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Economic Governance & Public Financial
Management for Climate Change Policies in
Indonesia
Policy research paper for
The 5th CRISU-CUPT Conference
Chiang Mai, 8-9 July 2010
Efa Yonnedi (Andalas University)
Kurnya Roesad (Australian National University)
Frank Jotzo (Australian National University)
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I. Introduction
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Research questions

How can Indonesia’s central government structure its economic
governance framework to better tap into international carbon finance?

How do regions benefit from carbon finance flows?
Methodology

Interviews

Review of policy documents, market data etc.

Jakarta and Sumatra components
Funding

Australia-Indonesia Governance Research Partnership (AIGRP)
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Additional funding from Environmental Economics Research Hub,
ANU
2
International climate policy and carbon
finance and why it matters to Indonesia

A sophisticated international climate policy and carbon
finance architecture is evolving

Post-Kyoto mechanisms: scaling up, broadening out – the
economic crisis may not deter for long

Indonesia: large potential for reducing emissions exists,
but other domestic policy objectives take precedence
3
The Carbon Finance Framework
Global Financial Flows
Bilateral
Multilateral
Private Investment
International Financial
Institutions (IFIs)
ODA
UNFCCC
Global Mechanisms
CDM
Global Environmental
Facility
Capital Markets
Adaptation
Fund
GOI
National Mechanisms
Private Sector
Voluntary & CSR
Mitigation & Adaptation
Budget
Regional Mechanisms
CDM
REDD (and
other)
Local Government and Investment Community
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The Clean Development Mechanism

Global project pipeline
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Largest project categories: industrial and energy
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expected offset credits 2,700 MtCO2-equivalent by 2012
prices: > 10 euro/t, total revenue > $ 40 billion to 2012
Industrial gases, hydro, energy efficiency, landfill gas, fuel switching,
biomass
CDM excludes deforestation, very limited in forestry
Indonesia’s CDM share


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Pipeline: 40 Mt = 1.4% of total
Comparison: Indonesia 2.8% of developing country emissions excl
deforestation and agriculture
Reduction potential much greater than realised under the CDM
An issue of CDM coverage and procedures, and investment climate
5
50
Global CO2 emissions, business-as-usual
40
Annual emissions, GtCO2
Post-2012
necessities
30
20
10
other
USA
other
India
50%
China
0
1990
1995 2000 2005 2010 2015 2020 2025 2030
Source: Garnaut, Jotzo & Howes China Update 2008

Substantial emissions reductions in developing countries must
be achieved to limit climate change

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Emerging global goal 50% reduction by 2050
Developing countries around half of global emissions right now, and
growing fast (combustion emissions growth >5% pa)
Developing countries must be comprehensively involved

Will require support from high-income countries
6
Post-2012 proposals
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Bali Roadmap
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‘measurable, reportable and verifiable nationally appropriate mitigation
actions’
sectoral agreements, deforestation (‘REDD’)
financing, technology transfer
Policy proposals (Stern, Garnaut, many others)
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Comprehensive commitments/targets for developing countries ASAP,
supported by international trading
Effective sectoral agreements fast
Create incentives to slow deforestation fast
Improve the CDM
Provide substantial funding for technology development and diffusion
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Indonesia CO2 emissions: history and a
business-as-usual future
2500
2000
Land-use change
and forestry
1500
1000
Fossil fuel
combustion
500
Mt
CO20
/year 1990
1995
2000
2005
2010
2015
2020
2025
2030
Large potential for mitigation in Indonesia,
if policy frameworks are broadened

Electricity supply
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South Sumatera expansion plan for new coal plants:
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23,000 MW by 2015, 36,000 MW by 2025
implies roughly 100 MtCO2 by 2015, 160 MtCO2 by 2025
Compare CDM pipeline: ~8Mt/year to 2012
Industry: many options for energy savings

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Power consumptions grows at around 7%pa, limited by supply capacity
Expansion largely in coal-fired plants: 10,000 MW crash program
Currently: ca 29,000 MW capacity, emissions 96 MtCO2, ca half of electricity
output from coal, emissions 61 MtCO2
eg cement plants – Semen Padang
Deforestation remains the big emissions source in the medium term
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Mainstreaming climate change into the
national economic governance framework

Indonesia’s climate change policy framework still
evolving: complex coordination issues and competition for
leadership

Integration beginning, but no clear low carbon
development strategy or consistent climate finance
approach – yet

Potential institutional overlaps: policy dialogue, climate
finance and donor coordination to be resolved
10
The Climate Change Policy Framework
Ministries
Key Policy Documents
Bappenas
Long-term Development Plan
(RPJP) 2004-2025
Coord. Economy
Medium-term Development
Plan (RPJM) 2009-2014
Coord. Welfare
National Development
Planning: Indonesia’s
Responses to Climate Change
Environment
National Action Plan
Addressing Climate Change
Forestry
National Strategy on Forestry
and REDD
Mines & Energy
National Energy Strategy
Finance
Budget process
National Climate
Change Board
Reports to President
Gov. Work Plan
(RKP) 2010
Annual Budget
(APBN)
Implementation
Provincial and
local governments
Foreign Financing /
Grant/ Loan
Donor Agencies
Practical barriers to carbon finance

To date mainly projects under the CDM, but the record
falls short of overall emissions reduction potential

Sumatra case studies: investment climate, capacity and
information especially of local governments, regulatory
uncertainties (land tenure!)

