COP27 – A just transition: viewpoint from Southeast Asia

As has been well documented in the press over this month, a major focus at this COP27 was on the divide between the developed and developing countries around climate change and how to finance the energy transition to net zero in the “Global South”.

Needless to say, the world is a very different place for this year’s COP27 in Egypt – with the world in the midst of serious and overlapping economic and geo-political crises. We also saw this year an acceleration of the devasting physical impacts of climate change. The result is that energy security and a “just transition” were always going to be top of minds at this year’s COP – with developing countries and those most vulnerable to the effects of climate change arguing loudly for “climate justice” and a “just transition”.

The term “just transition” has various meanings depending on the context and is not uniformly defined. In this blog we look at “just transition” from a Southeast Asia perspective – a region balancing commitments to net zero and decarbonisation policies, alongside the need to meet increasing energy demands and the need for electrification – and the what the outcome of COP27 may mean for the region.

The road to net zero for Southeast Asia

Last year, the UN Intergovernmental Panel on Climate Change (the IPCC) report predicted particularly stark consequences for Southeast Asia, one of the most vulnerable regions to climate change. This year we have witnessed parts of Asia being significantly affected by devastating floods, heatwaves and other weather extremes linked to climate change - India experienced extreme heat (which arrived unusually early) with temperatures hitting over 45 degrees Celsius and up to 30 percent of harvest lost in some areas. Pakistan suffered the worst floods in its history, causing an estimated US$30 billion in damages.

Most Southeast Asian countries still rely heavily on fossil fuels in their current energy mix and, as with many countries in Asia, are continuing to build new fossil fuel-fired power generation assets. Despite renewable development programmes in a number of Southeast Asian countries (see here), the low-carbon share of the energy mix in these countries remains very low.

Most governments in Southeast Asia have now set “carbon neutrality” or “net zero” targets and have signaled significant shifts in policy, for example:

• Indonesia has committed to net zero by 2060 with the aim of reducing greenhouse gas emissions by approximately 32 per cent by 2030 (below "business as usual") (or reducing greenhouse gas emissions by approximately 43 per cent conditional on the provision of international assistance). Indonesia has also set a target of 23 per cent of renewable energy in the country’s total energy supply by 2025 and 31 per cent by 2050;
• Malaysia has committed to a carbon neutrality target by 2050, with a pledge to achieve 31 per cent of renewable energy in the country’s total installed capacity by 2025 and 40 per cent by 2035;
• Singapore updated its nationally determined contributions in the run up to COP27, with a commitment to reach net zero by 2050 and hit peak emissions before 2030;
• Thailand has pledged to achieve carbon neutrality by 2050 and net-zero greenhouse gas emissions by 2065; and
• although the Philippines has no committed net zero target, it has set a target for 75 per cent reduction of greenhouse gas emissions by 2030 (below “business as usual”) and 50 per cent renewable energy in their power generation mix by 2040.

However, despite these national targets, Southeast Asia faces huge challenges to close the emissions gap. According to a report on Southeast Asia’s green economy by Bain & Company, Temasek and Microsoft, Southeast Asia needs to close an emissions gap of approximately three Gt (gigatonnes) by 2030 to be aligned to a 1.5 degrees Celsius pathway which, the report explains, will require up to US$ three trillion in green investment to build the energy infrastructure and nature-based solutions to close the gap. This is a significant amount of investment needed for the region and the report states that less than one per cent has been invested to date.

Investment at the scale required for Southeast Asia to decarbonise requires the right conditions to attract private sector equity and debt capital from a range of sources, including venture capital funds, private equity funds, pension funds and insurance companies, as well as banks and other credit providers. We have seen a huge appetite for investment in renewable energy across Asia as the continent seeks to decarbonise, including in Southeast Asia. That said, there is a significant degree of variation between the regulatory frameworks and incentives for renewables across the region. Investors will need to understand and be comfortable with the individual local regimes which are, in many cases, continuing to evolve and could present a challenge to the deployment of capital. 

