The Imperative of Carbon Pricing for ASEAN’s Sustainable Future

Over the last decade, the concept of carbon pricing has increasingly gained traction globally, with more than 70 initiatives now in place, a significant increase from 40 in 2017. This growth signals a significant shift towards recognising the importance of carbon pricing policy, beyond just environmental considerations, but as a critical lever for facilitating the energy transition in ASEAN. But what exactly is carbon pricing, and why does it hold such importance for ASEAN’s energy transition?

At its core, carbon pricing is a tool designed to internalise the external cost of greenhouse gas (GHG) emissions – that is, to ensure that the environmental cost of emissions is reflected in the financial cost borne by emitters. This can be implemented through carbon taxes or cap-and-trade programmes (CAT), also known as Emissions Trading Systems (ETS). By assigning a price to carbon emissions, it drives producers and consumers to factor in the cost of carbon in their decision-making processes. This not only encourages the reduction of emissions but also stimulates investment in cleaner technologies. In ASEAN, it plays a critical role in ensuring energy security and affordability, which are paramount for the region’s sustainable future.

For the ASEAN region, the stakes are particularly high. Characterised by a dynamic economy and rapid development, according to the 7^th ASEAN Energy Outlook, ASEAN is on track to become the world’s fourth-largest economic bloc by 2030. However, this growth trajectory also forecasts a tripling of the region’s energy demand by 2050, compared to the 2020 baseline. Therefore, transitioning to a low-carbon economy is crucial for ASEAN’s long-term energy security and sustainable future.

Advancing ASEAN’s Energy Transition and Climate Goals Through Carbon Pricing

The ASEAN Plan of Action for Energy Cooperation (APAEC) 2016-2025 lays out ambitious targets, including achieving a 23% share of renewable energy in the total primary energy supply by 2025 and a 21% reduction in energy intensity. Meeting these targets requires significant policy shifts and investments, for which carbon pricing can serve as a powerful catalyst. Carbon pricing can catalyse these efforts by generating revenue for clean energy investments and incentivising the adoption of renewables and energy-efficient technologies.

Moreover, as ASEAN countries are updating their Nationally Determined Contributions (NDCs) to escalate their climate action ambitions, carbon pricing becomes pivotal. It economically discourages carbon emissions, making renewable energies become more competitive and aligns directly with ASEAN’s transition goals.

As ASEAN member states intensify their efforts towards ambitious climate targets, carbon pricing offers a transparent and scalable tool that can adjust to the region’s dynamic economic and environmental landscape. Additionally, carbon pricing can spur innovation in green technology within the region, fostering an environment that nurtures sustainable economic growth and resilience against climate-related risks.

Furthermore, the adoption of carbon pricing in ASEAN could lead to enhanced regional collaboration. Given the interconnected nature of ASEAN economies, a coordinated approach to carbon pricing could mitigate the risk of carbon leakage, where businesses relocate activities to countries with laxer emission constraints, thus undermining regional climate objectives. A unified ASEAN carbon market would simplify regulations and improve resource allocation towards low-carbon investments, fostering technological innovation and sustainable economic growth across the region.

Why ASEAN Needs to Fast-Track Carbon Pricing for Net Zero

Accelerating carbon pricing in ASEAN is not only vital for meeting climate goals but also for economic resilience. Internationally, mechanisms like the EU’s Carbon Border Adjustment Mechanism (CBAM) are being developed to adjust import prices based on carbon content, potentially impacting ASEAN exports like steel and cement. This mechanism, which aims to prevent carbon leakage by adjusting the price of imports based on their carbon footprint, specifically targets energy-intensive commodities like iron, steel, cement, and aluminium. While exports of these commodities from ASEAN to the EU represent only a small fraction of the region’s total exports to the EU—for instance, steel exports account for just 5.2%, 3.9%, and 1.8% of total exports to the EU from Indonesia, Vietnam, and Malaysia, respectively—the impact of the CBAM on ASEAN might initially seem limited. Additionally, the shares of other sectors exposed to CBAM in total exports are below 1%. This suggests that the region may not face immediate significant pressure from the enactment of CBAM. Nonetheless, the long-term challenges from global carbon border adjustment mechanism could pose significant economic threats to ASEAN. Proactively developing robust carbon pricing frameworks can mitigate these risks.

Economically, carbon pricing can generate significant revenue for governments, potentially funding public services or reducing taxes. It also drives business innovation by creating market incentives for greener technologies. Socially, the broader adoption of carbon pricing could lead to improved air and water quality, public health benefits, and the creation of green jobs.

Recognising the importance of addressing climate issues and advancing their climate goals, ASEAN Member States (AMS) are actively exploring, designing, and implementing various carbon pricing instruments within their national policies. This ongoing work is part of a strategic approach to gradually enhance the adoption of carbon pricing initiatives, which will support their journey toward achieving net-zero emissions.

As reported in the Policy Brief on ‘Progress of Carbon Pricing in ASEA to Support the Shift Towards a Low Carbon Economy’ by the ASEAN Centre for Energy, currently, among the ten ASEAN Member States (AMS), only Indonesia and Singapore have put carbon pricing mechanisms in place. Indonesia’s ETS focuses on emissions from state-owned coal-fired power plants, while Singapore’s carbon tax applies to its 50 largest emitters, covering approximately 80% of the nation’s emissions. Thailand is also in the process of introducing a carbon tax that will target the energy, transport, and industrial sectors. Other AMS are exploring the feasibility of implementing similar mechanisms.

To transition to a low-carbon economy, ASEAN needs comprehensive action and regional cooperation. Public support is crucial, necessitating investments in education and training for the green economy. ASEAN should also establish regional platforms for knowledge sharing and capacity building, assisting member states in accelerating their low-carbon transitions.

In conclusion, as the global community moves towards stringent climate targets, the adoption of carbon pricing mechanisms becomes increasingly essential. For ASEAN, implementing effective carbon pricing is necessary to navigate economic growth and climate action challenges. By embracing carbon pricing, ASEAN can convert potential economic and environmental challenges into opportunities for growth, innovation, and sustainability, securing a prosperous future for the region in the process.

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Aldilla Noor Rakhiemah is a Senior Research Analyst in the ASEAN Climate Change and Energy Project (ACCEPT) at the ASEAN Centre for Energy (ACE), Keisha Aurel Christian is an ACCEPT intern, and Beni Suryadi is the Manager of ACCEPT at ACE.

The views, opinions, and information expressed in this article were compiled from sources believed to be reliable for information and sharing purposes only, and are solely those of the writer/s. They do not necessarily reflect the views and opinions of the ASEAN Centre for Energy (ACE) or the ASEAN Member States. Any use of this article’s content should be by ACE’s permission.