Helping Ministries of Finance to understand the macroeconomic impacts of the transition to net zero in Asia

• The WITCH model was customized to better represent developing Asia by expanding its geographic resolution to provide disaggregated results for the three largest emitters in the region (China, India, and Indonesia) and regional results for South Asia, Southeast Asia, and the Caucasus and Central Asia.
• The report considered five policy scenarios: (1) Current policies, (2) Nationally Determined Contributions (NDCs), (3) NDCs followed by national net zero pledges, (4) NDCs followed by coordinated action toward global net zero to achieve well below 2°C of warming, and (5) accelerated action toward global net zero to achieve well below 2°C of warming. The model results show that costs are lower when there is global coordination to achieve the Paris Agreement goals, indicating that governments must not only commit to ambitious climate goals but also work together.
• One of the report’s central messages is that the benefits from avoided climate change damage to the region are far greater than costs associated with the transition. Under ambitious climate action the net present value of benefits is five times the costs for developing Asia, even before the substantial co-benefits from reduced air pollution are considered.
• In the near term, energy efficiency and land use emissions abatement are the most important sources of greenhouse gas mitigation in developing Asia. Improved energy efficiency will temper the increase in energy demand, while abating land use emissions will be a major source of mitigation for countries such as Indonesia. • As the largest source of greenhouse gas emissions, the energy sector (in particular, the electricity sector) will undergo rapid transformation. Average annual investment in the regional power sector will increase from US$468 billion in 2021 to US$707 billion by 2040 under an ambitious climate policy (about 2.2% of GDP).
• An additional 1.5 million energy sector jobs could be created in Asia by 2050. Nonetheless, higher residential energy and food prices due to phaseout of carbon-intensive energy and diversion of land from food production could adversely affect lower-income households.
• The ADB is also compiling a suite of complementary global and country-level models for a modeling initiative with the Government of India, to analyze the implications of India’s climate pathways.

Ministries of Finance, in their capacity to influence national budgets, economic policies, and financial regulations, have a crucial role to play in national climate action. The report identifies three policy pillars to attain a low-carbon development pathway. First, reforming prices via carbon pricing and fossil fuel subsidy reform could trigger a transition to low-carbon growth. Second, facilitating low-carbon innovation and investment and mobilizing finance for decarbonization are necessary to jumpstart the development of low-carbon technologies and catalyze private capital. Third, policy measures will be needed to shield poorer households from high energy and food prices, and support for workers will be required to smooth labor market transitions.