Pacific Money | Economy | Southeast Asia

Southeast Asia and the ‘Just Transition’ to Clean Energy

Despite talk of a green transition, some Southeast Asian governments still have strong economic incentives to cling to fossil fuels.

Southeast Asia and the ‘Just Transition’ to Clean Energy

A view of the Bangui Wind Farm in Ilocos Norte, Philippines.

Credit: Wikimedia Commons/Emman Asuncion Foronda

U.S. President Joe Biden held a virtual climate summit last week with 40 other global leaders, with Indonesia, Vietnam, and Singapore representing Southeast Asia. As is often the case with these things, the summit was rich with rhetoric and aspirational promises. South Korea promised to end coal financing (which will be huge, if true), and various other attendees made emissions reduction commitments or plugged favored policies like carbon pricing. The real goal of the summit was for the United States to signal a break from the climate change denialism of the Trump administration and announce that it was ready to take a global leadership position, committing to investing in renewable energy and reducing emissions both at home and abroad.

The good news is that the cost of renewable energies like solar and wind power has been coming down dramatically in recent years, and we are getting better at building batteries. This means if you look at it purely as an exercise in market pricing, as renewables become cheaper than fossil fuels the iron law of supply and demand will drive companies, customers, and markets to make the switch.

The bad news is that for decades we have built our modern economies around the extraction, refining and consumption of fossil fuels. Huge industries, employing hundreds of thousands of people, depend on them. Many countries are highly dependent on revenue generated from fossil fuels. Complex social, economic, and political structures have been created which are deeply embedded in the fossil fuel industry and have enormous incentives to preserve it.

This is where the Just Transition comes in: the idea that there must be some kind of compensation for the workers, industries and states that will be left behind as the world moves away from fossil fuels. Some unions in the U.S. have been wary of renewables, not necessarily because they don’t believe in climate change, but because their job is to protect workers. Yet even the United Mine Workers of America has seen the writing on the wall, signalling an openness to renewable energy as long as lost mining jobs can be replaced.

While the U.S. arguably has the political will and the state capacity to at least attempt a Juster Transition, it is less clear that other countries do. Let’s look at Malaysia, where dividends, taxes, and other income from the state-owned oil and gas company Petronas accounted for about a third of public revenue in 2019. In Malaysia, solar and wind eroding the market share of oil and gas might be good for the environment, but it’s not good for the state budget. Emission reduction targets are all well and good, but if Malaysia is going to have a realistic path to a lower carbon future someone needs to come up with an answer for how the government will replace a third of its revenue.

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A similar dynamic prevails in Indonesia, where the government places a high premium on export-led growth. As Indonesia is sitting on some of the largest coal reserves in the world, it is only natural that they will mine it, export it, and use it to power their electric grid. Changing the calculus and convincing Indonesia to leave that coal in the ground will require more than platitudes or a carbon pricing scheme. It will require a feasible way for Indonesia to plug the hole in its current account if it stops exporting coal.

This is where complex issues related to fairness enter the picture. How much responsibility does the U.S. have, for instance, in promoting Just Transitions in other countries? Indonesia only accounts for 2 percent of global emissions compared to 15 percent in the United States. There is something a bit unfair about the U.S. – and other early industrialized nations – powering growth for decades by burning fossil fuels only to do an about-face in the last few years and tell emerging markets that same path is closed to them. Countries that depend on fossil fuels are not going to play ball simply because it’s the right thing to do.

They will want to be reassured that whatever comes next will replace the jobs, revenue, and exports that will be lost in a clean energy transition. And while there are technical solutions for some of these issues, at their heart they are political questions and as such will require political solutions, potentially involving very difficult choices. The sooner the discourse confronts this reality, the sooner we can start grappling with the real issues.