Taiwan's Turning Point How Climate Action Can Drive Our Economic Future

Embargoed until August 23

Taiwan’s turning point How climate action can drive our economic future August 2021 Taiwan’s turning point

We have a narrow window of time. The choices made today and over the next decade will determine our future. We have the opportunity to create a new engine for sustainable economic prosperity while at the same time preventing the worst consequences of a warming world.

Deloitte Economics Institute

2 Contents

Contents

Foreword 4

Executive summary 6

Leading the world toward a low-emission future 8

The cost of climate inaction 10

Leading the way to a low-emission economy 11

Decarbonization is a new economic engine 12

Taiwan’s turning point 14

The economic costs of climate inaction 16

The new normal: a climate-damaged economy 18

The high costs of inaction 20

The economic cost of climate change 26

The economic gains of rapid decarbonization 28

A new economic climate 30

Taiwan’s turning point 36

The path to decarbonization 37

Endnotes 40

Limitations of our work 42

Related content 42

Contacts 43

Acknowledgments 44

Deloitte Economics Institute 45

3 Taiwan’s turning point

Foreword

Our planet is our most precious asset, and yet without dramatic efforts to address climate change, Through bold action now and the world as we know it is at risk. in the decades that follow, we No one is immune to the impact of climate change, could avoid the worst effects but for Taiwan and Asia Pacific, this crisis also presents a clear opportunity: to lead the world of climate change. and find the next wave of economic growth by accelerating action to mitigate climate change. This report discusses how this can be achieved and quantifies Taiwan’s potential gains. Our research By taking bold action now, we can create a new challenges one of the main concerns stopping engine for sustainable economic prosperity, governments, businesses, and individuals from while at the same time reducing the impacts acting on climate change: the cost. It reframes of climate change. In doing so, we can leverage the debate to show that what seems like a cost our leadership in the consumer economy and today is actually an investment in a climate-driven advanced manufacturing, to supply the low- transformation for a better future. emission innovations, processes, and know-how the world needs. The choices we make today and over the next decade will determine whether the worst effects of climate change are locked in or avoided. We Addressing the climate crisis are at a turning point, and it is time to discover how Taiwan and Asia Pacific can reshape the arc creates huge opportunities for of economic history. But we can only do it if we economic growth. do it together and act now.

4 Foreword

The Greenhouse Gas Reduction and Management Act passed in Taiwan in 2015 demonstrates the strong position of Taiwanese government’s supports and response to climate change. This act is in constant refinement and adjustment to make Taiwan a climate friendly region. At Deloitte, we have set a bold target to reach net zero emissions by 2030. We are also empowering our professionals, connecting with others, and engaging our broader ecosystem to create solutions that facilitate the transformation to a low-emission economy in Asia Pacific and globally. We look forward to working with you to help prevent the worst consequences of a warming world and realize the many opportunities presented by decarbonization.

Jason Ke Cindy Hook Chief Executive Officer, Chief Executive Officer, Deloitte Taiwan Deloitte Asia Pacific

5 Taiwan’s turning point Executive summary

6 Executive summary

MY 2035 NO O GE C HAN TUR E D C NI TE NG 2045 D A P E IN O D I IZ R N O T

O N C

O L O

B W S R Y - E A A M L

P I C S

E S E

T I

D N

M $1.3T

L economic gain

($US) T

D U

O E B

A C T 2021 IO N 1.5ºC 2070

IN 2021 AC 2070 3ºC T IO

S U

D Y D -$1.4T

P economic loss I

M R ($US) E O V O I D S U N N C E T T O I V N I C I T E Y N O B D R A E IN C C G RE A AS ES ING TUR M TEMPERA A E D AT CLIM

7 Taiwan’s turning point

Leading the world toward a low-emission future

If left unchecked, climate change will impose steep At the center of our research is Deloitte’s economic costs on Taiwan. These costs will threaten uniquely calibrated Regional Computable General the progress and prosperity the nation has enjoyed Equilibrium Climate Integrated Assessment Model, in recent decades. But there is an alternative path. the D.CLIMATE model. This model integrates the economic impacts of physical climate change Rapid reductions in emissions in Taiwan and across into a baseline economic trajectory to overcome the global economy, beginning now and continuing the myopia of many current economic models. through this next critical decade, offer a way forward By factoring the costs of climate change into the to a low-emission future. This potential future not baseline, our framework reveals the tremendous only avoids the worst impacts of climate change, it economic harms of inaction or inadequate action, also creates prosperous long-term economic growth as well as the significant opportunities that present for Asia Pacific and the world. themselves in transforming Taiwan’s economy. Taiwan’s future is particularly bright in a decarbonized world that keeps warming within 1.5°C of pre-industrial levels. The country is already Taiwan’s future is particularly a hub for innovative technology and advanced manufacturing. Now is the time to reorient economic bright in a decarbonized world structures to leverage this complexity and reap the that keeps warming within 1.5ºC economic benefits of a low-emission future. of pre-industrial levels. However, there is a need to pivot from seeing efforts to limit global warming as optional costs, and instead view them as necessary and new areas of economic opportunity. This will require quantifying the value of climate change mitigation and the benefits that can come from decarbonization. This report aims to achieve these goals.