National policies on energy an electricity not conducive
for carbon finance: fuel subsidies, electricity tariffs.
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Strategically, low carbon economy path in
Indonesia:
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Adopting ‘green’ taxation and fiscal policies
aiming to reduce fiscal and energy price
distortions.
Incorporating carbon finance into public and
private investment decisions.
Engaging internationally to shape post-2012
climate investment architecture
13
Institutionally, Indonesia:
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A clearer division of labor between policyformulating and budget/finance coordinating
agencies.
Clarify the role of the new National Climate
Change Council (DNPI), especially with regard to
its role as a policy-formulating agency.
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CDM-specific reforms:
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Develop a national CDM plan (linked to an overall low carbon growth strategy) and
identify key sectors and programs (e.g. renewable power like geothermal, hydro or
nationwide landfill gas flaring)
Consider establishing a public carbon investment or program agency to facilitate
program implementation, speed up CDM application, monitoring and verification
procedures, clarify trading and ownership of CERs.
Raise awareness in financial/banking sectors to increase lending to CDM projects
Keep improving the general investment climate, as CDM investments are like any
other investment flows which respond to sound incentives and transparent governance
regimes
Improve the communication flow between central government and regional
government on carbon finance investment opportunities
Increase CDM training programs for regional and local policymakers
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Main Story and Key Messages


International level
Scaling up and broadening international carbon finance
Comprehensively engage developing countries in mitigation effort

National level
Integration of climate change policy into economic policymaking
Policy coordination roles still evolving
Carbon finance regime is limited to CDM projects
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Regional level
Significant barriers to CDM and carbon finance more broadly
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Policy Outlook
Need broader policy and financing framework
Need clear economic incentives at all levels
Need sound domestic investment climate
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
Terimakasih
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Appendix
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Bureaucracy: CDM project cycle
10. End of contract
period (may be post2012)
9. Certification and
Issuance
1. Project Identification Note
plus financials (1 month),
2. Project Design
Document (2
months)
3. Bank Project due
diligence
(environmental and
social safeguards)
8. Verification
4. Validation (4 months)
7. Construction and start
up
6. Project Registration 5. Negotiate and sign
Emission Reductions
Purchase Agreement (ERPA)
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Project sponsor
Accredited CDM
auditor
CDM Executive Board
ENVCF/Region
Indonesia’s GHG Emissions Sources
Energy
Forests / Land Use
Projected Growth Stable Or
Declining
Data Source: IFCA (2007)
Prod’n
Above
Ground
Deforest
107
Planned
"Conversion"
100
Prot’d
19
Peatland
Deforest
Forests
/ Land
Coal
Pulp
55
88
Palm
50
43
Peat Drainage
(not REDD)
Peat Fires
(not REDD)
Total
Strong Fossil Fuels Growth
Data Source: IEA 2004
19
143
93
Gas
Emissions
Growth
'94-'04
Total
Industry
31.9
35.4
50.7
118
48%
231
Electricity
54.9
25.2
9.9
90
170%
100
Transport
78.0
-
78
74%
131
Resident
41.0
9.0
50
71%
469
Total
179.6
69.6
336
80%
1,260
207
Oil
2,191
86.8
All figures in MtCO2e. Forest data are
compiled from various years
20
Barriers: Distorted Energy Prices
Central government expenditure
components (percent of GDP in 2005)
Transfer to Regions 30%
(151 trn IDR)
Fuel Subsidies 15% (75 trn IDR)
Non-Fuel Subsidies 2% (12 trn IDR)
Fuel Subsidies Electricity Sector 4%
(21 trn IDR)
Social Assistance 5%
(24.2 trn IDR)
Subsidies 24%
(120.7 trn IDR)
Non-Fuel Subsidies Electricity Sector
3% (13 trn IDR)
Entry barriers to investment in
power sector:
Interest
Payments 11 %
(58 trn IDR)
Others 6%
(31 trn IDR)
Material
Expenditures 6%
(33 trn IDR)
Capital Expenditures
7% (37 trn IDR)
Personnel Expenditures
11% (
56 trn IDR)
Fixed fuel subsidies and electricity
tariffs do not provide clear price
signals
Causing overconsumption
Provides less incentives to innovate
and invest in renewable energy
21
Source: Compiled from World Bank (2007)
Increased Environmental Expenditures
bn IDR
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1.4%
1.2%
1.0%
0.8%
0.6%
RKP 2009: around 1.7
trn IDR allocated to
climate change actions
with Public Works
(23%) and Ministry of
Forestry (21%)
claiming the biggest
shares.
0.4%
0.2%
0.0%
2001 2002 2003 2004 2005 2006 2007
National nominal environmental expenditures
Environmental expenditures as % of total expenditures
22