The emergence of new technologies, such as hydrogen and ammonia, could further contribute to the energy transition in Asia, especially for “hard to abate” sectors such as manufacturing, aviation and shipping. In particular, the possibility of cross border trade of green hydrogen or ammonia would allow for effectively the export of renewable energy from areas where there is surplus renewable energy generation to areas where there is a deficit. Technological innovation will be key in order to unlock such potential. However, there remains great uncertainty given the scale and technological developments still required for this sector to develop - hydrogen production is limited and expensive, and significant stimulus is needed to draw in investors to change the scale and nature of the productive capacity. In addition, the markets for hydrogen – fuel cell electric vehicles, ammonia powered shipping, hydrogen powered jets, hydrogen boilers for residential homes – are still in development and there is not yet the infrastructure needed to bring supply and demand together. It will require governments to provide an underpin for potential suppliers on pricing and volumes and create demand-side incentives to cause businesses to make the potentially expensive technology switch. This inherent market uncertainty means investors will be reticent to deploy capital without assurances on governmental strategy.

What outcomes of COP27 had an impact?

Loss and damage

The most high-profile success of this COP27 was the announcement that the parties agreed to create a “loss and damage” fund which will be set up for “assisting developing countries that are particularly vulnerable to the adverse effects of climate change” - essentially a fund to compensate those countries most affected by the devastating effects of climate change but which have contributed the least to its creation. This was characterised by many as a “historic” development - not only because this was the first time that “loss and damage” has made it onto any official COP agenda, but also because it is a symbolic recognition of the importance of “not leaving anyone behind” and a “just transition”. The details of how this fund will operate will need to be developed by a transitional committee, which will submit its recommendations by COP28 next year in the United Arab Emirates. Therefore, crucial questions - such as which countries must provide financing, which countries will be eligible to benefit from it, and the sources of funding - have been left to future negotiations.

Just Energy Transition Plans (JETPs)

The question of how to accelerate the decommissioning of existing coal-fired power plants in Southeast Asia remains a complex issue, taking into account the needs of developing economies in Southeast Asia, such as the basic need for electrification and that power plants in the region are at an earlier stage of their operational life.

A success story at COP27 was the announcement of the Indonesia Just Energy Transition Plan (JETP). The JETP is the US$20 billion plan to shift Indonesia who is heavily reliant on coal transition to lower carbon energy mixes. The US, Japan, the EU, the UK and other G-20 economies would mobilise the US$20 billion over the next three to five years, of which the expectation is for US$10 billion to be mobilised by the international partner group as public money with a further $10 billion to be mobilised by the Glasgow Finance Alliance for Net Zero (GFANZ) Working Group. This follows the South Africa JETP the USD8.5 billion package for South Africa which was announced last year (see here).

Vietnam is set to follow Indonesia with a climate financing package of at least US$11 billion to shift its economy away from coal and boost the rollout of renewable energy sources which is expected to be announced at the EU-ASEAN summit in mid-December.

Similarly positive was the announcement by the Asian Development Bank (ADB) during COP27 that it has joined with key partners in Indonesia to sign a memorandum of understanding to jointly explore the early retirement of Cirebon-1, a 660-megawatt plant owned by Cirebon Electric Power (CEP) in West Java – the first coal-fired power plant owned by an independent power producer (IPP) - under ADB’s Energy Transition Mechanism. This planned transaction is being held out as a model that could be replicated for other IPPs in Indonesia and other parts of Asia. Once a definitive agreement is reached among the parties, it is anticipated that ADB would provide an early retirement facility in the form of senior debt, on the condition that the tenor of the power purchase agreement between CEP and PLN will be shortened.

It is reported that, the Glasgow Financial Alliance for Net Zero’s (GFANZ) Asia-Pacific network is to launch guidance for financial institutions on phasing-out coal power generation in the region. Speaking at COP27 in Sharm el-Sheikh, Ravi Menon, managing director of the Monetary Authority of Singapore explained that the authority and ADB are also helping to develop the guidance - one to watch out for.

