Low-carbon infrastructure key to ASEAN’s net zero future

The nations of Southeast Asia face a challenge. On the one hand, they have committed to ambitious global climate goals. On the other, they are pursuing rapid and more inclusive economic growth to meet the needs of their growing populations. Achieving these twin priorities will require a transition to a green, climate-resilient regional economy that is built on low-carbon and low-emissions infrastructure.

Low-carbon infrastructure is defined as infrastructure that is designed to use less energy and emit fewer greenhouse gasses, while promoting climate resilient development. The shift to low-carbon infrastructure faces obstacles, such as investment shortfalls, despite many public and private initiatives that are now working together to develop solutions. An example of this is private investors increasingly seeking projects with reduced emissions footprints.

Stronger governance, low-carbon technologies, and new infrastructure funding models are emerging to position Southeast Asia as a leader in low-carbon, climate-resilient infrastructure development.

Moving towards a low-carbon economy

The Association of Southeast Asian Nations (ASEAN) is a bloc of 10 nations with a total population of over 660 million people and a GDP of more than US$3 trillion. The region is set to emerge as the world’s fourth-largest economy by 2030. ASEAN’s centrality, growth, and substantial contribution to the global economy mark it as an impactful actor in climate mitigation. 

However, ASEAN is also particularly vulnerable to the physical and economic risks of climate change – with the region and its people increasingly threatened by rising sea levels, heatwaves, droughts, floods, and violent storms. Annual economic losses due to disasters in Southeast Asia is estimated at $86.5 billion and the broader Asia region was home to 84% of the 206 million people affected by disasters between 2000 and 2018. These environmental challenges occur as economic inequality rises across Southeast Asia and as the region struggles to address the far-reaching impacts of COVID-19. 

ASEAN Member States recognise the need to act and have individually announced carbon neutrality or net-zero emissions pledges which account for over 90% of the region’s emissions. Together, they have set an aspirational target of 23% renewable energy in the total primary energy supply by 2025.

To achieve these commitments, significant investments must be directed toward key infrastructure sectors, such as low-carbon transport, power generation, waste management, water supply and sanitation, and telecommunications. Limited resources and rising fiscal constraints owing to COVID-19 have multiplied the need to target these investments effectively.

Transitioning to clean power generation

ASEAN accounts for 12% of global coal-fired power plant operating capacity. Power demand is increasing and about 45 million people in the ASEAN region still lack access to electricity. The challenge of meeting this demand rapidly, raises serious concerns about the long-term sustainability of power generation. Under business as usual, fossil fuels will remain the primary source of energy supply as power capacity will increase 2.9 times to 629 gigawatts, with 71% being non-renewable energy. 

While many challenges remain, there are plenty of examples of progress in adopting clean technologies. As the largest ASEAN Member State, Indonesia accounts for over a third of the region’s GDP. While 14% of Indonesia’s energy mix is currently derived from renewable sources, the country is aiming to increase renewable energy targets to 23% by 2025 and 31% by 2030. Geothermal is an area of potential growth.  

Additionally, Indonesia has ambitious plans for electric vehicles (EVs), with the government aiming to build EV charging stations across 2,400 locations by 2025. As of March 2022, there were 267 EV stations in 195 locations.  This will add further momentum to the region’s transition, as Indonesia is the largest market for passenger vehicles in Southeast Asia with more than 659,000 passenger vehicle sales in Indonesia in 2021.

In Vietnam – ASEAN’s second-largest economy – hydropower energy accounts for 26% of domestic power needs, while other renewables account for a further 5% of electricity generation. A new 600MW wind farm, the largest in Southeast Asia, is expected to come online in 2025. 

Despite these promising advances, more investment is needed in low-carbon power generation to meet Southeast Asia’s sustainability targets. Governments must incentivise private investment to fund low-carbon infrastructure.

Incentivising private investment in low-carbon infrastructure

Over the next decade, an estimated total infrastructure investment of US$2 trillion is required for Southeast Asia to enable sustainable transitions and tackle emissions. Yet only US$9 billion was deployed to green businesses and assets in 2020. 

Government spending alone cannot finance this transition – private investment must be unlocked. The Australian Climate Finance Partnership, supported by the Australian Government, offers financing to developing countries in the Pacific and Southeast Asia (Cambodia, Indonesia, Lao PDR, Myanmar, Philippines, Vietnam) to encourage financing for private sector climate adaptation and mitigation projects.

To attract private investment, infrastructure project appraisals must take into account social (equity and social inclusion), environmental (biodiversity), and climate and disaster-related impacts and risks (resilience). Investors are also calling for policy changes, including power market deregulation, tighter emissions standards, incentivising coal retirement, and new mechanisms to help manage risks for investors in renewable energy. 

Investors are becoming increasingly interested in making allocations to efficient, low-emission, and climate-resilient infrastructure as they seek greater exposure to more responsible and sustainable assets. This demand is driving a range of financial innovations that can benefit Southeast Asian countries. 

Improving the prospects for private investors, green infrastructure debt has demonstrated a lower probability of default, greater rating stability, higher recovery rates, and lower expected losses compared to corporate bonds of similar credit ratings. Initiatives such as the ASEAN Green Bond Standards and Social Bond Standards are intended to build a supply of investment-ready low-carbon opportunities and enhance transparency, consistency, and uniformity to help investors make decisions.

The development of internationally accepted frameworks, metrics, and methodologies will result in more efficient capital allocation, better alignment with sustainability requirements, and the mitigation of perceived “greenwashing”. Reforms such as these are essential to attract private capital to finance this transition.

Collaboration will be key

Given the size and complexity of ASEAN’s low-carbon infrastructure needs, a combination of approaches is needed to support a shift to low-carbon infrastructure.

Governments and the private sector will need to work closely together to ensure project proposals are more holistic and attractive to investors. This will require governments to adopt new policy settings. Public-private partnerships will also be needed to offer technical expertise and funding, with additional support through regional and international mechanisms, such as multilateral development banks. 

Partnerships for Infrastructure works with regional governments on the relevant policy reform and capacity building needed to deliver low-carbon infrastructure. Through government-to-government partnerships, P4I connects Southeast Asian and Australian government officials on key topics across the energy, transport, utilities and telecommunications sectors. This collaborative approach is essential to Southeast Asia’s low-carbon infrastructure development. The region’s ambition to achieve its 2050 climate targets and other Sustainable Development Goals will depend on it.