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p. 9 of 21 BACK | NEXT Introduction: Looking ahead Past policies and operations Changing context of the policy review Poverty reduction Private sector participation and sector restructuring Regional and global environmental impacts Regional cooperation Impact of the financial crisis Future assistance in the changing context Conclusions

Energy 2000: Review of the Energy Policy of the Asian Development Bank : Changing context of the policy review

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Regional and global environmental impacts

55. The emphasis in earlier energy policies was on mitigation of the environmental impacts of ADB-funded projects and on the improvement of air quality in heavily polluted regions within the DMCs. It has now become necessary to expand environment-related interventions in the energy sector beyond the local level, and address regional impacts and global warming issues as the relevant mechanisms and procedures for dealing with these externalities become clearer. In particular, increasing the use of renewable energy sources minimizes environmental degradation from energy production, facilitates trading in credits, and increases opportunities for a decentralized provision of energy services.

Acid rain

56. Acid rain seriously harms vegetation, destroys beneficial minerals in the soil, and damages buildings. Because of its direct accumulation or when harmful elements get washed in with the rain, water bodies can become devoid of all fish and plant life. The major problem with acid rain is that it gets carried in the clouds by wind from the polluting areas over long distances and often to other countries. Tall boiler stacks help disperse particulate matter and gaseous pollutants to low concentration levels, but they can also exacerbate acid rain if the flue is not properly cleaned. Acid rain increased dramatically during the 1950s, 1960s, and 1970s in Europe until appropriate emission standards were enforced. Bilateral and multilateral organizations involved in the energy sector are now actively increasing public awareness, facilitating regional cooperation, and assisting in reducing the emissions that cause acid rain. ADB, in cooperation with the United Nations Environment Programme and the Stockholm Environment Institute, provided TA that eventually led to the promulgation of the Malé Declaration in 1998 by South Asian countries to facilitate the development of strategies to combat regional air pollution. In East and Southeast Asia, ADB is cooperating with the Japanese East Asia Network in monitoring acid rain. In the PRC, an ongoing TA is examining options to address acid rain problems in Anhui Province, with the view to formulating a suitable investment project.

Greenhouse gas abatement

57. The UNFCCC of March 1994 had been ratified by 181 countries as of December 1999. The UNFCCC aims to stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. The UNFCCC recognizes explicitly that energy consumption in developing countries needs to grow to support economic development and reduce poverty, and requires industrial countries to aim for GHG emission stabilization. The Global Environment Facility (GEF), the financial instrument of the UNFCCC, provides grants to assist developing countries in (i) removing barriers to energy efficiency and conservation; (ii) promoting the adoption of renewable energy by removing barriers to and reducing the implementation costs of commercial or near-commercial technologies; and (iii) reducing the long-term costs of low GHG-emitting energy technologies. The GEF has recently adopted a policy to expand opportunities for regional development banks to access its resources. The blending of ADB resources and GEF grants will allow DMCs to shift more rapidly toward renewable energy technologies. Under the Kyoto Protocol of December 1997 (the Protocol), 38 industrialized countries and the European Union have committed to reduce their GHG emissions by 2008–2012 to a level about 5.2 percent lower than the 1990 level. To achieve this goal, the Protocol also established legally binding GHG emission reduction targets for industrialized countries and introduced cooperative implementation mechanisms such as emission trading, activities implemented jointly, and clean development mechanism (CDM).

58. Emission trading can occur within and among the industrialized parties to the Protocol. Similarly, emission trading can take place among firms or governments of different countries on an international permit market. Of particular relevance to DMCs is the CDM, which enables the 39 industrialized parties or their designated legal entities to sponsor and finance GHG reductions in developing countries and also to transfer clean technologies to them for this purpose. The Protocol also created a certification mechanism by which independent auditors could check emission reductions from CDM projects to ensure that GHG reductions are real and supplemental to what would have taken place without the Protocol. Although the operational details and rules for the CDM are yet to be developed and agreed upon, it promises to be an excellent method for the DMCs to contribute to global GHG abatement without setting back their own economic development. The potential value of GHG trades involving developing countries during 2008–2012 has been estimated at $11 billion–$19 billion annually, and the potential value of project investments to generate this volume of GHG trades will be several times this amount. CDM projects will provide a framework for cooperation between private sector entities in the industrialized and developing countries when the Protocol comes into effect by about 2002.

