How can South Asia achieve greener and more resilient growth?
South Asia has achieved remarkable progress in economic development over the last two decades, multiplying its economy six times and successfully lifting nearly 375 million individuals out of poverty.
South Asia’s carbon emissions record is not bad either: although emissions have grown rapidly as average incomes have increased, on a per capita basis, South Asia today still emits only 2.6 tons of CO2eq/year, a quarter of China’s, one-seventh of the US’s, and less than half of the global average.
Can South Asia continue on this low-carbon trajectory while driving economic growth? There are two reasons to be optimistic. Firstly, South Asia could capitalize on its comparative advantage in low-emission service industries—notably business process outsourcing and tourism. Secondly, technological progress may allow latecomers such as South Asia to leapfrog carbon-intensive stages of growth, decoupling energy use from carbon emissions.
Indeed, technological progress has made renewable energy investments increasingly attractive for South Asia. The region has already made substantial strides in greening the power sector. India boasts the fourth-largest renewable electricity capacity in the world. In Bhutan and Nepal, hydroelectric power constitutes nearly the entirety of their energy generation. The region has also seen a surge in solar power. Fossil fuels will remain part of the energy mix for some time to ensure baseload and grid stability, but renewable capacity is already growing faster than traditional sources.
New energy-saving technologies offer another low-carbon investment opportunity. South Asia’s energy use per unit of output is twice the global average, so there is ample room to improve energy efficiency. Because energy-saving technologies often help firms and households cut costs, they can also improve South Asia’s competitiveness.
Policies to achieve the energy transition
However, much of South Asia’s green transition investment opportunity remains unrealized. Whether that changes in the decade ahead depends on whether the region has the right policies in place.
Economists stress the importance of getting carbon prices right through policies such as carbon taxes or cap-and-trade schemes. In several South Asian countries, the effective carbon tax is negative due to wasteful energy subsidies. Removing them would be the first step in getting carbon prices right. Reforming power utilities, so they charge and collect cost recovery tariffs will be necessary to sustain the green energy transition.
Will getting prices right be enough? Perhaps not. We know from the advanced economies that energy saving technologies often have negative abatement costs, and yet firms are slow to adopt them. For example, although companies in the region have been early adopters of basic energy-saving technologies such as LED light bulbs, the adoption of more advanced energy-saving technologies such as programmable thermostats has lagged despite high potential IRRs.
This suggests that there are obstacles to technology adoption that outweigh price incentives and that can be removed with the appropriate policies.
Take the unreliability of South Asia’s power grid supply. A startlingly large share of firms in South Asia are still reliant on inefficient and polluting backup power generators. More reliable power supply would cut their use and encourage electrification of carbon-intensive production processes.
Another barrier is the lack of accurate information on the benefits of new technologies. A recent study of leather goods firms in Bangladesh showed that firms were unwilling to pay more for a new energy-efficient technology because they underestimated the energy savings. A low-cost pilot program providing information and equipment is already showing promise in accelerating the adoption of the new technologies among these firms.
Finally, a point that is often not sufficiently appreciated: regional integration could help green power grids by smoothing out local fluctuations in energy demand. Already over 4000 MW of regional interconnection capacity exists between India and Nepal, Bangladesh, and Bhutan, and several bilateral interconnections are being explored. Nevertheless, South Asia remains the least integrated in terms of grid-to-grid and power trade. Major investment opportunities remain because of the wide differences in seasonal demand, for example between India’s South and Sri Lanka or between India’s Northeast and Bangladesh.
Managing the jobs transition
The most difficult challenge for the green transition is managing its impact on jobs. South Asia’s growth is not creating sufficient jobs as it is. While the renewable energy and other green industries will create new jobs, these demand higher than average skill levels. Meanwhile, low-skilled workers in traditional industries risk being left behind.
Pollution-intensive jobs account for about 10 percent of all jobs in South Asia. Unlike green jobs, pollution intensive ones tend to be lower-paying, lower-skilled, more informal, and concentrated in relatively few areas.
Some parts of South Asia will thrive in the energy transition, while others will struggle. We know from similar transformations in the past—such as subnational resource boom-and-bust cycles—that booms were accompanied by short-lived employment gains but busts caused lasting income and employment losses. This holds a warning for South Asia.
A wide range of policies will be needed to facilitate labor market shifts while protecting vulnerable workers. They include better access to high-quality education, finance, and markets; improved labor mobility; and strengthened social safety nets.
Some of these policies will require fiscal resources. But government revenues in South Asia are far below the average in emerging market and developing economies and may decline further because some taxes are linked to fossil fuel consumption. The imperative to raise revenues to finance a just transition may be one of the strongest arguments for pricing carbon.
The climate change adaptation imperative
My third and final point is the imperative of investing more in climate adaptation.
South Asia is the region most vulnerable to climate change among all EMDE regions. About 60 million people per year have been affected by natural disasters in South Asia since 2010.
Many adaptation measures require public investment. Here too, fiscal constraints impose strict limits on the extent of government support. It is thus critical to find opportunities for adaptation investments that are cost-effective and, at the same time, generate other developmental benefits.
One way to generate such double dividends is to invest in public goods that provide access to markets and essential service in a resilient manner. Bridges, for example, have been found to encourage profitable investments as well as ensure access to critical inputs when climate shocks hit rural households.
Technologies for sustainable and cost-effective cooling offer another opportunity for reaping double dividends of preventing labor productivity losses while sustaining output. And, to the extent that inefficient cooling solutions are replaced with efficient ones, air pollution would also decline—a triple dividend: economic, social, and environmental. This is a major investment opportunity for South Asia. For example, we estimate that the market for affordable, energy-efficient cooling solutions in India represents a $1.6 trillion investment opportunity. We urgently need to look for and develop similar triple dividend investment opportunities to ensure sufficient resources are allocated to climate adaptation.
Conclusion
Let me conclude. Despite the urgency of climate mitigation and justified concerns that our actions so far have been insufficient, I regard the energy transition in South Asia fundamentally as an investment opportunity. Progress may not be linear, energy security considerations may intervene, but South Asia is still likely to grow on a much lower emissions path than America, Europe and East Asia before.
Conversely, preparing better for the climate change that is likely to happen however big our efforts, deserves greater urgency. South Asia can do this best by focusing on technologies and public goods that generate double dividends: those that improve productivity as well as climate resilience.
South Asia’s international partners have the responsibility to support the regions mitigation and adaptation efforts. We at the World Bank are revamping our operating model to be fit for this important goal. Globally, we have committed to reach 45 percent climate finance, half of which on adaptation. We look forward to working with development partners such as Japan International Cooperation Agency (JICA) in helping South Asia realize these goals.