Meeting environmental objectives through energy sector reforms in Asia and the Pacific

Abstract

Economic development in the pursuit of better living standards for all requires a reliable supply of energy. Energy supplies enable growth in consumption and economic well-being both in powering basic household needs and the broader processes of production and distribution. Energy, being an essential factor input in economic production, implies that the expansion of energy sources and services have catapulted economic development by facilitating industrialisation and modernisation (Stern and Kander 2012). Therefore, access to affordable and clean energy is recognised globally as one of the distinct sustainable development goals within the framework of the United Nations. Notably, public policy focus and development planning efforts have shifted toward facilitating access, reliability, and utilisation of energy, for both households and industry. This path followed the first and second laws of thermodynamics (energy conservation and entropy), which implies that energy exists in various forms and engineering manipulations can yield productivity gains. The global emphasis towards clean and affordable energy is urgent as a climate change mitigation and adaptation response. As economies grew, and living standards improved, the world began to realise the growing impacts of associated environmental costs of fossil energy use. Although economists attributed those costs to the lack of a socially cost reflective pricing (i.e. non-pricing of the externality costs though accumulated carbon emissions) economic growth fuelled through under-priced fossil fuels always won the political debate. As this journal remarked in an editorial a decade ago, pricing attempts were incorrectly labelled as taxing, and the social purpose of driving change through appropriate price incentives was overlooked (Ross and Carter 2012). Global warming is now a reality, and the COVID-19 pandemic has made the situation overwhelming. In the growing Asia, the emergency response consumes the meagre resources that were previously directed to poverty reduction efforts, making the contest a double hurdle. The question is whether governments and communities could work together to learn from the past reform experience and reshape policy agendas toward greater coordination. How can the development community help, and would it be feasible to find solutions that work in meeting both the environmental objectives and arresting poverty as a social reality? These questions require a revisit against the backdrop that many Asian economies since the early 1990s have initiated energy sector reforms. Microeconomic and industrial organisation theories provided the economic rationale for undertaking energy sector reforms with the key objective of maximising economic welfare (Joskow 1998). The first fundamental theorem of welfare economics holds that all competitive outcomes are Pareto efficient. Therefore, promoting competition in the generation and retail segments of the energy supply industry (ESI) was one of the core objectives of reforms. Likewise, the monopoly segments of the ESI such as transmission and distribution networks are economically regulated based on incentive regulation in line with the theory of the second best since some distortions (or deadweight loss) arising from monopoly network characteristics cannot be eliminated. Therefore, these market-based reforms were primarily focussed on introducing competition,