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Climate Agreements’ Implementation Through Energy Transition and Economic Diversification in Kuwait

Part of the Gulf Studies book series (GS,volume 1)

Abstract

The Paris Agreement has identified climate change mitigation as a goal, aiming to hold “the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C above pre-industrial levels” (Paris Agreement, art. 2.1). The Agreement also recognizes that the current need for adaptation necessary to achieve the said goal “is significant and that greater levels of mitigation can reduce the need for additional adaptation efforts, and that greater adaptation needs can involve greater adaptation costs” (UNFCCC in Sendai framework for disaster risk reduction, 2015 Art 7.4). Climate change mitigation and climate-resilient development require energy transition away from fossil fuels to clean and renewable energy sources. Energy transition is happening in most countries, with different motivations and objectives. Adaptation measures, by contrast, are those changes that need to be introduced in response to the global adoption of climate change mitigation. This chapter examines how Kuwait can head toward energy transition and a larger economic diversification following a structural transformation of its economy. The energy transition from fossil fuels to renewables is necessary in order to reduce CO2 emissions and to free up hydrocarbon resources for export. Economic sustainability entails securing alternative sources of revenue to substitute for that generated by oil rents, which would be a solution to the intrinsically unsustainable nature of oil rents and the lack of diversification. Efficiency-enhancing structural change is required to achieve productivity growth in non-energy sectors that are also export-oriented—thereby achieving meaningful diversification. Policy reforms include competition and private sector reform. Moreover, energy pricing reform and revising energy subsidization are required in order to rationalize energy consumption, achieve energy efficiency, and encourage a more diversified growth while reducing greenhouse-gas emissions.

Keywords

  • Kuwait
  • Climate change
  • Energy transition
  • Economic diversification
  • Mitigation

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Fig. 1

Source WDI (2019), Statista (2019)

Fig. 2
Fig. 3

Source Malyshev et al. (2019, p. 24)

Fig. 4
Fig. 5

Source IEA (2019)

Fig. 6

Source IEA (2019)

Fig. 7

Source WDI (2019)

Fig. 8

Source Malyshev et al. (2019, p. 71)

Fig. 9

Source WITS (2019)

Fig. 10

Source Atlas of Economic Complexity (2019)

Fig. 11

Source WDI (2019)

Notes

  1. 1.

    See Shehabi (2017) and El-Katiri et al. (2011) for details on energy subsidies and pricing.

  2. 2.

    To this end, important strategic projects include the planned building of a polypropylene plant through a joint venture with a Canadian company, likely to be commissioned in 2023; and the Olefin project, likely to be started by 2025 (Malyshev et al. 2019).

  3. 3.

    Oil has been shown to be one of the most volatile of all traded commodities (Plourde and Watkins 1998; Pindyck 2004; Regnier 2007).

  4. 4.

    The HHI index is calculated as the sum of squared shares of the various industries in gross value added. When a country’s trade is concentrated in very few markets, the value of this index is close to 1. Conversely, the index approaches zero when a country has a perfectly diversified trade portfolio (World Bank 2019a). The index effectively measures the dispersion of trade value across an exporter’s partners. Within the GCC, the UAE appears the most diversified (HHI = 0.05) and Oman the most trade-concentrated (HHI = 0.30).

  5. 5.

    Knowledge intensity is important when measuring ECI; the export of products shows the knowledge intensity of an economy (OEC 2019).

  6. 6.

    An input-output table is a detailed presentation, often prepared by national statistical agencies, of “the process of production and the use of goods and services (products) and the income generated in that production” (OECD, n.d.) and the intermediates.

  7. 7.

    Even upon the decline of the oil price in 2014, which slashed outflows into the SWFs dramatically, investments abroad were more than 10 times inward FDI. In 2018, outward FDI exceeded 11% of GFC (USD$3751 million), while inflows represented a meager 1% of GFC formation (USD$346 million) (UNCTAD 2019).

  8. 8.

    Kuwait has two SWFs managed by the Kuwait Investment Authority (KIA) abroad. The KIA was set up to hold substantial wealth abroad in diversified assets and geographic locations. The government is required by law to contribute 10% (which became 25% between 2012 and 2014) of oil export revenue to the Future Generations Fund (FGF), and to invest any remaining fiscal surpluses in the other SWF, the General Reserve Fund (GRF).

  9. 9.

    Laws were enacted as early as 2000 to attract FDI. In 2000, foreigner investors were allowed to buy shares in companies listed on the Kuwaiti Stock Exchange, and in 2008 they could own non-listed shareholding companies. The Companies Law No. 97 of 2013 eliminated some foreign ownership restrictions, permitting total ownership of shareholding companies.

  10. 10.

    GCC states except for Oman, for which no data were available.

  11. 11.

    Undoubtedly, some barriers to FDI include exogenous factors such as geopolitical and geographic risk (given the region’s stability, or lack thereof) and possibly other endogenous variables such as cultural ones.

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Correspondence to Nathalie Hilmi .

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Hilmi, N., Farahmand, S., Shehabi, M. (2020). Climate Agreements’ Implementation Through Energy Transition and Economic Diversification in Kuwait. In: Miniaoui, H. (eds) Economic Development in the Gulf Cooperation Council Countries. Gulf Studies, vol 1. Springer, Singapore. https://doi.org/10.1007/978-981-15-6058-3_2

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