Flexible Financial Incentives for Inclusive and Green Growth

Flexible Financial Incentives for Inclusive and Green Growth



Venkatachalam Anbumozhi

Han Phumin

Economic Research Institute for ASEAN and East Asia (ERIA)

Selected macro economic indicators relating poverty, natural resource depletion, and environmental degradation


The extreme prevalence of poverty in several ASEAN Member States (AMS), in spite of rapid economic growth at ASEAN calls for urgent action. Of the region’s nearly 620million people, about 33% lives on less than US$2 a day. More than 22% lack access to clean and modern electricity. This energy poverty and related issues like climate change increasingly poses a serious threat to sustainability of economic integartion. To date, environmental protection and clean energy development debates have been mainly restricted to high income households and middle income economies. However, existing literature suggests a close nexus between energy access, climate change and poverty. In the pursuit of Millennium Development Goals (MDGs) and poverty alleviation, low-income households harbor great potential for clean energy consumption, production, innovation and entrepreneurial activity that is largely untapped. This paper shows how clean energy development can be made inclusive by involving low income households as producers, employees and business owners. From that perspective, it also analysis how ASEAN economies are stepping up clean energy ambitions. Deployment of clean energy is accelerating in AMS, but strong policy actions remain necessary to bring competiveness of clean energy enterprises and achieving the regional targets. In order to attain the targets, subsidies, tax benefits and tax breaks are needed. The imperative is that (i) clean energy produce positive externalities that are not factored in to either the production or purchasing decisions of consumers. (ii) If non clean energy companies or products generate negative externalities but no tax or disincentive is levied, then governments could either tax those firms, or give incentives to clean energy producers. In order for AMS to use these methods, it does require resources and know-how, but fortunately working models already exist. This paper reviews such practices and outlines the enabling policies as lessons learnt from other country experiences. For most AMS that rely on imported energy resources, volatile energy prices have mounted negative pressures expanding energy access and put an extra burden on fiscal budgets. This paper later argues that ASEAN need to link clean energy paradigm and inclusive development policies as part of Environmental Fiscal Reform (EPR) as it can strengthen the foundations for ASCC.

1 Redefining Economic Growth, Energy & Environmental Concerns and Poverty Reduction

The impact of economic growth upon the poor in ASEAN countries is a complex and contentious issue. Taking households as the unit of observation, raising their average income clearly is of critical importance where rapid economic growth has become a priority. For the last three decades the pursuit of growth has been the single most important policy goal of any AMS. The ASEAN economy is almost five times the size it was about three decades ago. If it continues to grow at the same rate the economy will be 80 times that size by the year 2050 (ADB, 2011, ADBI, 2013). It is totally at odds with the knowledge of the finite energy resource base on which ASEAN economies depend for survival (Table 1). Today, many of AMS faced with the imminent end of the era of stable oil supply, steadily raising commodity prices, the degradation of forests, and the momentous challenge of stabilizing concentrations of carbon in the atmosphere (Fig 1).

Figure 1: Trend of carbon dioxide emissions and GDP in selected ASEAN and Non ASEAN countries

(Source: The World Bank Development Indicators and IEA electricity access database)

For most part of the last two decades, economic growth avoided to address the stark reality of the issues related to the quality of growth. The myth of strong growth to lift the masses to prosperity has failed us. It has failed a billion people who live on less than US$2 a day. It has failed to provide 40 million people accesses to clean and green electricity.

A rebalancing is urgently needed, and the conventional ideas of economic growth alone are not sufficient for prosperity. It needs to be sustainable, sustained and inclusive. When growth is unsustainable, in other words, a region is enjoying current consumption of resources such as energy at the expense of future generation. The distributional patterns of growth also have deep sustainability implications, especially where inequality levels are already quite high. Various factors influence the magnitude of growth elasticity of poverty, including initial inequality, the distributional pattern of growth, the composition of public expenditure, the role of private sector etc. Governments can intervene on each sector to reduce poverty, and in ASEAN this part of the explanation is given as a reason for stated overall success of economic integration.

Table 1: GDP/Capita, Electricity Consumption and Carbon Emissions in ASEAN countries

1.1 Energy Access and Developmental Constraints of Low Income Households

The economic pyramid of any nation consists of several tiers. At global level, 75 to 100 million households constitute the Tier 1 which is composed of middle and upper income people in developed countries and few rich from the developing Asia (Table 2a). In the middle of the pyramid, in Tiers 2 and 3, are low income households in developed countries and middle income households in developing economies. The Tier 4, consists of about 4 billion people, where their per capita income is very low to sustain a decent life. This extreme inequality in wealth distribution reinforces the view that they can not participate in the regional or global economy constructively, even though they constitute the majority of population. According to UN projections, the population of low income households could swell two times, because bulk of population growth occurs there (World Bank, 2007). Most of that population lives in rural areas or urban slums, and they usually do not hold legal title or access to electricity and assets.

