INDONESIA: Investing in Climate, Investing in Growth

Key Messages:

·       The 1.5 degree Celsius (°C) rise compared to 2°C provides a host of benefits and avoided impacts.

·       The economy in a 1.5°C rise will be in better shape than in a 2°C —increasing wealth and preventing further deepening of inequalities. Costs will be lower for public health and climate adaptation. There will also be less of: extreme climatic events (heat waves, high intensity rainfall, hurricane, sea level rise, and flood), and long-lasting or irreversible impacts, e.g. the loss of some ecosystems.

·       Climate change impacts in Indonesia have been projected to decrease the country’s gross domestic product (GDP) by 2.5% to 7%, by the end of the century.

·       The Government of Indonesia (GOI) has integrated public low-carbon and climate adaptation/resilience investments in the Country’s development. The private sector, financial market, and state owned enterprises (SOEs) in the Country have addressed climate investments through direct implementation of low-carbon technologies and adaptation/resilience measures, issuance of green bonds and sustainable and responsible mutual fund, corporate social responsibility (CSR), and public-private partnerships (PPPs).

·       A conservative guesstimate on climate investments in the country in 2020 will be, USD 3.1 billion annually, which will cover 33% of investment based on the Intended Nationally Determined Contribution (INDC), and 14% if consistent with the Paris Agreement (PA) target (below 2°C). Climate finance gap will further increase for 1.5°C consistent pathways, roughly estimated at 3 - 4 times the costs of below 2°C.

·       The potentials to reduce the climate finance gap in Indonesia are, 1) GOI’s Low Carbon Development Initiative (LCDI), and 2) embedding climate actions in the government’s expenditures on infrastructures and regional and village funds. Also, IPCC has further advocated for global policy tools to address climate resource gaps in a key climate negotiation document, the “Special Report on 1.5°C”.

·       Economic study has not been availed for a 1.5 °C scenario. For below 2 °C scenarios in the Group of 20 countries (G20), an increase of GDP is estimated at 2.5%, and 4.6% with climate damages included.

In October, the United Nations Intergovernmental Panel on Climate Change’s (IPCC) dispatched a report unveiling the pressing needs for a large scale reduction of greenhouse gas (GHG) emissions to limit temperature rise to 1.5 degree Celsius (1.5°C). Responses to the report ranged, from the resolute of Patricia Espinosa, Executive Secretary of the UN Climate Convention (UNFCCC) who twitted about the report as “a clarion call to maintain the strongest commitment”, to the pessimistic of Drew Shindell, one of the report’s leading writer, spoke to the Guardian on the remote possibility of ever reaching the 1.5°C limit.

The release of the IPCC Special Report which assesses a 1.5°C temperature rise (SR1.5) in Earth’s average surface temperature above the pre-industrial level, will likely consolidate the present climate goal of “well below 2 degree Celsius (2°C), and to pursue efforts to limit it to 1.5°C”. As defined by the IPCC, a 1.5°C consistent pathways are carbon budget scenarios with probabilities of 50 – 66% of staying below 1.5°C, by 2100. The “well below 2°C” is a political consensus, with no scientific definition found, and as speculated by Glen Peters’ in Energi and Klima is pathways with 66% probability of staying below 2°C. Meanwhile the world’s efforts are alarmingly inadequate in addressing the goal. Climate Action Tracker reported the present climate efforts are putting the world to between 3.1 to 3.7 °C, by 2100.

The Special Report, distilled from more than 6000 scientific studies, focuses in communicating impacts of 1.5°C versus 2°C rise. "Limiting global warming to 1.5°C compared with 2°C would reduce challenging impacts on ecosystems, human health and well-being" said Priyardarshi Shukla, Co-Chair of IPCC Working Group III. However, SR1.5 also informs that climate-related risks for natural and human systems are higher for global warming of 1.5°C than at present. The economy in a 1.5°C rise will be in better shape than in a 2°C —more wealth can be created, while also preventing further deepening of inequalities. Costs will be lower for public health and climate adaptation. There will also be less of: extreme climatic events (heat waves, high intensity rainfall, hurricane, sea level rise, and flood), and long-lasting or irreversible impacts, e.g. the loss of some ecosystems.

