In June, the Dubai Multi Commodities Centre (DMCC) signed a memorandum of understanding with EcoSecurities, a London-listed emissions reduction project developer, to work together on making Dubai a regional centre for carbon trading. 'We are confident that the Middle East and North Africa can be a lucrative market,' says Souheil Abboud, EcoSecurities' Dubai-based regional manager. 'There is huge potential.'

Other participants in the carbon business are also looking to Dubai. 'I have high hopes for the region,' says Adrian Stott, London-based carbon credit origination manager at EDF Trading, the trading arm of France's state-owned energy giant EDF. 'I expect to see a lot of projects [to reduce greenhouse gas emissions] coming on line.'

The carbon market has grown mainly as a result of the 1997 Kyoto Protocol, an international agreement that requires industrialised countries to reduce greenhouse gas emissions by an average of 5.2 per cent below 1990 levels between 2008 and 2012. The protocol was adopted by all parties to the UN Framework Convention on Climate Change (UNFCCC), and although the US and Australia subsequently withdrew from the treaty, it came into force in February 2005.

Under the terms of the protocol, a series of so-called 'flexible mechanisms' can be used to help these countries meet their emission reduction targets. These mechanisms are market-based instruments that include international emissions trading and the Clean Development Mechanism (CDM).

The CDM allows projects that limit or reduce greenhouse gas emissions, and contribute to sustainable development, across 15 industry sectors to be undertaken in developing countries. If authorised by the CDM Executive Board, the UN-appointed body that oversees the project approval process, the projects will earn carbon credits, known as certified emission reductions (CERs), for the project investors. Each CER is equivalent to one tonne of carbon dioxide (CO2) and can be sold to governments to help them meet their Kyoto targets, or to companies for compliance purposes under 'cap-and-trade' systems, such as the EU Emissions Trading Scheme which was set up by the EU in 2005 to help member states make the cuts in greenhouse gas emissions needed for Kyoto.

The main objective of the DMCC and EcoSecurties agreement is to identify potential projects, primarily in the UAE, that could be developed under the CDM, says Abboud.

'The [carbon] market is in its infancy here, but it could easily become one of the top regions for the CDM,' he says. 'We want to put the Arab world on the CDM map.'

EcoSecurities acted as adviser on the first CDM project in the GCC to be registered by the UNFCCC. The project, operated by Qatar Petroleum, captures and processes gas, which was previously flared, from the Al-Shaheen oil field off the coast of Qatar. The project reduces gas flared by 80 per cent and is expected to generate more than 2 million CERs a year (see table, page 29). It was registered by the CDM Executive Board at the end of May, and is now authorised to generate CERs.

'The project is a great morale boost for the region,' says Abboud. 'We could see a lot of similar projects coming along as big as Qatar Petroleum's, generating millions and millions of CERs.'

Many Gulf countries are already looking to reduce flaring, so generating CERs could be a tradeable side-effect.

DMCC and EcoSecurities are not the only companies in the region looking to seize the initiative in the carbon market. In January, Abu Dhabi Future Energy Company (Adfec), part of the Masdar initiative, launched a carbon management programme that aims to develop a sustainable infrastructure to reduce emissions and generate carbon credits.

Masdar was set up in April 2006 by the Abu Dhabi government to turn the emirate into a regional hub for new and clean energy technologies (see feature, page 26). The carbon programme is just one aspect of the initiative and will focus on developing CDM projects and establishing a nationwide network for carbon capture and storage a new technology under development to capture CO2 emissions at source and then bury them in underground reservoirs, such as depleted oil fields. 'The intention is to build a global market for carbon in Abu Dhabi,' says Sultan Ahmed al-Jaber, chief executive officer of Adfec and Masdar.

The company has a mandate to develop CDM projects with its sister companies in the emirate, such as Abu Dhabi National Oil Company, and is acting as a project developer in the rest of the region. 'We have a huge portfolio [of projects] to be developed,' says Al-Jaber.

The first projects are expected to be registered by the UN in the first quarter of next year, he adds.

In Saudi Arabia, consultant Xenel-Balderrie describes itself as 'a one-stop service to cover all steps of CDM project implementation'. It is working with companies such as National Petrochemical Company (Sadaf) and Safra Company, another petrochemicals firm, to develop CDM projects in the kingdom.

A wide range of projects could be developed. As well as gas-flare reduction, carbon market specialists mention energy efficiency particularly in the cement and aluminium industries, given the construction boom in the region fuel switching, renewable energy, and landfill gas recovery and utilisation as sectors with good CDM potential.

'The Gulf countries offer good opportunities in all these areas,' says Marco Monroy, president of MGM International, a Florida-based emissions reduction project developer.

Two of the 46 CDM projects in MGM's portfolio are in the Middle East and North Africa. They are a 100-MW combined-cycle thermal power plant at Samra in Jordan and a biomass fuel-switching project at a cement plant in Egypt owned by Cemex, the Mexico-based cement producer. Monroy says the design documents for each project are close to completion and will soon be sent to the UN for validation and registration.

EDF's Stott expects a lot of big projects to be developed that will provide 'low-lying fruit' for investors. By this, he means relatively low-risk CDM projects that can provide large volumes of low-cost carbon credits.

CDM projects carry a wide range of risks country, technology and regulatory so prices for carbon credits bought directly from a project, called primary CERs, vary considerably. In 2006, the price for primary CERs ranged from $6.80 to $24.75 a tonne of CO2,according to World Bank estimates. Current prices for secondary CERs carbon credits that have been issued and sold by project developers and traded again are now selling for about $19.

The region has been recognised for the quality of some of its projects. In June, the first CDM project to be registered in Egypt won the 'achievement in carbon finance' award in the Financial Times/International Finance Corporation 2007 Sustainable Banking Awards.

The project abates nitrous oxide (N20) a potent greenhouse gas with a global warming potential 296 times greater than CO2 from nitric acid production at Abu Qir Fertiliser Company's plants. The project was registered in October 2006 (see table below), and was the first N20 destruction project under the CDM.

Projects that destroy industrial gases, such as N20, have come under increasing scrutiny from critics of the carbon market for generating large profits for developers, but few sustainable development benefits. However, in the case of the Abu Qir project, 3 per cent of the income from the sale of carbon credits has been allocated to a social fund to benefit local people by financing new schools, hospitals and infrastructure.

There is no doubt that the region has lagged behind the rest of the world, particularly the rest of Asia and Latin America, in CDM project development (see pie chart). There are several reasons for this, including: an all-round lack of understanding of the greenhouse gas market; suspicion of the Kyoto Protocol's impact on the global oil industry particularly from Saudi Arabia; and a general lack of the policy infrastructure needed to develop projects. But things are changing.

In the Gulf, the governments of Bahrain, Kuwait, the UAE and Qatar have set up departments, known as designated national authorities, to approve CDM projects. And according to carbon market sources, Saudi Arabia is in the process of establishing its own.

MGM's Monroy is in no doubt that carbon trading will grow in the Middle East. 'There are several ambitious initiatives to make the region a hub for innovation in low or non-carbon technology,' he says. 'I am sure that they will achieve it because they have the financial resources and vision. So, despite their late arrival, we will see a strong presence in the [carbon] market in the next few years.'