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As governments rush to revive and rebuild their economies in the wake of COVID-19, leaders must consider how their approaches can be implemented without sabotaging significant progress already made to address another urgent crisis – climate change. Akin to a grant “reset”, the pandemic now provides a fresh opportunity for governments to consider the future direction of their economies and how they can align the recovery from one crisis with that of another.
Aligning the recovery of a duo-crisis
To grasp the need for a green recovery, it is crucial to recognise how the global market, in respect to renewables and green technology, is evolving, and to anticipate the coming challenges and opportunities. As Balazs Horvath, RBAP Senior Economic and Strategic Advisor on Belt and Road Initiative at UNDP Asia Pacific, highlighted, the generation of renewable energy has now become a cheaper option to coal power and is set on becoming even cheaper, with a steep learning curve driven by accelerating technological advances. As such, investors are cautioned that coal power plant investments could lead to stranded assets in the longer-term, and eventually become loss-making within its intended lifetime.
Moreover, there is a salient interdependency between strengthening climate resilience and achieving economic and social resilience. Sumba for Indonesia is a clear example: the public-private initiative aims to build a 900km-long interconnection across the Indonesian archipelago that will tremendously scale the generation of renewable energy and serve one of the largest demand sources in the Jawa-Bali-Madura System. Muhammad Yusrizki Muliawan, Director of PT Basis Utama Prima, shared that this could directly create over 300,000 job opportunities, add USD 13 billion to the GDP, and lead to a significant boost in the local economy.
Likewise as global leaders, particularly in Japan, South Korea, and China, announce ambitious domestic emissions targets, they are pressed to reengineer markets and scale up supply chains in order to meet significant decarbonisation needs and growing global demand. This will inevitably churn out immense opportunities for job creation and livelihood development in their Southeast Asian counterparts.
How, then, can governments respond to these shifts and stimulate economic growth while also meeting climate, and ultimately, sustainable development goals?
What steps can governments take?
To initiate the shift towards a greener economy in a symbiotic manner with the private sector and civil society, governments need to first recognise where its comparative advantages lie and act in those spheres. Through a two-pronged approach, they can pave a natural transition by creating the right fiscal environment for climate investments.
Governments must send the right market signals
The first is to set clear, targeted, and ambitious national climate goals lined up with the Paris Agreement. Leaders can then follow through by addressing market failures and removing market distortions such as fossil fuel subsidies, tax havens, tax avoidance by multinational corporations using transfer pricing, and the untaxed digital economy.
Simultaneously, they can invest in a smarter grid, use the existing fossil fuel basis to balance the electricity system, and manage demand through both prices and market-based aggregator companies in electricity and gas. By doing this, governments are levelling the playing field and making it more profitable to invest in renewables over fossil fuels.
Meg Agryriou, Head of International Programs at ClimateWorks Australia, shares how such signalling from the government has led to the rapid deployment of technologies: in Vietnam, the national ministry had set a fee in tariff for utility-scale solar PV. In the span of a year, the generation capacity for large-scale renewable energy increased from an estimated 10 MWh of installed capacity (enough to power 6500 homes) to 4 GWh, capable of powering about 2.5 million homes, thus proving that when the signals are right, private sector investments will flow to where it is directed to.
Governments need to be early movers and adopters
Secondly, countries are recognising that those who attain scale in the low-carbon sector first will have a massive first-mover advantage. This has introduced a healthy competition amongst governments for the global good. On a national level, the government’s role as an early mover will help develop supply chains and boost domestic capability through its procurement efforts, particularly in nascent industries. For example, if an initiative to improve the efficiency of government buildings is implemented, that reduces the costs for the government while also forming a market that did not previously exist or was rather small. By that same token, major private sector players—particularly those that are monopolistic—can play a role in creating sizeable domestic capacity and crowding in investments as well.
This transition is demonstrated in Indonesia when the government signalled the creation of the domestic battery and electric vehicle industry. This is a tactical move in many aspects: Indonesia’s oil reserves are drying up, fossil fuel prices are increasingly volatile, and their land is rich in valuable minerals used in the production of batteries. Pertamina, Indonesia’s state-owned oil and gas extraction and processing company, has therefore shifted to become the largest producer of batteries in Indonesia. By being an early mover, the government can take advantage of this immense growth opportunity for Indonesia to carve out a niche position in the battery market globally.
Last but not least, governments need to act in a globally coordinated way. When confronting a global crisis such as climate change, several necessary policy measures are effective only if a critical mass of countries, cities, and corporations comply with it. Failing to band together will only lead to a zero-sum game. National leaders must thus begin speaking to each other so that common interests and risks can be tackled collectively.
What about the private sector then?
Private sector players here are not any less important in triggering this change and supporting governments to create this market space. Impact investors can embolden governments through innovative models of public-private partnerships, where the high financial risk of necessary large-scale projects such as building an interconnection, is lessened or shared.
Encouragingly, as Yusrizki highlights, many investors are unanimously expressing their anticipation for the government to take up a more committed public response so that there are greater opportunities to move investments into the renewable energy sector. The fact that countries are cash-strapped due to the current pandemic also introduces a unique opportunity where private sector investors can signal that they are willing to invest in a green recovery.
It will be interesting to see how governments and the private sector will come together to take bold and smart action in these emerging realities. As Balazs commented: “Foresight is essential. Our future will emerge from all possible futures—shaped by addressing anticipated and past problems and risks, the private sector response, ongoing megatrends, shocks, and policies. No one knows the perfect response. But one thing is clear: inaction, or actions framed by a zero-sum view of this bundle of problems, are not the right ones.”
“Investing in a Green Recovery: Public-Private Responses for a Climate-Resilient Future” is the final session in a three-part COVID-19 Response and Recovery Webinar Series co-organised with the UNDP. Watch the recording here.