Carbon pricing potential in East and South Asia : synthesis and case studies for Indonesia, Vietnam, and Pakistan : final report

Carbon pricing at appropriate levels is critical in the response to climate change, but currently only a fifth of global emissions are priced. Successful carbon pricing in Asia can help jurisdictions in the region achieve their climate targets cost-effectively, spur investments into low-carbon alternatives, and catalyse regional climate action. This report presents in-depth case studies of carbon pricing potential and readiness in Indonesia, Vietnam, and Pakistan. It begins with a synthesis of common issues across the case studies identified through the application of the analytical framework developed in Doda et al. (2021). Although there is strong political will to pursue carbon pricing in all three jurisdictions, the influence of and opposition from vested public and private fossil fuel interests pose a challenge. From a legal perspective, all three jurisdictions have flagship climate laws and key energy policy frameworks in place that are conducive to carbon pricing. Challenges arise in the context of policy coordination in the jurisdictions’ fragmented institutional environments and the risk of international investment arbitration. Jurisdictions’ economic and trade structure and power market characteristics are also critical, as carbon pricing is a market-based instrument that relies on economic incentives to change behaviour. All three jurisdictions have a high share of and rising power sector emissions. Government and private sector technical knowledge and capacity are also essential to operate the infrastructure for and comply with carbon pricing. Though the three case study jurisdictions are at different stages of progress towards carbon pricing, MRV was identified as the main outstanding technical challenge. Finally, multilateral frameworks provide external incentives for carbon pricing, facilitating cross-border cooperation including on international carbon markets. All three jurisdictions have - in one way or another - been able to draw on carbon pricing support from various organizations and/or other jurisdictions. The report’s policy recommendations include: to align carbon pricing with ongoing power market reforms; to remove fossil fuel subsidies and provide targeted support instead; to engage early with relevant stakeholders to understand and alleviate opposition; to further leverage multilateral cooperation and dialogue with jurisdictions which already have experience with carbon pricing implementation, and - in this context - to assess needs and draw support from dedicated multilateral capacity building programs.