Update Country Report Maldives 22 Nov 2021

• The 26th UN Climate Change Conference (COP26), while not bringing fundamental change, carries important considerations for Asia. More stringent environmental goals will impose important social and economic costs on the region should policymakers adhere to strict emission reduction targets for 2030.
• Asia is home to some of the world's largest consumers, producers and exporters of coal, who will resist sudden shifts in energy policy in the absence of greater social and business confidence in climate technology. Energy security concerns will also remain at the top of national agendas, particularly as geopolitical frictions intensify over the next decade.
• As a result, EIU continues to see Asia as a major source of global emissions over the next decade, with near-term concerns overshadowing tougher climate action.

We gave previously flagged the struggle facing the region regarding the mismatch between rhetoric and reality. Although some Asian countries created a surprise with their commitments at COP26-including Australia and India, which committed to net-zero emissions targets (by 2050 and 2070 respectively) for the first time-we expect financial and economic constraints to continue to frustrate regional emission reduction plans over the next decade.

What did Asia say?

The international commitments delivered by the representatives at COP26 reflected already submitted updates to nationally determined contributions (NDCs) and long-term strategies (LTSs). These commitments are built on pledges made under the 2015 Paris Agreement-often benchmarked against "business as usual" (BAU) scenarios, which assume less stringent climate mitigation-but also reflect domestic policy decisions in individual markets. This is not unusual: delegates will have needed to secure sign-offs from their home governments before showcasing their new commitments (although, as we discuss below, miscommunication between governments and COP26 representatives can happen).

Beyond Australia and India, net-zero emission pledges were also made by Nepal, Thailand and Vietnam, while China and the US signed a joint declaration on climate change in a rare instance of co-operation. Most of Asia's updated pledges at COP26 were modest, however. Last-minute changes by developing nations to the Glasgow Climate Pact (the agreement reached at the end of the conference) to reword the "phasing out" of coal use to "phasing down", illustrate lingering attachment to dirty energy sources. This carries important consequences for international climate goals, given that over half of global greenhouse emissions come from Asia. Our forecast of strong industrial and trade-driven economic recovery in Asia over the next five years, for example, will naturally prompt a worsening of regional carbon emissions.

Commitments by China, Japan and South Korea earlier this year to end financing for overseas coal plants will help Asia to wean itself partially off its dependence on coal, but the effects of this will be limited by resistance in all three countries to a more aggressive reduction of their domestic coal use. We expect China in particular to remain an important coal consumer over the next five years, incentivising mining activity in Australia, Indonesia and Mongolia. While the Chinese president, Xi Jinping, has stated that the country would achieve "peak coal consumption" by 2026, that timeline suggests a frontloading in coal use in the interim. This will increase China's carbon emissions over the next five years, and risks yielding a higher level of "peak coal use" than might have materialised without this pledge.

The costs of inaction

The commitments made under both the Paris Agreement and the Glasgow Climate Pact are voluntary, and without strong enforcement mechanisms they are unlikely to spark significant improvement from current emissions trajectories. Ongoing international debates over financial assistance for combating climate change will also complicate this. Richer countries are unlikely to acquiesce to demands for US$1.3trn in climate financing from developing nations (including the economic powerhouses of China, India and Indonesia), and are already struggling to meet their existing pledges of US$100bn a year in 2020-25.

Action on climate change in Asia may be driven in part at corporate level. Efforts in advanced nations to mitigate climate change include penalties against non-compliant firms, both within and beyond their borders. The EU is already embroiled in a trade dispute with Indonesia and Malaysia over palm oil (as well other climate disputes elsewhere). That bloc's planned carbon border adjustment mechanism-effective from 2026-suggest penalties such as tariffs for high-emission industrial value chains throughout Asia, unless companies and governments move to decarbonise their supply chains in the interim.

Urgency does not just stem from the West. China's plans to reduce coal usage from 2026 pose trade risks for regional commodity exporters. Diplomatic pressure may also change some governments' behaviour, with authorities sometimes using environmental goals as a pretext for import bans and other protectionist measures (as has been the case in recent years with China and Australia). Climate concerns will also complicate the ongoing battle for influence between China, Australia and New Zealand in the Pacific Islands, which are the most exposed to rising ocean levels.

In the longer term, we expect Asian governments eventually to become vulnerable to domestic pressure. The focus for most developing Asian markets remains engineering economic recoveries following the Covid-19 pandemic, with wider popular focus on jobs and income growth allowing Asia to avoid the same level of popular climate activism evident in the West.

This will change in the coming years, however, as the costs associated with disruption caused by inclement weather, and the public spending needed to offset this, increasingly affect public livelihoods and public finances. Popular concerns over pollution have already driven green policy change in China, while these dynamics are becoming increasingly evident in India and Indonesia. These trends may gain more traction elsewhere in Asia from 2023-24 as the region's recovery from Covid-19 settles.

Economic consequences will also become a powerful driver of change. EIU's long-term forecasts, adjusted for climate change, expect the region to experience varying shocks to real GDP by 2050, based on our current assumptions about mitigation and adaptation efforts. Among those covered by our forecasts, countries in South Asia-namely Bangladesh, India, Pakistan and Sri Lanka-are expected to lose the most economically by 2050 as a result of the effects of climate change.

An uphill battle

Beyond the lack of a legally binding framework, the absence of an actionable near-term roadmap risks delaying policy implementation and development, with the earliest targeted goals not materialising until 2030. This will be salient as political administrations change, creating shifting goals for climate mitigation, and perennial concerns over economic growth outweigh painful policy choices. As evidence of these difficulties, one pledge from COP26 was for nations to strengthen their emission reduction targets by COP27 in November 2022, thus postponing disagreements over climate rules by another year. Actions necessary to fulfill climate-change pledges also risk being thwarted by domestic agencies. For example, officials in South Korea and Indonesia have already begun to push back against deforestation and coal reduction agreements, despite their representatives having signed the relevant pledges at COP26.

The creation of a global carbon-trading market would be positive, if it can be realised. However, the patchwork of existing international carbon markets would first need to be standardised, with an agreed-upon set of standards, methodologies and monitoring to facilitate the buying and selling of carbon-offset credits. This will require another round of fraught negotiations, including over whether older credits created under the Kyoto Protocol of 1997 (which environmental groups argue are of poorer quality, given weaker benchmarks and transparency) can be grandfathered into the new mechanism.

Broad resistance to stricter climate regulation throughout Asia in general will also complicate the regional adoption of a global carbon trading market. Existing regional moves towards national carbon-trading markets, for example, are often unambitious, covering small volumes of emissions, including low prices and offering higher emission allowances. The voluntary nature of these mechanisms also suggests that many of Asia's most severe polluters may choose not to participate at all.

The region's inherent unwillingness to face the costs of climate change, particularly relating to its mitigation, will continue to discourage policymakers from adopting more urgent measures to alter national energy mixes. Taiwan's attempts to move away from coal power are illustrative, given potentially severe energy stability risks amid debates over nuclear power. Energy security concerns will also remain at the top of national agendas, particularly as geopolitical frictions intensify over the next decade. The uncertain security outlook will challenge plans to "phase down" coal use, particularly given the ease of its procurement and storage, which offers assurances against sudden energy shortages.