8 Executive summary

Figure 1.1: Economic growth in Taiwan is the trend in a 1.5ºC world

2025–2035 2035–2045 Decade of Global warming GE delivery on bold HAN TUR limited to 1.5ºC, D C NI climate plays TE NG worst impacts A P IN O D I of climate R N O T change

O avoided C

L O

W S Y - E A M L

P I

E S

T I

To 2025 O After 2045

A N

Rapid and M $1.3T Decarbonized

F L economic gain

bold climate U Taiwan and

($US) T

D action U global L

R economy

O E B

A C T 2070 2021 IO N 1.5ºC World maintains 1.5ºC warming limits beyond IN 2021 2070 A 2070 for a modern 3ºC C and prosperous Taiwan has T IO net zero future signiﬁcant loss N due to climate

inaction

S U

E D D -$1.4T

P economic loss I

R ($US) E O V I D S U Climate change N Emission damages C E intensive T T I V N economies I industry remains I T dominant Y N O B R A IN C C R EA S SIN RE G TEMPERATU Emissions increase global average temperatures

Source: Deloitte Economics Institute D.CLIMATE model. Note: Taiwan’s stylized economic loss pathway reflects global average warming aligned with the RCP 6.0 baseline. The stylized economic growth pathway reflects limiting global average warming to no more than 1.5ºC by 2050, in line with the current ambition of the Paris Agreement. 9 Taiwan’s turning point

The cost of climate inaction

In the economic future Deloitte has modeled, Taiwan The result over the next half-century would and the rest of the world do not significantly reduce be climate change–induced economic losses emissions relative to current levels. This future has to Taiwan of approximately US$1.4 trillion in an emissions pathway that leads to global average present value terms.a This lost economic potential warming of more than 3°C by 2070. would total 9.5 percent of GDP in 2070 alone. This pathway would lead to economic losses For comparison the Chi-Chi earthquake in 1999, of more than US$468 billion in present value one of Taiwan’s worst natural disasters, cost the terms by 2050—or nearly 5 percent of Taiwan’s economy an estimated US$10 billion.1 The economic gross domestic product (GDP) in 2050 alone. Over cost of unchecked climate change in Taiwan the 30 years to 2050, that is an average annual loss would be equal to an earthquake of this scale of 2.4 percent of GDP each year. occurring almost three times a year between now and 2070.

Figure 1.2: Economic loss in Taiwan due to climate inaction

-US$1.4 trillion

Signiﬁcant losses to Taiwan from climate change inaction and a 3ºC world, by 2070.

Source: Deloitte Economics Institute D.CLIMATE model.

a. Total net present value (NPV) of deviation loss to GDP in Taiwan over the period to 2070, at a 2 percent discount rate. Refer to the Technical Appendix for a discussion on the selection and application of the discount rate.

10 Executive summary

Leading the way to a low-emission economy

Fortunately, the temperature changes and costs But time is of the essence. Policy and investment described above are not fixed. Although some decisions made in the next several years will largely degree of global temperature rise and climate shape the economy and climate that Taiwan and impact is already “locked in” due to historical the world inherit. This narrow window makes it emissions, there is an opportunity to take bold even more important to understand the economics action to enable economic prosperity and avert the of a warming world and incorporate them into worst impacts of an altered climate. Supported by decision making that addresses the multiple market the right economic framework, these actions can failures of climate change. For Taiwan, an open put Taiwan—and the world—on a path to realizing economy heavily reliant on international trade and strong, equitable, and shared growth. emissions-intensive manufacturing, executing the transformation in a way that maintains global export Taiwan is at the frontier of a new economic era and competitiveness will be paramount. the development of a new system of production. By making the right choices now, it could chart a more prosperous path toward a low-emission future, accelerating progress in the rest of the world by exporting key technologies, processes, and know-how.

11 Taiwan’s turning point

Decarbonization is a new economic engine

Our modeling shows that rapid decarbonization could yield economic gains of approximately US$1.3 trillion (in present value terms) for RCP 6.0 explained Taiwan’s economy by 2070. Compared to a RCP 6.0 is an emission scenario used world of climate inaction (the Representative by the Intergovernmental Panel on Concentration Pathway (RCP) 6.0 baseline described Climate Change (IPCC). RCP 6.0 assumes at right), Taiwan’s GDP would grow by an average of the global community largely fails to 4.5 percent per year over the modeled decades introduce significant climate mitigation to 2070. policies, making it an appropriate In 2070, that would equate to GDP growth of a baseline for forecasting the potential staggering 10 percent and a gain in economic output effect of inaction. The IPCC’s scenarios of nearly US$165 billion—equivalent to increasing vary widely, depending on socioeconomic the economy by more than three times the entire development and climate mitigation market value of Hon Hai Precision Industry (trading policy settings. as Foxconn Technology Group), one of Taiwan’s largest electronic manufacturers.2 In our forecasts, these economic benefits would be observed from the first year that bold climate policy decisions started delivering rapid investment and technology development consistent with limiting global average warming to 1.5°C by 2050.

Figure 1.3: Potential economic gain for Taiwan due to decarbonization in a 1.5°C world

US$1.3 trillion

Signiﬁcant gains to Taiwan from climate change action and a 1.5ºC world, by 2070.

Source: Deloitte Economics Institute D.CLIMATE model.

12 Executive summary

Figure 1.4: Four phases of action to achieve a decarbonized Taiwan in a 1.5°C world

Transforming Taiwan in a 1.5ºC world

gain at 2025 gain at 2035 gain at 2045

8 0.3% 0.3% 3.4%

6 10%

gain at 2070 4

2021 2025 2035 2045 2070 Percentagedeviation in in reference GDP to 6.0 a RCP baseline

GDP percentage gain in a 1.5°C world

Largest economic gains during transformation Ordered by largest GDP gain, level terms ($US)

Bold Climate Plays New energy sector Few industries enjoy immediate Services Retail and tourism GDP gains due to bold climate Construction

2021-2025 plays toward a 1.5ºC world. Transport

Coordinated Change A small number of industries gain New energy sector consistently in the key decade Construction

2025-2035 of change toward a 1.5ºC world.

