Asia: Urgent Climate Action to Prevent Inequality

2 May 2021

Asia has a vital role to play in mitigating the global risks of climate change. Indeed, the region accounts for over 50% of world-wide CO2 emissions (and 44% of energy consumption). Of course, China and India are the world’s #1 and #3 GHG emitters. These two giants are responsible for 70% of the region’s emissions and energy consumption. But, they are not alone. The rest of Asia (which will be referred to as AxCI) account for 15% of global emissions: roughly equivalent to the USA (the world’s second most prolific polluter), and well above the European Union’s 11% share. Japan, Korea, and Indonesia are all amongst the planet’s top 10 emitters.

Clearly, Asia requires dramatic action to avoid the economic consequences of rising temperatures. In addition, however, the Chart above illustrates that low-income countries are most at risk (a low ND-GAIN score indicates a high degree of vulnerability). For example, Bangladesh, Pakistan, Laos, and Cambodia have the region’s lowest per capita incomes, and collectively are responsible for only 2% of Asia’s carbon emissions. Nevertheless, they are the region’s four most vulnerable countries. Critically, therefore, climate change has the potential to dramatically worsen income inequality within the region.

Can Asia avoid these outcomes? Which countries are most vulnerable? What are the sources of vulnerability? Which countries are taking effective corrective measures? As the world’s largest emitter, and given its aspiration to become Asia’s dominant geo-political power, China must play a pivotal role. Will Chinese leadership be sufficient to limit both domestic and regional economic costs, and prevent a damaging widening of income disparity within the region? All considered.

(Prior to November’s COP-26 summit in Glasgow, I will assess the climatic challenges facing key countries and regions. See my blog “Biden’s Climate Plan” regarding the role of the United States. Given the importance of China and India, I will also deal with them seperately. For my rankings of 90 countries’ climate vulnerability, see my earlier blog entitled “Climate Change: Who’s Preparing, Who’s Not”).

Cutting Emissions: Doesn’t Need to Harm Growth

Given low incomes in much of Asia, it’s key that efforts to cut emissions do not come at the expense of economic growth and development. Fortunately, Europe’s experience indicates this trade-off need not exist. During the past 30 years, for example, EU emissions have declined 30%, while GDP advanced over 40%.

Despite the Paris Accord’s pledges to cut emissions, Asia’s CO2 levels continue to grow rapidly, up 55% since 2005 (Chart above). Cutting emissions while sustaining strong GDP growth will require dramatic improvements in energy efficiency. Fortunately, the following Chart illustrates the amount of energy used per unit of GDP has declined 25-30% recently in several key Asian countries, e.g. China, India, Japan, Australia, and New Zealand. But, even these achievements lag the 40-50% improvements in Europe and the USA.

Moreover, other countries have been less impressive: Korea, Taiwan, and Indonesia. And, rapidly-industrialising countries like Vietnam, Thailand, and Bangladesh experience worsening energy efficiency, as manufacturing uses far more energy than agriculture. As a result, Asian energy efficiency remains far worse than in other regions, especially Europe. On the bright side, this suggests Asia has enormous potential for further improvements, e.g., the UK uses 50% and 25% less energy per unit of GDP compared to Australia and Japan respectively. The techology and best practices already exist for Asia to utilise.

Likewise, Asia must improve dramatically its carbon intensity — the amount of CO2 released per unit of energy consumed — which is far higher than in Europe and the USA. The worst culprits are India, China, Indonesia, and Australia (Chart above). Progress has been made recently in China, Thailand, Taiwan, Australia, Vietnam, and Korea. But, again, China’s gains lag behind what has been achieved in Europe. Meanwhile, the situation has actually worsened in Japan, Indonesia, and industrialising countries in South Asia and Indochina.

Energy System: Addicted to the Black Rock

Asia’s lack of consistent progress in reducing its carbon intensity lies in it’s continued heavy reliance on fossil fuels, especially highly-polluting coal. Indeed, Asia accounts for 77% of the world’s coal consumption. In the vital electricity sector, coal accounts for nearly 60% of overall power generation: compared to 15% and 24% in Europe and the USA respectively (next Chart). The addiction to the black rock is highest in India (72% of power) and China (65%). Indeed these two countries account for a staggering 82% of Asia’s coal consumption. However, they are not alone. Coal usage in AxCI (38% of power generation) is higher than in more advanced economies, with Indonesia (63%), Australia (53%), and Vietnam (49%) particularly reliant.

Since 2005, China and Australia have succeeded in reducing the share of coal usage: both were at 80% in 2005 (it’s worth noting, however, the absolute amount of coal consumed continues to increase in both countries). Unfortunately, progress elsewhere has been limited. Indeed, coal’s share of power generation has risen sharply in India, Indonesia, and Japan (coal use was rising even before the Fukushima nuclear disaster). Even in less-addicted Thailand and Bangladesh, diminishing natural gas supply is resulting in greater coal consumption.

In order to sustain strong GDP growth during its energy transition, Asia must make greater use of renewable energy sources. Currently, renewables account for only 9% of Asia’s electricity generation compared to 24% in Europe (11% in the USA). Australia (16%), Japan, and Thailand (both 12%) have outperformed. Korea and Indonesia (both 5%) are especially disappointing. Encouragingly, Japan hopes to boost renewable usage to 24% by 2030, and Korea to 30% by 2040 (doubtful). During the past decade, China has tripled its use of renewables, but still accounts for only 10% of electricity. Fortunately, New Zealand, Malaysia, Thailand, Vietnam, and China enjoy considerable hydroelectric power.

