By Gan Meixi and Fang Eu-Lin
For The Business Times
The European Union (EU) recently announced a set of policy proposals that aim to give the region a strong start in redirecting the domestic and global economy towards a zero-carbon world. The so-called “Fit for 55” plan aims to make the EU Green Deal a reality, by cutting greenhouse gases by 55 per cent from 1990 levels within nine years.
This is the region’s most comprehensive set of climate policies yet. Although driven by the EU, its effects will reach far beyond Europe.
Within the EU, the new measures will affect a range of economic sectors including transportation, energy, forest and land use, as well as external trade.
Stricter standards will be imposed on the emissions of new cars, which some industry watchers say effectively amounts to a ban on petrol and diesel cars by 2035.
The maritime and aviation transport sectors will also see policy shifts. Clean fuels such as hydrogen will be promoted. As part of a revamp of the EU’s emissions trading system (ETS) – which caps carbon emissions of certain industries and allows market participants to trade them – the maritime sector will be newly included in the system, while free emissions allowances will be phased out for the aviation sector.
Critics of the EU’s proposals have already weighed in, alternately saying they are too ambitious, or not ambitious enough. A major point of contention is how the measures will affect ordinary citizens.
With the removal of incentives for fossil fuels, some are concerned that the cost of the energy transition may trickle down to consumers and small businesses. Workers in sectors facing new or tightened restrictions may see the plan as a threat to their livelihoods, driven by what they perceive to be out-of-touch elites.
HELP FOR THE VULNERABLE
The European Commission’s press release acknowledges that the new policy proposals “risk putting extra pressure on vulnerable households, micro-enterprises and transport users in the short run”. Thus, the plan calls for a 72 billion euro (S$115.1 billion) Social Climate Fund, funded by the ETS, that will help citizens and smaller companies finance investments in energy efficiency, energy systems upgrades, and cleaner transport options. Workers will also need to be upskilled and reskilled for greener jobs. With the European Parliament and all 27 member states required to approve the plan by 2024, ensuring a just transition will be crucial if it is to achieve widespread acceptance.
The EU has said that the Green Deal aims not only to raise climate and energy standards domestically, but to also bring other countries along with them. But will these efforts be accepted by, and even inspire Asia and Asean to follow? Or will they breed caution or even suspicion?
Responding to the new announcements, some Asian car manufacturers have already expressed concern. The new land transport emissions standards – which will affect both internal combustion engines as well as hybrid vehicles – could throw a wrench in their plans for the European market.
External trade measures may also cause friction with Europe’s trade partners. The Fit for 55 plans call for a carbon levy on imports of carbon-intensive goods such as steel and cement, which will be expanded to other goods over time. The levy is meant to reflect the true cost of carbon emissions from their production.
Emissions embedded in imported goods and services account for 20 per cent of the EU’s carbon emissions and are growing. The EU posits that this levy will reduce “carbon leakage”, referring to the production of certain goods moving out of the EU and into jurisdictions with less stringent carbon standards.
Despite the EU’s best intentions, the consequential change in how the EU now demands for goods and services to be delivered is leaving many companies in developing economies, that require time to ramp up and execute their climate policies, feeling sidelined. At present, Singapore is the only Asean economy with an official price on carbon, via a tax, although lower than EU standards.
The EU’s latest policies will be an additional open point on top of the ongoing palm oil discussion. In 2019, the EU announced its intention to phase out the use of palm oil as biofuel by 2030, citing its links to tropical deforestation. Indonesia and Malaysia, the largest producers of the commodity, contended that this move would affect the livelihoods of millions of farmers and plantation workers, and have challenged it at the World Trade Organisation.
How can Southeast Asia better prepare for the Fit for 55 plan?
Around 200 billion euro of goods are traded between the EU and ASEAN each year. The European market accounts for more than 10 per cent of ASEAN’s exports, while ASEAN is the EU’s third-largest trading partner after China and the United States.
With the two regions so intertwined and decarbonisation a global concern, ASEAN countries must strengthen their climate policies to avoid being penalised or left behind in a greener global economy.
AVENUES OF GROWTH
The pandemic has given Asean policymakers an opportunity and impetus to find new areas of growth. These avenues of growth can be greener and more sustainable ones, which will require policy mindset shifts. National carbon pricing should be considered, such that the cost of decarbonisation is compared against the true social cost of carbon associated with traditional methods of production. New green jobs must be created, and new technologies developed to make all existing jobs cleaner over time.
Effects will be felt by ASEAN enterprises who export to the EU, particularly relating to carbon-intensive goods. Enterprises that are initiated or have more resources can understand these risks better through measuring their carbon footprint. They can also leverage the concepts of the Taskforce for Climate-related Financial Disclosures in assessing the potential financial impacts under different timeframes and scenarios.
Enterprises can consider setting an internal carbon price to encourage innovation and prioritisation of low carbon activities, in anticipation of wider and more stringent carbon regulation from the EU and globally. Larger enterprises can also help move the green needle for smaller to medium enterprises through sustainable procurement requirements, which will in turn make the ecosystem more resilient against transitional risks such as carbon taxes.
Beyond domestic action, the region can also find ways to work together. Areas that will benefit from cooperation include green financing standards, expertise-sharing on sustainable infrastructure or smart cities, and building a robust voluntary carbon market supporting cross-border trading. Collaboration within the region will place ASEAN on a stronger footing to manage new expectations that the EU, or any other country or region, may put in place.
Climate action is in the long-term self-interest of all countries. As the ASEAN economy continues to grow, the region will face greater expectations from the global community to contribute its fair share to the decarbonisation effort. ASEAN can step up to the challenge.
- Gan Meixi is deputy director and leads the sustainability programme at the Singapore Institute of International Affairs (SIIA). Fang Eu-Lin is partner and sustainability & climate change leader, PwC Singapore, and a council member of the SIIA.
