Asia Pacific countries work to address the effects of climate change

Recent years have seen the issue of climate change and its potential ecological and economic effects move more clearly into the spotlight. It is now widely accepted that the planet cannot sustain current high-carbon industrial and consumer behaviours. With scientific knowledge on the subject now better informed and more reliable, economic models used to forecast the fiscal impacts of a steadily destabilising environment are also more sophisticated. The result is consensus that climate change will have major economic and social impacts; the uncertainty now surrounds just how severe those impacts will be. Due to their geographical location and level of development, the emerging economies of Asia Pacific require immediate and extensive attention to adapt and limit future damage. In 2018 alone Asia lost $54.7bn to natural disasters, highlighting the region’s vulnerability to worsening weather trends, according to an April 2019 report by global reinsurer Swiss RE.

Multilateral Efforts

The June 2019 G20 summit in Osaka, Japan saw consensus among 19 member states on the Paris Agreement’s “irreversibility”, with the US being the only major economy not committed to the global agenda for reducing greenhouse gas emissions. The 2015 agreement significantly develops plans laid out in the 1997 Kyoto Protocol to ensure that industrialised nations assist emerging economies in their efforts to mitigate the adverse effects of climate change. ASEAN member states have also reiterated their commitment to achieving the goals set out in the Paris Agreement, and pledged that in doing so they would share information and best practices, recognising that regional and global cooperation are essential in order to effectively tackle climate change.

As of November 2019, 187 countries had ratified the agreement and submitted their nationally determined contributions to tackle global warming. Ratifying parties agree to the target of keeping the level of global warming lower than 2°C above pre-industrial levels. Scientists predict that restricting atmospheric temperatures to below this level will save the global economy $17trn per year relative to a four-degree increase, and $4trn per year relative to a rise of three degrees. In 2018 the International Labour Organisation announced that climate change is a threat to 1.2bn jobs worldwide, so it is vital that environmental strategy is used to help shape economic policy, and that a shift to the use of renewable energy becomes a global priority.

Vulnerabilities in Asia Pacific

The impacts of climate change are expected to be felt most acutely in the emerging world. A 2018 study by Oxford University Press states that the relative impacts of climate change drop as income per capita rises, thus vulnerability is higher in developing nations, especially those with hotter climates. Therefore, climate-resilient infrastructure development in more susceptible countries would help to offset the negative economic effects of progressive environmental destabilisation.

The UN Economic and Social Commission for Asia and the Pacific (UNESCAP) predicts that Asia Pacific will be the region worst affected by both the environmental and economic effects of climate change, and that over 100m people within the region could be forced into poverty by 2030. Without concerted action, overall GDP in the region could decline by up to 3.3% by 2050 and by 10% by 2100. Narrowing the scope, the hit to South and South-east Asian GDP could be anywhere between 1.8% and 6.6% by 2060. This variable displays the uncertainty surrounding climate change and also emphasises the fact that whichever end of the scale is more accurate, it involves significant economic repercussions. Part of the reason for Asia Pacific’s high level of vulnerability is that the El Niño phenomenon – a climatic event occurring every two to seven years in the eastern Pacific that manipulates ocean surface temperatures and affects global wind and rainfall patterns – is expected to become more frequent and more severe, as are other extreme weather events. This will unavoidably impact several key economic sectors.

The emphasis on being green has been an opportunity to nudge financial systems towards sustainability. Foreign direct investment (FDI) in Asia remains strong, with the region receiving $512bn – 39% of the global total – in 2018. FDI into South-east Asia came in at $145bn in 2018 and the expansionary trend continued into 2019, with increasing enthusiasm for green investments helping to support robust inflows of FDI.

Transport & Logistics

Climate change has necessitated an overhaul to transportation and logistics infrastructure in Asia Pacific. Extreme weather can cause major disruption as higher temperatures and more regular flooding and storm surges compromise the safety and integrity of roads, bridges and railways. The Asian Development Bank (ADB) forecasts that $41bn per year will be needed for infrastructure adaptation up to 2030, with the majority of that figure going towards transport. Ensuring developments are climate resilient will make them more expensive at the design and construction stages, but the future costs of not implementing such measures will be higher. Advancements in technology should ensure that climate-proofing investments become more cost effective. “Logistics costs in Myanmar can be quite a lot higher than other ASEAN countries due to efficiency gaps,” Alex Wicks, CEO of Myanmar-based logistics firm Kargo, told OBG. “In trucking, innovative technology is enabling these gaps to be filled by connecting excess capacity and empty runs to available shipments. This maximises the utilisation of vehicles, which in turn reduces carbon emissions from unnecessary journeys.”