Climate finance

The final decision document at COP27 - the Sharm el-Sheikh Implementation Plan - highlighted the substantial figures of required climate financing for developing countries to transition – the plan states that for developing countries to implement their nationally determined contributions (NDCs) an estimated US$ 5.8–5.9 trillion is needed for the pre-2030 period.

Some of the initiatives around climate finance announced at COP27 include:

• Climate resilient debt clauses - The announcement for “climate resilient debt clauses” was interesting for developing countries in Asia. Countries hit by climate change-driven disasters such as flooding and hurricanes will automatically be able to defer debt payments under new plans laid out by the International Capital Market Association (ICMA). The UK export finance agency - UK Export Finance (UKEF) - will become the first export credit agency to offer “climate resilient debt clauses” in its loan agreements. In part, these clauses will allow low-income countries to defer debt payments in the event they are hit by a climate disaster.
• Reform of multilateral development banks - The Sharm el-Sheikh Implementation Plan recognises that delivering the amount of funding needed (see above) will require a transformation of the financial system. One of the suggested areas of transformation is the reform of multilateral development banks (MDBs) practice and priorities in order to substantially increase climate finance. This addresses numerous calls for the scaling up of climate finance, including through various types of blended finance (a combination of private capital with public capital using various instruments that help to improve the project risk profile). Prior to COP27, the Net-Zero Asset Owner Alliance called on policymakers to support scaling blended finance, including through modernisation of the governance and business models of MDBs and DFIs (see here). One of the suggested areas of improvement was adjustment of the “risk frameworks of DFIs and MDBs to generate greater additionality by increasing the type of financing currently undersupplied in the target markets (e.g. equity, including early-stage project development finance, and local currency financing)”.The Prime Minister of Barbados, Mia Morley, has been particularly vocal about the need to revamp MDBs to better reflect the climate crisis and the needs of developing countries via her Bridgetown Initiative, which includes a detailed action plan (see our COP27 Week 1 recap for more information on that). US climate envoy John Kerry says he wants to work with Germany (as the two largest shareholders in the World Bank) to come up with a strategy by the next World Bank Group meetings in April 2022 (see here).
• Blended finance – Other developments on blended finance included the Central Banks and Supervisors Network for Greening the Financial System (NGFS) launching a blended finance initiative co-led by the Monetary Authority of Singapore (MAS) and De Nederlandsche Bank (DNB) with the aim of unlocking more capital for green and transitional projects in emerging markets. Also, at the G20 summit in Bali (which took place alongside COP27), the Global Blended Finance (GBF) Alliance was formed with several partners, which will seek to bridge the gap in financing sustainable development goal (SDG) programs. The alliance partners include the Glasgow Financial Alliance for Net Zero (GFANZ), the United Nations Sustainable Development Solutions Network (UN SDSN), the Rockefeller Foundation, and the Upaya Indonesia Damai Foundation.
• Global Shield insurance initiative – Germany and the G7 have launched a "Global Shield" plan at COP27 to provide funding to countries suffering climate disasters, by rapidly providing pre-arranged insurance and disaster protection funding after events such as floods, droughts and hurricanes. Backed by EUR170 million in funding from Germany and EUR40 million from other donors, the Global Shield will in the next few months be deployed in countries including Pakistan, Ghana, and Bangladesh when events occur (see here).

At the same time, a previous commitment by developing countries to mobilise jointly USD 100 billion per year by 2020 has not yet been implemented, and the Sharm el-Sheik Implementation Plan urges developed nations to meet that commitment.

Adaption

Private finance tends to be focused on climate mitigation projects such as renewable power ventures, rather than helping adaptation and resilience. However, far greater attention to adaptation finance has been given at this COP27. As part of its commitment to scale up financing for climate change adaptation, the ADB joined with partners to announce at the start of the conference the ambition to mobilise more than US$200 million from 2021 to 2025 to build water and sanitation resilience and security in Asia and the Pacific.

To conclude, whilst the developed world has in essence created the need to de-carbonise, developing countries are not wanting to place limits on their economic growth by avoiding the use of carbon-based fuels to power their industries in the medium-term. It will take major investment in clean energy projects within those countries to ensure that the carbon peak for the developing world can be both lowered and brought forward.