Who needs more tactical easing on climate change policies to weather the energy shock? : Australia, India and Thailand

Against the backdrop of the Russia-Ukraine war, FED hikes and China’s growth slowdown, we made the call in early March that?Asian countries would be inclined to relax their emission targets in the short-term?to buffer the upside risks on energy inflation and downside risks on growth. In this note we review the impact of the three shocks above on the region’s strategies to address climate change as well as their energy policies. With that information, we also assess which countries / economies will need to further ease their climate change policies given the very tight global energy market.

Regarding the already announced relaxations in climate change policies since the beginning of the year,?China has dropped its annual targets to reduce energy consumption and loosened its standards on coal, while maintaining medium-term ones. Also, the PBoC has approved 100bn yuan worth of targeted relending quota to support “clean coal” projects with cheap funding. In addition, Indonesia has delayed the introduction of carbon tax to at least July from April. And India has ordered utilities firms to ramp up coal imports and set strict timelines on implementation to secure energy supplies.

Regarding the energy price developments and their impact, most Asian economies are net importers of fossil-fuels and are bound to be negatively impacted by the massive increase in energy prices as well as the energy supply disruptions. But the degree of vulnerability, in terms of inflationary pressure and industrial constraints, varies from one to another. To assess the spillover from the global energy crisis and, thus, the urgency to ease on climate measures, we look into: (i) the proportion of energy-related components (fuel & transportation) in the CPI basket, (ii) the weight of energy-intensive goods for industrial outputs, (iii) the dependence on energy-intensive exports for foreign earnings.?

For households, while direct fuel costs through household utilities only represent 4.4% of the Asian consumer baskets on average, total energy-related components (including transportation) have a weight of 15.8%. In particular, Southeast Asian households have even more energy-related components at 18.5%, led by Thailand (23.8%) and Singapore (19.0%). This means many Asian countries cannot afford to pay higher costs for greener fuels such as LNG in the near term given that the regional inflation has surged to 3.7% YoY in March from less than 3% end of 2021.

For producers, total energy-intensive outputs, including basic metals, chemicals and non-metallic mineral products (representing 75% of total direct industrial carbon emissions based on IEA estimates), account for 16.6% of industrial production in Asia: Australia has the highest weight of 27.1%, followed by China (25.5%) and India (24.8%), making industrial production in these countries most vulnerable to the rush to transition away from coal. The higher energy input costs will also squeeze on their profit margin, which will eventually pass through to goods sector and lead to higher inflation.

For exporters, Australia and India have the highest share of energy-intensive products in total exports at 43.1% and 28.6% respectively, led by basic metals for the former and chemical products for the latter. Meanwhile, the foreign earnings from energy-intensive exports will be partially offset by the much higher fuel import costs, leading to trade balance deterioration. This is a challenge particularly for India as a net fuel importer and to a lesser extent Australia thanks to its trade surplus in fossil-fuels.

Taking inflationary pressure, production constraints and export earnings into account, we rank the Asian economies on the necessity to ease on energy transition in the near term. Our analysis shows that Australia and India will need the most flexibility in the short run due to the high proportion of energy-intensive industrial production and export earnings, followed by Thailand and Indonesia given the heavy weight of energy components in household consumptions.

In short, we expect more Asia countries to ease - or continue to ease - on their climate policies in the near term to rein in the energy inflation pressure and industrial constraints. This will be particularly positive for Southeast Asian households as well as Australian and Indian producers. As for China, although its energy-related activities are less significant compared to Australia and India, its role as the largest energy consumer globally makes any tactical shift on its climate targets impactful on global efforts to address climate change.

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