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Reverting to dirty fuels sacrifices long-term goals for short-term gains

Amid economic challenges, Asia risks regressing on recent clean energy reforms

| China

China this summer quietly gave the go-ahead for several new coal-powered electricity projects, after grabbing international headlines for halting many such schemes in 2016 and 2017 in a bid to curb greenhouse gas emissions and air pollution.

The new plants are expected to raise Chinese power production by 4%, a much-needed addition from a cheap source, in a country witnessing robust growth in energy demand. Only, it is coming from the dirtiest of fuels.

As the Asian giant braces for economic headwinds from its festering trade war with the U.S., the need to keep the growth engine humming could mean an easing of pollution controls on the country's "smokestack" industries.

The Chinese government is not alone in cutting corners to ensure cheap energy. A combination of higher oil prices, economic pressures and pre-election populism is also spurring disconcertingly regressive moves by other Asian governments.

China's overall consumption of thermal coal, used for producing power and heat, has reportedly rebounded -- it surged 12% on the year in the first five months of 2018. Coal use had climbed marginally in 2017 after three successive annual declines since 2014.

The country's carbon emissions have accelerated since the beginning of 2018, and could be headed for their largest annual increase in climate pollution since 2011, according to Greenpeace.

In Thailand, an oil fund used for subsidizing liquefied petroleum gas (LPG) ran into a deficit in July. The government simply decided to dip into another fund that is meant to subsidize biofuel consumption, in order to keep a lid on cooking gas prices until the end of 2018.

Junta leader and Prime Minister Prayuth Chan-ocha has promised general elections in February 2019 and LPG prices are a hot-button topic.

The Philippine government's energy department recently directed oil retailers to make the lower-quality diesel fuel compliant with Euro 2 emission standards available in the country as a cheaper alternative to the cleaner-burning Euro 4 fuel for use in transportation and industry. The country had switched to Euro 4 diesel from January 2017.

Oil companies, stunned by the latest move, have protested that the order runs counter to the country's Clean Air Act of 1999 and will produce minimal savings. More importantly, it would mean a return to a higher level of toxic sulfur, carbon monoxide and nitrous oxide emissions from vehicles, which are known to cause a range of heart and lung problems.

Indonesia, which is due to hold its presidential elections in April 2019, expects to spend around $11.4 billion from the government coffers subsidizing fuels and electricity this year, 73% higher than what it had budgeted, and its highest spending since 2014, when crude prices began crashing from around $115 per barrel.

The diesel subsidy, which had been fixed at 500 rupiah (3.4 cents) per liter as part of progressive deregulation, may be jacked up four or even five times through 2019 to control retail prices.

In another move clearly designed to win votes, President Joko Widodo recently directed state-owned oil and gas company Pertamina to resume offering the subsidized lower-octane or RON 88 gasoline in the most populous islands of Java, Madura and Bali, having phased it out in favor of the higher-quality and unsubsidized higher-octane fuel. Pertamina must bear the subsidy cost.

Widodo has ended up reversing nearly all the bold and progressive fuel pricing reforms he had initiated after his election win in mid-2014. He had pledged to redirect the billions of dollars saved from phasing out subsidies to developing much-needed infrastructure and health care projects.

If he wins the 2019 elections on the basis of a promise to keep fuel subsidies and price caps in place irrespective of the international market prices, Jokowi will end up hemming himself into a debilitating national addiction to cheap fuel, particularly lamentable if it includes even the well-heeled car drivers.

Widodo need only look next door, at the example of Prime Minister Mahathir Mohamad in Malaysia. A stunning election win in May has locked the 92-year-old into keeping his electoral promise of freezing pump prices. Ironically, he made that commitment just as Malaysians were gradually getting used to fuel pricing liberalization, with former Premier Najib Razak having pushed through a controversial weekly adjustment of fuel prices in March, replacing long-established monthly changes.

Under Mahathir's instruction, retailers have been banned from adjusting fuel prices since May, irrespective of international markets. The recent cooling off of crude prices after a spike to 42-month highs in late May of close to $80 per barrel for Brent is a fortunate reprieve for the country. But not one that can be counted upon in the long run.

Word on the street is that Mahathir is looking to lift the cap on diesel and gasoline prices in 2019. However, if he wants to replace the blanket fuel subsidy with one targeted to the economically weaker sections of society, as we understand he does, it would be a complex arrangement, needing a lot of planning. Unfortunately, there are still no signs of such preparations in Putra Jaya.

No one expects the task of managing the fast-growing energy needs of an emerging economy while tackling the challenges of accessibility and affordability, to be easy. It is not just about keeping consumers happy; energy is a vital input to economic growth and its availability and pricing needs to be managed accordingly.

At the same time, Asian governments have pledged to reduce emissions under the 2015 Paris climate agreement. Even if the causes of climate change can still be debated, citizens in China, India and other countries are increasingly holding their governments accountable for ensuring that the air they breathe is clean. That is not only measurable, but now being regularly monitored as well.

Governments need to avoid trading short-term political gains for long-term pain. China and India are making exemplary strides in growing the share of cleaner-burning natural gas and renewables in their energy mix -- their Southeast Asian neighbors need to hop on to the bandwagon. This is a long journey. It will take time to retire coal, but as a start, its consumption growth needs to be restrained. As for fuel subsidies, nothing would be more unfortunate than losing the reforms made in the wake of the 2014 oil price slide.

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets.

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