Asia’s transportation services and ports are among the busiest in the world, and are vital to global supply chains. China and South-east Asia are major manufacturing hubs, so any weather-inflicted impairment of logistical efficiency and damage to storage and production facilities within the region is of global economic consequence. Flooding in Thailand in 2011 and 2012 caused business supply and communication disruptions around the world, with more than 14,500 companies affected. Indeed, the stocks of major manufacturers were destroyed: US data technology firm Western Digital lost 45% of its hard-drive shipments, US software company HP suffered fiscal losses of around $2bn, while Japanese automotive manufacturers Toyota, Honda and Nissan lost upwards of 400,000 cars between them. The total insured losses of the catastrophe were between $15bn and $20bn. As such, it is important that governments and private firms take the necessary measures to mitigate weather-related disruptions.

Tourism

The aforementioned flooding in Thailand also impacted the country’s tourism sector, inflicting an estimated loss of between $469m and $781m in inbound tourism revenues. This illustrates how an extreme weather event can affect multiple sectors. As well as relying on efficient transportation, the tourism industry is dependent on the preservation and accessibility of popular urban and natural locations. Coastal metropols such as Manila, Ho Chi Minh City, Jakarta and Bangkok are all major regional tourism or business centres, yet all are under serious threat from flooding and destruction caused by cyclones and rising sea levels. Climatic instability also threatens Asia Pacific’s many small islands and other low-lying areas.

There is genuine concern that vital facilities and tourist attractions in these areas – as well as natural resources such as coral reefs – will be destroyed from increased ocean temperatures and coastal erosion. Damage to coral reefs is of particular significance, as they sustain popular tourist activities like scuba diving and snorkelling, and are an integral component in fragile marine ecosystems. Such is the ecological significance that in both 2016 and 2018 Thailand’s Department of National Park, Wildlife and Plant Conservation closed some of the nation’s most popular islands, beaches and dive sites due to coral bleaching. Several of the locations deemed off limits are still closed, thus locals and businesses are suffering due to loss of income. Most notably, the iconic Maya Bay, which was made popular by the 2000 Hollywood movie The Beach, remains closed to visitors until at least June 2021 to allow for natural regeneration.

“Sustainable tourism measures are always a positive sign for the country, the environment, communities, tourists and, in the longer term, businesses,” Paul Ashburn, co-managing partner of consultancy BDO Thailand, told OBG. “Investors committed to the longterm future of the tourism industry will understand the necessity of closing off endangered environments and the future benefits this will bring to the industry.”

Mining & Agriculture

The economy of Papua New Guinea was badly damaged by drought during the 2015-16 El Niño event. Ok Tedi’s copper and gold mine was closed due to the Fly River drying out, which the mine depends on for shipments of materials, fuel and food supplies. With 96% of its workforce being PNG nationals, the closure was deeply felt. In 2014, the year preceding the closure, Ok Tedi’s earnings accounted for 5.5% of national GDP. “El Niño, together with low copper prices, caused Ok Tedi to restructure its operations to become lower cost and better able to deal with such shocks,” Peter Graham, chairman of Ok Tedi, told OBG. “It reinforced the importance of our agricultural projects in building self-sustainability in communities.”

PNG’s agricultural output was also impacted by the droughts. Families reliant on subsistence farming, particularly those in the highland areas, saw their garden and cash crops destroyed. The response package for these events was upwards of $85m, with an estimated $12m of that sum required to provide food relief to affected families for the first four months.

The impact of climate change on agricultural productivity is expected to be most severe in low-lying nations. The agriculture sector accounts for around 10% of overall GDP in the majority of South-east Asian economies and provides jobs for over one-third of the region’s working population. Due to the 2015 drought, the Philippines experienced a loss of crops and agricultural land amounting to $325m, and rice exports in Thailand dropped by $430m, while rubber, palm and corn yields were also badly affected. In Indonesia 3m people dropped below the poverty line due to loss of crops and income, while the price of rice rose to 80% above the international average.

