As President Biden returns the United States to the Paris climate accord, there is now a greater urgency for Asia to raise its voice on how the economies in this region intend to proceed with the transition to a green recovery. Following a summit of leaders from 40 countries hosted by the US President in April 2021, the worry is that the transition narrative will once again be driven and dominated by the rich countries.
That would be unfortunate. Although it is a fact that Asia represents about half of the globe’s greenhouse gas emissions – with China accounting for a quarter of the total – North America (led by the US), followed by the Middle East and Europe are the biggest emitters of CO2 on a per capita basis, well ahead of the Asia-Pacific.
This is perhaps what’s behind Singapore’s push to become the region’s green finance hub. As Ravi Menon, managing director of the Monetary Authority of Singapore, acknowledges in a speech recently, “to move the needle on global emissions, Asia’s must move”.
Yet, he also made clear that Asia’s pathway towards a low-carbon future will be different from that of Europe. “It is not realistic to suddenly replace fossil fuels with renewables,” he points out. “Asia cannot move quickly to a European standard of green without curtailing its economic and social development.”
This sentiment was repeated during a number of presentations during The Asset Triple A Infrastructure Awards 2021 evaluation process. It has been encouraging to hear project sponsors and their financial advisers showcase deals like the fourth offshore windfarm developed by Copenhagen Infrastructure Partners off the west coast of Taiwan; a series of rooftop solar projects in Singapore, Vietnam and Hong Kong; a battery storage facility located in Wandoan, 400 kilometres northwest of Brisbane, Australia; and the world’s first energy transition facility backed by an export credit agency for Castle Peak Power Company, which is developing an offshore liquefied natural gas receiving terminal in Hong Kong.
The last deal, for example, could be viewed dimly by dark-green investors and financial institutions residing, mostly, outside of Asia. In fact, the sponsor’s ability to raise transition finance is vital in order to meet Hong Kong’s own green aspirations. As one arranger explains: “Hong Kong can’t do nothing and wait until it can import renewables – or more nuclear energy – across the border. In that ten years, that would be a critical piece of mitigation lost from the investment in the gas-fired turbines.”
One comment that strikes a chord particularly in Asia is that in many of the mechanisms, products, and assessment tools available today, they are largely based on global averaging. They start by allocating the carbon budget based on current market share. They do not really facilitate an emerging economy any catch-up growth.
Take the case of Indonesia, for example. Its coal-fired power generation curve looks a bit like China’s. “It is going to go up for several years, and then it will start coming down,” one banker explains. “It is going to probably land at zero later than China. That is what Indonesia’s curve looks like.” China says it will hit peak by 2030 and zero by 2060. “Those pathways are not easily aligned to a rich-country narrative that is focused on standards in mostly rich countries that you see embedded in the EU taxonomy. That is where we got this challenge.”
Indeed, to reach the goal set out in the Paris agreement, the implication is for the developed, rich economies to be getting to net-zero emissions much faster than what is happening today. “In a just transition, some countries will need to get there earlier, and others will take longer because they have growth and catch-up,” he continues. “In these countries, creating catch-up growth is going to be more than displacing existing coal-fired power generation. In the rich countries in Europe, it is a direct substitution, and they do not have to support growth because they have already reached US$40,000 to US$50,000 of GDP per capita.”
Part of Singapore’s green finance ambition includes coming out with its own green taxonomy, which is being formulated by a mostly private-sector-led panel of experts. The first draft is due out by the end of 2022 or early 2023. It is also intended to support the transition efforts of the Asean region. It is understood that while the taxonomy will be aligned with the version produced by the European Union, transition elements will be a part of Singapore’s version.
But it is not going to be easy to define what is green and what is green enough, explains the head of sustainability at an Asian bank. “The word taxonomy suggests it is set in stone. Because when you use it in a scientific context, a taxonomy is classification that you rarely change. There is a lot of debate and conversations on setting a threshold when in fact what would be transition now may not be transition five years down the road. In the same way, what is considered green five years ago is no longer green. A taxonomy for green and transition needs to evolve.”
To bridge understanding, especially for investors who are increasingly risk-averse to carbon exposure, Asia will need to articulate in a much more robust manner those transition pathways. “It is creating these curves and pathways where it is very clear that you are – where you have got the opportunity – to deploy renewables [that] you are doing it. And it is only when you do not have the opportunity yet that you are still going to run and operate your coal-fired or gas-fired assets because to not do that would be effectively turning the lights off and inconsistent with a just transition.”
As MAS’ Menon stated: “Asia is at a different stage of development – millions of people still do not have access to electricity, modern sanitation, and drinking water. Demand for affordable energy will continue to grow strongly, especially with rapid urbanization and modernization.”