The Road to COP28: Fueling a Green Revolution in the Middle East and North Africa by Bridging the Climate Finance Gap

Climate challenges and energy transition opportunities in MENA

The MENA region faces a mounting climate threat. In the worst-case climate scenario of global temperatures reaching 4°C above pre-industrial levels, countries like Algeria, Iraq and Saudi Arabia might grapple with summer temperatures soaring by up to 8°C by the century’s close. The fluctuating patterns also threaten the Mediterranean coastlines, with rainfall potentially halved, while regions like the southern Arabian Peninsula might face intensifying floods. Coastal cities like Tunis might experience a sea level rise of 1.2 meters by 2080.

Besides being vulnerable to the effects of climate change, the MENA region has a significant role to play in mitigation efforts because of its deep ties to hydrocarbons. While as consumers of hydrocarbons the people of the region have historically contributed little to climate change, the region’s fossil fuel production has made it home to some of the world’s top per capita carbon emitters.

Authorities in the MENA region must urgently address climate change and pursue energy transition; citizens simply cannot afford the luxury of inaction. Besides being vulnerable to the effects of climate change, the MENA region has a significant role to play in mitigation efforts because of its deep ties to hydrocarbons. While as consumers of hydrocarbons the people of the region have historically contributed little to climate change, the region’s fossil fuel production has made it home to some of the world’s top per capita carbon emitters (when scope 3 emissions are counted), including Bahrain, Kuwait, Qatar, Saudi Arabia and UAE. On the current trajectory, greenhouse gas (GHG) emissions from the region could triple by 2060.

However, in the shadow of these looming challenges lie many opportunities. MENA is bathed in a substantial portion of the earth’s solar energy. A single square kilometer in solar energy potential can rival the energy from 1-2 million barrels of oil every year. If harnessed efficiently, this could substantially contribute to global electricity supply. Wind energy potential, high in nations like Egypt, Morocco and Tunisia, also offers promise.

Transition to low-carbon energy in MENA: an imperative and an opportunity

Transitioning to a low-carbon energy system in MENA isn’t just an environmental imperative—it’s an economic and political one. Embracing renewables could invigorate economic growth, inspire industrial diversity and open doors to significant employment opportunities. For instance, Morocco’s shift in this direction could usher in nearly 400,000 jobs in the next twenty years. Uptake of renewables would also contribute to regional energy security in the long term. For example, Jordan aims to be a regional hub for renewable energy and to export through existing and planned interconnected transnational grids; it has already exported electricity to Palestine and is planning to expand exports to Lebanon and Iraq. In addition, the International Renewable Energy Agency projects that renewables could provide 53 percent of energy to the region by 2050 if governments institute the right policies.

While MENA governments acknowledge the critical importance of transitioning to low-carbon energy systems and leveraging the region’s renewable energy potential, achieving this transition requires not just political and economic will, but also the right financial mechanisms. Given the extensive economic and employment opportunities renewables can bring, as demonstrated in countries such as Morocco and Jordan, the international climate finance community must support the region’s effort to address the financial underpinnings of this shift. Climate finance mechanisms can bring the needed support. By harnessing tools such as grants, concessional loans, green bonds, and sukuk, the region’s governments and private sector can better navigate the financial challenges posed by global economic shifts and ensure the accessibility and affordability of green energy.

Finance remains an obstacle to MENA’s energy transition

In the 2015 Paris climate agreement, developed countries (Annex I) committed to assisting developing countries (Annex II) with climate finance to help them mitigate and adapt to climate change. MENA, mostly composed of Annex II countries, needs these funds to address its climate-related challenges. OECD data from 2020 indicate that the region attracted a flow of climate finance averaging between $2 and $3 billion annually since 2012. This steady flow, while additive, is modest when juxtaposed against the region’s pressing needs and vast potential for sustainable growth.

MENA countries are grappling with a substantial funding gap for the effective implementation of adaptation and mitigation measures, and concurrently, the international community is also struggling to allocate funds for climate projects in the region. A 2022 United Nations Economic and Social Commission for Western Asia policy brief, using OECD data and nationally determined contributions (NDCs) concluded that MENA countries, including Egypt, Iraq, Jordan, Mauritania, Morocco, Palestine, Sudan and Tunisia, now need a total of USD 570 billion in climate funding. Notably, Egypt, Iraq and Morocco account for USD 450 billion of this required funding. But MENA received a mere 11 percent of climate finance over the period 2000-2020, with a meager 4 percent deriving from UNFCCC climate funds.