New energy sector Turning Point Services Construction A growing number of industries Retail and tourism benefit from decarbonization Agriculture and forestry 2035-2045 achieved in a 1.5ºC world. Water and utilities Mining and gas

New energy sector Services Low Emission Future Retail and tourism New economic structures Manufacturing and outputs remake Taiwan Construction

2045-2070 in a decarbonized 1.5ºC world. Water and utilities Agriculture and forestry Mining and gas

Source: Deloitte Economics Institute D.CLIMATE model. 13 Taiwan’s turning point

Taiwan’s turning point

In our modeling, the economic benefits of climate action would be immediate for Taiwan, scaling up dramatically toward the middle of the century. Our analysis shows that the structural adjustment costs of rapid decarbonization would be almost immediately offset by positive returns in the capital and technology that shift economies onto a decarbonized pathway. We also show how rapid decarbonization toward a 1.5°C worldb would be likely to occur through the following four economic phases.

Bold Climate Plays

Coordinated Change

Turning Point

Low-Emission Future b. References to 1.5°C in this report describe a situation in which nations successfully achieve rapid decarbonization, limiting global average warming to 1.5°C by the middle of the century and maintaining that average until the end of the century. Under this scenario, Taiwan would achieve nearly net zero emissions by 2050. This scenario has been dimensioned and modeled by Deloitte Economics Institute.

14 Executive summary

Bold Climate Plays Turning Point from 2021 to 2025 from 2035 to 2045 The next few years set the stage for rapid The decarbonization of high-emitting industries decarbonization. The decisions by government, should be nearly complete by this period. The regulators, business, industry, and consumers cost of new low-emission technologies would would reinforce initial progress and create the be decreasing and net economic gains would market conditions to deliver decarbonization be shared more widely. Efforts to curb emissions at pace and scale. This would send price signals, would begin to manifest in lower global average transform supply chains, and lay the foundation temperatures relative to a higher-emitting posture for a structural shift that limits global average (a 0.13°C average decrease across the decade warming to 1.5°C. Several areas of Taiwan’s to 2045, compared to the RCP 6.0 baseline). economy—particularly new energy—could reap This pathway would result in a 1°C difference early benefits in this phase, as power generation in the global mean temperature by 2070, relative technology evolved and prices began to drop. to the RCP 6.0 baseline. This decade would be the climatic and economic turning point that avoids a “locked in” higher-emission pathway and

realizes the economic dividends of technological progress. As a major manufacturer of low-cost, high- complexity electronics, Taiwan would benefit from rapidly growing global demand for green technology. Coordinated Change from 2025 to 2035 The hardest shifts in industrial policy, energy systems, and consumer behavior would occur in this period. Businesses and economies would begin to see the consequences of bold climate A Low-Emission Future plays, with different industries and countries after 2045 transforming at different paces. More sectors in Taiwan’s economy would begin to realize By the end of the century, Taiwan’s economy the benefits of rapid decarbonization during would be near net zero emissions and the this decade, as industries such as conventional world’s economic systems of production would energy, manufacturing, and transport continued be keeping global average warming to around 1.5°C. to absorb structural costs. Economic structures would be radically transformed, underpinned by a series of interconnected, low-emission systems spanning energy, mobility, manufacturing, and food and land use. The energy mix would be dominated by low- or zero-emission sources across every market, with green hydrogen and negative-emission solutions, both natural and technological, playing prominent roles. This period would see remarkable growth for Taiwan. Supply chains would have been established, energy sources and industries would have transitioned, and the economy would be aligned to a new growth trajectory. Historically significant aspects of the Taiwanese economy, such as manufacturing and services, would also benefit significantly from productivity gains and lower costs as a result of avoided climate damage.

15 Taiwan’s turning point The economic costs of climate inaction

16 The economic 2021

2070 3ºC

costs of D

S U

D Y climate D -$1.4T

P economic loss I

M R ($US) E O V O I D S U N N inaction C E T T O I V N I C I T E Y N O B D R A E IN C C G RE A AS ES ING TUR M TEMPERA A E D AT CLIM

17 Taiwan’s turning point

The new normal: a climate-damaged economy

Most economic thinking has it wrong. Growth with consequences Dominant economic projections do not account Taiwan’s economy is a microcosm of broader for the consequences of climate change, or the regional development. One of the Four Asian world’s efforts to adapt to or mitigate the impacts. Tigersd and once one of the fastest-growing When they do consider climate change damage economies in Asia, Taiwan drove economic growth and mitigation policy, it is often in scenario analyses in the 1960s through rapid industrialization and that compare alternative future states to the development of its export trade. It experienced same incorrect starting point—and against an record annual growth rates of 9.3 percent, erroneous “business as usual” trend that assumes 19.7 percent, and 13.1 percent in the 1960s, unconstrained economic growth via emissions- 1970s, and 1980s, respectively (refer to Figure 2.1). intensive economic production. This is the economic baseline that informs how most decisions and This rapid expansion was underpinned by a investments are made, for governments and globally competitive manufacturing industry. businesses alike. The combination of a highly skilled workforce and comparatively low wages saw Taiwan quickly And no wonder. Since the Industrial Revolution, become the manufacturer of choice in the region, economic growth has moved nearly in lockstep particularly in the 1960s and 1970s. with rising greenhouse gas (GHG) emissions. As humanity burned fossil fuels, removed forests, This growth brought many benefits to Taiwan, and converted land to intensive agriculture, it but it also had consequences. As with most enjoyed the “fruits” of those actions: economic modern economies, Taiwan relies on emissions- growth, rising standards of living, and better quality intensive fossil fuels for its energy needs. Its of life.c The world economy has expanded almost GHG emissions expanded rapidly from the 1960s every year since 1750. While growth has not been and 1970s, and have remained persistently high constant or even—across regions and individual despite a slowing economy. countries—GDP growth has, on average since the Industrial Revolution, been around 1.5 percent per year. 3 Economic growth and rising That emissions-intensive growth has been perhaps standards of living have come most evident in the Asia Pacific region, where the at a huge cost. last several decades have seen dramatic economic expansion and hundreds of millions rising out of poverty—alongside rapidly increasing carbon 4 dioxide (CO2) emissions.

