Download Transition of Countries Endowed with Fossil Resources toward

Transition of Countries Endowed with Fossil Resources toward Renewable Energy: What
is the role of institutional setting?
Motivation:
The Gulf Cooperation Council (GCC) member states and some other countries in the Middle
East are well endowed with fossil fuel resources. Such endowment generally allows
administrative bodies to subsidize energy for domestic consumption. These subsidies along with
industrial development result in rising energy demand in the region. Moreover, these countries
have abundant renewable resources such as sunshine, wind resources, geothermal and biomass.
Not only would delivering energy from renewable sources to consumers boost energy supply to
meet demand, it would also help authorities to meet carbon footprint reduction
commitments. The importance of this problem becomes more pronounced in view of the recent
oil shock, which makes it inevitable for governments to institute changes in utilities policies. A
relevant query is to investigate this transition from hydrocarbon dependence to a more diverse
portfolio of energy consumption and export.
Background:
The IRENA report1 indicates that “doubling the share of renewables in the global energy mix
increases global GDP in 2030 by up to 1.1%, equivalent to USD 1.3 trillion.” In addition, direct
and indirect employment in this sector has a potential of 24.4 jobs in 2030. Fossil fuel exporters,
currently dependent on export revenues, may be vulnerable to this change, an effect that is
amplified by the 2014 oil shock. But the situation can also be seen as an opportunity for
economic diversification in the new markets. Among others, GCC countries have adopted
renewable energy in recent years with a number of different drivers: environmental concerns,
given that GCC countries have a negative image and are among the major per capita emitters
worldwide; greater economic diversification; and being rich in renewable energy resource
endowment (Ferroukhi et al., 2013).
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http://www.irena.org/DocumentDownloads/Publications/IRENA_Measuring-the-Economics_2016.pdf
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More specifically, GCC countries lie in the Global Sunbelt and 60% of the area is excellent for
solar PV deployment. Just 1% of this area can potentially provide almost 470 gigawatts of
additional capacity. Furthermore, falling technology costs have led to some new records in the
region: production cost in Dubai’s Al Maktoum Solar Park is as low as 5.85 US cents per
kilowatt-hour2. Solar applications like home systems for lighting and appliances, PV modules for
community buildings, solar cooling systems for commercial applications, solar water heaters,
and solar power plants are considered as the least expensive means of energy provision in the
region (Doukas et al., 2006). Taleb and Pitts (2009) also show that development of building
integrated photovoltaics (BIPV) has good potential in the GCC but needs appropriate policy and
wider introduction of viable BIPV in this market.
Nevertheless, deployment of renewable energy still has a long way to go in fossil fuel-rich
countries. El-Katiri (2014) refers to an absence of cost-reflective energy and electricity tariffs,
which disregard the opportunity cost of domestically consumed oil and natural gas resources.
During the 2000s, the average growth rate of domestic energy consumption was around of 5%
annually, higher than in India, China and Brazil (Saudi Arabia consumed 28% of its produced oil
in 2014 compared with 17% in 2000, and the UAE is a net gas importer)3. One of the main
justifications for postponing structural reform of oil exporting countries’ domestic energy market
is to foster economic growth, but this viewpoint may not be adequate (Mirnezami, 2015). From
another perspective, Arouri et al. (2012) show that not all MENA countries need to “sacrifice
economic growth to decrease their emission levels” because they may decrease carbon emission
without negative long-term effects on growth, by means of energy conversion and energy
efficiency programs.
Although some countries like Saudi Arabia and the UAE have defined prestigious renewable
projects for long-term solutions, countries in the region need to focus on a more systematic takeup of alternative energy sources through combining supply-side energy solutions with demandside schemes (El-Katiri and Husain, 2014). According to Reiche (2010), the rentier state policy
suggests that the GCC governments do not opt for structural changes like trade tariffs and
individual taxation because this leads to public scrutiny and populations ask for more political
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http://www.irena.org/DocumentDownloads/Publications/IRENA_Market_GCC_2016.pdf
http://www.irena.org/DocumentDownloads/Publications/IRENA_Market_GCC_2016.pdf
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representation. Instead, they follow top-down initiatives with low political cost, like the green
building code in Dubai or Masdar University in Abu Dhabi.
Bhutto et al. (2014) argue that a comprehensive and systematic plan for renewable energy should
include but not be limited to shifting subsidies from consumption to investment and promotional
tariffs, feed in tariff schemes, renewable portfolio standards, pricing laws, and quota systems.
