The commodities supply crunch can disrupt Southeast Asia’s goal of attaining net-zero targets in the next few decades. While regional countries have backtracked on climate commitments, the crisis can stimulate long-term strategic responses such as accelerating decarbonisation efforts and developing domestic deposits of critical minerals.
The Russia-Ukraine conflict has caused an exponential rise in the price of commodities, given that the two warring countries are key exporters of fossil fuels, food grains, fertilisers and metals. Disruptions in the supply of these commodities have drastically affected the global economy, including in Southeast Asia. In 2020, ASEAN imported 9.7 per cent of its fertiliser from Russia and 9.2 per cent of its cereals from Ukraine. According to the World Bank, the conflict will cause global prices of energy and food to rise by 50 per cent and 20 per cent respectively in 2022. The inflation rate for ASEAN as a group increased from 3.1 per cent in 2021 to 4.7 per cent in 2022.
In addition to stunting economic growth, the commodity crisis is already undermining Southeast Asia’s climate ambitions. To reduce inflationary pressures, the Philippines recently doubled its fuel subsidy programme for public transport and also plans to increase the use of coal in electricity generation. Malaysia’s oil subsidies can reach more than US$6 billion this year, while Indonesia has ramped up coal exports. Thailand and Vietnam also recently increased fossil fuel subsidies.
ASEAN’s renewable energy target of 23 per cent by 2025 is also impacted by supply shocks of critical minerals that can enable the transition to green energy. As economic sanctions against Moscow have not taken their full effect, Russia is still the world’s largest exporter of nickel and palladium. Nickel is an important component of batteries that power electric vehicles, while palladium is used to produce catalytic converters — a part of a car’s exhaust system that controls emissions. Following U.S. sanctions on Russia, the price of nickel and palladium increased by as much as 60 per cent and 25 per cent respectively, which led to concerns about the economic viability of renewable energy technologies. Ukraine is the world’s leading supplier of neon gas, which is used for producing semiconductors — critical components of electric vehicles and communication technologies.
The commodity crisis can be used by Southeast Asia’s policymakers to market decarbonisation as an economically attractive development model, especially if the war in Ukraine remains protracted. In a business-as-usual scenario, Southeast Asia will need to increase its oil imports by 65 per cent on top of current levels by 2040, where equivalent supply shocks would have greater adverse impacts than what is being felt today.
The Southeast Asia Energy Outlook 2022 demonstrates that exploiting the region’s substantial renewable energy potential can reduce projected import dependency. A report by the ASEAN Centre for Energy proposes collaboration between Malaysia, Thailand and Vietnam in the production of solar panels and the expansion of biofuel capacity in Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Cross-border electricity transmission grids, such as the recently commissioned Lao PDR-Thailand-Malaysia-Singapore Power Integration Project (LTMS-PIP), can reduce dependence on extra-regional sources of energy and boost the usage of renewables. The LTMS-PIP is also a first step towards the realisation of true multilateral energy trading within an integrated ASEAN Power Grid.
Yet, the crisis provides an opportunity for regional leaders to reorient future collaboration towards renewable energy and energy transition minerals.
Regional integration of renewable energy supplies requires the support of strong regulatory environments and policy decisions that support multilateral trade. Malaysia’s ban on the sale of renewable energy to Singapore in 2021 is a step backwards in this regard. Fortunately, the ban does not extend to the import of electricity from other countries and will not affect the LTMS-PIP.
However, as demonstrated in a study by ISEAS researchers, the developed nations’ failure to fulfil their climate finance pledges has undermined mitigation efforts in the region. The current crisis offers an opportunity for Southeast Asian countries to use geopolitical arguments to convince developed nations to fund large-scale mitigation projects (not just in the form of loan or debt instruments but actual grants). Following Russia’s invasion of Ukraine, the European Union (EU) has pledged to cease the import of fossil fuels from the former before 2030, in which case Moscow may redirect supplies to Asia. By funding renewable energy projects in Southeast Asia and elsewhere, the EU and its partners may hinder the growth of Russian economic and geopolitical influence.
The current commodity crisis also provides insights into the importance of uninterrupted access to energy transition minerals. The control of these minerals is more concentrated than that of fossil fuels, with China playing a dominant role in their production and refining. This dominance can be used for geopolitical leverage, as was the case when China banned exports of rare earths to Japan following a maritime conflict in 2010.
As the South China Sea dispute between Beijing and certain Southeast Asian countries continues to fester, regional countries should collaborate on developing domestic deposits, which can include rare earths in Myanmar and Vietnam, and nickel in the Philippines. While the region holds large reserves of minerals, investment in mining has declined in recent years. If Southeast Asian countries can develop their existing deposits, this can play a key role in diversifying supply chains. There is also the potential to earn US$60 billion in revenue by 2050.
So far, Southeast Asian countries have responded to the commodity crisis by prioritising short-term economic goals at the cost of long-term decarbonisation efforts. Yet, the crisis provides an opportunity for regional leaders to reorient future collaboration towards renewable energy and energy transition minerals. This will be necessary for sustainable development and protection against future supply shocks, in an increasingly uncertain global environment and against guaranteed climate change.
Mirza Sadaqat Huda is Lead Researcher in the Climate Change in Southeast Asia Programme, ISEAS - Yusof Ishak Institute.