US, EU climate policies may pose unforeseen risks for emerging Asian economies

The EU's Carbon Border Adjustment Mechanism, the US' Inflation Reduction Act, and other climate policies by developed nations may pose unforeseen challenges for the energy transition in Asia's emerging economies if they are not implemented cautiously, ministers and company executives said at the Energy Asia 2023 conference in Kuala Lumpur, Malaysia, June 26.

Unintended consequences could include draining Asia of much-needed clean energy investment, creating trade barriers for vital exports, and polarizing governments at a time when combating climate change requires more collaboration, the experts said at the event in which CERAWeek by S&P Global is a partner.

"We need to be very careful so that the pulling of investment is not too hard or too much until it drains the investment needed in Asia," Mazuin Ismail, Senior Vice President of Corporate Strategy at Malaysia's oil and gas company Petronas, said at the conference.

Ismail said that while these subsidy schemes were well intended, they are likely to pull investments to clusters in the US and EU and away from Asia, at a time when Asia accounts for the majority of energy demand growth.

"The disparity between the rich and the 'global south' or Asia needs to be managed because climate change is a global matter. If it is too polarized, we will not have a global solution to the problem," he said, adding that Asia needs to realize the importance of building up its own supply chains and infrastructure locally.

The EU's CBAM, aimed at leveling the playing field for companies that pay a cost for carbon emissions, will impose a tax on emission-intensive commodity imports. It will, however, take into account the cost of carbon imposed in the suppliers' domestic emission trading system.

"The tariff-based nature of CBAM can create trade barriers for Asian exports. If Asian countries fail to reach European standards, there will be an exclusive tariff on goods," said Karen Andries, TotalEnergies' Vice President, Asia-Pacific Exploration & Production.

Platts assessed the EU Emission Allowance, Nearest-December, at Eur90.15/mtCO2e June 22, down Eur0.40/mtCO2e on the day.

Platts is part of S&P Global Commodity Insights.

Room for a differentiated approach

"We acknowledge the CBAM, and we acknowledge the IRA, but we believe that we need to have our own policies when we engage with Europe and the US," Nik Nazmi Nik Ahmad, Malaysia's Minister of Natural Resources, Environment, and Climate Change, said at the conference.

He said many Asian countries have a slower industrialization process and limited access to necessary resources in the energy transition.

"We hope that there would be room for countries in the global south, countries that are developing, to be able to pursue slightly differentiated approaches," Nik Nazim said, adding that the real need was for greater financial assistance. "We don't want those grant announcements about money being there but we can't cash the checks."

He said the Association of Southeast Asian Nations, which represents most Southeast Asian countries, must unite under a common position in climate dialogues with the EU and the US to have stronger bargaining power.

However, Brad Crabtree, Assistant Secretary, Fossil Energy and Carbon Management with the US Department of Energy, argued that the IRA was mainly a reflection of domestic realities in the US, and designed to get its own house in order on climate change, rather than prompt rivalry.

Crabtree added the IRA could benefit Malaysia and other Asian countries by motivating research and technology, scaling up manufacturing and supply chains, mobilizing private finance, and supporting infrastructure construction as well as operation, which ultimately drives down costs.

"The opportunity here is that such lower costs will benefit countries in the global south in terms of their ability to deploy," he said, adding that IRA's tax credits and government funding are open to companies from around the world that are doing projects in the US.

"We have companies from [Southeast Asia] participating in the US market, as well as from Europe and East Asia. These companies doing projects on the basis of this policy will then take that experience and apply it around the world, including right here in Southeast Asia," Crabtree added.

Andries with TotalEnergies said both CBAM and IRA could motivate countries to align their climate policies with international standards and commitments, as well as put in place their own emission accounting frameworks. Additionally, technologies like carbon capture and storage need global-level cooperation.

"The cross-border nature of CCS requires a working-together approach. Governments and regulators need to work together to strengthen policies on carbon pricing and share solutions between carbon exporting and carbon-storing countries and businesses," she said.