrogen 
ambitions within the Kingdom are challenged 
by low levels of renewables capacity installed 
to date, i.e., 0.4 GW in a 75 GW power system 
(with another 10 GW under construction).14 

Also,  on  March  11,  2021,  HRH  Abdulaziz  bin 
Salman,  Minister  of  Energy  of  Saudi  Arabia 
and  German  Economic  Affairs  Minister 
Peter  Altmaier 
signed  a  Memorandum 
establishing 
of  Understanding 
cooperation  on  clean  hydrogen.  The  MoU 
formalises the commitment of both countries’ 
industries  to  cooperate 
governments  and 
closely on the production, processing, use and 
transport  of  clean  hydrogen  and  underlines 

(MoU)15 

Gassan Al-Kibsi, Jonathan Woetzel, Tom Isherwood, Jawad Khan, Jan Mischke, Hassan Nourai, McKinsey MGI Saudi Arabia_Executive 

Saudi Vision 2030 – consulted on 18/04/2021
Saidi M. Ouassaf, King Faisal University - The Economic Diversification in Saudi Arabia Under the Strategic Vision 2030 (abacademies.

Overview of Japan’s Green Growth Strategy Through Achieving Carbon Neutrality in 2050, January 2021 1225_001a.pdf (meti.go.jp)
European industrial strategy | European Commission (europa.eu)
Green hydrogen is produced when renewable power is used in the electrolysis process.
Blue hydrogen uses carbon capture and storage for the greenhouse gases produced in the creation of grey hydrogen. Grey Hydrogen 

6 
summary_December 2015.pdf (mckinsey.com)
7 
8 
org)
9 
10 
11 
12 
is hydrogen produced using fossil fuels such as natural gas
13 
Energy - Bloomberg – consulted on 06/04/2021
14 
ed on 06/04/2021
15 
standing on German-Saudi hydrogen cooperation – consulted on 06/04/2021

Bloomberg/ Matthew Martin, Salma El Wardany, and Abeer Abu Omar Saudi Arabia Aims to Become Next Germany of Renewable   

EnergyPost/ Jan Frederik Braun, PhD Saudi Arabia’s clean hydrogen plans for converting ambitions into action - Energy Post – consult-

BMWi/ Andreas Martens BMWi - Federal Ministry for Economic Affairs and Energy - Minister Altmaier signs Memorandum of Under-

4

STG | Policy Papers Issue | 2021/10 | May 2021KSA’s  ambition 
powerhouse producer in this field. 

in  becoming  a  global 

KSA, as a low-intensity hydrocarbon producer 
with  6  trillion  cubic  meters  of  proven  natural 
gas resources (the eighth largest in the world), 
about 25Gt of CO2 storage capacity in multiple 
storage formations, and very high direct normal 
irradiance and wind speeds, has the resources, 
infrastructure,  and  skills  for  producing  cost-
competitive clean hydrogen. This argument is 
exemplified by KSA’s decade-long experience 
in  industrial-scale  hydrogen  and  chemicals 
production – Saudi Aramco’s CO2 capture plant 
in  Hawiyah,  which  injects  compressed  CO2 
into flooded oil reservoirs as a mechanism for 
CO2  storage  while  simultaneously  enhancing 
oil  recovery,  has  a  sequestering  capacity  of 
800.000  tCO2  per  year.  The  futuristic  project 
NEOM  Helios,  the  world’s  largest  renewable 
hydrogen-to-ammonia  facility,  a  joint  venture 
between  Air  Products,  ACWA  Power,  and 
NEOM  is  an  ongoing  project  scheduled  to 
go  onstream  in  2025.  The  facility  will  take 
advantage  of  the  very  high  direct  irradiance 
and wind speeds along the Red Sea. Equipped 
with 4GW of renewables, with solar powering 
the plant during the day and wind during the 
night,  the  electrolysers  at  Helios  will  run  at  a 
high  load  factor  with  an  output  of  ammonia 
estimated at 1.2 Mt/year.16 The world’s biggest 
oil exporter has set its sights on also becoming 
the  largest  supplier  of  clean  hydrogen.  In 
September 2020, the country already shipped 
the world’s first cargo of blue hydrogen, which 
was converted into ammonia, to Japan. 

it  comes 

technologies.  When 

The potential is clear but challenges remain. A 
key hurdle for the Circular Carbon Economy’s 
concept  is  the  lack  of  competitive,  scalable 
CCUS 
to 
innovation,  a  vast  majority  of  the  proposed 
technologies  have  not  had  the  chance  to  be 
demonstrated  at  a  commercial  scale,  which 
should  now  be  a  priority  for  the  country.  To 
do  so,  more  efforts  and  resources  should  be 
allocated  towards  achieving  scalability  in  a 
shorter time frame than currently envisaged. 