c. Economic growth as measured by GDP, and improved standards of living as measured by increasing GDP per person. d. The Four Asian Tigers are the high-growth economies of Taiwan, Hong Kong, Singapore, and South Korea.

18 The economic costs of climate inaction

Figure 2.1: Trends in Taiwan’s per capita GDP growth and emissions5

GDP growth (LHS) CO2 emissions (RHS)

9% 12

8% 10 7%

6% 8 emissions (metrictons) 2 5% 6 4%

3% 4

2% 2 Average annual growth incapitaper GDP 1%

0% Average annual capitaper CO * 1970s 2010s 1980s 1960s 1990s 2000s

Source: Deloitte Economics Institute analysis of World Bank data. *Per capita GDP growth to 2019; per capita emissions to 2016.

Changing the economic narrative Deloitte’s D.CLIMATE model integrates the economic impacts of physical climate change into a baseline Mainstream economic theory and models assume economic trajectory, to overcome the myopia unconstrained emissions do not have negative of many current economic models. By factoring consequences for economic growth potential. the costs of climate change into the baseline, our This view of the world has now come up against the framework reveals the tremendous economic harms overwhelming scientific consensus—and increasingly of inaction or inadequate action, as well as the our own lived experiences—telling us that the significant opportunities that present themselves in current system of economic production is generating remaking Taiwan’s economy. untenable changes in the climate.6 These changes put at risk Taiwan’s hard-earned economic growth and prosperity.7

19 Taiwan’s turning point

The high costs of inaction

Unmitigated climate change threatens to wipe out decades of hard-won economic growth in Taiwan. Climate change could The foundations of the nation’s prosperity—its reverse Taiwan’s hard-won natural and human capital—are at risk, and along with them its standard of living, its prospects for economic gains. future growth, its place on the global stage, and the wellbeing of its people.8 If Taiwan’s recent economic story is one of growth, unchecked climate change would turn it into one of decline.

20 The economic costs of climate inaction

Figure 2.2: How climate change impacts the economy

Impacted workers Lost productive land Heat stress, the “slowing down” A loss of productive land through of workers, and their reduced rising sea levels and a reduced level ability to perform results in of productive activity on the land lower labor productivity. impacts low-lying and coastal areas.

Stalling productivity Diminished health and investment and wellbeing Economies suffer as investment repairs Increased incidence of existing assets instead of contributing to mortality and morbidity new, more productive capital. Climate disrupts living standards and change stalls economic progress. the lives of the working population.

Disrupted flow of Agricultural losses global currency Despite adaptation, climate The scale of loss of tourism change inaction limits what and international money farmers can do. Significant circulating in economies impacts variations in crop yields damage business, jobs, and livelihoods. the agricultural sector’s output.

Source: Deloitte Economics Institute.

21 Taiwan’s turning point

Modeling climate inaction in Taiwan This modeling framework involves significant research on region-specific climate and economic Global emissions will continue to rise if no further impacts across Asia Pacific, which are used as inputs significant action is taken to mitigate climate for Deloitte’s D.CLIMATE model (refer to the Technical change. The outcome would be increasing global Appendix for more detail). average warming toward the end of the century. In this world, inaction on climate change would be To quantify this conclusion, Deloitte modeled the the baseline path for the economies of Taiwan and economic impacts of a changing climate on long- the world. This baseline scenario would negatively term economic growth in Taiwan, using the following impact economic growth when compared to stepped process: a world without climate change (refer to the Technical Appendix for more detail).

1. Projected emissions-intensive global economy 2. Global surface temperatures continue rising

3. Physical damage to the factors of production

4. 5. Impacts to Alternative the economy baseline views of economic growth

22 The economic costs of climate inaction

1 4

The model projects economic output (as measured The damage to the factors of production is by GDP) with emissions reflecting RCP 6.0 to the distributed across the economy, impacting GDP. year 2100.e RCP 6.0 represents a single scenario Any change in emissions (and, correspondingly, without significant additional efforts to constrain temperatures) over time results in changes to emissions (a baseline scenario).9 This results in a these impacts and their interactions. The economy projected emissions-intensive global economy. impacts the climate, and the climate impacts the economy.

2 5 Increased atmospheric GHGs cause average global surface temperatures to continue rising above pre- The key variables of time, global average temperature, industrial levels.f In the RCP 6.0 baseline scenario, and the nature of economic output across industry global average temperatures increase more than structures combine to offer alternative baseline 1. 3°C above pre-industrial levels by the end of the views of economic growth. Specific scenario analysis Projected century.g (Note that present-day temperatures have is then conducted, referencing a baseline that emissions-intensive already risen more than 1.0°C above pre-industrial includes climate change damage. Scenarios can also global economy 2. Global surface levels.) include policy actions that either reduce or increase temperatures emissions and global average temperatures relative continue rising to the RCP 6.0 baseline view. 3

3. Warming causes the climate to change and results Physical in physical damage to the factors of production. damage to The Deloitte model includes six types of economic the factors of damage, regionalized to the climate, industry, and production workforce structure of each defined geography in Asia Pacific.

