Developing Asia faces moment of truth on outpricing dirty fuels

Energy-hungry Asia has been caught in the crosshairs of global supply risks, as the Israel-Gaza and Russia-Ukraine conflicts have loomed over oil-rich regions.

The volatile backdrop has exposed Asia's vulnerability to imports and underscored the need for its renewables push, with oil hovering around US$90 a barrel. But it also begs another question: will developing Asian nations impose a price on dirty energy?

Time is running out for the region - which currently accounts for half of global greenhouse gas emissions with its reliance on coal-fired power - to answer the question because of global warming and changing trade winds.

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Last month, the European Union rolled out the first phase of a system to impose carbon emission tariffs on imported steel, cement and other goods - provoking disquiet among key trading partners, including in Asia.

In the initial phase of the Carbon Border Adjustment Mechanism (CBAM), importers into the EU will have to report the greenhouse gas emissions generated during the production of iron and steel, aluminium, electricity, fertilisers and hydrogen. Companies failing to do so face fines.

From 2026, importers will have to purchase certificates to cover these emissions to put foreign producers on level with European companies who need to buy permits from the EU carbon market when they pollute. The EU says the point of the exercise is to also nudge other countries into setting their own carbon price.

There is a good chance that the fees will lead to inflation in products that are made with fossil fuels less appealing. Other jurisdictions such as Australia and the US are also considering frameworks similar to the CBAM, according to a Moody's report.

If implemented widely, it will increase costs for carbon-intensive sectors, likely nudging a greater switching to green energy, analysts say. The move, however, has ignited concerns that it will impose a crushing cost burden on small manufacturers and developing economies.

China and India are among several countries that have aired concerns about the EU's CBAM's compatibility with World Trade Organization rules. Asian steel and aluminium exporters are expected to be among the hardest hit, and smaller firms are already struggling to meet the norms for reporting emissions in the first phase.

"If emissions become a norm for trade, then they [the EU] can target Asia's rice production by the same argument because it generates huge amounts of methane," said Biswajit Dhar, a distinguished professor at the Council for Social Development, a New Delhi-based research institute.

The debate over carbon pricing has brought into spotlight another key issue: should emerging Asian economies that have become a global growth bright spot be treated on par with the developed West, which have historically spewed the most emissions in building up their industrial economies?

Developed countries have failed to deliver on their commitment to provide US$100 billion a year to developing nations, who have borne the brunt of climate change disasters that have hampered their adoption strategies. Imposing a carbon tax will be akin to putting the cart before the horse, their supporters argue.

On the other hand, climate scientists say endless debate would only lock the world into a growing crisis as the lack of a mechanism for carbon pricing would only shift polluting industries to regions with lower emission standards.

Several Asian nations have progressed towards establishing such mechanisms.

In 2019, Singapore became a pioneer in Southeast Asia when it introduced a carbon tax of US$5 per ton, and plans to progressively raise this further through 2030 in line with climate goals. For over two years, China has established an Emissions Trading Scheme where emitters can buy and sell credits with the overarching goal of reducing carbon intensity.

India is introducing measures to push its industries towards decarbonisation and is considering its own carbon trading mechanism to mitigate the impact of CBAM. New trading platforms have emerged in Thailand and Malaysia.

Most such markets lag behind the EU in putting a cap on emission volumes. Fragmentation also means there is no uniformity in emission pricing. The United Nations Conference of Parties meeting in Dubai on November 24-29 is expected to advance towards establishing international rules in carbon trading.

Participant nations are expected to move towards phasing down fossil fuels, with a focus on coal-driven power generation. Hopes are also riding high that rich nations will move towards landing the US$100 billion target for climate adaptation, without which any proposal to price out dirty energy is likely to fall apart.

An International Energy Agency (IEA) report warned last month that as things stand, demand for fossil fuels is set to remain far too high to keep within reach of the Paris Agreement goal of limiting the rise in average global temperatures to 1.5 degrees Celsius.

This risks not only worsening climate impacts after a year of record-breaking heat, but also undermining the security of the energy system.

"Every country needs to find its own pathway, but international cooperation is crucial for accelerating clean energy transitions," said Dr Fatish Birol, executive director of IEA.

This article originally appeared on the South China Morning Post (SCMP).

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