Road to Carbon Zero in Southeast Asia: Spur Innovation and Price Carbon

The transition to net zero carbon emissions is among the greatest development challenges for the world. Given the relatively high carbon content of GDP growth in Southeast Asia, the region’s economies need a structural transformation. There is some change underway but in two separate tracks, one set of efforts to innovate and invest in low carbon modalities, while another to price and discourage the carbon content of economic activities. Innovation covers product and process changes, new or adapted from elsewhere, focused on a low-carbon transition. It would pay to bring the two tracks together and vastly raise their ambition to see results before 2030, a target date for halving emissions.

Despite the plummeting cost of solar energy, both approaches face rising fossil fuel deployment, with the fossil fuel share of global energy stuck at well over 80 per cent in Southeast Asia. This is partly due to subsidised dependency on fossil fuels, coupled with their state-dominated market control. Sound economics calls for a heavy tax on fossil fuels in view of their negative “externalities”, and subsidies for renewables for their positive externalities. But worldwide, including Southeast Asia, fossil fuels are subsidised, according to the International Monetary Fund, to the tune of US$7 trillion in 2022. This is equivalent to nearly 7.1 per cent of global GDP.

Starting with this unfavourable condition, what approach might best move the needle on decarbonisation in Southeast Asia? It is worth remembering that major transitions like switching from horse and buggy to the internal combustion engine were long drawn out. Where changes were swift, for example, digital technologies or smartphones, the new modality had a dominant cost advantage, and the prevailing alternative was not subsidised or did not even exist. But the cost and efficiency advantage of renewables over fossil fuels (with their massive subsidies) remains tenuous.

Under the circumstances, a swift energy transition will need all hands on deck. Southeast Asia faces a tough challenge considering that the share of renewables in the energy mix is only 14 per cent. That said, green energy sources have been increasing, for example, Vietnam in solar, Laos in hydropower, Indonesia and the Philippines in geothermal. Even if down the road, Malaysia, through Petronas, is trying to make use of its depleted offshore oilfields to capture and sequester carbon. To cut its 95 per cent dependence on natural gas, Singapore is betting on low-carbon hydrogen for a decarbonised pathway and net zero by 2050.

The time for a carbon tax, so far fully in place only in Singapore in Southeast Asia, has arrived: nearly 70 per cent of respondents say they support a national carbon tax, with those from Vietnam, Indonesia and Philippines giving the strongest backing according to a 2023 survey from ISEAS–Yusof Ishak Institute.

The most transformative and practical clean technologies for Southeast Asia are those focusing on carbon avoidance while making high-volume industrial commodities — electricity, cement, steel, ammonia, and hydrogen — without requiring carbon capture and storage. Solar would top that list. Electrification of transportation and power generation would also be high on the list.  Another low-hanging fruit for Southeast Asia is transforming the food system using alternative forms of protein that reduce land, water, and energy use, protect biodiversity, and reduce carbon emissions These approaches centred on investing in new solutions, if scaled up, can be more cost-effective in driving innovation and structural change. One estimate of likely investment in total clean energy in the region is US$76 billion during 2023-25. Social cost-benefit calculus comes down in favour of stepping up these investments in technology.

Meanwhile, the cost of delaying a carbon transition, according to various studies, is becoming prohibitive.  The upshot with some of the laudable green investment initiatives is the time lag for the market deployment of new technologies. Therefore, proactive investment in product and process innovation and adoption of new technologies will need the full support of pricing and market incentives to get results in time. Investments to prompt innovation are unlikely to take hold fast enough on their own. Without a price imposed on the harm fossil fuels are doing, proactive investment by the government in renewables would run very high risks of inefficiency and waste. The not often recognised role of a carbon tax or a straight regulation is that it motivates innovation in renewables as an alternative.  The time for a carbon tax, so far fully in place only in Singapore in Southeast Asia, has arrived: nearly 70 per cent of respondents say they support a national carbon tax, with those from Vietnam, Indonesia and Philippines giving the strongest backing according to a 2023 survey from ISEAS–Yusof Ishak Institute.

To see results in time, Southeast Asia would want to invest proactively in renewables innovation and match it by pricing carbon.  Carbon pricing can be based on carbon trading as in China and South Korea or on a carbon tax as in Japan and Singapore. If carbon pricing were to take the form of a carbon tax, there is the added advantage that tax revenues can be used to fund innovation in renewables.

So, it would not be an investment in innovation versus a price on carbon. Like the two blades of a pair of scissors, they are complementary, each needing the other to get results. Given Southeast Asia’s high stakes in achieving a carbon transition swiftly, a judicious blend of the two approaches is needed immediately and across the region.

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