As Asia-Pacific economies grow more integrated, governments and the private sector must work on decarbonising global value chains in order to meet climate goals, according to
Asian Development Bank’s (ADB’s) latest report.
The report, launched at the Lee Kuan Yew School of Public Policy (LKYSPP) in late February 2024, emphasised how global value chains (GVCs) generate a significant amount of carbon dioxide emissions. "The share of developing Asia in global GVC-related emissions significantly increased over 1995–2018, reaching 42 per cent in 2018," the report stated.
Holding on to economic benefits
These production networks play a key role in economic development. Modifying the energy sources and updating the technology can combat climate change, while still promoting regional growth, experts say.
"Any sort of mitigation strategy in Asia has to focus on the industrial sector that accounts for more than 35 per cent of emissions, and now we know that GVCs are the fastest growing contributor to that,"
Priyanka Kishore, founder and principal economist at consultancy Asia Decoded, said at a panel discussion held as part of the report launch. By integrating green infrastructure into GVCs, emerging markets like India can especially benefit, she added. Renewables are generally considered more important to emerging markets than advanced economies, given the former's higher power consumption.
One positive sign for decarbonisation is the rising foreign direct investment (FDI) in high-tech renewable infrastructure such as semiconductors, which also boosts production efficiency,
Dr Albert F. Park, chief economist at ADB who also leads its Economic Research and Development Impact Department, told LKYSPP. "A huge percentage of FDI is now in renewable energy sectors. Whereas it was almost nothing… and Asia is in the thick of it," he said.
According to the report, FDI decreased by 12 per cent globally in 2022 but Asia fared much better. Cross-Border Investment into the region grew by 8 per cent and of that, nearly 80 per cent was greenfield investment “driven by megaproject investments above $1 billion — in semiconductors and renewable energy”.
Workable solutions
Carbon markets are touted as one solution to decarbonising GVCs and encouraging firms to embrace cleaner production methods. But as the report points out, the "fragmented nature of carbon pricing across different jurisdictions" is a major obstacle.
Carbon should be priced to "capture the external costs motivating both manufacturing sectors and suppliers," said postdoctoral fellow at LKYSPP
Moitre Mukherjee, one of the panellists at the report launch. She added: "The real challenge lies in how to apply these policy functions, how to price carbon so that prices are uniformly applied.”
The report urged Asian policymakers to explore the concept of bilateral or regional carbon market linkages. Dr Park said: “We still don’t have a lot of countries with well-developed carbon markets in Asia.” He singled out larger economies, particularly big emitters like Indonesia, India and Kazakhstan, which he said needed to develop their own carbon markets before cooperating with others on best practice.
Referring to Article Six of the Paris Agreement, Dr Park said rich countries can help meet their Nationally Determined Contributions (NDC) commitments — i.e. promises made to the United Nations by countries to reduce their greenhouse gas emissions — by paying another country. But he noted that that requires countries to be transparent in their measurement and planning capacity.
He said: ”If I’m Singapore and I want to pay the Philippines to reduce carbon to meet my obligation, then I need to be sure that the Philippines first meets its own obligation. I have to be really sure of their ability to achieve their own NDC plan before I can then pay them to achieve additional reductions. And then I also need to be sure that these additional reductions are also verifiable.” Ultimately, the more countries get their act together on measurement capacity, the more opportunities there are to mobilise finance around that, he added.
Beyond carbon markets, the ADB report highlighted other mechanisms to make Asia’s production chains more environmentally friendly. These include accounting mechanisms for embedded emissions and international cooperation for technology transfers to reduce emissions. Technology transfers and similar pacts are essential to enabling more decarbonisation among developing countries, Kishore noted. Domestic tax incentives for investments in renewables are also critical, Dr Mukherjee added.
Crucially, big players, make a big difference. The world’s second-largest economy, China, remains a manufacturing giant — “the largest factory in the world”, said Dr Park. But he added that provides it with an opportunity to play a valuable role in making investments in other countries’ renewable sector. "It has an incentive to do that now, because of US sanctions, to shift and partner with producers in other countries,” he said.
Dr Park is optimistic that, should China invest in another regional country which will benefit from FDI in its renewable energy sector, “it could actually be very supportive of the energy transition in the region”.
“We need to try to think about how China can be positive," he added.