FORGING A NET ZERO FUTURE

South-east Asia grapples with challenge of ‘just transition’

Transformation of infrastructure through innovation, investments is vital for the scaling up of decarbonisation efforts across the region

AS SOUTH-EAST Asia steps up its efforts to address the problem of climate change, it is increasingly having to confront the challenge of achieving a "just transition" to a more sustainable future.

The just transition goal is to decarbonise the region without creating undue harm related to energy security, economic and social equity and equality. The enormity of that task has sparked vigorous debate about whether to have one's cake or to eat it if you can't do both.

The International Energy Agency's (IEA) South-east Asia Energy Outlook 2022 showed that the region has been reliant on heavily-polluting fossil fuels to drive massive economic expansion, urbanisation and industrialisation over the past two decades.

Power generation almost tripled since 2000, driven by a six-fold increase in coal-fired generation, which accounted for more than 40 per cent of total generation in 2020, the IEA said in the report released in May.

Moving that legacy onto a more sustainable footing will require significant investments, but a large gap persists on that front.

A report by Microsoft and Temasek estimated that more than half of the US$2 trillion investment needs in South-east Asia will likely be in sectors such as renewable energy, transportation and the built environment. But IEA's findings showed that the region's investments in renewable power have remained low compared to other regions, while capital costs of these technologies were kept relatively high given uncertainties over remuneration mechanisms and tariff levels for renewable output.

All in all, IEA estimated the region's annual green finance flows towards clean energy technologies to be around US$28 billion between 2016 and 2020.

In fact, South-east Asia - together with India - had the highest ratio of fossil fuel-to-renewable power investment. For every US dollar invested in renewable power capacity in South-east Asia, another dollar was invested in unabated fossil fuels, compared with 50 cents in Sub-Saharan Africa, 30 cents in China and 20 cents in Latin America.

Meanwhile, capital costs for utility-scale solar photovoltaic and wind in Indonesia are higher than in South Africa and Brazil, and much higher than in China or India, it noted.

Measured goals

The possibility that substantial populations may not have the resources to transition smoothly to a low-carbon future has led some players to be more cautious about how fast and far to push the climate agenda.

On Monday (Oct 31), United Overseas Bank announced its strategy to reach net zero by 2050 in certain key sectors. Notably missing from its commitments were targets for downstream oil and gas, a decision founded on concerns about a just transition.

In response to queries by The Business Times, UOB chief sustainability officer Eric Lim said the bank will oversee a power transition that is more gradual in emerging economies such as Indonesia, but faster in developed countries such as Singapore.

This means the bank "will continue to support our power clients in setting and achieving diversification goals for their businesses through structured engagement and our transition finance framework", he added.

Lim is under no illusions that South-east Asia is one of the most vulnerable regions to climate change. He added that the only way to push back its effects is to embark on a "significant change in direction", as he cited IEA's projection that its total energy consumption will rise by 38 per cent between 2020 and 2030 based on current national policies.

But he is of the view that the cost to adopt lower-carbon alternatives in emerging economies has to go down first, or it risks leaving parts of the population behind in poverty and a persistent lack of access to affordable energy.

A just transition is measured through supporting employment and ensuring energy access, security and affordability, he stressed.

UOB's chief sustainability officer Eric Lim says the bank will oversee a power transition that is more gradual in emerging economies such as Indonesia, but faster in developed countries such as Singapore. PHOTO: NUDGE PHOTOGRAPHY

Pointing out that most South-east Asian countries are emerging economies, he said the need for decarbonisation in several countries is currently competing with the goal to extend energy access to parts of the population to enable economic development and alleviate poverty.

However, the desire for energy security has to be achieved through self-sufficiency, where reliable and affordable access is paramount, he stated.

This means the transformation of national infrastructure through technology innovation and investments is imperative for the scaling up of decarbonisation plans by industries and companies, he said. "Being able to bring renewable energy sources at scale and at affordable prices is the key to a successful energy transition."

Timothy Colyer of management consulting firm Oliver Wyman said banks should not shun controversial issues unique to the region, such as palm oil land-use change and its use as a feedstock for biofuels, which are a key transitionary technology for transportation.

Bad environmental, social and governance practices - both deforestation and social - have correctly resulted in pressure from overseas investors, but a blanket rejection of the sector is "bad for the region and the world" as well, he noted.

The region needs to further develop initiatives such as the Roundtable on Sustainable Palm Oil, which can help create a palm oil sector that can be a contributor to the transition, he said.

High ambitions

But Colyer, who heads climate and sustainability for Asia-Pacific at his firm, also stressed that South-east Asia needs significant inbound investment to achieve the scale of transition needed and there is a need to coordinate global finance to make this happen.

For instance, low-carbon alternatives currently require upfront investment that return less economic output per dollar invested. This is problematic in emerging markets (EMs) where investment dollars are scarce and the need for increased economic output is stark, he said.

However, he pointed out, if EMs do not invest in these technologies, they risk being left behind and lumbered with stranded assets while other countries transition their economies to low-carbon alternatives as well.

"Owning the world's last coal mines and oil fields as demand for these commodities disappear will not be a good place to be," he warned.

Agreeing, Kate Blaszak, director of protein transition at Asia Research & Engagement, said: "The longer banks and companies wait, the harder the transition will be, and the greater the potential for climate impacts to translate to stranded assets and economic imposition."

Engie Impact's director of sustainability solutions Amandeep Bedi said ambitious carbon neutrality targets and timelines must become the starting point for all policy and business decisions. For governments, this includes "super-charging efforts" to scale renewable energy sources, up to the point where they are affordable and economically competitive, he said.

It is also critical for stakeholders to progress on climate finance at the upcoming United Nations climate change conference in Egypt, including the delivery of the promised US$100 billion per year to assist developing countries, he said.

Not only will this help developing countries transition without compromising on their fundamental growth needs, this will also support the transition away from coal and create new green jobs and skills, Bedi said.

Finding solutions

In the near term, Colyer suggested that the highest priorities be placed on sectors where low-carbon technologies are mature and economically viable - namely, power, automotive and real estate - although he noted that "most paths go through power" in the longer term.

"For automotive to decarbonise, it needs to electrify. For real estate to decarbonise, it needs low-emission energy. For steel and cement to decarbonise, it will probably require green hydrogen, which needs renewable energy. For shipping and aviation to decarbonise, it requires lower emission fuel sources," he said.

Capital markets play a part too, said BNY Mellon Investment Management's chief economist Shamik Dhar, citing research that more than half of the estimated US$100 trillion in global green investment required will be needed in EMs.

"To transition fairly, developed markets need to help EMs find the capital they need, and this is where financial institutions and investors can make an impact by directing financing towards EMs and help them get up to speed in transition development," he said.

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