Executive Summary- SEA Change: Delivering a Zero Carbon Economy in Southeast Asia

Executive Summary- SEA Change: Delivering a Zero Carbon Economy in Southeast Asia

Southeast Asia is one of the most vibrant and fastest growing economic regions in the world. Demand for energy services is growing extremely fast: since 2000 overall energy demand has grown by more than 80 per cent and the vast majority of this growth has been met by a doubling of fossil fuel use.

This report is the final report for a project entitled ‘Shifting financial flows to accelerate the energy transition in Vietnam, Indonesia and the Philippines’. These countries were selected as the focus because as of July 2019 they collectively had a total of 49 GW of coal in their pipeline (announced, pre-permitted and permitted) – in addition to 25 GW under construction. The energy systems in Vietnam, Indonesia, and the Philippines are becoming more, not less, dependent on fossil fuels, and in turn their reliance on energy imports is growing. The projected increase in fossil fuel consumption, particularly coal, would lead to a 66 per cent rise in CO2 emissions to 2.4 gigatons by 2040. Put simply, should they build the coal-fired power plants currently in their pipeline, the Paris Agreement goals cannot be met.

Southeast Asia is the only region in the world where the share of coal in the energy mix increased in 2018. In the same year, the Intergovernmental Panel on Climate Change (IPCC) issued a special report effectively saying there is no more atmospheric room for the emissions from coal power plants if we want to reach the 1.5 degree temperature goal set out by the Paris Agreement, and it is imperative that we do given the impact on lives and livelihoods if we stick to 2 degrees and overshoot. To this end, the task in hand is to decarbonise all economies so that they produce net zero emissions by 2050.

Southeast Asia is a diverse and dynamic region growing in economic weight and carbon footprint, despite possessing extraordinary renewable energy resources, and having already benefited from their falling costs and many positive early deployments. In order to compete in a low carbon world, and hasten its onset, regional collaboration must be strengthened. In their 2019 regional outlook, the International Energy Agency (IEA) paints a picture of two very different scenarios out to 2040. This is one model of many, but it is a stark illustration of the strategic choice.

The first IEA scenario is based on policy frameworks and ambition in place today – it is called the Stated Policies Scenario (SPS). In the SPS, the share of renewables in power generation rises from a base of around 24 per cent of power generation coming from renewables today (18 per cent of which is hydropower) to 30 per cent. This places Southeast Asia far behind China, India, and other Asian economies and would result in a net energy trade deficit of over USD 300 billion per year and 650,000 annual premature deaths associated with air pollution, up from an estimated 450,000 in 2018. This path means that the carbon intensity of Southeast Asia’s power generation infrastructure would be responsible for almost half of the globe’s total energy-related emissions, up from 42 per cent today. Pause for a moment and reflect on that. Southeast Asia would be trending in the exact opposite direction of most other parts of the world, where the share of energy-related emissions declines as they replace fossil fuels with renewables, cut demand and electrify.

There is an alternative low carbon development pathway for Southeast Asia. The IEA’s Outlook forecasts one possible version of what that could look like. In their Sustainable Development Scenario (SDS), coal demand peaks after 2020 and is cut by 80 per cent relative to the scenario outlined above. The share of coal in electricity generation falls to 4 per cent in 2040. From the base of 24 per cent in 2019, in this scenario the share of renewables in generation triples to around 70 per cent in 2040 – cutting the current emissions trajectory by 50 per cent with this one measure alone.

The IEA provides a regional outlook and we know there are big variations between countries. Indonesia is a juggernaut compared to some other economies in the Association of Southeast Asian Nations (ASEAN) and warrants its own analysis. Not all countries will follow the same pathway or trajectory. Finding ways to work at the regional level is important to more efficiently share learning, build capacity and then support countries to make progress in the areas that resonate most. The region has considerable potential for renewable energy and faces a strategic choice: to continue on the high carbon development pathway and become an outlier, or switch to a low carbon model of growth and request the development banks and international donors support them to modernise their economies for the future.

This report considers the political economy conditions and dynamics in Vietnam, Indonesia and the Philippines in order to identify the political and institutional barriers that currently prevent Vietnam, Indonesia and the Philippines from throwing their political weight behind the sustainable development scenario. It suggests a number of priority action areas to tilt them towards building a modern energy system and low carbon economy, and sending clear-cut and long-term market signals to unlock financial flows.

We start by asking why they should care. We argue that Vietnam, Indonesia and the Philippines should see it as critical to their national interest to get ahead of global forces and remain competitive in an inter-connected system of trade and finance. The global investment landscape is changing fast with a growing number of countries, companies and central bankers embedding practices to minimise financial jeopardy from climate risk and maximise flows to low carbon economic activity and assets. Transitioning to clean, home-grown energy sources would enhance energy security and save the public purse from having to cover the delta between expensive fossil imports and artificially cheap fuel prices.