The multitude of climate change impacts in Indonesia have been projected to decrease the country’s gross domestic product (GDP) by 2.5% to 7%, by the end of the century—as assessed by the Asian Development Bank (ADB). As projected by the report, “Pursuing a 1.5°C Rise, Benefits & Opportunities”, the country could experience a reduction in annual GDP growth by at least 50% by the 2040s due to climate change, if compared to no climate change. A study by the French Development Agency (AFD) and Japan International Co-operation Agency (JICA) found that the greatest climate change impacts will also fall on the poorest people, especially those dependent on climate-sensitive livelihoods, such as agriculture and fisheries, and those living in areas prone to, for example, drought, flooding or landslides. The impacts are likely to be socially as well as economically divisive, disproportionately affecting the poor, women and female-headed households, families with a large number of children, and ethnic minorities. Those population groups often lack the necessary capacities to adapt, buffers against shocks, and capacities to recover.

Climate change directly challenges Indonesia’s development aspirations — both by presenting different opportunities and prospects for the future while also putting the Country’s past development gains in jeopardy (AFD & JICA).

The Government of Indonesia (GOI) has integrated public low-carbon and climate adaptation/resilience investments in the Country’s development. The private sector, financial market, and state owned enterprises (SOEs) have addressed climate investments through direct implementation of low-carbon technologies and adaptation/resilience measures, issuance of green bonds and sustainable and responsible mutual fund, and corporate social responsibility (CSR). Public-private partnerships (PPPs) investments on climate actions have also been facilitated by development agencies/financial institutions.

Indonesia’s Third National Communication to the UNFCCC (TNC) projected climate mitigation and adaptation investments, to 2030 at, USD 81 billion. Those investments will under the right conditions help and be a part that creates potentially larger climate-smart investments at USD 274 billion, as projected by the International Finance Corporation (IFC).

A conservative guesstimate on the volume of existing climate investments in the country, and with the assumption of a new climate finance regime that starts in 2020 will be, USD 3.1 billion annually.  The guesstimate is calculated and adjusted to 2020, based on data from 7 sources: Kemitraan, TNC, Ministry of Finance, BAPPENAS, Climate and Development Knowledge Network, United Nations Development Program, and indonesia-investments.com. The amount will cover 33% of the required annual climate finance needed in 2020 (USD 9.4 billion) based on the TNC document. The costs are estimated  based on Indonesia’s climate goal (which is not consistent with the global climate goal of “well below 2°C…”).

The climate finance for the below 2°C scenario that is consistent with the Paris Agreement Goal has been estimated by the Deep Decarbonisation Pathway Project (DDPP) for Indonesia. Annual finance needed was estimated at, USD 21 billion, in 2020 (based on climate adaptation estimation in the TNC, and the mitigation costs from DDPP). Projected climate finance based on existing fund volumes and sources will only cover 14% of climate finance in the below-2°C pathway. The IPCC made a rough estimation of 1.5°C consistent mitigation pathways which are 3 -  4 times the costs in 2°C. Although costs are country/region specific, those pathways will increase further the climate finance gap in the Country.

Yet, there are potentials to at least reduce the climate finance gap in the Country. Climate compatible components will be integrated more coherently in Indonesia’s development expenditures, as the country embarks on the Low Carbon Development Initiative (LCDI) in its next five-year development plan (2020-2024). LCDI will be led by BAPPENAS with a focus on sectors with the most emissions—energy and land use. These potentials can be harnessed as it does not need to cost much more to ensure that new infrastructure is compatible with climate goals, according to the World Bank (WB) and the New Climate Economy (NCE). Similar in trait to Indonesia's LCDI, Oxford Policy Management (OPM)-led Action on Climate Today has been working with sub-national governments in India and Nepal to integrate climate change into planning and budgeting, and showed possibilities to use existing resources more effectively. The mainstreaming of climate change into a broader budget emphasised the cross-cutting relevance of climate change to development policy.