Renewable energy

59. Sustainable energy development is defined in economic, social, and environmental terms. Renewable energy deserves priority for sustainable energy development as it meets the objectives of both environmental improvement, increasing access to energy (in off-grid applications), and poverty reduction. Notable technological advances have taken place in respect of renewable energy options¹⁸, reducing their capital costs and increasing their conversion efficiency. Still, the renewable energy options are mostly unable to compete with grid-based fossil fuel options, even on the basis of a comparison of life-cycle costs, partly as a result of the various kinds of explicit and implicit subsidies enjoyed by conventional fossil fuels (distorted relative prices) and the utilities using such fossil fuels (concessional loans, equities without expectation of any return, grants, and exemption from border, local, and corporate taxes). The situation was not helped by the decline in the real oil prices that took place during the last two or three decades (more recently, however, there has been a sharp increase in oil prices) as the market prices of all other fuels tend to move downward in tandem with oil price movements. Nevertheless, in the case of wind power, the capital cost is coming down fast and it is expected that in certain areas it may be able to compete with fossil fuels. Increasing the share of renewable energy will also help DMCs reduce their dependence on oil and gas imports.

60. A level playing field will only be possible when subsidies for fossil fuel production and use are substantially eliminated. In addition, the internalization of external costs, particularly environmental cost, needs to be encouraged through appropriate incentive-driven, market-based instruments. Reference to the true economic cost by imposing pollution taxes, levies, and surcharges matching damage costs in respect of pollutants and toxic effluents, and implementation of cooperative implementation mechanisms under the Protocol will enable the nonpolluting renewable energy options to enjoy their comparative advantage of environmental friendliness.

61. There are generally two types of mechanisms in operation to promote renewable energy in a competitive environment. The first is to create a renewable energy fund to subsidize power purchase costs from renewable sources. By their very nature, such funds are designed to kick-start an infant industry and have a limited life span. At the national level, this type of support could come from the state’s tax revenues or from surcharges levied on all fossil fuel use without distorting their relative prices. A nonfossil fuel obligation program has been adopted in some more developed countries, under which revenue from a small surcharge on electricity consumption is used to support the winners of competitive bids to supply electricity from renewable sources. In the second mechanism, a renewable energy portfolio standard is stipulated that mandates a minimum percentage of energy to be supplied from renewable sources by distribution companies and power utilities. Some industrialized countries use both schemes while some developing countries are considering the introduction of the renewable energy portfolio standard.

62. In countries where the existing power grid does not extend to all regions, off-grid electricity supply options are possible using renewable energy sources like mini and micro hydropower, biogas-driven turbines, and hybrid systems using wind or solar power with diesel engines. Such isolated systems can be owned and operated by cooperatives, private entrepreneurs, and energy service companies. The introduction of consumer choice in a restructured electricity market has also given impetus to the use of renewable energy sources. Conscientious consumers have shown their willingness to pay a higher price for electricity from renewable sources (also known as “green energy”), which results in higher utilization of such power plants and a consequent reduction in their cost over the long term. Public awareness campaigns and the efforts of environmental NGOs are largely responsible for such trends.

63. In respect of emerging technologies, market intervention by the government has been employed in the past to stimulate demand, thus accelerating the achievement of economies of scale in production and a decline in prices. Recent literature suggests that five key criteria should be taken into account when deciding to support a new technology through such initiatives: (i) excellent prospects for long-term market penetration once subsidies end; (ii) potential for relatively fast cost reductions as indicated by a favorable growth prospects and relatively low cumulative production to date; (iii) elastic market demand; (iv) public access to high-quality data about all of the preceding three factors; and (v) the capacity to address substantial social externalities, such as environmental impact or national security¹⁹. Appendix 5 provides additional information regarding experiences in promoting the use of renewable energy.

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