Hard to justify low carbon prices in Asia-Pacific’s developed markets: BMI
Janice Lim
WHILE low carbon prices can be beneficial – especially when carbon-pricing instruments are introduced with enough time for market participants to learn and adapt – it is hard to justify the current price levels in Asia-Pacific’s developed markets, such as South Korea and Japan, a new report shows. This is considering how far they fall behind equivalent schemes in the European Union (EU), United Kingdom, United States and Canada.
Low carbon prices have the potential to stifle decarbonisation efforts as they may disincentivise investments into renewable energy resources and energy efficiency, said the May 9 report from BMI, the financial research arm of Fitch Solutions.
While estimates of appropriate carbon-pricing levels vary, the report cited the International Monetary Fund’s argument for carbon prices to rise to US$75 per tonne of carbon dioxide equivalent by 2030 for developed markets. For emerging markets, the prices would range between US$25 and US$50 per tonne.
The carbon price for Tokyo’s cap-and-trade programme in 2022 was US$4.94 per tonne of carbon dioxide equivalent, while Japan’s carbon tax is set at US$2.
Singapore’s carbon tax stands at US$3.75 per tonne of carbon dioxide equivalent, while South Korea’s carbon price, as a result of its national emissions trading scheme, is US$15.97.
“We are relatively sanguine on the prospects for a wider spread of carbon-pricing instruments in Asia, although price levels and coverage, as in most markets, will remain a concern,” said BMI in the report.
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While developed markets in Asia-Pacific are generally less emissions-intensive than their emerging market counterparts, their carbon-pricing instruments “fall far short” of equivalent schemes in North America and Europe, the report found.
In contrast, emerging markets in Asia-Pacific are outpacing those outside of the region in their adoption of carbon pricing, with action stimulated by less economic reliance on commodity exports, an often-heavy dependence on fossil fuel imports, and favourable natural resource endowments for renewables, the report showed.
It also noted that European power markets tend to be well-connected, while those in Asia-Pacific generally have little or no connectivity and so rely more heavily on domestic energy resources or fuels, such as liquefied natural gas and coal, that are easy to import.
“They also lack a (body equivalent to the EU’s) to put in place the appropriate policies, regulations, financial incentives and funding schemes to accelerate the deployment of renewables,” said BMI. “For these reasons, they often allow for a greater and longer-lasting role for fossil fuels in their power and broader energy mixes.”
This, however, has caused the energy trade deficit for Asia-Pacific to widen, especially due to higher energy prices in the last year, leading to deteriorating terms of trade and pressure on local currencies. Fuel subsidies used pervasively across the region also impose significant costs on governments.
The report noted: “The global pandemic left Asian markets saddled with larger public debt loads and financing gaps, while high and volatile energy prices exposed balance-of-payments vulnerabilities in a number of markets last year, most notably in South Asia.”
Hence, introducing carbon-pricing instruments to more Asia-Pacific markets would not only alleviate the region’s reliance on imported fossil fuels, but also benefit its local economies in the long term as well as improve macroeconomic resilience.
For instance, carbon-pricing instruments can help markets in the region reduce their exposure to volatile commodity price cycles. Along with a rollback of energy subsidies, these could improve resource allocation in the economy, create much-needed fiscal space, and aid ongoing efforts at fiscal consolidation.
A well-functioning carbon-pricing instrument can also play a critical role in funding emissions abatement and climate adaptation, as well as in redressing any negative distributional impacts stemming from the energy transition.
Even so, the report acknowledged that there are certain challenges in implementing carbon prices in Asia-Pacific. The move could be politically problematic, especially in the context of elevated energy prices and global inflation.
Rising carbon prices can also create short-term issues, such as impacting the competitiveness of affected industries, particularly if there is a limited scope for passing rising prices on to consumers. Asset-stranding risks will also rise at higher carbon price levels, although they will vary across different sectors and locations.
BMI noted that progress in setting up carbon pricing would hinge on strong policy support, institutional capacity-building, and careful implementation.
For carbon pricing to be effective in decarbonisation, there needs to be adequate room for switching to low-carbon energy alternatives. Policymakers may also have to set up guidelines for prioritising the offtake of electricity for renewable power projects rather than conventional thermal power plants.
These guidelines should also take into consideration the upskilling of workers as they transition from the fossil fuel sector to renewables. This would address the non-price barriers of renewable energy investment.
To be impactful, carbon-pricing instruments must also be durable and not subject to change with every electoral cycle. Markets with a greater capacity to form, enact and enforce policies, and with stable policy directions, are better placed to introduce carbon taxes and emissions-trading schemes.
Another challenge in implementing effective carbon pricing across Asia-Pacific is the high proportion of regulated energy markets. The report found that carbon-pricing instruments work better in liberalised markets, where competitive pressures compel deeper decarbonisation at higher price levels.
Instituting a carbon price for markets dominated by state-owned companies could end up increasing the government’s costs of operations, given that they are largely in control of power generation.
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