Other Sources of Vulnerability

Agriculture

In terms of climate vulnerability, having a large agicultural sector is a double-edged sword. On the negative side, rising temperatures, droughts, flooding, and less predictable climate patterns will be a risk factor for food-producing nations, and countries with large rural populations, especially India, South Asia, Vietnam, and Indochina (Chart above). Likewise, the agricultural sector accounts for roughly 20% of Asia’s overall emissions, especially highly-toxic methane. The following Chart illustrates that China, India, Indonesia, Pakistan, Australia, and Vietnam are amongst the world’s largest methane emitters.

On the other hand, if food supply is unreliable during a climate emergency, being a net food exporter is a good thing, Australia, India, Thailand, and Vietnam. Korea, Japan, Hong Kong, and Singapore would be potentially most at risk.

Geography: Location, Location, Location

Physically risks matter greatly, and vary widely. Low-lying, coastal nations face potential devastation from rising sea levels and flooding. The next Chart indicates Vietnam, Bangladesh, Japan, Thailand, Myanmar, Hong Kong, and Singapore are most exposed. Mitigation measures are urgently needed, assisted by international aid where necessary. In addition, population density can be an important risk factor during climate emergencies, e.g., Bangladesh, India, China, Japan, Indonesia, Korea, Pakistan, Hong Kong, and Singapore.

Health Care System Resilience

The Covid experience has illustrated the importance of a high-quality health care system during a crisis. Climate emergencies could result in more contagious diseases, malnutrition, physical injury, etc. A robust, responsive health system will be key to mitigating risks. Johns Hopkins’ assessment of 195 national health systems indicates no country is fully prepared for health emergencies (even top ranked USA is only 83% ready). High-income Asia countries, Australia, Singapore, and Hong Kong, score highly. Thailand and Korea illustrate what’s possible even in middle-income nations. But, several Asian countries are below the important 50-level. And, South Asia and Indochina are below the world average. Covid highlights the need to build resilience everywhere, but especially in the poorest countries.

Infrastructure

Of course, high-quality infrastructure is an important ingredient to sustained economic growth and development, especially in poorer nations. But, climate change will put increased demands on a nation’s infrastructure, which will influence the economy’s and society’s ablility to respond. For example, rising sea levels will impact port performance, sewage and water reliability will impact health outcomes, poor roads and rail will impede the reallocation of resources during a climatic event. The World Economic Forum ranks 141 nations’ infrastructure quality (next Chart). Asia’s performance varies widely. Several countries are world-class (4 of the world’s 6 top-rated countries are in the region). However, the Philippines, South Asia, and Indochina all rank well below the world average.

Strategic Considerations

  • The poorest are the most vulnerable. Asian (and world) leaders must strengthen their commitment to climate action to limit economic costs and prevent greater regional inequality. This includes deeper emissions reductions, deployment of renewable energy throughout the region, financial assistance to strengthen health systems, infrastructure, and mitigation efforts in coastal nations.
  • China has committed to capping emissions by 2030, and achieving net zero by 2060. This is most welcome, and China has made considerable progress in improving energy efficiency and reducing the coal’s share in their energy mix. Nevertheless, coal consumption continues to increase; consequently, CO2 emissions are still growing 3% annually. I am optimistic China will make huge progress in coming decades (a 50% emissions cut?), but I suspect achieving the 2060 goal will require GDP growth below 5% per year.
  • India is likely to achieve its goal of reducing its carbon intensity (CO2 per unit of GDP) by 33% in 2030 (compared to 2005 levels). This goal, however, is not ambitious, and allows over 5% annual increases in carbon dioxide in the next decade. Capping emissions will require a meaningful reduction in coal usage, which has continued to grow 4% per year since 2015. India’s enormous rural population would be especially vulnerable to climate change.
  • On Earth Day, Japan set a more ambitious target to reduce emissions by 46% in 2030, and achieve net neutrality by 2050. Detailed plans are expected in the New Energy Plan in June. To achieve this aim, Japan must double the share of renewables to 24%, as promised (the current EU level). Likewise, they must reverse the increase in coal consumption that has taken place since Fukushima. Also, Japan has plenty of scope to improve energy efficiency, which is 25% worse than in the UK. In addition Japan’s coastal areas are vulnerable, and its food security needs improvement.
  • Indonesia’s booming coal usage, deforestation, and GHG growth (including high levels of methane) are concerning.
  • Korea has pledged net neutrality by 2050, but its recently announced Green New Deal casts doubt on its ability to meet this goal. Achieving the 30% share for renewables, for example, seems unlikely: currently only 2% of overall energy consumption. Coal use (40% of electricity generation) remains far too high, and is not declining. There’s plenty of scope to improve energy efficiency, which is amongst Asia’s worst performers.
  • Despite an unambitious aim to cut its carbon footprint 26% by 2030, Australia’s emissions are still rising. Moreover, no net-zero target has been established. Australia needs to improve energy efficiency dramatically, which lags the UK by 50%. Coal usage — 56% of electricity generation — remains too high. And, despite recently declines, the government lacks a clear strategy to reduce its reliance further. On the bright side, renewable use is Asia’s highest.
  • By contrast, New Zealand has set its 2050 net-zero goal into law, although excluding its agricultural methane emissions weakens the impact. In addition, NZ will use only carbon-free energy sources by 2035, already an impressive 80% (hydroelectric accounts for nearly 60% of electricity generation).
  • Based solely on climate considerations, my model suggest IDR, INR, THB, and A$ are overvalued (Kiwi is undervalued). Wider real bond yield spreads are required to compensation for climate vulnerability in India, Japan, Philippines, Vietnam, Taiwan, Hong Kong, and Bangladesh.