Southeast Asia economies need to define their own fit-for-purpose 'Inflation Reduction Act': experts

Southeast Asia economies need to come up with clearer investment strategies, deliver strong policy signals and effective economic incentives to drive the region's decarbonization in a way similar to Inflation Reduction Act of the US, management consulting firm Bain & Company said in a report April 15 at Ecosperity Week 2024.

The message was conveyed in Southeast Asia's Green Economy 2024 Report, jointly developed by Bain & Company, Singapore's state-owned decarbonization investment platform GenZero, and Standard Chartered Bank. It called for Southeast Asia leaders and investors to prioritize 13 actionable areas that could generate $150 billion of economic growth annually in the region by 2030.

The areas include energy efficiency improvement for data centers and buildings, utility-scale solar and wind energy projects, power transmission and distribution infrastructure expansions, improved agricultural practices, electric vehicles, nature conservation, biofuel production from wastes, maritime decarbonization, and management of coal-fired power plants.

Southeast Asian countries cannot afford to duplicate the US IRA in terms of scale and the amount of subsidies provided, but it is critical for the region to come up with its own pathways, establishing their investment portfolios and identifying opportunity sets, Dale Hardcastle, Global Sustainability Innovation Center director of Bain & Company and a lead author of the report, told S&P Global Commodity Insights on the sideline of the report's launch event.

"I think the [Southeast Asia] IRA is just a tagline. Southeast Asian countries need to figure out what should they incentivize and how should they incentivize to drive the transition. Incentives and policies drive investment and drive change. What we can see today is that, without incentives or the enabling policies, companies are not investing, and the transition is not happening," he said.

The report suggested five key strategies to accelerate changes in Southeast Asia's green transformation, including a more comprehensive set of policy incentives, innovative finance mechanisms, scaling corporate investments, development of decarbonization clusters and pilots, and regional collaborations.

Investment growths in 2023

Up until 2023, $45 billion has been invested in Southeast Asia to develop the green economy, but $1.5 trillion will be needed by 2030 for the region to meet its climate commitments and effectively address climate change, the report showed.

The report highlighted that private investments in developing a green economy in the region increased significantly in 2023, reaching $6.3 billion, up 20% year on year.

Among the $6.3 billion of investments, more than 50% flowed to renewable projects. $2.2 billion was invested in solar and wind projects and $1 billion was invested in other renewable projects, according to the report.

Among all countries in the region, most private investments flowed to Indonesia, totaling $1.6 billion, up by $1.3 billion year on year.

Despite the surge in renewable investments, fossil fuels still accounted for 75% of the region's power supplies, and about 60% of the region's coal-fired power generation units are still young with long lifetime remained. Hence, it is critical to ensure a transition that can deliver clean and affordable energy to all stakeholders, the report showed.

Positive synergies

Hardcastle told S&P Global that some positive changes were observed recently.

For instance, countries in this region have expressed more willingness and interest to connect their power grids and coordinate power supplies, especially to address the intermittency issue of renewable power supplies.

Meanwhile, he said industrial stakeholders have started coming up with higher standards for carbon credits to address the recent integrity concerns, paving the way to leverage carbon markets to scale up investments in some of the 13 suggested areas, like nature conservation and improvement of agricultural activities.

He added that some countries have started to develop their own national standards for carbon credit issuance, highlighting that it is important to have these national standards aligned with international standards.

"Creating new and independent standards, I think, creates confusion in the market and potentially limits the fungibility of those credits and capitals that will flow into the market," he pointed out.