There is a global and regional trend away from coal and towards renewables in the energy mix. Incremental steps are proving inadequate to meet rising public concern over air pollution or demands from younger generations for faster climate action and ambition. ‘Net Zero’ is becoming a mantra since the IPCC found that achieving the 1.5°C target requires emissions to decrease to net zero by 2050. Minimising dangerous domestic impacts of a warming world – Southeast Asia is one of the most vulnerable regions – requires collective action. Every country is expected to implement their nationally determined contribution in the global fight against climate change.

We know the characteristics of a low-carbon energy transition: a major focus on energy efficiency, a massive scale-up of renewable energy, and investment in flexible grids that can power a modern vibrant economy. Phasing out of fossil fuel subsidies and electrification of systems like transport are also critical elements. The science tells us we don’t have time to go sector by sector: instead what is required is a transformation of the whole economy with a compelling and holistic package of reform measures including an industrial strategy, labour policy and revised social contract.

Choosing to pursue a low carbon instead of a high carbon development pathway is not as easy as it may sound. For example, coal is an energy input but also an import, or export commodity in Indonesia’s case. Fossil fuels are hard-wired into the system and have underpinned the region’s industrial growth. A focus on technical capacity building alone won’t change that. The institutional inertia from business as usual manifests as a real drag on the transition. The extent to which the government is entangled with the high carbon sector can impede progress, as does corruption which is often present. Managing an exit from coal assets involves significant losses now for the governments of Vietnam and Indonesia, versus a risk of stranded assets at some future time.

Five priority action areas

In Part 2 of this report, we suggest a framework of five priority action areas to address the most critical barriers and help position these countries to maximise value in the transition to a low carbon world.

1. Create a big vision and whole economy approach

Building a modern economy of the future for a growing middle class and the next generation of educated young people inherently has to be low or zero carbon and powered by regional modern renewable energy systems. Decarbonisation is not the only driver for change and can be framed as an optimistic vision of the future; other meta trends such as digitalisation, decentralisation, and demographic changes are having a big impact on what the future will look like. These are seismic shifts affecting the whole economy, not just the power sector; they present big opportunities for the young generations coming of age in Southeast Asia, or big risks if the governments fail to respond or resist.

2. Focus on competitiveness and full-cost benefit analysis

As the world enters a zero-carbon paradigm and the IMF is preparing to integrate climate risks in their country-level economic assessments, the case becomes more compelling that Vietnam, Indonesia and the Philippines invest in developing low carbon supply chains and energy systems, if not for climate reasons, then to protect the future competitiveness of their economies. As technology takers, dependent to varying degrees on being competitive in the global marketplace, this is a critical lever that needs more serious consideration. A lot of innovation is happening to reorient the financial ecosystem to which Vietnam, Indonesia and the Philippines are paying close attention. For example, there are various multilateral collaborations working to green the financial system and identify, measure and manage climate-related risk; the International Platform on Sustainable Finance is working to reorient capital flows and reduce friction to low carbon assets and activity.

3. Build confidence from the bottom up through at-scale demonstration projects and proof points

As a priority, we need to decouple economic growth and energy demand with a major drive to do more with less energy. Saving consumers and businesses money in theory is politically palatable; yet utility business models and fossil fuel subsidies weaken this link currently. Hopefully the economic and competitiveness arguments in favour of a major energy efficiency drive will win over decision-makers and give them confidence for a faster transition to renewables. As an illustration, one of the fastest growing uses of electricity to 2040 is space cooling: its share in peak power demand is set to rise towards 30 per cent in the region by 2040.

There have been promising signs of progress to build on: Vietnam’s successful feed-in tariff scheme secured 4.5 GW of solar in a matter of months and Cambodia’s recent 60 MW solar auction secured a price of USD 0.039 – the cheapest yet in the region. These and other proof points reverberate around the region building confidence and tapping into competitive forces within and between ASEAN neighbours. We need to invest more in a communications apparatus to aggregate and amplify these signals. Like-minded diplomatic coalitions and learning platforms are also critical to give political and financial actors the confidence to take a leap of faith and commit to a low carbon future.

4. Provide an exit strategy to high carbon actors and assets

The level of fiscal entanglement has to be painstakingly thought through and a conversation opened about how to ease the capital destruction for governments transitioning to the low carbon development paradigm. A structured financing mechanism might enable Indonesia and Vietnam to restructure their debt and convince them to phase out fossil assets, invest in green and the grid instead, and align with the Paris deal. This is of first-order importance and warrants further research and dialogue. More robust support structures are needed to protect the public from climate impacts and prevent backlash to social and economic disruption from the transition; and stronger and more diverse coalitions can counter the fossil lobby and demand faster and more
ambitious action.

5. Build the institutions for long-term change

The fifth priority area should include stronger governance and coordinating mechanisms. These are necessary to drive the transformation required. We suggest investing in new leadership training platforms to reach the next generation of decision-makers, and starting now to raise their consciousness of the stakes involved and the shape and scale of global transformation required to deliver a low carbon future. We also need dedicated green national banks and instruments, as well as low carbon professional services – such as urban planners, engineers, and lawyers. It’s going to take everyone to change everything.

