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Financing has long been recognized as a barrier to accelerating decarbonization in Southeast Asia. A successful transition to a low-carbon economy – especially in the region’s low- and middle-income countries – will rely heavily on two things. The first is international concessional finance and the second, stronger climate targets to accelerate investor interest.
Both are expected to be determined at COP29.
Countries must update their Nationally Determined Contributions (NDCs) by February 2025 under the terms of the Paris Agreement, and leaders will announce the New Collective Quantified Goal (NCQG), a new set of financing commitments to support developing countries in their climate actions post 2025.
While most countries in Southeast Asia now have ambitious long-term clean energy goals, the investments required to meet these targets are not yet on track.
According to the International Energy Agency (IEA), the region attracts only 2 percent of global clean energy investment despite accounting for 6 percent of global GDP, 5 percent of global energy demand, and being home to 9 percent of the world’s population. Annual average energy investment over the last three years was $72 billion. The IEA’s “Net Zero Emissions” (NZE) scenario calls for $190 billion in annual investment from 2026–2030.
Developing countries require far more funding than current levels to adopt green technologies at scale and deploy adaptation measures. Many developing country NDCs include “conditional” climate pledges, which they say are only attainable with international support. Of the $4.5 trillion developing countries say is needed, one-third is linked to conditional pledges.
There are significant differences between conditional and unconditional targets in the existing NDCs submitted to the UNFCCC by most Southeast Asian countries. For instance, the Philippines’ unconditional target is a 2.71 percent emissions “reduction and avoidance,” while its conditional target is a 72.29 percent emissions reduction. In Vietnam, NDC targets are framed as large emissions reductions against a business-as-usual scenario: a 15.8 percent reduction unconditionally and 43.5 percent conditionally.
At COP29, leaders will negotiate financial contributions to support developing countries in tackling climate change. Key points to monitor include the total amount of financing for developing countries and how it is accounted for. For example, discussions centered on whether the last financing goal from COP15, which promised $100 billion annually, was met as reported by the Organization for Economic Cooperation and Development (OECD).
This is complicated by the fact that many of these financing commitments are repurposed from existing program funds, meaning they are not “new and additional,” and there is no clear distinction between grants and non-grants.
Lower- and middle-income countries in the region are primarily concerned about whether accelerating decarbonization will lead to significant debt and create trade-offs with other important priorities, such as health and education. These issues have already posed a real challenge to the implementation of Just Energy Transition Partnerships in Indonesia and Vietnam.
In addition to grants, concessional loans – those with more favorable terms than “market rate” – are also essential for accelerating Southeast Asia’s energy transition, as the region faces capital costs significantly higher than in industrialized nations. The IEA suggests that the region could meet its energy transition goals with substantial increases in concessional financing from development finance institutions. This type of financing can lower the cost of capital and enhance the financial viability of clean energy projects, especially in emerging and “high-risk” markets.
In the IEA’s net zero scenario, an estimated $12 billion in concessional finance could be needed for the region by the early 2030s to support an accelerated uptake of clean energy technologies.
Financing accelerated energy transition in Southeast Asia will significantly depend on the strength and integration of the region’s climate policy framework, which would send long-term signals to mitigate risks for investors, including political, technology, currency, and market risks.
A robust NDC target, aligned with policy frameworks can convey strong “push” signals for investors. The robustness and alignment of different targets need to be supported by effective institutional and cross-ministerial governance arrangements to enable effective implementation.
Southeast Asian nations have an opportunity to strengthen their NDC targets and signal long-term and demonstrable ambition to mitigate market and political risks. This, in turn, can help reduce capital costs and broaden the investment pool. It is also crucial to enhance sustainable finance policies, such as regional and national taxonomies, and to increase 1.5-degree-aligned climate reporting and ESG reporting standards.
Southeast Asia is projected to account for a quarter of the growth in global energy demand over the next decade, driven by its expanding population and industrial growth. To meet global climate goals outlined in the Paris Agreement, COP29 must see developed countries enhance their financing offers, while Southeast Asian nations need to present ambitious NDC targets supported by credible transition plans.
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Originally published under Creative Commons by 360info™.