Asia in the Global Transition to Net Zero: Asian Development ...

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HIGHLIGHTS

Asia in the Global Transition to Net Zero

1 Asia’s Special Stake in the Global Climate Crisis

Developing Asia is highly vulnerable to climate change. Given its geographic features and socioeconomic circumstances, developing Asia is vulnerable to climate-related risks. The region faces increasing frequency and severity of storms, flooding, heat waves, and droughts under climate change. About 70% of the global population susceptible to sea level rise is in Asia. Natural resource–based sectors, such as agriculture and fisheries, that are directly conditioned by climate, account for around a third of total employment in the region. Beyond threatening the livelihoods of Asia’s poor, climate change may also put at risk regional and global food security. Climate change will increase the spread of vector-borne and waterborne diseases, and deaths due to cardiovascular stress. Climate change under a high emissions scenario could impose gross domestic product (GDP) losses of 24% in the whole of developing Asia, 35% in India, 30% in Southeast Asia, and 24% in the rest of South Asia by 2100.

Asia accounts for an increasing share of global greenhouse gas (GHG) emissions. Although historical emissions from developing Asia were low, they have been growing faster than the global average. The region’s share of global GHG emissions doubled from 22% in 1990 to 44% in 2019 and is expected to remain at this share until mid-century under current policies. At current levels of GHG emissions, the region would by itself exhaust the remaining global carbon budget consistent with limiting warming to 1.5 degrees Celsius (°C) by 2040.

Achieving global climate goals depends on Asia’s development path. Growth in the region has relied heavily on emission-intensive activities, with the emission intensity of GDP currently 41% higher than the rest of the world. Developing Asia is starting its decarbonization at relatively low income levels and faces large development needs. A billion people in the region were still living on less than purchasing power parity of $3.20 a day in 2017 and 940 million lack reliable power supply. Meeting development goals while avoiding catastrophic climate risks cannot be achieved without transforming Asia’s growth patterns.

Governments across developing Asia have made increasingly ambitious climate pledges, but there remains substantial scope to accelerate decarbonization. All parties from developing Asia have submitted nationally determined contributions (NDCs) under the Paris Agreement, and 19 economies, accounting for about 80% of the region’s 2019 emissions, have pledged to achieve net zero emissions. Ten economies, including the largest emitters, have submitted long term strategies. Yet, sector plans and policies often have yet to be aligned with climate pledges.

2 Asia’s Transformation during the Global Transition to Net Zero

Key climate policy choices include the degree of mitigation ambition, timing of mitigation, and extent of international cooperation, especially via carbon markets. The Paris Agreement represents a global consensus that the world must act to keep global warming well below 2°C. However, there is little agreement on how this goal should be achieved. Individual economies have made mitigation pledges that are intended to be strengthened over time, while elements to foster international coordination are only slowly emerging. Key mitigation decisions are embodied in five core scenarios of implementing (i) current policies, (ii) NDCs, (iii) uncoordinated pathways toward national net zero pledges after NDCs, (iv) NDCs followed by coordinated action toward global net zero to achieve well below 2°C of warming, and (v) accelerated action toward global net zero to achieve well below 2°C of warming. The modeling is performed using the World Induced Technical Change Hybrid global integrated assessment model, adapted to study the region’s large economies and different subregions.

Fragmented climate policies to date are unlikely to meet Paris Agreement goals. Under current policies, mean global warming of 3.0°C is modeled by 2100. Implementing submitted NDCs reduces this to 2.4°C, which misses Paris Agreement goals due to insufficient collective ambition. National net zero pledges, if fully achieved, would take the world closer to Paris Agreement goals with 2.0°C of mean warming, but the costs are much higher than scenarios with more global coordination—and the costs fall disproportionately on lower-income countries.

Land use and energy efficiency are vital to reducing emissions in the short run, while decarbonization of energy is critical in the long run. Of the modeled scenarios, only the global net zero scenarios are consistent with Paris Agreement goals. In the near term to 2030, under the accelerated global net zero scenario increased energy efficiency would account for 44% of emissions reduction in developing Asia. The transition of energy to cleaner sources would account for 17% of emission reduction until 2030, and increases to 45% by 2050 as cleaner energy becomes the predominant source of decarbonization in the long term. In Southeast Asia, land use could be a major source of mitigation, particularly in Indonesia, where under the accelerated global net zero scenario it would account for 72% of emissions reduction by 2030.

A global transition to net zero may lead to bold changes in patterns of land use, with vastly expanded forest area and land area used to grow crops for bioenergy. In much of developing Asia, the potential exists to reduce emissions from land use at low cost, while generating co-benefits for climate adaptation. Under the accelerated global net zero scenario, forest cover in the region would increase by 95 million hectares (ha), reaching 30% of land cover by 2050.
About half of the total increase in forest area in the region is concentrated in the People’s Republic of China. Land area devoted to growing food crops would decrease by 36 million ha, while about 39 million ha of land would be used to grow energy crops by 2050.

