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Economic Logic Alone Will Not Curb ASEAN’s Carbon Emissions

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Pacific Money | Environment | Southeast Asia

Economic Logic Alone Will Not Curb ASEAN’s Carbon Emissions

The hard political choices involved in phasing out coal and reducing emissions are the most important, and also the most often elided, element.

Economic Logic Alone Will Not Curb ASEAN’s Carbon Emissions
Credit: Wikimedia Commons/ CSIRO

A recent report by the climate research group Carbon Tracker grabbed headlines when it claimed that around 75 percent of current coal-fired capacity and 80 percent of planned new capacity is concentrated in just five countries: China, India, Vietnam, Japan, and Indonesia. This figure is jarring (although most of that is China and India), but it’s effective at drawing attention to Carbon Tracker’s larger point, which is that as a going economic concern the future of coal is dim, especially if government subsidies and other market-distorting mechanisms are ended.

The study models a couple different scenarios, concluding that the “favorable economics of clean renewables over coal continue to abound” and that “investing in new coal is a bad bet without subsidies.” Their recommendation to investors, utilities, banks, and developers is pretty clear: “Cancel all new coal projects or face $150 billion in value destruction.”

I think the study does a good job leveraging economic logic to show that coal is a long-term dead-end. People who are unmoved by warnings about coming environmental disaster might be more amenable to arguments couched in terms of profits and losses. But the report’s focus on economic reasoning also highlights the key role of non-economic factors when it comes to energy policy.

The authors are upfront that in their modelling they assume “the decision to build [a coal-fired power plant] is a rational economic decision rather than one based on nonfinancial reasons.” That’s fine, because any workable model needs to draw the lines somewhere with its assumptions. In reality, however, energy policy is often intensely political, and many decisions are made for nonfinancial reasons. In my opinion, the hard political choices involved in phasing out coal and reducing emissions are the most important, and also the most often elided, element of this debate.

Indonesia’s state-owned electric utility, PLN, is a case in point. Carbon Tracker notes that PLN is one of the companies most exposed to leaving billions of dollars’ worth of its assets stranded as coal becomes uncompetitive. PLN should therefore get ahead of this development and start shutting down these assets now before they weigh down its balance sheet in the future. But PLN rarely behaves like a rational, profit-maximizing actor. Instead, it occupies a nebulous middle ground between a corporate entity and a social service meant to provide a low-cost public good to its end-users.

PLN often takes big operating losses, which are offset by injections of state capital, and softened somewhat by the state’s ability to control the price of coal since Indonesia has large domestic reserves. It operates under this model not because it makes sense in a rational actor way but because it returns a variety of benefits to Indonesia’s political class, such as the provision of cheap electricity to Indonesian citizens and propping up the large and powerful domestic coal industry. If we expect PLN to curb emissions because it is in their long-run economic interest, we might be waiting for a long time. Instead, we need a better understanding of their irrationality.

This is further complicated by the unfortunate fact that the economic logic of coal is still favorable in many instances. Carbon Tracker’s own model looked at coal power plants in Indonesia and found that “aggregate operating profitability remains strong throughout the lifetime of projects.” The only way that they become economically unviable is if you assume that all coal power will be shut down within 20 years. But if they do run through their entire useful life, many of Indonesia’s coal power plants will be profitable. This just drives home the point that there is a limit to how much economic logic alone can change behavior when it comes to climate policy and emissions.

What is needed is a clearer understanding of the non-economic factors driving these trends, and how to counter them. Then political and social forces can be marshalled more effectively to apply pressure where it will really matter. You can see this now as development banks in South Korea and Japan are being pressured to cut off financing for coal projects, even though this may run counter to their own economic self-interest. At their heart, these are political choices. While a vision of the future where the price of coal in equilibrium simply drives fossil fuels out of existence is an attractive one, the non-economic aspect of climate policy is where we need to be focusing our attention if we really want to control carbon emissions before it’s too late.