The authors also stress the need for a trained workforce provided via a network of university
training programs. There are some telling examples of lack of adequate training. For instance, a
study has shown that if the towers of Bahrain World trade Center had been built exactly the other
way round, this would have generated 15 percent more electricity per year4. However, in the big
picture, such a comprehensive plan should inherently (a) address the security of supply to
“minimize the dangers involved with this dependence on external supply,” (b) support a
competitive energy market through provision of energy products and services, and (c) consider
environmental concerns (Doukas et al., 2008).
Research questions:
According to the literature, the institutional setting is an important consideration for sustainable
deployment of renewable energy. The two concepts of “energy subsidy” and “taxation” are
principal distinctive characteristics of MENA and especially GCC countries. This research will
answer the following two questions in this regard:
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What are the effects of “income taxation” and “tax exemption program” on renewable
energy deployment?
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How does “subsidy reform” affect the renewable energy sector?
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What is the effect of international treaty commitments on shaping the institutional setting
in the renewable energy sector?
Methodology:
This research will be conducted on two levels. At the theoretical level we use game theory and
contract theory to investigate the trade-off between subsidy reform and taxation. A number of
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https://www.tue.nl/en/university/news-and-press/news/23-04-2014-bahrain-world-trade-center-is-exactly-thewrong-way-round/
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other variables such as income inequality, political structure, or social security measures can
potentially affect the governmental choice between taxation and subsidy reform. In addition,
international commitments may also have a political impact on shaping such policies.
From the empirical perspective, this research looks for significant determinants of investment in
the renewable energy sector. To this end, we plan to first gather data on foreign/domestic
investment, energy production/consumption/import/export, diversity of energy portfolio, GDP,
government tax revenue, budget deficit, environmental measures like carbon emission,
international environmental commitment, and social/or political measures like income inequality
and education indices. Relevant data should be available from national and international
statistical authorities. After that, by conducting regression analysis in a relevant model or
comparing graphs, we can find trends and verify whether our theoretical predictions match
empirical analysis.
Expected outcomes:
It is expected that taxation, subsidy reform, and international commitment all contribute to the
development of the renewable energy sector in MENA countries. Depending upon data
availability, we may also be able to show the effect of income inequality, political structure, or
social security measures, as control variables that have co-variation with the three main
explanatory variables. There may also be region-specific characteristics explaining differences in
exploitation level of renewable energy resources.
References:
Arouri, M.E.H., Youssef, A.B., M'henni, H., Rault, C., 2012. Energy consumption, economic growth and
CO 2 emissions in Middle East and North African countries. Energy Policy 45, 342-349.
Bhutto, A.W., Bazmi, A.A., Zahedi, G., Klemeš, J.J., 2014. A review of progress in renewable energy
implementation in the Gulf Cooperation Council countries. Journal of Cleaner Production 71, 168-180.
Doukas, H., Patlitzianas, K., Kagiannas, A., Psarras, J., 2008. Energy policy making: an old concept or a
modern challenge? Energy Sources, Part B 3, 362-371.
Doukas, H., Patlitzianas, K.D., Kagiannas, A.G., Psarras, J., 2006. Renewable energy sources and rationale
use of energy development in the countries of GCC: Myth or reality? Renewable energy 31, 755-770.
El-Katiri, L., 2014. A roadmap for renewable energy in the middle east and north Africa. Oxford Institute
for Energy Studies.
El-Katiri, L., Husain, M., 2014. Prospects for Renewable Energy in GCC States…. art. cité, 14.
Ferroukhi, R., Ghazal-Aswad, N., Androulaki, S., Hawila, D., Mezher, T., 2013. Renewable energy in the
GCC: status and challenges. International Journal of Energy Sector Management 7, 84-112.
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Mirnezami, S.R., 2015. Do Oil-Producing Countries Have Normal Oil Overconsumption? An Investigation
of Economic Growth and Energy Subsidies.
Reiche, D., 2010. Energy Policies of Gulf Cooperation Council (GCC) countries—possibilities and
limitations of ecological modernization in rentier states. Energy Policy 38, 2395-2403.
Taleb, H., Pitts, A., 2009. The potential to exploit use of building-integrated photovoltaics in countries of
the Gulf Cooperation Council. Renewable energy 34, 1092-1099.
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