Since this is a question of global significance, donor governments and philanthropic foundations need to coordinate for more efficient and effective delivery of international support. The bilateral and multilateral development banks have committed to align their operations with the Paris Agreement, but we argue they need to go much further and do more with their public budgets and mandates to de-risk and drive the transformative agenda. This is their raison d’être.

This report is targeted at decision-makers regardless of where they sit in the system. Visionary and creative leadership will be required to address the most critical barriers to building a modern energy system and a low carbon economy in Southeast Asia. The benefits of pursuing decarbonisation range from the pragmatic, such as greater energy independence; to the economic, such as enhanced competitiveness and access to capital; to the political – clean air and future jobs for citizens; to the existential – minimising risks to the most vulnerable individuals and vital ecosystems.

Ultimately it is up to the governments of Vietnam, Indonesia and the Philippines to decide to pursue a new development paradigm that leapfrogs the carbon intensity of the Industrial Revolution and make it a political priority to pivot towards clean, affordable, reliable and sustainable energy for the 21st century. Based on our extensive engagement in the region we offer several ideas that
can help deliver the paradigm shift.


If Vietnam, Indonesia and the Philippines are to modernise their energy systems, the 2020s must be the decade of action. Our main recommendations include:

  • Develop a transition mechanism to take account of the capital destruction from an accelerated energy transition.
  • Connect financial decision-makers and regulators in the region to the international initiatives designed to enhance transparency and disclosure
    of climate-related risks.
  • Align with or agree a shared language for green investments by connecting the ASEAN capital markets’ development with the International Platform on Sustainable Finance, which includes China, India, and the EU and aims to move capital in the right direction at speed and scale.
  • Use foreign direct investment and public pressure to decarbonise international supply chains to change norms and behaviours and keep the region abreast of discussions around border carbon adjustments and the like.
  • Use patient capital from national and multinational development banks to de-risk the transition, underwrite a pipeline of low carbon assets and set new norms in the process. Development banks have to go beyond aligning their operations with the Paris goals, as we argue in our report, Banking on Asia, with specific recommendations for the six banks most active in Southeast Asia.
  • Choose – unequivocally – to switch to a low carbon development pathway and send clear long-term market signals by publishing, for example, coal phase-out dates, a long-term strategy with a carbon neutrality deadline, and a low carbon infrastructure plan – that investors say they need from governments in order to shift financial flows.
  • Double-down on energy efficiency and decouple energy demand from growth. All actors must emphasise the competitive advantages of decoupling and drive industry to join initiatives such as EP100 and ISO 50001 to consume energy in a smarter way, reduce costs and boost competitiveness.
  • Develop and implement ambitious national cooling plans to provide populations with super-efficient cooling services.
  • Channel all investment to industries, technologies and infrastructure compatible with a net zero world. All new infrastructure has to be built to handle this new normal.
  • Position SEA as a renewable energy hub. Models vary but most indicate that there’s room for more stringent near-term mitigation than currently planned in Vietnam, Indonesia and the Philippines by taking advantage of the economic, social and technical feasibility of solar energy, wind energy, and electricity storage technologies.

Whichever way these economies choose to develop the investment needs are enormous. The IEA in their 2019 regional outlook estimate the cumulative investment needs over 2019 to 2040 is over USD 2.5 trillion in the Stated Policy Scenario, rising to USD 3.3 trillion in the Sustainable Development Scenario. This breaks down to an average annual capital spend of USD 120 billion for the SPS or USD 150 billion for the SDS, over the period 2019 to 2040. Investment in Southeast Asia’s energy sector in 2018 was around USD 65 billion. The higher investment needs of the SDS are more than compensated for in savings elsewhere: for example, Southeast Asian economies could collectively save nearly USD 200 billion annually on fossil fuel imports by 2040. Put this way, it seems an obvious choice which path to invest in and put political weight behind. Either way, it will have profound consequences on their citizens and the globe.

Trying to rewire what is hard-wired into a system is tough work. Energy transitions in other parts of the world can offer valuable guidance and encouragement. The status quo has so many vested interests. It is political. There are multiple opportunities on the horizon where actors can work to change the optics and open up the politics for more ambitious regional outcomes including Vietnam’s chairmanship of ASEAN and COP26 in 2020 a year when governments are expected to upgrade their climate actions under the Paris Agreement. China plays host to the Convention of Biodiversity COP around the theme “Ecological Civilization: Building a Shared Future for All Life on Earth” and Japan hosts the Olympics. Both warrant further exploration. The relocation of Indonesia’s capital city from Jakarta to Borneo is a unique opportunity to build and showcase what a low carbon Asian city of the future can look like. New leadership at the Asian Development Bank (ADB) can move the low carbon transition and climate risks higher up the organisation’s agenda, as it has at the International Monetary Fund.

There are no simple solutions, and certainly no silver bullet. With some genuine political leadership in the region, international cooperation, public-private partnerships, and a big push to find and finance large-scale clean energy opportunities, SEA could become the world’s new renewable energy hub. Becoming green is not an obstacle to growth, it is a requirement for it.
So goes Southeast Asia, so goes the world.


Subscribe to our newsletter