Clean-growth opportunity for Southeast Asia

The region still lags far behind China and India in terms of registered Clean Development Mechanism projects
Catherine Wong Mei Ling, Business Times 17 Nov 09;

SOUTH-EAST Asia must seize rising appetite for new Clean Development Mechanism (CDM) markets, but make it work for its developmental needs.

As the CDM markets in China and India become saturated, attention is turning to South-east Asia for new CDM opportunities as investors seek first-mover advantages in new markets.

(CDM allows industrialised countries to invest in projects that reduce carbon emissions in developing countries in order to meet their emissions reduction targets.)

In a CDM investment climate index released in April 2009 by DEG, a member of KfW Bankengruppe, Malaysia and Thailand were ranked first and third respectively, above China, while Indonesia and the Philippines ranked sixth and seventh respectively, trailing India only by small margins.

But South-east Asia still lags far behind China and India in terms of registered CDM projects. Based on the latest figures from the United Nations Framework Convention on Climate Change (UNFCCC), the international governing body for CDM projects, China and India together account for close to 60 per cent of all CDM projects registered. Malaysia has a minuscule 3.5 per cent share while the Philippines and Indonesia managed to scrape 2.1 per cent and 1.8 per cent respectively.

Several endogenous factors account for this. The region lacks strong and reliable reporting regimes, which translates into the poor availability of good-quality data needed by validators to register a project. This contributes to problems of defining project additionality, baseline determination and assessing CER (carbon credit) delivery risk.

Local entrepreneurs looking to develop green projects are also frustrated by poor language skills and technical know-how. They are further disadvantaged by their inexperience with international standards of project monitoring and reporting. This affects their ability to get projects approved and starves good ideas from the funding needed to help them take off.

Furthermore, local financial institutions are unsure of how to treat Emission Reduction Purchase Agreement and prospective carbon revenue streams in their evaluation of loan applications. They also do not accept carbon credits as collateral.

But where there are deficiencies, there also are opportunities. A host of international CDM developers and Designated Operation Entities (DOEs) - organisations accredited by the UNFCCC to validate projects - have set up shop in the region to provide these services. For example, Tricorona, the second most active buyer of carbon credits worldwide, and CVDT Consulting, the seventh largest CDM developer globally, have opened branches in Singapore recently.

DOEs such as Det Norske Veritas Certification AS and TÜV NORD CERT GmbH now have offices in Malaysia, indicating the growth of CDM market potential in the region.

The presence of these third-party service providers alone, however, is not enough to propel growth of the CDM industry and ensure that the developmental needs of the region are met through it.

While individual South-east Asian countries need to find their own feet, regional groupings such as Asean could potentially facilitate the process. At the recent 11th Asean Ministerial Meeting on the Environment, the Asean environment ministers announced the formation of a working group to address threats posed by global warming to eco-systems, coastal communities and marine environments.

These issues are pertinent, but the function of such a group could be enhanced if the agenda is expanded to include CDM as an instrument to address these issues.

In line with Asean's triple bottom-line principle of profitability, social responsibility and environmental protection, such working groups should aim to match problems with viable solutions and funding. They could help identify new areas for project development, precipitate the flow of funds through CDM financing and promote public-private partnerships.

Aid funding alone will not be sufficient to meet the mitigation and adaptation needs of the region. The latest World Development Report 2010 shows that even with CDM finance, funding available (up to 2012) for climate mitigation efforts amount to US$8 billion a year as opposed to the annual US$400 billion needed by developing countries. The private sector therefore must be included in discussions.

Reduction of carbon emissions and economic growth are not mutually exclusive. In fact, by helping the region's small-medium enterprises tap on this emerging market, Asean will be one step closer to its new growth model of greater emphasis on domestic and intra-regional markets.

Waiting on technology and knowledge transfers from the developed world will take too long, and may not be suited to the local context. More developed Asean countries such as Singapore, Malaysia and Thailand can offer their knowledge, expertise and services to its less developed member countries to produce projects and build institutions that meet local needs. Given their greater familiarity with the socio-political and economic fabric of the region, Asean countries are better placed to navigate the local politics and help one another formulate localised solutions.

Left to free market forces, CDM may not deliver the type of technologies needed to address the country-specific vulnerabilities and mitigation needs - out of over 2,000 CDM projects registered with the UNFCCC, 1,383 are in the energy sector and only two are in transportation even though the sector is projected to be the largest contributor to fuel emissions growth worldwide, 80 per cent of which will come from developing Asia, according to the latest Asian Development Bank Report 2009.

Therefore to make CDM work for the development needs of the country, governments should target particular CDM sectors - particularly transportation, waste management and agriculture - and design policies that will make investments in these areas conducive and attractive.

It is evident that the region has a lot to catch up on. Ironically though, with next month's Copenhagen meeting unlikely to produce any concrete agreement and the US climate bill (the Kerry-Boxer bill) still stalled by the Senate, these delays will buy the region some time to set up the necessary conditions for CDM growth. But these momentary intermissions will not last long and South-east Asia's governments must act now.

The writer is a research associate with the Institute of Southeast Asian Studies