Establishing a domestic system of carbon offsets 
from  both  nature-based  and  technological 

revenues 

instrument 

is  a  potential 

removals 
that 
could  generate  financial  revenues  for  CCUS 
development. If KSA’s domestic offset market 
goes  forward,  special  effort  must  be  put  into 
developing transparent and robust Monitoring, 
Reporting  and  Verification  protocols,  and 
a  registry  system.  Demand  for  such  carbon 
offsets  could  come  from  emitting  sectors  of 
the economy, thereby combining the polluter-
to  finance 
pays-principle  with 
technological  development. 
International 
sources  of  sustainable  finance  could  also  be 
drawn  upon,  as  renewable  hydrogen  and 
CCUS  are  activities  considered  sustainable 
under  the  EU  Taxonomy,  subject  to  stringent 
technical  criteria. 
is 
moving fast towards ESG (Environment, Social 
and  Governance)  and  net-zero  commitments 
aligned  with 
the  Paris  Agreement.  The 
opportunity of using the emerging framework 
to  accelerate  economic  diversification  can 
reinforce KSA’s leadership role. 

International  finance 

4. CONCLUSIONS

Low carbon technologies (for reducing, reusing, 
and capturing carbon emissions) will play a key 
role  as  well  as  carbon  pricing  as  part  of  the 
policy package. Clean, known, and affordable 
technologies (renewables and storage) should 
become  KSA’s  technological  pillar.  There  is  a 
nascent  local  industry,  ready  to  finance  and 
develop projects together with hydrogen add-
on  projects,  and  ready  for  ESG  disclosure  – 
which is starting to be mandated in KSA. CCUS 
is key and is eligible under sustainable finance 
frameworks, but still needs scale and a carbon 
pricing mechanism to become competitive. If 
KSA  strengthens  both  pillars,  diversification 
and carbon pricing, the technological evolution 
could be accelerated. 

Diversification  of 
the  economy  has  a 
considerable  benefit  in  avoiding  potential 
stranded  assets:    not  being  so  dependent 
on  oil  and  gas  exports  but  rather  relying  on 
clean hydrogen - prioritising the one produced 
with  renewables  (green  hydrogen)  –  taking 
advantage  of  its  competitive  position  (natural 
resources  and  financial  capabilities)  to  lead 

16 
ed on 06/04/2021

EnergyPost/ Jan Frederik Braun, PhD Saudi Arabia’s clean hydrogen plans for converting ambitions into action - Energy Post – consult-

5

STG | Policy Papers Issue | 2021/10 | May 2021the hydrogen market on a trend that shall take 
green  hydrogen  to  become  competitive  in 
2030.17  Also, more drive and resources should 
be allocated towards achieving CCUS scalability 
to complement the clean hydrogen mix with a 
more competitive blue hydrogen. KSA has the 
full potential to lead the clean hydrogen race, 
setting standards and definitions. 

Sustainable finance from international funding 
sources  is  also  an  option  for  KSA,  as  green 
hydrogen and CCUS are activities considered 
sustainable  under  the  EU  Taxonomy,  which  is 
not unimportant given the strong trading links 
with the European market. For this to happen, 
KSA must be leading from the front in terms of 
ESG financial disclosures, as financial markets 

and  civil  society  expect  stricter  integration  of 
sustainability from all players. 

KSA’s  government  and  the  private  sector 
have  critical  roles  in  shaping  the  economy´s 
transformation.  Public  authorities  should  lead 
and steer the way forward for green and blue 
hydrogen,  setting  out  future  regulations  that 
guide investment decisions, and reassures the 
private sector through a predictable regulatory 
framework underpinning KSA’s clean hydrogen 
ambitions.  A 
long-term  strategy  setting 
priorities  for  more  investment  in  renewables 
and  for  boosting  the  demonstration  of  CCUS 
technologies at scale is crucial for KSA’s carbon 
neutrality success.  

17 
Green hydrogen costs between 3.50 EUR (USD 4.15) and 5.00 EUR per kilogram, according to the IEA (International Energy Agency). 
That compares with around 1.5 EUR for the conventional, dirtier process that produces grey hydrogen. The cost of producing blue hydrogen lies 
in between these two levels.

6

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© European University Institute, 2021

doi:10.2870/816369 
ISBN:978-92-9466-007-7
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STG | Policy Papers Issue | 2021/10 | May 2021