Table 2a: Tiers of Development pyramid

(Source: The World Bank. ()

Table 2b. Poverty distribution in ASEAN

The distribution of poverty hit people in ASEAN is presented in Table 2b. About 33% of 618 million people could be categorized as poor, looking for further new economic opportunities. Many studies (Winfred, 2006, Prhalad, 2010, Shaligram, 2003) already demonstrate the link between having access to modern forms of energy and its importance in not only providing reliable and efficient lighting, heating, and cooking systems but also improving access to clean water, improved sanitation. As IEA-OECD World Energy Outlook (2010) suggests, countries with a large share of people living on an income of less than $2 per day tend to have low electrification rates, relying mostly on biomass and waste, and have less access to improved water and sanitation. As incomes increase, access to electricity is seen to increase rapidly as first governments give higher priority to electrification, and then to cooking fuels, water and sanitation. But in order to eradicate poverty and make development more inclusive access to energy for lighting, mechanical power, cooking, and transport, with improved access to water and sanitation is imperative (Fig 2). On the contrary, people relying on biomass and waste is projected to increase in the coming decades, raising grave concerns in terms of household air pollution from the use of biomass in inefficient stoves which would lead to over million premature deaths per year. The IEA study further suggests that over the next 20 years an investment of $756 billion, $36 billion per year will be required at global level,

In order to deal with these problems, there have been various solutions offered at the macro level in terms of improving the electrification rate, and at the micro level in terms of spreading more energy efficient technologies to provide lighting and heating services. As the IEA-OECD (2010) study suggests, at the macro-level the ability to provide additional generating capacity required to achieve universal access, studies assume that even if rural households are assumed to consume at least 250 kilowatt-hours (kWh) per year, and urban households 500kWh per year this amounts would require an incremental electricity output of around 950TWh by 2030. Generating this additional electricity output would require a capacity of 250 GW, and various models of supply and distribution would need to be considered including on-grid, mini-grid and isolated off-grid solutions. Grid expansion will solve the problems more easily in the urban context but decentralized options will play a larger role under rural conditions where grid extensions would be too expensive without complementary demand. And so, development of off-grid, clean and green energy resources such as biomass, solar, wind and geothermal – become imperative for low-income households.

Fig 2: Trend of access to electricity (%) and GDP (PPP US$ per capita) in selected ASEAN and non-ASEAN Countries

(Source: The World Bank Development Indicators)

1.2 Tracking Energy Poverty and MDG achievement in ASEAN from the context of Low Income households

Provision of renewable energy sources could contribute for low-carbon development. The recent White Paper by DFID defines low -carbon development in the following way:

- Using less energy, improving the efficiency with which energy is used and moving to low or zero carbon energy sources

- Protecting and promoting natural resources that store carbon such as forests and lands.

- Designing, disseminating and deploying low or zero carbon technologies and business models

- Policies and incentives that discourage carbon intensive practices and behaviors.

Low income households of ASEAN have contributed least to global environmental problems such as climate change; For them clean energy provision is not about cutting emissions, but about the providing the benefits and opportunities that come from higher economic growth that include access to basic energy services and utilities that eventually improve the quality of life and achieving the Millennium Development Goals (Table 3) . Though MDG 8 is highly related to environment sustainability, access to energy is almost directly related to almost all of the MDGs. For eg, expanded access to energy services will allow better health, educational services for elderly, young mothers and children in poor-households.

Table 3: Millennium Development Goals and their overlaps with Energy issues

Millennium Development Goal / Role of Energy
1.To halve, between 1990 and 2015, the proportion of the world's population whose income is below US$1 a day / Expanded access to energy services and, to some extent, agroforestry can lead to increased income for beneficiaries
2.To halve, between 1990 and 2015, the proportion of people who suffer from hunger / Expanding access to energy services and Agro-forestry increases food productivity
3.To ensure that, by 2015, children everywhere will be able to complete a full course of primary schooling / Access to energy services allows for development of more schools
Energy access allows children to have adequate lighting during the evening studying
4.To ensure that girls and boys have equal access to primary and secondary education, preferably by 2005, and to all levels of education no later than
2015 / Increased access to modern energy services allows women and children to have more time for education rather than gathering fuelwood
Access to modern energy services reduces exposure to high levels of indoor pollution caused by dirty energy systems
5.To reduce by two-thirds, between 1990 and 2015, the mortality rate for children under the age of five / Expanded access to energy services will allow better health services for children
6. To reduce by three-quarters, between 1990 and
2015, the rate of maternal mortality / Expanded access to energy services will allow better health services for pregnant women
7.To reduce the prevalence of HIV/AIDS, malaria and other major diseases / Expanded access to energy services will allow better health services overall, including in rural areas, and better preventive measures
8.To stop the unsustainable exploitation of natural resources / Mitigating climate change can reduce unsustainable exploitation of natural resources and increase access to renewable resources

