Will Asia Fall Into an Energy Gap?

April 17, 2013

By By Véronique Salze-Lozac’h, Nina Merchant-Vega, and Katherine Loh

Last week, the Asian Development Bank released its annual “Asian Development Outlook” report for 2013, with Asia’s success story of unprecedented growth in the last decades forecast to grow by 6.6 percent in 2013 and 6.7 percent in 2014. This remarkable growth is fueled by what seems to be an insatiable and possibly dangerous appetite for energy, the focus of this year’s report.

Energy consumption is indeed helping to power Asia’s economic expansion, and this trend is only growing. Asia consumed 34 percent of the global energy supply in 2010; by 2035, that share will increase to more than half.

Energy consumption is indeed helping to power Asia’s economic expansion, and this trend is only growing. Asia consumed 34 percent of the global energy supply in 2010; by 2035, that share will increase to more than half. However, this does not come without a cost.

Many Asian cities are among the worst cities for air pollution in the world, from Ulaanbaatar to New Delhi to Beijing. In China, the government – which only in recent years has become more candid about the environmental consequences exacted by its growth strategy – released statistics from its own Ministry of Environmental Protection which estimated that the cost of environmental degradation to the country was $230 billion, or 3.5 percent of the nation’s total GDP. This environmental degradation and its impact on climate change is becoming a real threat to Asia’s growth and to its population. Southeast Asia, for example, has been designated by the UN as “highly vulnerable” to the impacts of climate change and natural disaster, as the majority of its population and many of its major cities are located in low-lying coastal areas. According to the ADB, continuing “business as usual” emissions increases are expected to trigger a loss of 6.7 percent combined GDP by 2100 in ASEAN countries. In this context, Asian economies will have to manage energy access, both among countries in the region and between the rich and the poor. Without effective management, rising disparities may lead to wider development gaps and exacerbate social and political tensions in the region.

Regional cooperation may hold the key to addressing Asia’s energy challenge, as it already has on the economic front. Asia has clearly benefited from improved intraregional trade and regional economic integration. Intraregional trade and trade with China now accounts for more than 37 percent of ASEAN’s total trade, up from 26 percent in 2000. Moreover, ASEAN is moving forward on its plans for an integrated ASEAN Economic Community (AEC) by 2015, which will create a single market and production base that will enable member economies to benefit from improved efficiencies in their value chains and economies of scale. Such reforms have helped contribute to strong economic performances by ASEAN member economies in 2012 and strong projections for the near future. Although South Asia is less integrated than Southeast Asia, significant headway has also been made toward improved intraregional economic cooperation in the region. For example, earlier this year, Pakistan granted Most Favored Nation (MFN) status to India, a major breakthrough for trade relations between these two countries. Regional integration has been credited as a key factor in insulating the sub-region, and Asia overall, from the effects of the global slowdown or stagnation experienced in EU and the U.S.

Similarly, efforts to foster regional cooperation on the energy front may lead to major payoffs for meeting Asia’s energy challenge. Currently, cross-border energy markets and infrastructure connectivity have been neglected on the regional arena. As the ADB report states, “The lack of cooperation is all the more glaring as jointly promoting energy savings and energy security would not require new technology or pose the high cost and financial risk developing it might entail. … What is missing is political commitment in Asian countries to cooperate in energy markets and build the necessary infrastructure.” Examples of areas ripe for regional cooperation include cross-border coordination on the mode of electricity transmission for maximum efficiency, political consensus on the sharing of hydroelectric power, transportation connectivity, development of interconnected natural gas systems, and co-investment on renewable energies.

All of these projects will require strong political will at the national and regional levels. There are technical as well as policy challenges to overcome in order for an integrated Asian energy market to emerge. As the environmental and health costs to rapid economic growth become too large to ignore, regional cooperation will no longer be optional for political and economic actors. The private sector will also have a prominent role to play in the delivery of sustainable development solutions for the region. Ultimately, the objective for Asian development must underscore coordinated and responsible approaches, with nations working together to bring about sustainable prosperity for all.

Véronique Salze-Lozac’h is The Asia Foundation’s director for Economic Development Programs based in Bangkok, Nina Merchant-Vega is associate director, and Katherine Loh is a senior program officer. Salze-Lozac’h can be reached at [email protected]. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation.

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