Energy crisis and sanctions on Russia are good news for Asia’s climate fight

Asia faces higher energy prices like the rest of the world, but in the long run this will accelerate the transition to cleaner, more reliable forms of energy
Falling prices for renewable energy projects combined with firm climate commitments in the region will drive more power generation from renewable sources

Chris Iggo

Published: 1:30pm, 23 Mar 2022

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The demand for energy is growing most rapidly in Asia. Given the region’s strong economic growth, Asia is expected to represent most of the global rise in energy demand through to 2040.

A decreasing amount of that growth will be met by traditional fossil fuels as the need to tackle the climate crisis along with technological advancements mean renewable energy will become much more important. For the moment, though, renewable energy capacity cannot meet demand or the expected growth that comes with increased electrification of Asian economies.

This means that Asia, like Europe and the Americas, is feeling the effects of the current energy crisis. That translates into higher inflation and, in many economies, higher interest rates.

However, higher energy prices today should reinforce and accelerate the transition to cleaner, cheaper energy in the future. There is a symbiotic relationship here as strong growth means an accelerated adoption of green energy, which then further boosts economic competitiveness.

Despite the acknowledgement that society needs to accelerate its transition to a net zero economy in the coming decades, recent developments have shown that the journey will not be straightforward.

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The recovery in global GDP growth in 2021 exposed capacity constraints in traditional energy markets. Some of this can, arguably, be ascribed to reduced capital allocations to companies in the fossil fuel industries.

Oil, gas and coal production and demand fell sharply in 2020, and the rapid recovery in demand has led to significant increases in global energy prices. Between the end of 2020 and February 2022, global oil prices have more than doubled. There have also been significant increases in the price of coal and natural gas relative to their pre-pandemic levels.

This price shock was quickly followed by a supply shock to energy markets with the imposition of sanctions on Russia in the wake of its invasion of Ukraine. Countries that are big consumers of Russian oil and gas are trying to find alternative energy sources to reduce dependency on a supplier that is being ostracised by the global community.

This includes Asia, which, according to the US Energy Information Administration, accounted for more than a third of Russian crude oil exports in 2021.

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There are clear economic implications. The energy shock has pushed up global inflation. Asia is not immune, although the rise in inflation in the region so far this year has been modest compared to that in the United States and Europe.

Nevertheless, higher inflation has convinced the US Federal Reserve to start raising interest rates, pushing up the cost of borrowing in US dollars. This will affect demand for consumer goods – many of which are manufactured in Asia – as household real incomes in the US and Europe get squeezed by higher prices for electricity and fuel. Firms are also likely to see some erosion of profit margins in 2022.

This is both bad and good news from a climate perspective. The bad news is that carbon dioxide (CO2) emissions will rise again this year and will delay the reduction in emissions needed to meet atmospheric CO2 levels consistent with limiting global warming.

The world needs more energy and wants to use less Russian-supplied energy. As such, demand for coal, oil and natural gas is rising in the short term. After declining for two years, 2021 saw an increase in coal-fired electricity generation, contributing significantly to the rise in global emissions.

The good news is that the negative economic consequences of the current energy shock and the renewed urgency to limit global warming will accelerate the growth of renewable energy sources. The International Energy Agency argues that much of the growth in electricity production in the coming years will be delivered by renewables such as solar and wind.

Given Asia’s economic trajectory, it will be the fastest-growing region for renewable energy investment. Falling prices for renewable energy projects, combined with firm climate commitments from governments in the region, will see power generation from renewable sources increase significantly. It has to, if economic growth and public commitments to reduce carbon emissions are to go hand in hand.

The recent rise in energy prices is a call for action on many fronts. For Europe, it reinforces the need to accelerate the energy transition and reduce dependence on Russian natural gas and oil. For the US, record high fuel prices will accelerate the shift towards electric vehicles.

For Asia, where the direct hit to living standards has been less severe, the story is even more about the massive need for renewable energy to fuel the region’s continued high rates of growth.

The share of renewables in the energy mix in the region is expected to double by the end of this decade. That will mean cheaper, cleaner and more reliable and equitable sources of energy. Consumers and industry alike will benefit.

Chris Iggo is the chief investment officer for core investments with AXA Investment Managers

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