(Source: ADB-ADBI, 2013)

Fig 3 shows the on and off track regions within Asia for reaching the selected MDG targets. In all MDGs different indicators points various directions; while the ASEAN is an early achiever in half of the indicators, it is off track in the other half. It is for example, progressing only slowly in reducing the carbon emissions – moving back

E 24 noviembre 2010 UN Test outputfolder Chapter 1 Version 5 tableI 1 png

Fig 3: Tracking MDG Achievement in ASEAN

(Source: ESCAP, 2012)

words, for example in the proportion of land area covered by forests. Moreover, regional averages invariably mask disparities between countries, urban and rural araes. Even for an indicator, for which ASEAN is already an early achiever, many AMS are lagging within the region. For instance, although the region is early achiever in MDG poverty and education, CLMV countries are expected to miss the target, due to several reasons including lack of energy access.

In other words, to make growth inclusive, access to energy is necessary. Key policies and business models can be devised to link those households with clean energy products and services, depending upon the community’s priorities, plans and the available funding and technologies. It is important that new services targeting those in poverty should focus both on the supply and consumption side of those households and also their ability to develop with the least emissions and pollutions.

2. Adaptation of Clean Energy Products and Services by Low-Income Households

The consumption patterns of urban and rural households differ. In rural settings, the amount of electricity supplied could only support a floor fan, two compact fluorescent light bulbs and a radio for about five hours per day. While for the urban areas, consumption would also include a television and another household appliance, such as an efficient refrigerator or a computer. At the micro-level, there has been a growing interest in efficient low-cost lighting through the distribution of compact fluorescent light bulbs (CFLs) in many ASEAN countries. These high-quality CFLs are four to five times more efficient, and last longer than average lucent bulbs. The mass dissemination of CFLs is expected to reduce peak electricity needs, costs, and presents a business opportunity for private sector exploit.

In terms of investments, it has been estimated that a cumulative investment of $223 billion would be required between 2010 and 2015 in order to achieve the MDG of eradicating extreme poverty and hunger by 2015, another $477 billion between 2016-2030 was estimated to ensure universal access to electricity by 2030. Rural areas will be the bulk of additional household electrification in this period through grid and off-grid solutions, as by 2015 especially in Asia most of the urban households are expected to be given access to electricity services. A high household density is the most important aspect in providing electricity access through the grid, as the MWh delivered through an established grid is cheaper than that through mini-grids or off-grid systems, but the cost of expanding the grid to less populated areas is very high, with transmission losses and is usually not profitable. A large share of the rural households that are to be connected by off-grid and mini-grid options, will include alternative sources of energy including solar photovoltaic’s, mini-hydro, biomass, wind, diesel and geothermal. The current Total Primary Energy Supply (TPES) situation among the ASEAN countries can be seen in Table 4. While large Asian countries including Indonesia and Malaysia are more dependent on coal for their energy supply, other low- income countries like Cambodia, Mayanmar and Philippines and Indonesia are dependent on biomass for their energy.

The bulk of the investment on electrification in the next five years is expected to be incurred in ASEAN countres, especially due to rapid economic growth. Low carbon renewable energy as a share in grid extension in rural areas is expected to increase, however currently it is not cost effective. There is great investment and business opportunities in developing small, stand-alone renewable energy technologies that could meet the electricity needs of rural communities more cheaply. The proliferation of specific green technologies have potential including solar photovoltaics (PV) for lighting and clean drinking water. For greater load demand, other technologies such as mini-hydro or biomass might offer a better solution, though solar PV could be expected to improve in efficiency and could be used on a mass scale as prices eventually drop. The main challenge with solar PV and wind technologies is their high upfront cost, which demands new and innovative business models, financial tools to improve dissemination and. The mini-grid is also being considered the best probable approach to rural electrification, where it can combine the different sources of energy and ensure the stable supply and transmission of electricity.