Carbon pricing, growth, and green financing: Policy options for Saudi Arabia

Abstract

This study simulates the impact of hypothetical carbon-pricing policy options with alternative revenue recycling on Saudi Arabia’s economic growth and its decarbonization aspirations, using a semi-structural macro-sectoral econometric model, extended with energy and emissions linkages. The following findings are worth considering. (i) Deregulation of sales prices for 15 energy and 4 feedstock products, assumed in Business as Usual-BaU, raises prices in 2040 to 35% above 2025 levels. On average over the period 2025–2040, (ii) Carbon prices of 75 SAR per ton of CO2 emissions at the top of energy price reforms, with revenues spent under conventional budget patterns and channels, would reduce CO2 emissions by 5.2% against the BAU, but slows down economic growth by 0.5% against the BAU. (iii) A two-year vacatio legis for carbon pricing law, combined with short-term solar subsidies financed by green-bond borrowing, would ease economic drag to 0.4% below the BAU, while reducing emissions by 9% relative to the BaU. (iv) If instead, the carbon price revenues were recycled into long-term sustained support for renewable energy investments, economic growth could be even higher than in the BAU by 0.2%, while emissions could fall further to 15.4%.