4. 5. Impacts to Alternative the economy baseline views of economic growth e. IPCC-adopted emission scenarios vary widely, depending on socioeconomic development and climate mitigation policy settings. RCP 6.0 is chosen as an intermediate baseline scenario as it includes no specific or significant climate mitigation policy effort, making it an appropriate baseline for reference. f. Pre-industrial is defined in IPCC assessments as the multi-century period before the onset of large-scale industrial activity around 1750. g. The associated climate data (like annual temperature increases and atmospheric concentrations) are sourced from a synthesis of the models available through the Coupled Modeling Intercomparison Project (CMIP6). See the Technical Appendix for further detail. For each RCP scenario, the associated climate data (like annual temperature increases and atmospheric concentrations) are sourced from a synthesis of the models available through the Coupled Modelling Intercomparison Project (CMIP6). See the Technical Appendix for more detail.

23 Taiwan’s turning point

Figure 2.3: Sector loss at 2070, in a climate damaged Taiwan in a 3°C+ world

Services -$76.8B -$34.2B Retail and tourism (US) (US)

Manufacturing -$31.7B -$11.9B Construction (US) (US)

Conventional energy -$8.0B -$3.4B Transport (US) (US)

Agriculture and forestry -$1.1B -$1.0B Water and utilities (US) (US)

Mining and gas -$0.8B -$0.4B New energy (US) (US)

Source: Deloitte Economics Institute D.CLIMATE model.

24 The economic costs of climate inaction

Figure 2.4: Loss to the economy over 50 years -US$1.4

lo trillion s 0 t 7 f 0 ro 2 m y b Tai y wan’s econom

Services -US$608 billion

Manufacturing -US$295 billion

Retail and tourism -US$278 billion

Other -US$229 billion

Source: Deloitte Economics Institute D.CLIMATE model.

New: Total NPV of deviation loss to GDP in Taiwan over the period to 2070, at a 2 percent discount rate. Refer to the accompanying Technical Appendix for a discussion on the selection and application of the discount rate.

25 Taiwan’s turning point

The economic cost of climate change to Taiwan

In the economic future modeled, Taiwan and Substantial losses to industries, the rest of the world do not significantly reduce firms, and workers emissions relative to current levels. This future has an emissions pathway that would lead to global Taiwan’s economy is highly exposed to the economic average warming of more than 3°C by 2070.h damage caused by climate change. Over the next 50 years, the top five most impacted industries The result over the next half-century, in terms of economic activity comprise 95 percent by Deloitte’s estimates, would be climate of the country’s current output. change–induced economic losses to Taiwan of approximately US$1.4 trillion in present These industries—services (government and private), value terms. This loss to economic potential retail and tourism, manufacturing, construction, and would equal 9.5 percent of GDP in 2070 alone. conventional energy—are economic powerhouses and major sources of employment in Taiwan. Together, For comparison, the Chi-Chi earthquake in 1999, they form the basis of the country’s contemporary one of Taiwan’s worst natural disasters, cost economic engine. the economy an estimated US$10 billion.10 The economic cost of unchecked climate change Deloitte estimates that by 2070, these five industries in Taiwan would be equal to an earthquake would experience an annual loss in the value added of this scale occurring almost three times to GDP of more than US$55 billion per year. a year between now and 2070. In our model, the impacts would threaten Taiwan’s If substantial actions are not taken, climate change position as a modern, global manufacturer and would, in average annual terms, reduce Taiwan’s services-based economy—the manufacturing economic potential by 4.5 percent a year over and services sectors would experience by far the the next 50 years. greatest economic impacts from unchecked climate change. Direct impacts—such as to insurance, This pathway would lead to economic losses human health, and social work—would combine of more than US$468 billion in present value with indirect effects across many upstream services terms by 2050—or nearly 5 percent of Taiwan’s industries such as business and financial services, GDP in 2050 alone. On average over the 30 years which are exposed to climate impacts in other parts to 2050, that is an annual loss of 2.5 percent of GDP. of the economy. Over the period to 2070, unchecked climate change would, in average annual terms, reduce the value added by Taiwan’s services sector Taiwan is highly exposed to by US$25 billion per year. the economic damage caused by climate change.

h. IPCC-adopted emission scenarios vary widely, depending on socioeconomic development and climate mitigation policy settings. RCP 6.0 is chosen as an intermediate baseline scenario as it includes no specific or significant climate mitigation policy effort, making it an appropriate baseline for reference.

26 The economic costs of climate inaction

Figure 2.5: Largest industry losses in Taiwan due to climate change

Share of Taiwan’s total economic output Services

Retail and tourism 95% Manufacturing Construction

Conventional energy Most impacted industries

Source: Deloitte Economics Institute D.CLIMATE model.

