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INDONESIA'S TRANSITION TO GREEN ECONOMY

MANDALA CONSULTING, APRIL 18, 2023

Defining green economy

A green economy prioritizes human well-being, social equity, and reduces environmental risks. Three pillars characterize it: sustainability/ environmentally friendly, resource efficiency, and social inclusivity. The “greenness” of a country is determined by its NDC targets, policies, and measures in alignment with global climate goals. Currently, Indonesia ranks as highly insufficient in achieving these goals.

Why Indonesia needs to transition to green economy

Indonesia must transition to a green economy due to:

  • High contribution to global climate change as a top ten emitter, with potential for significant emissions increase as a high-income country.
  • Costly impacts of climate change, estimated at 2-5% of GDP, particularly affecting vulnerable populations.
  • Positive economic opportunities in the long run, including potential GDP growth of 6.5% and creation of 2.8 million green jobs, with potential cost coverage from the Government, private sector, and international community, as per a Bappenas study.

Current state of Indonesia’s green economy

Indonesia has committed to emission reduction targets in line with its Nationally Determined Contributions (NDCs), but planned policies and actions are projected to result in rising emissions. The country’s mitigation plan is rated as “highly insufficient,” and no explicit net zero target has been communicated.

Current policies & measures that support transition to green economy

Indonesia’s policies and measures impacting every sector of the economy and three major emission-contributing sectors (power, manufacturing, transportation) can be summarized as follows:

Fiscal policies: Indonesia has integrated climate change aspects into its National Medium Term Development Plan (RPJMN) 2020-2024, implemented climate budget tagging for issuing global green bonds/sukuk, and initiated carbon pricing in the coal power sector. However, there are still environmental degradation risks due to subsidies for ‘brown’ sectors like fuel and electricity.

Investment policies: The new omnibus law has made investment in Indonesia easier, but has also reduced or eliminated environmental restrictions, such as requirements for forest preservation by developers and relaxed environmental permit requirements, posing risks to the environment.

Financial policies: The Financial Services Authority (OJK) has set a roadmap for sustainable financing and introduced a green taxonomy to promote green financing and. However, there is room for further enhancement of financial regulations, particularly in prudential measures for the banking sector.

Institutional framework: Sectoral coordination for green transition is lacking, with blurred responsibilities among ministries, such as Bappenas, KLHK, and Kemenko Marves. Coordination between central and local governments is also not comprehensive, with each ministry having its own initiatives without a coordinated plan. Technical studies supporting green transition need better incorporation into integrated policy making.

Current state of Indonesia’s green economy

  • Power, Manufacturing and Transportation sector accounts for 33%, 28% and 17% of emission share respectively. Achieving emission reduction target for these three sectors contributes to 90% of total Indonesia’s emission reduction target
  • Power sector:
    • Indonesia’s emission from the power sector is still high (804 gCO2/Kwh vs 409 OECD average) because fossil fuel sources still dominate the generation mix (85%, with 60% from coal)
    • In the Long Term Strategy for Low Carbon & Climate Resilience (LTS-LCCR), Indonesia commits to make 52% generation mix from zero carbon emission sources (according to LCCP scenario), however among the three scenarios, GoI has not set a fixed scenario
    • As a result, this plan is not aligned with RUEN and other power planning documents, such as RUKN and RUPTL – revisions are required in the planning document to reflect the goals
    • Indonesia enacted a new law on rooftop solar panels that will support its growth, however for grid based renewable energy, the current average Cost of Generation (“Biaya Pokok Pembangkitan”/ BPP) regulation still remains a major hindrance for the development. In the BPP regulation, renewable energy price is capped at 85% of local BPP or national BPP, a tariff uneconomical to develop renewable energy
    • A new renewable energy law is under discussion – under the new law, it is expected that new tariffs scheme and other incentives are provided to boost renewable energy development
  • Manufacturing:
    • Most of manufacturing emission comes from cement, ammonia, iron & steel, and pulp & paper industry
    • We view that government strategies to reduce emission in manufacturing sector (e.g. cement blending, revitalization of fertilizer plants, utilization of waste) can be highly effective, but unfortunately it has low share on the total emission reduction target
    • There are other policies that does not support emission reduction, such as natural gas price for selected industries, i.e. subsidy of natural gas is given to high emitting sectors
  • Transportation:
    • 99% of total transportation still uses fossil fuel, with land transportation accounts for the biggest emitter
    • GoI has set three major policies in the sector:
      • Biofuel: currently 30% of biofuel has been successfully implemented by the GoI, with a vision to increase further to 40%, even though palm oil supply becomes a major challenge
      • Mass transport: only 20% of commuters in Indonesia uses mass transportation (vs 70% in Japan) – GoI has pushed for rail transportations (MRT and LRT) to encourage people to use more mass transportation and launched Sutri NAMA (Sustainable Urban Transport Nationally Appropriate Mitigation Action) projects out of Jakarta to reduce emissions from urban transport
      • Electric Vehicles: According to the Ministry of Industry, Indonesia is still focused on Internal Combustion Engine development – a first horizon in the EV plan. Subsequently, Indonesia will develop local EV motorcycle, before shifting to local EV cars in the third horizon

