Bahrain advances on the path to Net Zero 2060
Achieving carbon neutrality by 2060 is a considerable challenge for an arid country like the Kingdom of Bahrain, where heavy industry makes a large contribution to national income. It requires mechanisms that motivate businesses to exert extraordinary decarbonization efforts given the absence of carbon in a traditional corporate balance sheet and profit and loss account. The recently launched Green Factory Seal initiative reflects the government’s awareness of the need to change the incentives that businesses face when making carbon-related operational decisions.
In his 1920 treatise, The Economics of Welfare, the British economist Arthur Cecil Pigou formalized the concept of a ‘negative externality’, which is defined as a cost arising from an economic activity that affects third parties. A classic example is an airport causing noise pollution for neighboring houses. The key insight is that – since the negative externality doesn’t appear in the bottom-line calculations of the party causing the externality – it will ignore the impact, leading to levels that are sub-optimally high from a societal perspective.
Pigou used this to argue in favor of governments using taxes and regulation to make the party causing the negative externality ‘internalize’ it, as in the case of the large excise duties imposed upon cigarettes due to smoking-related negative externalities, such as second-hand smoke inhalation.
In the 21st century, carbon emissions are considered one of the most salient negative externalities. It is especially vexing because of the global nature of the externality: carbon released by an Australian farmer equally affects – through global warming – Russians, South Africans, and Brazilians, rather than just those in the farmer’s immediate surroundings. This makes it much more difficult for the party succumbing to the negative externality to negotiate with its source, placing a greater onus on the government to take corrective action.
This reality has spawned a broad range of government interventions seeking to decarbonize their economies, with some degree of global coordination through mechanisms, such as the Kyoto Protocol and the Paris Agreement. Examples include tradeable carbon permits (credits) and direct carbon taxes. In countries such as Germany and Sweden, they have been very effective in decreasing the economy’s aggregate carbon footprint in a manner consistent with the broad blueprint laid down by Pigou during the first quarter of the 20th century.
Bahrain’s commitment to net zero 2060 requires adopting many fiscal and regulatory reforms that motivate businesses to be more judicious about the volume of carbon they release into the atmosphere. Historically, the government has preferred a laissez-faire approach to its local industry, with the limited environmental regulation targeting pollution where the adverse impact is centered on Bahrain, such as air pollution and the disposal of hazardous materials. This affords policymakers a wide range of latitude in adopting new initiatives that help the Kingdom achieve its climate goals.
In this vein, Bahrain’s Ministry of Industry and Commerce has launched a Green Factory Seal program. Manufacturing companies are encouraged to demonstrate adherence to a suite of environmental criteria, including the use of renewable energy in operations, reusing industrial waste in production, utilizing carbon capture, and others. Those that succeed earn a selection of benefits, such as favorable financing and support in the export promotion domain.
In early February, over 40 Bahrain-based factories were awarded the Green Factory Seal, confirming the program’s success in inducing more environmentally conscious behavior. The industrial sector is especially important to Bahrain’s decarbonization efforts given its supernormal contribution to aggregate economic activity within the Kingdom, making the Ministry’s initiative both timely and impactful.
Despite the enlarged role of heavy manufacturing in Bahrain’s economy, achieving the 2060 target requires substantive efforts in many other sectors. For example, residential electricity users must learn more responsible consumption habits, and this is reflected in the range of reforms introduced by the Ministry of Electricity and the Electricity and Water Authority, such as restructuring of subsidies and permitting net metering. Nevertheless, the Green Factory Seal plays a dual role, with its impact on the public’s awareness and on the Kingdom’s global reputation complementing the direct carbon-reduction returns.
If Bahrain is to reconcile industrial strength with environmental responsibility, initiatives such as the Green Factory Seal demonstrate that aligning incentives with long-term climate objectives is not only feasible, but essential to placing the Kingdom on a credible and economically sustainable path to Net Zero 2060.
Dr. Omar Ahmad AlUbaydli, Director of Studies and Research
