EU carbon tax already impacting UAE's power generation mix: energy official

The EU regulation that will tax imports of carbon-intensive goods is already impacting the energy mix in the oil and gas-rich UAE, a senior Emirati official said on Feb. 6.

The Carbon Border Adjustment Mechanism, or CBAM, which is currently in its transition phase, and will move to its definitive phase from Jan. 1, 2026, has forced producers of certain goods to reevaluate the energy that powers their production.

"We are preparing ourselves for that," Sharif al-Olama, the UAE's undersecretary for energy and petroleum affairs, told S&P Global Commodity Insights on the sidelines of the World Hydrogen Congress MENA.

Olama said reducing the energy intensity in the UAE's aluminum and steel industries is the primary focus of those sectors right now and that complying with the EU's regulations has already impacted the oil heavyweight's energy mix, adding that currently, 25% of the country's electricity needs come from clean sources.

The Gulf country's installed capacity for power generation in 2022 comprised 6% nuclear, 10% solar, 82% gas and 2% oil, according to analysis from Commodity Insights.

The same Commodity Insights analysis finds that by 2050, solar is expected to make up 52% of installed capacity, with gas dropping to 38% of the mix and oil falling below 1%. Nuclear energy's contribution to the mix is expected to remain approximately the same.

With green energy expected to assume a bigger role in the next decades, eight renewable energy projects are being constructed or are in development in the UAE, with memorandums of understanding signed for three projects, according to the MENA Energy Outlook 2025 from UAE-based think tank Dii Desert Energy. There are currently 34 operational renewable energy projects in the Gulf country.

CBAM is a carbon tax on emission-intensive commodities exported to the EU, currently covering cement, iron and steel, aluminum, fertilizer, electricity and hydrogen sectors. The levy is to reflect the difference between EU carbon prices, and carbon costs in exporting countries.

"But the idea is going to expand for sure. What we do for aluminum and steel, we're looking into other angles as well," Olama told Commodity Insights in an exclusive interview.

RAK Gas CEO Chris Wood said at the conference that glass- and ceramic-producing customers are also looking to decarbonize their energy sources as the EU is a major export market. RAK Gas is the UAE emirate of Ras al-Khaimah's state-owned integrated energy company.

Others in the industry have expressed skepticism over the feasibility of implementing CBAM, with one UAE-based energy executive saying the EU needed to rethink the scope and timeline for rolling out the regulations as its impact on certain industries is likely to be acutely felt.

Cement exported to the EU will be subject to new carbon intensity regulations, and it's expected to become more expensive. UAE cement, typically priced around $50-$55/mt FOB, is cheaper than its European counterparts, and it is expected that CBAM will add anywhere between Eur70-100/mt to European cement prices, according to sources.

"For a policy like CBAM to work, global collaboration is important," said Abdulhamit Akçay, vice chairman of Turkish Cement. Factors including the new Trump administration in the US and domestic European issues toward financing decarbonization have meant slowing momentum for CBAM, he said.

"There is a question mark, [but] if Europe maintains CBAM, then [cement] prices will go up in the long run," he said.

Emissions accounting

The EU has emerged as a key trade partner for the UAE in recent years, and Olama said talks with the EU were ongoing to understand any certification processes required for export to ensure CBAM compliance.

In 2023, the EU imported industrial products worth Eur16.991 billion from the UAE, with mineral products, transport equipment and base metals forming the bulk of these imports, according to data from the Directorate General for Trade and Economic Security of the European Commission.

The EU is the Gulf Cooperation Council's second biggest trade partner, representing 11.1% of the GCC's total trade in goods with the world in 2023. The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

CBAM-exposed importers must report on the quantity of imported goods, direct and indirect emissions embedded in them, and any carbon price payable on those emissions. CBAM certificates will then need to be acquired for 2.5% of emissions in 2026, rising to 100% by 2034.

Under the transitional phase of CBAM, which started on Oct. 31, 2023, traders must only report on emissions embedded in their imports without paying any financial adjustment. But this mechanism is to be phased in from 2026 to 2034, in step with the phasing out of free allowances in the EU Emissions Trading System.

CBAM aims to level the playing field for EU companies, as most exporting countries do not have a carbon price as high as EU ETS, or do not have a price on emissions at all.

European carbon prices have risen sharply at the start of 2025, driven by resurgent demand and a much stronger gas complex. The suspension of Russian gas transit via Ukraine on Jan. 1 led to higher coal power generation, boosting demand for carbon permits. Buying interest also returned as investment funds increased their net long positions.

EU Allowances have been trading near a 15-month high in recent weeks. Platts, part of S&P Global Commodity Insights, assessed EU Allowances for December 2024 at Eur81.04/mtCO2e ($83.95/mtCO2e) on Feb. 5.