Challenges and Opportunities in the three focused sector

Sector Challenges Opportunities
Power
  1. Slow adoption of renewable energy due to lack of investment, uncompetitive tariff scheme, logistical challenges, and lack of incentives.
  2. Coal lock-in with majority of coal power plants being less than 10 years old, long operating years, and power purchase agreements insulating coal producers from market prices.
  3. Technical grid problems requiring investment for accommodating massive renewable energy generation
  1. Cost-lowering trend of some types of renewable energies.
  2. Institutional investors showing less appetite for fossil fuel investment and more environmentally friendly and clean energy
  3. Development outside traditional economic centers driving up demand for electricity in regions with historically low demand.
  4. Introduction of carbon pricing potentially changing behavior and creating a level playing field for renewable energy development.
Manufacture
  1. Insufficient environmental disclosure with low practice standards.
  2. Lack of disincentives for environmentally unfriendly practices, with increased emissions leading to higher financial returns.
  3. Limited interest in Green Industry Certificate (SIH) due to limited scope and benefits.
  1. Circular economy practices to generate sustainable economic growth and achieve emission reduction targets.
  2. Fuel substitution from coal to biomass/waste in industries like cement with potential for emission reduction at low abatement costs.
Transportation
  1. Challenges for Electric Vehicle (EV) development including supply (batteries, charging stations) and demand (higher prices compared to Internal Combustion Engine vehicles).
  2. Continuation of Biofuel 30 (B30) policy with challenges in land replantation, social conflict, and subsidies.
  3. Shift from mass transportation to ride-hailing services due to perceived slow services of mass transportation.
  1. Collaboration with international partners on EV development and potential for lower Total Cost of Ownership compared to fuel/ICE vehicles.
  2. Policy benchmarking from other developing countries like China with more developed EV policies.
  3. Moratorium on new land for palm oil plantation ensuring emission reduction from B30 expansion.

Addressing these challenges and leveraging opportunities can help Indonesia achieve its eco-friendly/ green transition goals and work towards net zero emissions in the power sector, manufacturing sector, and transportation sector. It will require coordinated efforts from the government, private sector, and other stakeholders to drive investments, policy reforms, and innovation in sustainable technologies and practices.

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THE PURPOSE OF THIS DOCUMENT IS TO PROVIDE GENERAL INFORMATION ABOUT INDONESIA'S TRANSITION TO A GREEN ECONOMY. THE CONTENTS OF THIS DOCUMENT SHOULD NOT BE CONSTRUED AS SPECIFIC RECOMMENDATIONS OR ADVICE. FOR QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT, PLEASE CONTACT MANDALA CONSULTING. THE INFORMATION IN THIS ARTICLE IS ACCURATE AS OF THE PUBLICATION DATE. HOWEVER, DUE TO THE RAPIDLY CHANGING NATURE OF THE LAW IN INDONESIA, THE ACCURACY OF THE INFORMATION CANNOT BE GUARANTEED WITHOUT UPDATES.

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