Significant as the El Niño effect is, it is only part of the problem, as many other damaging weather events occur independent of it. The IMF predicts that if climate change continues unabated, countries such as Thailand, Vietnam, Indonesia, Myanmar and the Philippines could experience a 50% decline in rice yields by 2100 compared to 1990. In addition, a study by UNESCAP found that the average annual cost of disaster-inflicted damage on the Asia-Pacific agriculture sector rose from $52bn in 1970 to $523bn in 2015. These figures display the urgency with which adaptation methods for the sector need to be implemented, as the continued destruction of land, crops, housing and facilities will force many people to relocate to large towns and cities in search of employment, increasing crowdedness.

Policy Efforts

Much can be done at the policy-making level to raise awareness and better equip industries to cope with the economic effects of climate change. Sustainable farming and fishing methods, promoting ecotourism, reef conservation projects and climate-proofing vital infrastructure are all existing practices across Asia Pacific, yet more needs to be done. While adaptation and preservation are essential, lowering greenhouse gas emissions is vital to the success of mitigation strategies and key to supporting sustainable growth. Asia Pacific accounted for over half of total global emissions in 2018, with China alone contributing 27%. Willingness to address such issues as carbon pricing and fossil fuel subsidies is growing. G20 members from the region – Australia, China, Russia, Indonesia, South Korea, Japan and India – have all pledged to discontinue oil, coal and gas subsidies in the medium term, and this is an important step. Subsidies encourage the use of fossil fuels, create public debt and discourage the adoption of renewable energies, subsequently undermining efforts to meet national and regional greenhouse gas reduction targets. Appropriate carbon taxing and the removal of fuel subsidies would make the switch to renewables more financially appealing to companies and could result in the region’s emissions being cut by 18-25%, according to UNESCAP.

Renewables & Green Finance

Costs are a significant worry for many governments’ energy departments and power providers, particularly when it comes to pursuing a path towards renewable energy. The PNG government plans to switch to 100% renewable, indigenous energy by 2050, as does Sri Lanka. The Philippines has set the conditional target of reducing its own emissions by 70% by 2030. Major investment will be required if these targets are to be met, with Sri Lanka alone needing an estimated $54bn-56bn.

Advancements in green technology mean that higher energy efficiency, and lower fuel and operating costs are benefits of switching to renewable power sources, while the estimated costs of damage caused by the continued use of carbon-based energies have increased significantly. This has aroused genuine appetite in the region for making the transition.

In ratifying the Paris Agreement, industrialised nations pledged to donate $100bn per annum to developing countries by 2020 to aid their adaptation and mitigation efforts. By 2017 the donated sum had reached $71.2bn, but the withdrawal of the US from the agreement has cast doubt over whether the full $100bn is achievable within the original time frame. Intergovernmental funding and investment from multilateral banks – the ADB has pledged $80bn to the region between 2019 and 2030 – is crucial, as is capital raised through private flows of green finance. In 2019 sustainable finance assets were valued at over $31trn globally, up from $30trn the year before, with finance tools such as green bonds, green sukuk (Islamic bonds), private placements and credit guarantees being increasingly utilised. As of November 2018 public and private entities from ASEAN nations had issued $5bn in green bonds, which accounts for 1% of the global market, meaning vast scope exists for upscaling. Even so, progress has been made in recent years. An October 2019 report by the International Finance Corporation found that around half of the emerging markets that initiated sustainable financial reforms were in Asia Pacific. Through collaboration cross-border green bond opportunities can be created, raising capital for infrastructure adaptation and climate change mitigation.

The ASEAN Infrastructure Fund, a multilateral fund co-financed by the ADB, was established to enable such collaboration. It has opened a “green window” to fund large-scale green development. A host of other such funds exist in the region. Indonesia’s Tropical Finance Facility employs public capital to stimulate private investments, focusing on sustainable agriculture and renewable energy initiatives. In 2018 it jointly funded a $350m project aimed at creating sustainable rubber plantations in the Jambi and Kalimantan provinces of Indonesia. Thus green financing can help reinforce an economy on a regional and national scale, at both the macro and micro level, against the destabilising effects of climate change.