As temperatures continued to rise, workers would Over the next 30 years, these extreme weather acutely feel the climate impacts and physical capital events are likely to become more severe. Research would degrade. This would have a profound impact indicates that rising sea levels and associated on the powerhouse of Taiwan’s historical economic inundation would impact 1.2 million people in growth: manufacturing. Over the period to 2070, Taiwan. Storm surges could more than double this Deloitte estimates that the value added to GDP by impact to an estimated 2.9 million residents, more Taiwan’s manufacturing sector would be reduced by than 10 percent of the island’s current population. almost US$12 billion a year, in average annual terms. These impacts are expected to occur in Taiwan’s most densely populated regions and could affect Retail and tourism, construction, and conventional major landmarks and crucial infrastructure such energy would also suffer as labor productivity as the Presidential Office Building and Taipei declined and more frequent and extreme weather Songshan Airport.12 events hastened the degradation of capital assets. Deloitte estimates that climate impacts on these Heat stress is an immediate and ever-growing three sectors—but primarily retail and tourism— threat for the productivity of Taiwan’s workforce, would reduce the value they add to GDP by especially in industries like construction and almost US$18 billion a year to 2070, in average agriculture. As a subtropical island, Taiwan is annual terms. highly exposed to increases in temperature and humidity. Some studies indicate that more than The driving forces behind these economic losses are half of summer days could bring dangerous levels already being felt. Taiwan’s geography and exposure of heat stress as early as 2075.13 to ocean currents make it particularly vulnerable to rising sea levels, as well as typhoons and tropical storms with potentially devastating winds that cause damage, including through storm surges. These extreme weather events are increasingly common and already lead to widespread flooding and losses in economic output.11

27 Taiwan’s turning point The economic gains of rapid decarbonization

28 The economic gains of rapid decarbonization

MY 2035 NO O GE C HAN TUR E D C NI TE NG 2045 D A P E IN O D I IZ R N O T

O N C

O L O

B W S R Y - E A A M L

P I C S

E S E

T I

D N

M $1.3T

L economic gain

($US) T

D U

O E B

2021 1.5ºC 2070

29 Taiwan’s turning point

A new economic climate

The economic costs of climate change are not fixed. Accelerated decarbonization could bring significant Although some degree of global temperature rise benefits to Taiwan and the world. Taiwan could use and climate impact are already “locked in” due to the transition to a low-emission footing to lean its historical emissions, there is an opportunity to take economy towards growth in advanced industrial bold action to enable economic prosperity and avert sectors, leveraging clean energy export markets and the worst impacts of an altered climate. Supported making clean energy technologies affordable for by the right economic framework, these actions can countries around the world—including developing put Taiwan—and the world—on a path to realizing countries, which will see a rapid increase in energy strong, equitable, and shared growth. demand over the coming years.14 Taiwan is at the frontier of a new economic era and But time is of the essence. Policy and investment the development of a new system of production. By decisions made in the next few years will largely making the right choices now, it could chart a more shape the economy and climate that Taiwan and the prosperous path toward a low-emission future world will inherit. This narrow window makes it even while accelerating progress in the rest of the world more important to understand the economics of a by exporting key technologies, processes, and warming world and incorporate them into decision know-how. making that addresses the multiple market failures of climate change. Taiwan needs to act now to avoid the worst impacts of climate change and reap the economic benefits on offer.

30 The economic gains of rapid decarbonization

Figure 3.1: Economic growth in Taiwan is the trend in a 1.5ºC world

2025–2035 2035–2045 Decade of Global warming GE delivery on bold HAN TUR limited to 1.5ºC, D C NI climate plays TE NG worst impacts A P IN O D I of climate R N O T change

O avoided C

L O

W S Y - E A M L

P I

E S

T I

To 2025 O After 2045

A N

Rapid and M $1.3T Decarbonized

F L economic gain

bold climate U Taiwan and

($US) T

D action U global L

R economy

O E B

A C T 2070 2021 IO N 1.5ºC World maintains 1.5ºC warming limits beyond IN 2021 2070 A 2070 for a modern 3ºC C and prosperous Taiwan has T IO net zero future signiﬁcant loss N due to climate

inaction

S U

E D D -$1.4T

P economic loss I

For Taiwan—an open economy heavily reliant While the region continues to move away from on international trade and emissions-intensive nuclear power, Taiwan’s electricity generation manufacturing—it is vital to transition to a low- is shifting towards greener sources. Government emissions footing in a way that maintains global initiatives, including the Four-year Wind Power export competitiveness. Promotion Plan and the Two-year Solar Promotion Plan, have led to rapid growth in renewable And there is significant work to do. Taiwan, like generation. By 2025, 20 percent of Taiwan’s electricity many other countries in Asia Pacific, is heavily is expected to be generated by renewable energy.17 reliant on fossil fuels for energy, and consequently economic activity. In 2019, most of Taiwan’s primary Taiwan’s geography and climate favor large offshore energy supply consisted of oil and petroleum commercial wind fields and increased solar capacity. products (47 percent), followed by coal (30 percent), Future investment is likely to see an expansion in and gas (15 percent).15 Coal and gas were responsible these renewable sources, but Taiwan needs to make for 48 percent and 34 percent of electricity a concerted effort to reduce emissions to the levels generation, respectively. outlined in the Paris Agreement. Policy actions to date suggest that Taiwan is taking steps in the right direction. In 2015, it passed legislation to reduce GHGs to 50 percent of 2005 levels. The policy was later refined to include interim targets, such as a 20 percent reduction by 2030.16

32 The economic gains of rapid decarbonization

Decarbonization is a new Being a major manufacturer of low-cost, high- economic engine complexity electronics would also allow Taiwan to capitalize as countries shifted to a decarbonized Rapid decarbonization could yield gains for pathway. Deloitte forecasts that this would be Taiwan’s economy of approximately US$1.3 trillion reflected in early economic gains throughout the in present value terms by 2070. Compared to next decade. These benefits, in addition to avoided a world of climate inaction (the RCP 6.0 baseline damages, would constitute significant benefits scenario), Taiwan’s GDP would grow by an average for the region over the next decades. of 4.5 percent each year over the modeled In our forecasts, these economic benefits would decades from today to 2070. be observed from the first year that bold climate In 2070, that would equate to GDP growth of policy decisions started delivering rapid investment a staggering 10 percent and a gain in economic and technology development consistent with limiting output of nearly US$165 billion—equivalent global average warming to 1.5°C by 2050. to increasing the economy by more than three times the entire market value of Hon Hai Precision Industry (trading as Foxconn Technology Group), Taiwan would begin to feel the 18 one of Taiwan’s largest electronic manufacturers. economic benefits of climate The economic gains of climate action would be immediate for Taiwan. Rapid decarbonization would action almost immediately. create structural adjustment costs, but they would be quickly canceled out by positive returns to the capital and technology that shifts Taiwan’s economy onto a decarbonized pathway.

