[Aziz Durrani] Reset Southeast Asia’s Climate Agenda

High inflation, rising interest rates, falling currencies and volatile energy prices, along with economic slowdown and post-pandemic fiscal issues, could increase pressure on ASEAN+3 – the 10-member Association of Southeast Asian Nations, along with China, Japan and South Korea – to reduce efforts to mitigate climate risks. While this policy change may be fiscally sound, it is a mistake that could have serious repercussions for the region and ultimately lead to slower economic growth and higher great financial instability.

If not taken into account, the risks that climate change poses to ASEAN+3 countries could have far-reaching implications for agricultural production, water availability, energy security, transport and the region’s infrastructure, tourism industries and coastal resources. Over the past two years, floods, cyclones, droughts, sea level rise and landslides have become an increasingly frequent feature of life. Myanmar, the Philippines, Vietnam and Thailand are among the 10 most climate-vulnerable countries in the world, having suffered the highest number of deaths and economic losses from weather-related disasters between 1999 and 2018. .

In addition to these physical risks, the transition to a low-carbon economy carries risks of its own. For starters, industries that rely heavily on fossil fuels increasingly face heavier regulatory burdens. Much of the region’s oil, gas and coal reserves could end up being left in the ground and discounted or written off entirely. Changes in energy policy are also likely to increase banks’ credit risks. If Indonesia, the Philippines and Vietnam meet their commitments under the 2015 Paris Agreement, for example, coal-fired power plants valued at $60 billion will become stranded assets in 15 years, instead of 40.

The green transition would most likely also affect the profitability of coal mines elsewhere in the region, such as in Indonesia. And European Union efforts to move away from palm oil-based biofuel and encourage the use of deforestation-free products could turn land banks in Malaysia and Indonesia into stranded assets. But despite these transition risks, doing nothing would ultimately be more costly for ASEAN economies.

Certainly, ASEAN countries have taken steps to mitigate climate risks. Brunei has put in place coastal protection structures. Indonesia has promoted mangroves and climate-tolerant crop varieties. Laos has developed sustainable crop management techniques. And Malaysia has pursued climate-smart technology and organic farming.

But despite these improvements, there is still a long way to go to meet the renewable energy targets of ASEAN+3 countries. Several initiatives could support the region’s efforts: the ASEAN Action Plan for Energy Cooperation, for example, aims to increase renewable energy to 23% of the region’s energy supply by 2025, compared to 14% in 2017. And the 2021 Carbon Forum – China, Japan and South Korea’s neutrality targets presented concrete ideas for achieving net-zero emissions through trilateral cooperation on innovation and technology.

Carbon pricing is essential to the green transition. ASEAN+3 countries have led discussions on the balance between pricing systems and the need to stimulate economic growth. In July 2021, China launched the operation of its national emissions trading system, designed to be a “significant market instrument” to help China achieve its climate goals. A year later, although still facing data quality issues, China’s ETS is the largest in the world in terms of emissions covered, and prices are steadily rising. Although calls have been made for a region-wide carbon tax, this idea seems unlikely in the short term, given the differences in tax regimes. Nevertheless, a carbon tax is likely to remain at the center of discussions within ASEAN+3 for the next few years.

Promoting sustainable finance will also be essential for a successful transition, as the financial sector could drive economy-wide change. In recent years, many central banks and financial supervisors in Asia have implemented, or started to implement, such measures, despite continued capacity and resource constraints.

In the short term, central banks and financial regulators in ASEAN+3 have significant leeway to incentivize the transition to a low-carbon economy by incentivizing businesses and lenders to reduce their carbon consumption. and to focus on renewable energy and green technologies. Such measures would encourage a similar shift across the economy, leading companies to integrate climate risks into their products and services.

By promoting low-carbon policies and encouraging green finance, policymakers could stimulate new renewable energy sectors and boost economic growth. Moreover, reducing their reliance on dollar-denominated fossil fuels would allow ASEAN+3 countries to redirect government revenues from maintaining large foreign exchange reserves to domestic policies.

To minimize the adverse effects of climate change on their people and economies, ASEAN+3 policymakers must implement risk mitigation policies that help prevent regional spillovers and encourage the emergence of new industries and technologies. It would also enhance energy security. Cutting off the sun and the wind is much more difficult than blowing up a gas pipeline.

Aziz Durrani

Aziz Durrani is a capacity development expert at the Singapore-based ASEAN+3 Macroeconomic Research Bureau. — Ed.

(Project Syndicate)

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