Comment on “Implications of Deglobalization on Energy and Carbon Neutrality in Asia and the Pacific Region”

Abstract

Arimura and Sugino (2024) explain well how the volatility and high prices of fossil fuels due to the Russian invasion of Ukraine have caused a global crisis. In fact, Dr. Fatih Birol, Executive Director of the International Energy Agency (IEA) called it “the first truly global energy crisis”. Energy security is the first priority for many if not all governments. Responses to this crisis by REPower EU as well as the US Inflation Reduction Act accelerate the decarbonization of industries everywhere. The EU's Carbon Border Adjustment Mechanism (CBAM) and the US decouple-China policy further complicate the situation. In this crisis, there are winners and losers: the EU and US are winners. China can be a renewable energy superpower, while India may increase its wind and solar dependency. Saudi Arabia may avoid stranded-assetization of its natural resources by using carbon capture and storage (CCS) to export blue hydrogen. Russia is the least prepared because of a lack of technology transfers due to sanctions, investment withdrawals, the increase of war expenses, and a brain drain. Can the ASEAN countries become winners? What about Japan and Korea?

For ASEAN countries, the key issue is if they can secure affordable finance for transition. As Arimura and Sugino say, natural gas has an important transitional role in replacing coal but its high and volatile prices due to geopolitical reasons may jeopardize a smooth transition. Japan has introduced the Asian Energy Transition Initiative with JPY 2 trillion, but international financial institutions must put more money into natural gas development to facilitate the transition. To provide a clear advantage for gas over coal, carbon pricing is essential. ASEAN countries must be prepared to introduce a region-wide carbon pricing mechanism as the EU has done with its emissions trading system (ETS). To phase out coal gradually, co-firing clean ammonia or hydrogen is a practical approach. Technology transfers and supply chain development for green/blue hydrogen and ammonia with CCS are needed.

The challenge for global carbon neutrality is providing affordable financing to developing countries. Renewable energy costs will decline further but its deployment needs investment. Inter-regional grid connection should be seriously considered for ASEAN countries which facilitates an expansion in the use of renewables while increasing energy security. The Joint Crediting Mechanism (JCM) is a useful tool to increase investment. There are gaps in regional CO₂ prices, high in the North and low in the South, which could facilitate carbon credit transfer from the South in return for investment from the North. A global framework for carbon credit trading is needed.

Another group of winners is the Megatech firms. Apple, for example, will force its whole supply chain to be carbon neutral by 2030. Device providers to Apple must consider relocating their production operations to low-carbon-intensive localities. Demand-side driven transformations may mean a massive relocation of hard-to-abate sectors domestically and internationally. For example, Japanese steel companies may consider relocating their carbon-intensive operations to India, Australia, or the United Arab Emirates (UAE), while German steel makers may move their pig iron operations to the US because of its huge CCS tax credit.

As Arimura and Sugino say, governments are tempted to provide consumption subsidies for social stability purposes when energy price hikes occur. But this rather encourages fossil fuel use by heavy users with high incomes rather than supporting poorer families. Well-targeted social measures like income support for the poor should be introduced rather than consumption subsidies.

The IEA's (2023) Energy Technology Perspective 2023 says the energy world is in the early phase of a new industrial age—the age of clean energy technology manufacturing. Energy security policy also is changing. In 1973 oil supply security was energy security. In the carbon-neutral world, hydrogen, critical minerals, their production processes, and rare earth-related technology manufacturing are the issues. One country, China, controls a major portion of the supply chain of renewable-related materials and equipment. The supply chains need to be diversified even though it means higher costs. Green industrial policy is prevailing and trade conflicts are happening. Local content requirements for electric vehicles (EVs) and batteries could be in breach of the World Trade Organization's (WTOs) rules. In addition to rules and standards for low-carbon materials, we need new rules for the green trade of carbon neutrality.

For Japan and Korea to become winners, nuclear power may play a key role. Japanese Prime Minister Kishida announced a restart of an additional seven reactors in 2023. This is a very courageous move to prepare for the emergency when Russia stops exporting Sakhalin liquified natural gas (LNG) to Japan. There is a clear risk of this after the G7 summit in Hiroshima if Kishida plays up to the politically anti-Russia coalition for his domestic popularity. The Russian energy war may help win the people's support for nuclear power. But to convince local politics to accept nuclear power, policymakers should develop a new narrative. After the Fukushima accident, nuclear power is no longer considered to provide safe, clean, and cheap electricity. We have to address three additional conditions to make nuclear sustainable. They are as follows: (1) risk minimization using small modular reactors (SMRs) and passive safe structures; (2) nuclear waste treatment; and (3) nuclear proliferation resistance. There is such a technology: the integral fast reactor which was developed at the Idaho National Laboratory of the US. Japan and Korea should work with the US to develop a new paradigm for “sustainable” nuclear power. This would contribute significantly to the geopolitics of the North East Asia and global non-proliferation treaty reform.