The share of coal in primary energy will decline even under modest climate action. Developing Asia’s total primary energy supply increased threefold from 1991 to 2020, with more than half of this growth provided by coal. Coal is the largest source of energy emissions in developing Asia, accounting for about 70%, followed by oil (20%) and gas (10%)—a structure that has remained largely unchanged since the 1990s. Under the current policies scenario, the share of coal in primary energy will decline from about half to less than a quarter by 2050 and to 13% under more ambitious climate action.

Even under current policies, renewable energy could dominate electricity generation in developing Asia by 2040, while ambitious climate policy would lead renewables to supply almost all of the region’s power needs. Growth in solar and wind energy over the past decade has been remarkable. Developing Asia has led the world in solar and onshore wind capacity additions, supported by dramatic cost reductions in these technologies. Renewable energy would account for 63% of electricity generation by 2040 even under the current policies scenario. Under the accelerated net zero scenario, by 2040 renewable sources would account for nearly all electricity generation, while coal would be virtually absent from the region’s power sector. The potential rapid transformation in how energy is supplied is unprecedented.

Transformation of the energy sector requires an increase in investments and a reallocation toward cleaner sources. In 2021, $468 billion was invested in power supply in developing Asia, of which $397 billion was in renewable energy, electricity networks, and storage infrastructure. The People’s Republic of China accounted for 63% of clean-electricity investments in the region. To achieve Paris Agreement goals, the modeling finds that average annual investments until 2050 would need to increase to $707 billion, corresponding to between 1.5%–2.7% of GDP for the economies and subregions analyzed.

3 Socioeconomic Consequences of the Transition to Net Zero

Asia stands to gain from ambitious climate action, with benefits from avoided climate change damage far greater than costs associated with the transition. Meeting Paris Agreement goals requires drastic transformations of energy and land use in developing Asia. While the transformation has cost implications for economic activity, it will deliver non-climate co-benefits in the short run and economic benefits from reduced climate damage over the medium to longer term. Under the accelerated global net zero scenario, the net present value of benefits is found to be five times the cost for developing Asia.

Paris Agreement goals can be met with modest mitigation costs, which are lowest for the least developed regions of Asia. Even the most costly global net zero scenario of aggressive decarbonization would entail the loss of less than 1 year of economic growth over the 21st century for developing Asia when all benefits are excluded. The overall cost of pursuing global net zero is found to be around 1% of GDP during the 21st century if efficient policies are adopted. Fossil fuel-exporting regions, including the Caucasus and Central Asia, would experience more reduction in economic activity than fossil fuel importers and low-income countries. Carbon dioxide removal through avoided deforestation, direct air capture, and biomass with carbon storage and capture can help to keep costs contained, but even without these options, costs can remain below 3% of GDP.

Enhanced international coordination could substantially lower the costs of achieving the Paris Agreement goals. Beyond NDCs, climate policies currently rely on achieving individual countries’ net zero pledges, which are not necessarily determined by market or economic mechanisms that allocate mitigation according to abatement costs. There is ample opportunity to improve the efficiency of mitigation through market mechanisms, including international carbon trading. Many poorer countries in developing Asia, especially in South Asia, could benefit the most from international carbon trading, with revenues from carbon-offset exports potentially greater than the cost of decarbonization.

Early action can minimize the long-term cost of mitigation. Analysis in this report finds that NDCs are not ambitious enough, even in the short run, to achieve Paris Agreement goals. The overall cost of achieving net zero decarbonization can be reduced by 10%–20% if aggressive decarbonization starts immediately, rather than waiting until after the current NDC pledge period of 2030.

In the near term, developing Asia can realize substantial co-benefits from ambitious mitigation. Co-benefits from aggressive decarbonization are initially much larger than climate benefits. Under the accelerated global net zero scenario, 346,000 lives in developing Asia would be saved annually by 2030 as a result of reduced air pollution. In addition, millions of tons of annual rice and wheat production would be saved from air pollution damage.

In the long run, Asia’s avoided damage from climate change would be far greater than the mitigation costs. Aggressive decarbonization is in developing Asia’s interest, as the region is highly vulnerable to climate change. Expected losses from climate change are highest in Asia’s lowest-income countries and will harm the poorest people. Climate benefits alone would be 260% of mitigation costs for developing Asia under the accelerated global net zero scenario.

Ambitious mitigation could lead to large increases in energy sector employment, with 1.5 million additional jobs potentially created in Asia by 2050. The modeling finds that aggressive decarbonization leads to the loss of 1.4 million jobs in the fossil fuel sector in Asia by 2050, while over 2.9 million jobs would be created, mostly in manufacturing, installing, and operating solar photovoltaic and wind power generation. The employment generated tends to be higher skilled than the jobs lost, although the new roles may not match the skills and locations of the people facing job losses.

