AB: Just Transition and Emerging Markets: Weighing the Risks - Seite 2

Relative Transition Risks and Specific Vulnerabilities

Informed by past policy lessons, we created a Just Transition Index (JTI) that scores countries across a range of key indicators. The scores are intended to capture a country's overall level of macroeconomic development and the locations of its mines, the make-up of its labor and energy markets, government policy commitment to a just transition, and the ability to finance it.

Some indicators are relatively easy to measure quantitatively (such as a country's level of development, exposure of its labor market to coal, and government budget capacity), while others (for example, coal mine locations and government commitment to reform) are harder to quantify.

For this reason, we opted for a qualitative index to score each country from -2 to 2, where the lowest numbers represent the most risk (Display). The JTI provides a guide not only to countries' overall relative risk (contained in their score averages) but also specific vulnerabilities (individual factor scores).

But the value to investors of such an approach lies not only in its systematic aspects. The underlying qualitative research is critical for understanding the nuances of transition risk.

Preconditions Are a Key Variable

As noted earlier, EMs are particularly exposed. For example, EM labor rights and opportunities tend to be less extensive than those in developed countries. In India, Indonesia and China, coal production is located far from urban centers, limiting the scope for easing coal-dependent populations into alternative employment without the cost and disruption of relocation.

Poland illustrates this well. The country began its transition away from coal more than 30 years ago. Though the transition hasn't been seamless, it has worked well in one major respect: many of Poland's coal mining areas are co-located with key industries, such as automobile manufacturers and information and communications technology service providers.

The situation is different in Indonesia. Coal production there is heavily concentrated in Kalimantan and South Sumatra and accounts for 35% of East Kalimantan's GDP. These areas are remote from the islands of Java and Bali, which together account for 60% of both Indonesia's population and its GDP. But this challenge may be mitigated by plans to relocate Indonesia's capital city-currently Jakarta, on the northwest coast of Java-to East Kalimantan.