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"Asia's Energy Needs and Climate Change: What Can Be Done?"

Speech By
Haruhiko Kuroda
President
Asian Development Bank

At the Chatham House

12 March 2007
London, United Kingdom

I.  Introduction

Mr. Chairman, distinguished guests, ladies and gentlemen. I would like to thank Chatham House for giving me the opportunity to present my views on Asian's energy needs and climate change and contribute to our collective thinking about the way forward.

II.  Asia's Development Path

Asia today is clearly a remarkable success story of rapid economic growth and poverty reduction. In less than a generation, the Asian people have transformed their economies to become among the most vibrant and dynamic in the world. Following Japan and "Asian Tiger" economies, now China and India are emerging as major players in the global economy. Over the past 25 years or so, China has averaged real GDP growth of close to 10% a year. India's trend growth has accelerated steadily from about 4% in the 1960s to the early 1980's, to around 7% to 8% in recent years. Developments in these countries are important not only for Asia but also for the world.

Along with growth, Asia's energy consumption, which is dominated by greenhouse gas (GHG) emitting fossil fuel, has been rising. Over the last 30 years, Asia's energy consumption has grown by 230%. Asia now accounts for nearly one-quarter of the world's greenhouse gas emissions. Looking ahead, the International Energy Agency estimates that the region will require more than $6 trillion from now to 2030 for new energy infrastructure. The bulk of this requirement will come from China and India, the two major emerging economies of the world. More than half of the energy infrastructure investments will be directed toward electricity, primarily coal-fired power plants. On the basis of such increased energy demand and consumption, it is reported that the global energy-related carbon dioxide emissions will surpass 40 billion ton in 2030, with Asia contributing about 40% of total emissions. Thus, Asia's future development path is attracting high level of global attention.

Asia must continue to grow rapidly to pull out hundreds of millions of people still living in poverty and to meet the Millennium Development Goals. Rapid development has brought enormous benefits to its people, with 300 million people lifted above the $1 a day poverty line since 1990. However, nearly 1.9 billion Asian people - half the region's population - live on $2 a day or less, and about 1/3 of these people still have less than $1 a day. Moreover, about 1 billion people in Asia do not have access to electricity. Thus, providing energy for all is also among the many challenges facing the region. These mean that Asia's energy consumption will continue to rise.

Given the growth in global energy consumption and the recent volatility in the oil and gas markets, addressing energy security is also becoming a national priority and central to future planning in Asia. Huge investments are required in the oil producing countries to meet the rapidly growing world energy demand. And questions have been raised about the future flow of oil and gas. How will the world demand be met despite large fluctuations? What are the alternative options? What are the implications for government budgets and the economy? Solutions must be found through collective global action.

It will be a big challenge to meet Asia's energy needs comprehensively without adversely impacting the local and global environment. Climate change due to rising GHG emissions is a major concern. Clearly energy and environment are the top priorities for Asia today. Moreover, like other parts of the world, Asia is also affected by emissions taking place across the globe including from high energy consumption in industrialized countries. Thus, there is a strong case for collective global action on these issues.

III.  Climate Change - a Global Challenge

The Intergovernmental Panel on Climate Change (IPCC) reports that "Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global mean sea level.' Moreover, "Eleven of the last twelve years (1995-2006) rank among the 12 warmest years in the instrumental record of global surface temperature (since 1850)." Such global warming, according to scientists, will severely hinder long-term efforts to create a more healthy, prosperous and sustainable world.

We all know about the comprehensive Stern Review on the economics of climate change, which has contributed greatly to our understanding of the economic implications of climate change. The Review estimates that the likely cost of stabilizing emissions to a level corresponding to a 2oC temperature rise will be around 1% of global GDP by 2050. The economic impact of not taking adequate action far exceeds this amount.

Scientists also tell us that global warming will irreversibly damage fragile ecosystems from the Himalayan highlands to the tropical forests of Southeast Asia and down to the Pacific Islands. Human populations in all parts of the world will be vulnerable to more severe natural disasters, rises in sea level, less freshwater availability, and threat to crop production and aquaculture. But it is communities in the poorer and more vulnerable countries, including those in South Asia and the Pacific, who will suffer the most. And it is countries like these that lack the resources to either mitigate or adapt to climate change.

There will be no winners on the planet if the current pattern of energy consumption continues and the rise in greenhouse gas emissions remains unabated.