33 Taiwan’s turning point

Figure 3.2: The process of economic adjustment to decarbonization in a 1.5°C world scenario

How Taiwan rapidly decarbonizes

In the modeled scenario where global warming is limited to 1.5ºC by 2050, Taiwan’s economy would prosper as it rapidly reduced the emissions intensity of economic activity compared to today’s levels. The country would become a leader in global decarbonization efforts as a fast adopter of change and an exporter of decarbonization.

1 2 3

Change is valued Energy transforms Fuels switch

Decarbonization policies, Pricing change and Pricing change and energy investments, and new decarbonization efforts system transformation technologies structurally encourage renewable accelerate electrification and change economies. electricity to transform the use of new sources of Taiwan’s energy system. low emission fuel for industry and households.

The value of this structural change is ‘priced into’ As renewables become economic activity. cheaper compared to fossil This transformation links fuel sources in end use, energy producing and there is a substitution for energy consuming sectors renewable power. more closely.

The type and pace of change sets the price for industries in Taiwan to reduce emissions. The energy sector has Economies have cheaper and many ways to decarbonize cleaner energy, and more and the incentives for productive economic output investment are strong. from it.

Source: Deloitte Economics Institute D.CLIMATE model.

34 The economic gains of rapid decarbonization

US$1.3

a trillion d 0 d 7 e 0 d 2 t y o b Tai y wan’s econom

Note: Total NPV of deviation loss to GDP in Taiwan over the period to 2070, at a 2 percent discount rate. Refer to the Technical Appendix for a discussion on the selection and application of the discount rate.

35 Taiwan’s turning point

Taiwan’s turning point

In the modeled scenario, Taiwan’s future energy These fuels would be used in a range of applications mix would see a significant transition away from including passenger cars, power generation turbines, fossil fuel sources, from 97 percent in the early steelmaking facilities, heavy-duty vehicles, and ships. 2020s to around 35 percent by 2050. Clean energy Deloitte estimates that hydrogen would comprise generation—via solar, wind, hydro, geothermal, and 33 percent of Taiwan’s fuel mix by 2070, compared nuclear—would ramp up significantly. with approximately 2 percent in 2030. Biofuels In this future, Taiwan would continue to reduce its are also expected to play a key role in meeting use of petroleum, coal, and gas, replacing these Taiwan’s future fuel needs, comprising 8 percent historical sources with renewables—such as green of the fuel mix by 2070, compared to around hydrogen using electrolysis, or biofuels generated 0.5 percent in 2030. from plants, algae, or animal waste. Its need for Currently, Taiwan’s economy is powered almost constant load-generating capacity would mean entirely by imported fuels. Although Taiwan has some fossil fuels remaining a component of the total the potential to produce future fuel types, and it energy mix. This is where innovation in technologies is increasing its generation of renewable energy, for carbon capture and storage would be crucial. it will most likely continue to rely on imports to As technologies continued to advance, emerging meet demand. alternate fuel sources such as hydrogen and biofuels would become core to Taiwan’s energy mix.

Figure 3.3: Taiwan’s fossil fuel usage by 2050

Coal Oil and petroleum products

52% 58%

52%

24% 28% 19% 9% 4%

2020 2030 2040 2050

Source: Deloitte Economics Institute D.CLIMATE model.

36 The economic gains of rapid decarbonization

The path to decarbonization

Deloitte expects rapid decarbonization to a 1.5°C world to follow four key economic phases.

Figure 3.4: Four phases of action to achieve a decarbonized Taiwan in a 1.5°C world

Taiwan’s GDP percentage gain in a 1.5°C world 12

gain at 2025 gain at 2035 gain at 2045

8 0.3% 0.3% 3.4%

6 10%

gain at 2070 4

2021 2025 2035 2045 2070 Percentagedeviation in in reference GDP to 6.0 a RCP baseline

Largest economic gains during transformation Ordered by largest GDP gain, level terms ($US)

New energy sector Construction Bold Climate Plays Services Transport 2021-2025 Retail trade and tourism

Coordinated Change New energy sector Construction 2025-2035

New energy sector Agriculture and forestry Turning Point Services Water and utilities 2035-2045 Construction Mining and gas Retail and tourism

New energy sector Construction Low Emission Future Services Water and utilities 2045-2070 Retail and tourism Agriculture and forestry Manufacturing Mining and gas

Source: Deloitte Economics Institute D.CLIMATE model.