In perspective, the magnitude of potential low-carbon development that can be embedded in the country’s expenditure is, (a part of) USD 77 billion. That has been based on the current (2018) GOI’s 2018 expenditure allocation for sectors that have the greatest need to be climate-friendly (infrastructures, and fund transfers to regional governments and villages).

To further consolidate climate actions, the Country still needs to address various shortcomings in climate finance mobilization, from market and non-market sources (public, private, and development; domestic as well as international).

The TNC document discussed climate finance programmatic gaps as they relate to the public, intergovernmental, and multilateral institutions sources. To bridge such gaps, the German Development Agency (GIZ) has developed the approach ‘Ready for Climate Finance’ to support capacity building in climate finance—through enhancing planning and financial governance to access international climate finance, and enhancing private sector engagement.

GOI, besides fulfilling its roles to finance climate related actions as a public service obligation, has also paved the route toward sustained climate change responses through enhancing climate/sustainability related capital flows and investments. These are by, establishing the Indonesia Climate Change Trust Fund (ICCTF), enabling Indonesia Financial Services Authority’s (OJK) capacities, enhancing policy framework for climate investments, issuing of government green bonds, and implementing public-private partnership projects.

ICCTF links international public and private finance sources with national investment strategies—in stages, from grant-based investment to eventual market penetration and revenue generation, as described by Frankfurt School-UNEP’s report. Indonesia Financial Services Authority’s (OJK) technical capacities and governing authority are especially essential in the creation of an enabling policy environment to mobilize private investments in climate actions from, financial institutions and institutional investors in the capital market. The sustainable finance roadmap developed by OJK details work plan to achieve a goal on sustainable finance in the Country for the financial service industry. Paving the way for a systematic implementation, OJK is developing an umbrella policy to provide practical guidance to Indonesia financial sector on sustainable finance, the mapping of priority sectors, and an action plan for banking, the capital market and non-banking sectors, as revealed by IFC. Technically, OJK is building the capacity of financial market actors, developing green financing products, and engaging relevant ministries in developing financial schemes for industrial sectors. While in terms of governance, in 2017, OJK has issued a regulation requiring banks to develop action plans for sustainable financing and report their green financing.

GOI has provided fiscal and non-fiscal incentives, as conveyed by IFC and the Climate Bonds Initiative (CBI), an international, investor-focused not-for-profit. Significant steps have been taken over the past few years to improve Indonesia’s policy framework—13 separate pieces of legislation from 2012 to 2015 in areas such as permitting, licensing, purchasing policies, and feed-in-tariffs for renewable sources of energy, along with support for green buildings. Other fiscal and non fiscal policies are, a tax holiday for certain business types and those in the special economic zones, and tax allowance for selected business sectors, credit enhancement for PPPs and SOEs in the form of sovereign guarantees and the provision of subsidies for PPPs. The fiscal incentives are complimented by simplified regulation to enhance the ease of doing business, e.g. fast track processing, and the removal of a minimum investment threshold, and improvements to the government’s PPP regulations for infrastructure.

A number of green investments have been initiated in 2012, on renewable energy, transportation, and  waste management, which are worth about USD 150 million. Banking institutions, private businesses, an SOE, Finland government, and international development agencies have been involved in the above partnerships, as reported by Kemitraan.

The flow of climate capital has been enhanced with the issuance of green bonds and a mutual fund product by GOI, SOE, as well as a banks (OCBC-NISP and DBS Bank). Present green bonds issued have/will obtain about USD 4.2 billion. A large portion is the Islamic law compliance green bonds (sukuk), at USD 4 billion. Relatively long tenor periods of the bonds (5 – 10 years) can accommodate longer term financing of climate projects. Also, the first mutual fund themed on sustainability ("Sri Kehati") has been launched in Indonesia in 2017 by the DBS Bank with a capitalization of USD 223 million.

