Christina Ng, Managing Director of the Energy Shift Institute, says Asia’s approach to transition finance makes greater investor scrutiny inevitable.
COP28 was interesting. For the first time it called for the world to move away from all fossil fuels, and in the same breath gave a nod to natural gas as a transition fuel.
The juxtaposition of those two statements is both jarring and contradictory.
The transition fuel narrative has been prominent since the early 2000s. So the fact that it needed some form of recognition at a global climate event seems curious.
A high-emission fuel
Gas is portrayed as a cleaner fossil fuel because, when combusted, it emits half as much carbon than coal or oil. This narrative is not only espoused by industry, but also used as justification in pro-gas policymaking and investment.
The inconvenient truth often ignored, is that natural gas also emits methane — a greenhouse gas with a warming effect at least 80 times worse than carbon in the short term.
Recognising gas as a transition fuel seems counterintuitive for a world that is chasing a 1.5°C global warming limit by 2050. So why did COP28 turn a blind eye to important facts about gas?
Avoiding the same fate as oil
The global electrification push is driving the decline in oil and gas demand, and much of the electrification effort is intertwined with ambitions for greater renewable energy generation to realise it. COP28 also resulted in a new global target to triple renewable energy generation and double energy efficiency by 2030. Despite being a ‘transition fuel’, some of these dynamics have seen investors viewing gas as a sunset industry.
Furthermore, a 2022 paper published by the International Energy Agency (IEA) openly discredited the credentials of gas as a transition fuel, for the first time. It found that global demand for the fuel would rise by less than 5% between 2021 and 2030 and then plateau through to 2050. The IEA’s 2023 outlook was no better. It found that global demand for coal, oil and gas would peak before 2030. That’s less than six years from today and much sooner than what the gas majors were projecting.
Clean energy gaining traction
At the other end of the spectrum, renewables present an appealing story for investors.
In the first half of 2023, green finance deals, of which 58% were earmarked for renewables, overtook the aggregate of oil, gas and coal-related financing. Sustainability-themed bonds crossed the US$4 trillion mark globally with their volumes climbing year-on-year. Gas projects were not widely backed by these bonds.
And as debate continues about whether sustainable or green bond instruments offer any borrowing cost advantage over conventional debt, a recent study found that they can – by up to eight basis points in fact. Overwhelming investor interest consistently dwarfing the supply of green bonds is another factor driving lower financing costs for green projects.
Finding relevance in Asia’s sustainable finance world
It’s no wonder, then, that gas developers have become obsessed with attaining the ‘transition’ label in an attempt to reaffirm their place in global energy systems. Asian markets, in particular, are attractive as the region continues to solve for its energy demands, amid pressures to transition away from coal.
But while there could be a role for gas to play in Asia’s net zero journey, the logic of why gas should have a place in sustainable finance taxonomies, with the benefit of potentially lower financing costs, does not hold.
Most Asian markets recognise gas-powered generation as a transition investment (Singapore and Thailand to a lesser extent). Meeting the taxonomy’s definition of transition enables capital to be raised for new or existing gas plants via transition bonds or loans, and those branded ‘sustainability-linked’. This makes it harder for genuine ESG-focused investors to derive any value from the region’s taxonomies.
Singapore and Thailand recognise that it would be hard to meet thresholds today, but if zero or low emission gas-fired power were possible, it would qualify for green or transition capital. Put simply, if gas power players want to avoid paying a premium for financing, they must invest more heavily in real technology advancement, particularly in carbon capture and storage.
Indonesia, Japan, Malaysia and South Korea have a looser stance on gas. It is likely that most investment in gas power plants could qualify for green or transition capital.
Financing gas should be hard and expensive
In principle it makes sense that gas is a transition fuel, for some markets. But embedding this narrative at COP28 seems to be legitimising the long-term position of gas in energy and financial markets.
Those who can afford to pay for gas should proceed with it if they really need it. But in the absence of regulation that limits new gas investment, it should be left to market forces to determine its financing, without the help of a green or transition label.
Investing in more gas facilities comes at a cost to the environment or climate in the short term.
And so it makes even more sense that gas developers and power operators should be finding it difficult and costlier to source capital.
A longer version of this article appears here.