37 Taiwan’s turning point

Bold Climate Plays Coordinated Change from 2021 to 2025 from 2025 to 2035 The next few years set the stage for rapid The hardest shifts in industrial policy, energy systems, decarbonization. The decisions by government, and consumer behavior would get underway by this regulators, business, industry, and consumers point. This would be the decade in which economies, would reinforce initial progress and create the businesses, and industries began to see the market conditions to deliver decarbonization consequences of bold climate plays, with different at pace and scale. This would send price signals, industries and regions transforming at different paces. transform supply chains, and lay the foundation Taiwan’s new energy sector would continue for a structural shift that limits global average to experience significant benefits as momentum warming to 1.5ºC. continued to grow and emerging technologies Due to its bold climate plays, several areas of matured. Efforts to target harder-to-abate emissions Taiwan’s economy could reap early benefits. As from the transport sector would get underway, it reduced and targeted easy-to-abate emissions, as alternative fuel sources such as hydrogen its clean energy industry would thrive. Following and biofuels proliferated. New global supply chains the success of the Four-year Wind Power Promotion would emerge to meet the energy needs of Taiwan Plan and the Two-year Solar Promotion Plan, and other nations. momentum would build and investment would This transition period would generate more shift toward new renewable electricity projects. pronounced structural costs for Taiwan’s economy. Taiwan’s new energy sector would also benefit from While navigating this transition, conventional energy, advances in technology, the falling costs of existing manufacturing, and transport would face the largest technologies, and markets switching from fossil fuels share of costs, some of which would be attributed to renewables for electricity generation. to switching to hydrogen and biofuels. Sectors such as construction, transport, retail and tourism, and services would all enjoy small net gains as a result of falling electricity costs and investment in new infrastructure.

38 The economic gains of rapid decarbonization

Turning Point A Low-Emission Future from 2035 to 2045 after 2045 Our model suggests the decarbonization Beyond 2045, our model predicts Taiwan’s economy adjustments in industry should be almost complete would be near net zero emissions and global by this period. The cost of new low-emission economic systems of production would keep technologies would continue to decrease and global average warming to around 1.5°C by the net economic gains would be more widely shared. end of the century. Economic structures would This is when the material benefits of limiting global be radically transformed, underpinned by a series average warming through decarbonization would of interconnected, low-emission systems spanning be likely to materialize, in the form of a 0.13°C energy, mobility, manufacturing, and food and average difference in the global mean temperature land use. in the decade leading up to 2045, compared The energy mix would be dominated by low- or to the RCP 6.0 baseline. zero-emission sources across every market, with This would be the climactic and economic green hydrogen, biofuels, and negative-emission turning point, preventing the shift to a “locked solutions, both natural and technological, playing in” higher-emission pathway while realizing prominent roles. the economic dividends of systems-level This period would see remarkable growth for transformations. Hydrogen and biofuels would Taiwan—its new supply chains established, its continue to grow in prominence, and renewables- energy sources and industries transformed, powered electricity generation would stabilize. and its economy aligned to a new growth trajectory. Key areas of the economy—such as retail and Historically significant aspects of Taiwan’s economy, tourism, construction, and upstream services— such as manufacturing and services, would gain would begin to benefit from lower-cost energy significantly from productivity improvements and and avoided climate damage. lower costs—and by avoiding climate damage that As in the prior period, industries such as conventional would have existed in a world of unconstrained energy, manufacturing, and transport would continue emissions. Compared to a future in which no to absorb structural costs. But there would also be action is taken to address climate change, Taiwan’s new winners: the agriculture and forestry industry economy would experience annual net economic would begin to benefit, partly due to the greater gains of more than 10 percent by the late 2070s. prevalence of biofuels and an increase in domestic demand for plant matter.

39 Taiwan’s turning point

Endnotes

1 Risk Management Solutions Inc. (2000). Event Report–Chi Chi, Taiwan Earthquake; Statista. (2021). Taiwan: Gross Domestic Product (GDP) in current prices from 1985 to 2025. 2 Yahoo! Finance. (2021). Hon Hai Precision Industry Co. Ltd. 3 Bank of England. (2019). How has GDP growth changed over time? 4 Friedlingstein, P. et al. (2020). “The Global Carbon Budget 2020.” (2020)12, Earth System Science Data. 5 The World Bank. (2021). World Development Indicators.

40 Endnotes

6 IPCC. (2014). Climate Change 2014 Synthesis Report: Fifth Assessment Report (AR5), IPCC. (2018). Global Warming of 1.5°C. 7 Bank of England. (2019). How has GDP growth changed over time? 8 Asian Development Bank. (2017). Promoting Ecosystem Services and Forest Carbon Financing in Asia and the Pacific. Asian Development Bank; WWF. (2012). Ecological Footprint and Investment in Natural Capital in Asia and the Pacific. WWF; IPCC. (2007). Asia. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Rasul, G. (2021). “Twin Challenges of COVID-19 Pandemic and Climate Change for Agriculture and Food Security in South Asia.” (2021)2, Environmental Challenges. 9 IPCC. (2014). Climate Change 2014 Synthesis Report: Fifth Assessment Report (AR5). 10 Risk Management Solutions Inc. (2000). Event Report–Chi Chi, Taiwan Earthquake; Statista. (2021). Taiwan: Gross Domestic Product (GDP) in current prices from 1985 to 2025. 11 Mien-chieh, Yang. (2020). “Taiwan faces watery future: Greenpeace.” Taipei Times, 25 August 2020. 12 Ibid. 13 Lin, C. et al. (2017). “Climate variability of heat wave and projection of warming scenario in Taiwan.” (2017)145, Climatic Change. 14 International Energy Agency. (2019). China Power System Transformation, Technology report. 15 Taiwan Environmental Protection Administration. (2020). Carbon pricing options for Taiwan. 16 International Carbon Action Partnership. (2021). Taiwan, China. 17 Chang, C. (2020). “Taiwan to boost renewable energy to 20% by 2025, introduce trillion-dollar investment.” Taiwan News, 27 February 2020. 18 Yahoo! Finance. (2021). Hon Hai Precision Industry Co. Ltd.

41 Taiwan’s turning point

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