Promoting Sustainable Growth and Development in Saudi Arabia through Environmental Investments: The Role of Incentives

Abstract

This paper examines the role of financial and non-financial incentives in promoting environmental investment, which is critical in addressing the challenges of sustainable growth and development in the Kingdom of Saudi Arabia, whose economy is heavily dependent on fossil fuel that contributes to some of the environmental problems facing the country. The paper conducts an econometric analysis of the relationship between economic growth and environmental degradation and finds a negative and statistically significant relationship between environmental emissions and the growth rate of gross domestic product (GDP). However, the magnitude of the growth-environment coefficient shrinks when more ambitious cuts in environmental emissions are introduced, suggesting that environmental investments would help overcome environmental degradation and thereby lead to a sustainable Saudi Arabian economy. Attracting environmental investments, however, will require a strong policy incentive structure. As a result, the paper further investigates the link between policy incentives and environmental investment in the renewable energy sector of some European countries where data on a wide range of incentives exist. The estimated coefficients of all the incentive variables are positive and statistically significant at varying levels, suggesting that incentives matter in environmental investments, sending an important message to countries like Saudi Arabia that, by providing appropriate incentives, policy makers would be able to boost investments in renewable energy and other environmental goods and services and thereby help to promote sustainable growth and development.

Key words: sustainable development, Saudi Arabia, environmental investments, policy incentives, oil prices