[Analytics] How coal-hungry Asia can stoke its transition to green energy

Whether the world even comes close to a net zero future will depend largely on energy policy decisions taken in Asia. The risks, scale and needed speed of Asia’s energy transition require at least some financial burden-sharing by governments. Frederic Neumann, Joseph Incalcaterra specially for the South China Morning Post.

Soaring energy prices are putting Asia in a pinch. Since the region is highly dependent on imports of fossil fuels, growth is bound to suffer. At the same time, the rising cost of oil, gas and coal will further stoke price pressures.

That’s a challenging combination for Asian economies already buffeted by the pandemic, China’s recent growth wobble and softening demand for its exports.

There is, however, a silver lining. The surging cost of fossil fuels should, in principle, accelerate the transition to greener forms of energy. Renewable sources, after all, have now become even more cost competitive.

Surely, the current energy crunch will only speed up the adoption of new technologies, weaning Asia off the stuff that’s spewing carbon dioxide into the atmosphere and warming the planet.

Urgent action is needed. Whether the world even comes close to a net zero future necessary to limit the global rise in temperatures will depend largely on energy policy decisions taken in Asia.

Its robust growth prospects – at least by global standards – coal-heavy power sector, and overall energy intensity of growth lend an acute sense of urgency to the region’s energy transition plans.

Climate change poses a risk to lives and livelihoods that far surpasses the economic disruptions of the current energy crunch. Last year, Asia accounted for well over half of all global carbon dioxide emissions.

And while China and India are the world’s biggest and third-biggest emitters, the rest of the region still accounts for over a sixth of world output.

What is China doing about climate change?

Fortunately, most governments in Asia have heeded the call to action. Several have set a net zero target for either 2050 or 2060. Investment in renewable energy is soaring.

China is leading the way, pledging to install more such capacity by the end of this decade than the rest of the region combined – a plan that calls for annual investments equivalent to Germany’s existing renewables capacity.

In India and Australia, renewables are projected to account for over half of power generation by 2030, up from around a quarter today. But it’s not just the larger or richer economies that are pressing ahead.

Sri Lanka has set a target of generating 70 per cent of its power from renewables by the end of the decade. In the Philippines, solar, wind and geothermal power will account for nearly 40 per cent of total capacity in 2030, more than double the current share.

That’s impressive. But, despite all these commitments, a hard reality prevails. Given the region’s rapid growth, driven by especially-energy-hungry sectors like construction and manufacturing, fossil fuels will remain a key energy source in the coming years.

Coal dominates, and last year it still accounted for over half of electricity generation in the majority of the region’s major economies.

New coal-fired power plants are, in fact, still being built. Thus, even if the share of renewables in total power generation is set to rise, the use of coal, the dirtiest of the fossil fuels, will continue to climb over the coming years, pushing up carbon dioxide emissions further.

For Asia overall, the use of coal will only peak in 2025, that of gas, admittedly cleaner but still problematic, only in 2035.

To reach even intermediate carbon dioxide reduction targets, let alone net zero in a few decades, the investment in renewables will have to be scaled up much further.

For example, to meet planned carbon dioxide emission cuts by 2030, annual investments of nearly 0.9 per cent of gross domestic product would be needed on average across Asia. A considerable amount – though not unmanageable in principle.

But the challenge, as always, is political. Government budgets, already stretched by the pandemic and under persistent strain from competing priorities, will not be fully able to absorb the cost.

The private sector will need to shoulder much of the burden, and here regulation can spur things along with the right incentives, from carbon taxes to emissions trading schemes.

However, only Japan and Singapore have a fully-fledged carbon tax system in place, while proposals have been floated in Indonesia and Malaysia. Elsewhere, if debated at all, carbon taxes are likely to be adopted only in many years’ time.

Emissions trading schemes, a market-based incentive to reduce pollution, are even trickier to implement and only a handful of economies, among them China, have set this up so far.

China launches world’s largest carbon-trading scheme as part of 2060 carbon neutrality goal
Taxes and regulatory incentives, however, will only help so much. In the end, governments still need to stand at the ready with some direct budgetary support.

Obsolete power plants need to be decommissioned, subsidies for some new, daring ventures in renewables are needed, and entire electricity grids have to be restructured and vastly expanded to accommodate, for example, the rise in electric vehicle use.

The risks, scale and needed speed of Asia’s energy transition require at least some financial burden-sharing by governments.

Richer economies, of course, can do this by tightening belts and switching budget allocations. Poorer ones are in a far more difficult position, with pressing spending commitments from health care and education to welfare and infrastructure. The latter, therefore, will require the help of the former.

Here, the upcoming COP26 conference offers another opportunity to strengthen the commitment – not just to climate change goals broadly, but to specific steps, including financial, to get everyone on the track to more sustainable forms of energy.

The current energy crunch, for all the economic uncertainty it prompts, at least offers a little spur towards an urgently needed energy transition in Asia. But it also offers a faint glimpse of the disruptions that will ensue should the world fail to heed the call.

Frederic Neumann is co-head of Asian economics research at HSBC. Joseph Incalcaterra is HSBC’s chief Asean economist