IV.  Multiple Solutions are Required

The current trend of rapidly increasing greenhouse gas emissions allows only a short window to act. Global - and multiple - solutions are needed. Recent research and analysis have shown that it is possible to maintain carbon dioxide emissions around acceptable levels, but it will be possible only if firm policy decisions are taken. The hope for keeping atmospheric concentration of carbon dioxide equivalent within reasonable limits critically hinges on two key factors (i) energy efficiency promoted by national governments, and (ii) new policies that put a price on carbon - whether in the form of a carbon emission tax, or a cap-and-trade system like the Kyoto protocol or its variant. Moreover, as greenhouse gases remain in the atmosphere for many decades, there is also a need to adapt to climate change.

While a range of actions will be needed to address all climate change issues comprehensively, let me mention a few key ones.

First Asia's use of energy must be made more efficient. Promoting energy efficiency should be a priority in the region. On the demand side, residential and commercial buildings account for more than 60% of electricity demand today. Efficient lighting, space heating and cooling equipment and other efficient appliances can reduce energy consumption by 70%. As the cost of energy increases, industries that take steps now to increase their efficiency will obviously have a competitive edge.

The transport sector currently contributes about one-fifth of global greenhouse gas and is the fastest growing producer of greenhouse gas. Transport now represents about 21% of total global energy consumption, and is projected to account for over 60% of the increase by 2025, with much of this growth in emerging Asian economies. By 2035, the number of private cars and SUVs in China will be 15 times higher that in 2005, and in India, 13 times higher. Since urban car travel uses 3.5 times as much as energy as urban bus travel and 6.6 times more than electric train travel, well designed mass public transit systems in Asia's major cities are essential. Substantial public and private investment will be required, but will bring commensurate benefits.

Asian countries can also consider using tax and other incentives to promote bio fuels and hybrid vehicles. The number and size of mega cities (with populations of more than 10 million) in Asia are projected to grow. But the lifestyle model of working in downtown, living in suburban areas, and shopping in malls does not seem sustainable over time. To ensure a more sustainable lifestyle, there is a need to improve urban planning and reduce travel demand, and make the cities livable.

On the supply side, according to the International Energy Agency, fossil fuel based power generation is projected to account for about 80% of the region's total electricity supply. As we know, coal based power plants are a major source of carbon dioxide or CO2. A coal based plant built now will continue to generate green house gases for 50 years and beyond. Thus, there is a need to quickly adopt globally available cleaner technologies, such as super and ultra critical boilers, and integrated gasification combined cycle (IGCC) plants. New coal plants should aim to capture carbon, as captured carbon can be sold, even though the technologies to capture carbon are in the nascent stages. Renovation and modernization of existing power plants should also be accorded high priority. Simultaneously, investment in renewable energy such as windmill, photovoltaic, bio fuel etc. has to be considerably increased. Although the cost of renewable energy is still high compared to traditional sources of energy, benefits from trading credits under the Kyoto Protocol can reduce the burden. Some form of concessional fund by donors and multilateral finance institutions might also be needed to move this agenda forward.

The second action is the adoption of new technologies. New technology is important for achieving both energy efficiency and low carbon energy production. Carbon emission-reducing technologies, in both demand and supply sides, have been developed and research is continuing. These technologies need to be transferred to the developing countries where energy use is growing faster. Developed countries and the private sector should be forthcoming in transferring new and better technologies. Mechanisms should be developed to finance the additional cost of new technologies, particularly during the initial period. Asia has an impeccable record of reducing the cost of new technologies, from computer chips to cars, which has benefited the entire world. Thus, financial support to Asia for technology transfer can potentially benefit the entire world. At the same time, Asia should also consider allocating larger resources for research and development (R&D) on energy efficiency and low carbon energy production.

Third, putting a price on carbon through a cap-and-trade system in carbon or a carbon emission tax will be critical for effective reduction in carbon emission.

The Kyoto Protocol, through which 160 countries have committed to reduce global greenhouse gas emissions or engage in emissions trading, has proven to be an effective first step. With the emergence of international emissions trading, capital is effectively being transferred to developing countries for investment in projects that reduce carbon emissions. It has been estimated that international carbon trading and carbon finance has the potential to generate up to 100 billion dollars in green investment flows. However, this scale of investment and the positive change it will create in developing countries will only occur if there is certainty about the nature of the international climate change regime going forward.