Green bonds have also gained a significant momentum in the financial market, and are growing exponentially, reported CBI. According to CBI, the bonds can have comparable returns, and satisfy Environmental, Social and Governance (ESG) requirements for sustainable investment mandates. Quoting Eric Raynaud, CEO, Asia Pacific, BNP Paribas: “[Green bond issuance] is proof that financial institutions can generate socially beneficial outcomes when we really work hard [&] our institutional investor clients have the appetite to invest in projects and companies that combine commercial and financial performance with clear environmental and social purpose and impact.”

Another potential significant climate finance is the Reduced Emission from Deforestation and Forest Degradation (REDD+) scheme with finances sourced from public, private, bilateral and multilaterals. According to the TNC document, there are about 37 REDD+ related Demonstration Actions (DAs)/pilots/projects/ activities, implemented with a variety of approaches, scales, scopes, time periods, extent and methods, and are distributed in 15 provinces. While the Country has significant forest and peat-land carbon stock, REDD+ implementation has been challenging. While it cannot be generalised for all projects, a study by Enrici and Hubacek in Ecology and Society, found significant challenges that had been encountered: operational financing for a project tied to a result-based payment scheme, overlapping project boundaries with other land uses, project areas encroachments, stakeholders’ fatigue due to a long time lag between project preparation including pitching and its initiation, perceived scant/non-existent benefits by community stakeholder, carbon markets that might not readily absorb emission reduction credits from REDD+ scheme, and in designing appropriate business models.

Projects under the UNFCCC's Clean Development Mechanism (CDM) scheme (a carbon compliance market) have also been developed in the Country with 152 projects, by 2014, and worth billion of US dollar. Fund generation from CDM however is uncertain, as the Mechanism may be phased out in 2020, along with the Kyoto Protocol.

Indonesia is also involved in a number of other carbon emission reduction financing schemes. There are more than 60 projects across sectors—energy, forestry, and waste management—in Voluntary Carbon Standard, Joint Crediting Mechanism, Gold Standard, and Plan Vivo schemes, as presented by Indonesia Coordinating Ministry of Economic Affairs.

The carbon credit pricing looks to gain a positive momentum in anticipation of Paris Agreement consolidation in December’s Conference. The IPCC’s SR1.5, a key document in the upcoming Conference, produced high confidence analysis results stating the necessity of a high price on emissions in models to achieve cost-effective 1.5°C consistent pathways—being about three to four times higher compared to pricing of the 2°C warming scenario. Further, according to the NCE, most carbon pricing that is now in place are too low to drive transformational change.

Other avenue for private-commercial climate investments is the industry sector through policy on Green Industry Standards (GIS’s). The Indonesia's Ministry of Industry has ratified GIS’s which assess GHG emissions, and further the “cradle to grave” life-cycle of manufactured products, for 8 industry types, and is developing on more types. The adoption of the standards is voluntary, but will be compulsory although there is no confirmed implementation timeline.

Climate actions cross-cut Sustainable Development Goals (SDGs) and Targets, and are mutually consolidating. Complimentarily, sustainable development supports, and often enables, the fundamental societal and systems transitions and transformations that help limit global warming to 1.5°C, as analysed by the IPCC’s SR1.5. There are thus opportunities for financing effectiveness in the integrated implementation of the Paris Agreement’s and SDGs’ agenda.

Meanwhile IPCC is also advocating for global policy tools which support decisive actions to address global gaps in climate action resources. The SR1.5’s high confidence result of analysis calls for policy tools to assist in the mobilisation of resources, including the shifting of global investments and savings and through market and non-market based instruments.

Study has not been availed on a 1.5 °C scenario. Meanwhile below 2 °C  scenarios in the Group of 20 countries have been estimated by the Organisation for Economic Cooperation and Development, to increase GDP by around 2.5%, and 4.6% when climate damages are accounted for.

In a July's speech, Patricia Espinosa urged climate actions in the midst of a critical point in history, as our window of opportunity is rapidly closing. NCE is calling for similar urgent response in policy and investment decisions in the narrow window spanning 2-3 years from now. Decisions in that time span will be crucial in shaping the next 10—15 years. The Global Commission on the Economy and Climate stated that the benefits of climate action are greater than ever before, and that decisive shift will unlock unprecedented opportunities to deliver a strong, sustainable, and inclusive global economy.