Improving national governance systems

Governance challenges in the region impede the effective pursuit of climate finance. Notably, many countries lack comprehensive frameworks to adeptly harness, manage and supervise such funds. The UN offers guidance on instituting “integrated national financing frameworks.” However, the absence of detailed sectoral plans, strong governance, clear climate finance policies, accurate cost estimates for NDCs, and strategies for engaging the private sector makes it challenging for regional governments to determine which green projects to support and how to finance them. These shortcomings can also deter potential investors or donors.

Improving international climate finance schemes

Developed countries mainly provide public finance such as loans, resulting in an increase in borrowing countries’ public debt levels. Stakeholders can institute an array of alternatives to avoid compounding the financial burden on debt-laden countries that seek to advance their energy transition. For instance, debt-for-nature swaps—in which a portion of a developing country’s foreign debt is forgiven in exchange for local investments in environmental conservation measures—could be a double boon. And transparency in public climate finance accounting can instill confidence among domestic and international investors.  To improve their access to climate finance and the terms on which it is provided, MENA countries can support related international initiatives.

Tapping public and private sources of climate finance

According to the World Bank, MENA receives the least climate finance of any region. To bridge the financing gap, governments in the region should try to mobilize both public and private sources of funding. Regarding public finance, according to the International Monetary Fund, significant amounts of international public climate funds remain unused: “[W]orldwide deposits in climate funds have totaled $35 billion (from $43 billion in pledges). Of that amount, only $28 billion has been set aside for approved projects.” By putting together bankable projects, MENA countries could try to tap into these funds. In addition, countries in the region could mobilize domestic public finance by e.g., increasing public revenues or sovereign wealth fund investments.

Regarding private sector funding, banks, pension funds, insurance entities and domestic capital markets can play pivotal roles in financing climate mitigation efforts (though it is more challenging to get private funding for adaptation). The private sector accounts for a substantial proportion of climate finance on a global level. This increased consistently from 2011 to 2020, representing approximately 50 percent of total accumulated finance provided over the period.  To further tap into these funds, MENA countries can improve their investment environment (e.g., through improving overall governance, which can be weak in the region), as well as using tools like sovereign green bonds or green sukuk or other methods to allow private financing of public or otherwise unprofitable projects, such as co-financing. Green bonds differ from regular bonds because they are specifically designed to finance climate-related investments.. Additionally, sovereign guarantees can minimize perceived risks for the private sector. However, evidence is limited on how well such “blended finance” works in practice.

MENA governments could encourage domestic private investors to shift toward low-carbon investments by strengthening requirements for firms to disclose or mitigate climate-related risks, and requiring domestic financial sectors to dedicate a share of its investments to climate finance.

Recommendations for governments at COP28

For governments of donor nations and advanced economies:

• Develop a nuanced understanding of the MENA region’s diverse challenges and potential. Climate finance donors must provide tailored support in line with national priorities. They should combine this with active assistance to MENA governments to develop capacities to manage and invest climate finance.
• Generate and heed lessons from developed countries’ failure to deliver the USD 100 billion dollars committed in Copenhagen in 2009. The new collective quantified goal (NCQG) (initiated by parties to the UNFCCC at COP21) for a long-term financial plan needs to be built upon such lessons. The NCQG should include specific and clear criteria in collection, distribution and financial instruments, prioritizing grants for developing countries that are already swamped with debt.

For MENA governments:

• Build regional alliances. Collaborative initiatives, borne from shared challenges, can magnify impact.
• Introduce agility to investment strategies, seizing opportunities that align with sustainable development goals without awaiting ideal conditions. Governments should approach climate funders with bankable projects grounded in a holistic vision for their countries.

Abderrahim Assab is an economic and financial analysis specialist and a PhD researcher at the University of Edinburgh Business School. Hala Al Hamawi is PhD researcher specializing in climate finance politics at Nottingham Trent University.

This post summarizes key points discussed during the Arabic-language online event “Energy Transition and Climate Finance in MENA” held on 31 August 2023 as part of the webinar series: MENA Energy Transition and the Road to COP 28.