Ambitious mitigation may divert land from food production, which could adversely affect food security. Reduced fossil fuel use and increased demand for land during climate change mitigation could result in higher food prices, leading to food security concerns. The accelerated global net zero scenario could potentially lead to 22% of land planted with cereals to be converted to forests and bioenergy. This may increase food prices by up to 34% if not accompanied by appropriate land use and agricultural policies.

The costs of decarbonization could be regressive if redistribution policies are not implemented. Phasing out carbon-intensive energy will lead to increases in residential energy and food costs, which will have larger effects on poorer households. These regressive effects, however, can be more than offset by simple redistribution measures, such as recycling carbon revenues as universal basic income on an equal per capita basis.

4 Policies for an Efficient and Equitable Transition to Global Net Zero

Asia can attain a low-carbon development pathway via three policy pillars. These are: (i) reforming prices via carbon pricing and subsidy reductions; (ii) facilitating low-carbon responses via regulations and incentives, and mobilizing finance for decarbonization; and (iii) ensuring fairness internationally and domestically. Each pillar contains multiple policy opportunities to redirect development.

Carbon pricing is critical to achieving a net zero world at attainable cost. The inability of markets to account for the full social, economic, and environmental cost of GHG emissions remains the fundamental market failure that has led to carbon-intensive growth and climate change. A carbon price of $70 per ton of carbon dioxide equivalent by 2030 and $153 by 2050 is found to be able to trigger a transition to low-carbon growth and achieve global net zero. Ambitious mitigation can be attained without carbon pricing, but the cost would be higher as carbon pricing is more efficient. Although progress is being made in the adoption of carbon prices, barriers often prevent prices from affecting investment and consumption decisions in developing Asia. If the region’s economies do not proactively adopt carbon pricing, they risk being subjected to carbon border adjustment tariffs and other measures that could put trade at a disadvantage.

Cutting carbon subsidies can offset much of the cost of deep decarbonization. Developing Asia spent $116 billion in 2021 on subsidizing fossil fuels, and these subsidies are much higher than subsidies for renewables. The cost of fossil fuel subsidies, at around 1% of GDP, is near the policy cost of this report’s most ambitious decarbonization scenario. Artificially low prices incentivize the overconsumption of fossil fuels and discourage the development of renewables. Similarly, concessions that enable subsidized timber extraction create incentives for emissions from deforestation, and agricultural input subsidies often encourage the overuse of emission-intensive inputs. Removing these subsidies should be the first step toward low-carbon growth and redirecting valuable public resources for other development priorities.

Proactive policies are needed to create conditions for low-carbon innovation and investment. Reaching net zero emissions will require the widespread use of technologies that are still under development. Many of these technologies can benefit from investment in upstream research and development to generate public goods, as well as adaptive research by private companies. Incentives such as preferential taxation and targeted and time-bound subsidies, and mandates can enhance the competitiveness of low-carbon technologies and proactively create markets for low-carbon products.

Innovative risk sharing and financial instruments can mobilize private capital for the low-carbon transition. The investments needed to innovate and scale up low-carbon technologies carry certain risks, which can make these investments less attractive to the private sector. To catalyze private capital, governments can adopt innovative risk-sharing mechanisms such as guarantees and insurance. Removing extra costs, developing taxonomies and market ecosystems, and enhancing information disclosure and transparency can also help to scale up sustainable finance as a source of investments for the transition.

An international emissions-allocation framework could enable fairer outcomes for developing Asia. The lowest-cost GHG emissions mitigation opportunities are often in countries with low levels of historical per capita emissions and low levels of economic development. Both development and decarbonization objectives can be achieved when higher-income economies with higher mitigation costs support the low-carbon growth of low income, low emissions countries. Use of principles embedding fairness to allocate emissions, in combination with global carbon trade, could achieve a low-carbon future more efficiently and equitably than the current internationally fragmented approach. This could enable lower income, lower per capita emissions countries to be better compensated for keeping emissions low.

Progressive climate policies are needed to ensure fairness. Although the low-carbon transition can create many net benefits, they are unequally distributed, and some groups may be adversely affected through energy and food prices or via changes to employment. Progressive revenue recycling can offset potentially regressive effects of climate policies. Workers affected during the low-carbon transition, such as those in coal mining, will need to be both offered social protection and reequipped with new skills to access opportunities in the low-carbon economy. Agriculture is essential to the livelihoods of many of the poorest people in Asia, yet it faces simultaneous pressures posed from mitigation policies and unmitigated climate change. For Asia’s future to be fair, agriculture must be equipped to face these challenges through investments in public services and improvement of land rights.

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