The global community should look beyond the arrangement under the Kyoto Protocol (i.e. beyond 2012) to avoid investment risk perception. It is critical to send a long-term prices signal that gives confidence to both governments and project developers. A post-2012 regime is needed soon. Going forward, it is important to engage countries like the United States, China and India in building global consensus on climate change issues. Any agreement reached should maximize the deployment of greenhouse gas mitigation, clean energy and energy efficiency technologies and projects, and increase the availability of carbon finance in developing countries. The way ahead should also include more emphasis on frequent measurement and reporting at various levels, including the national emissions and enterprise level emissions. This would help bring the problem into focus and encourage more sincere efforts in finding results oriented mechanisms.

While the use of cap and trade in carbon has increased, the use of carbon tax as an instrument to address climate change concerns has yet to take off. It is important to discuss and examine related issues, as this instrument also has a strong potential to promote development of clean energy sources and stabilize greenhouse gas emissions.

Fourth, even with the most ambitious mitigation measures, adaptation will be needed to reduce vulnerability to climate change. Thus, there is a need to integrate adaptation to climate change into future planning and investment. Generally, the more densely populated and less developed countries are the most vulnerable but also the least able to adapt. Developing countries have underscored the importance of adaptation in several international forums. And national and international development organizations, including ADB, have already started to work with developing countries to build their adaptive capacity. These efforts need to be scaled up.

To recap, energy efficiency, the adoption of new technologies, putting a price on carbon and preparing for adaptation are key steps that can - and must - be acted on. If these solutions are applied now, and correct decisions made about future energy investments, it is possible that developing Asian economies could transition to cleaner, sustainable energy use within a few decades. But the global solution cannot come from Asia alone. Sincere and substantial efforts will be needed from both developed and developing countries across the world. None of these solutions will be easy to implement - nor will they be without costs. Resources will have to be found to make this $6 trillion energy investment green. Both domestic and external sources involving a range of players - public-private, sovereign government-multilateral organizations, the donor community and the capital market - will have to be mobilized.

V.  Global and Regional Efforts

Multilateral cooperation and action is particularly important. One of the important early initiative on climate change was the Gleneagles G8 dialogue and the multilateral financial institutions' Investment Framework for Clean Energy and Development. The Framework acknowledges what we all already know - that international finance institutions such as ADB and the World Bank do not and will not on their own have sufficient capital to meet the demand required for clean energy and other necessary infrastructure projects. In this regard, a proposal to establish a $10 billion fund under the investment framework, focusing on energy access, low carbon economy and adaptation, is on the table. This proposal is deserving of further discussions.

Another worthy initiative is the Asia Pacific Partnership on Clean Development and Climate, or AP6, launched in January 2006. AP6, whose member countries are India, China, Japan, South Korea, Australia and the United States, was created to promote technology transfer, demonstration and investment in clean energy and more efficient industrial technologies. AP6 complements the Kyoto Protocol and engages the private sector for transition to cleaner production of key energy using industries. I was present at its inaugural meeting in Sydney, and we at ADB share its vision.

Other multi-lateral initiatives are also emerging. For example, at their Summit in January 2007, the ASEAN countries together with Australia, China, India, Japan, Korea, and New Zealand announced a joint initiative to endorse the urgent need to address global warming and climate change and energy security. More such collective resolutions can be expected in the future.

Finally, voluntary action on carbon emission reduction has been growing across the world. There are good examples in Europe, Japan, United States, and non-government organizations. This reflects a rising public awareness and support for greater action to address climate change issues.

VI.  Concluding Remarks

Ladies and gentlemen, let me close by re-emphasizing the need for all parties, in all parts of the world, to join hands and scale up our collective effort to meet this massive challenge of mitigating and adapting to climate change. Asia's energy and environment issues are important for both the region and the world. We at ADB are aware of our responsibilities and have renewed our emphasis on clean energy and the environment. Our clean energy and environment program includes, among others:

• An Energy Efficiency Initiative to forge a regional strategy for promoting greater investments and activities in energy efficiency;
• A Carbon Market Initiative to provide upfront financing and technical support to clean development mechanism projects; and
• The establishment of knowledge hubs on clean energy in Asia.

Clean energy and climate change comprise a global agenda requiring a collective and inclusive global response. While it will take action by all countries, the development community has a special role in transfer of knowledge, technology and funds to the developing countries. The final global outcome will depend upon the collective determination of all of us to ensuring a more prosperous, cleaner, safer, healthier world for the future generations.