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Fiscal Policy towards an Inclusive Green Economy in Indonesia Expert Dialogue on the Quality of Growth Bangkok, 14-16 November 2012 by LAKSMI DHEWANTHI MINISTRY OF ENVIRONMENT OF THE REPUBLIC OF INDONESIA 1 Why Quality of Growth matters? for Indonesia Indonesia is a developing country with GDP per capita of US$ 3.500, with the following major environmental challenges: 1. 2. 3. 4. 5. 6. 7. Population will increase from 238 mil.(2011) to 316 mil. (2050); 80% are living in Jawa & Sumatra, 60% lives in urban coastal areas, many of them low-land; Inequity among regions: Western-Eastern Indonesia, SouthernNorthen Java, Urban-rural; Jawa produces 57% (Jakarta 16%), Sumatra 24% National GDP; Ecological footprint Jawa-Bali, Sumatra (Riau, Jambi), North Celebes exceeds island’s biological-capacity, High urbanisation rate to cities at eastern coast of Sumatra. northern-coast of Jawa induced by dense sea traffic along Malacca Strait, Karimata Strait, Jawa Sea and Celebes Strait; Land subsidence in Northern Jawa & sea level rise of Jawa Sea; Increase frequencies of floods and droughts with changing climate in Jawa; source: Emil Salim, 2012 2 Indonesia’s 2020 carbon challenges Loss of Biological Diversity 2000 1500 1000 -26% Peat Fire -41% LUCF Waste 500 Agiculture Industry 0 source: Bappenas, 2010 Energy 2000 2005 2010 2015 2020 BAU BAU BAU 2020 target 3 Map of Indonesian Green GDRP Legend Green GDP% GDP reg 57 - 73 74 - 80 81 - 85 86 - 89 90 - 92 NAD SUMUT KALTIM SULUT GORONTALO RIAU MALUT KALBAR SUMBAR JAMBI BABEL SULTENG KALTENG SUMSEL BENGKULU KALSEL MALUKU SULSEL SULTRA PAPUA LAMPUNG 0 170340 BANTEN JABAR JATENG DIY JATIM 680Kilometers BALI NTB NTT source: KLH, ESP2 DANIDA, 2009 4 Challenges POLICIES as well as MARKET FAILURES (subsidized growth, distorted energy prices, no internalized of externalities, absence of market and economuc value on th enatural resources and environment, unsustainable consumption and production pattern, lack of prority ) INTERVENTIONS FOR MARKET CORRECTIONS AND CHANGING BEHAVIORS • Reshape Fiscal and Financial Infrastructure • Ensure Food dan Energy Security • Moving from Single Track to Multiple Track 5 Points to share…. Mainstreaming • Leader commitment • Common understanding and National Development Plan Policy and Program • Various Sector Coordination and Complementarity • Strategic partnership • Involvement and Participation • Joint Task-force (Multistakeholder, MoE-MoF, MoE-Central Bank,etc) Methodology and Capacity Building • Guideline (Economic Valuation, Green GDP/GDRP,etc) • Training and Technical Facilitation Support and Incentives • Standard • Non-monetary and monetary (Fiscal and Financial) Incentives 6 LONG TERM DEVELOPMENT MISSION, 2005-2025 Competitive Indonesia Green and Everlasting Indonesia Just and Distributed Development Indonesia as a Strong, Selfreliant Archipelagic Country base on National Interests Vision “ Prosperous, Democratic and Just Indonesia” Mission Continue Development to achieve Prosperous Indonesia Strengthen Democratic Pillars Strengthen Justice in every Aspect of Development Source: Bappenas, 2010 and Ministry of Finance, 2012 2004 2007 2009 • Pro-poor • Pro-jobs • Pro-growth • Added by Pro-environment • Economic Growth 7% by 2014 • GHG Emission reduction 26% (+15%) by 2020 • Less biodiversity 2014 2020 • Sustainable Growth with Equity 7 Source: UKP4, 2012 8 THE NEW PARADIGM OF SUSTAINABLE DEVELOPMENT (Prof. Emil Salim, former Environmental Minister and member of Presidential Advisory Committee) 1. The need for Synergy of Economic Growth with Social Equity and Ecological Sustainability requires moving away from an “economic” single track to “economic-social-ecological triple track of development”; 2. With the Common Goal of: (1) Raising Green GDP with (2) Low Gini (inequality) coefficient and achieving Millennium Development Goals; (3) Ecological Foot-prints below Natural Carrying Biological Capacity; 3. It requires mainstreaming “sustainability principles” into the multi-disciplinairy approach of development. Develpment is conducted NOT IN A VACUM, but in an environmental setting that recognizes the need for: Interdependency among development components; Diversity within and among the components; Resiliency of the components; Usefullness of each and all components; Sustainability of components within the system. Source: Salim, 2012 9 GREEN ECONOMY- 3 component Sustainable use of natural resources, internalizing cost of natural resource depletion/environmental degradation, efforts on alleviate the poverty, creating decent jobs, and ensuring sustainable economic growth” Expected behaviours for GREEN ECONOMY LOW CARBON AND SUSTAINABLE USE OF LESS HARZARDOUS BIOLOGICAL DIVERSITY WASTE I. ROAD MAP OF LOW CARBON (National/Regional Action Plan on GHG emission Reduction (RAN GRK)) REDD+ II. Update IBSAP (Indonesia Biodiversity Strategic Action Plan) MAINTAIN NATURAL CARRYING CAPACITY III. SPATIAL PLANNING emphasizing on Environmental Carrying Capacity POLICIES INITIATIVES, including Fiscal and Financial 10 Source: MoE, 2012 and Bappenas, 2012 SUSTAINABLE DEVELOPMENT PERSPECTIVES IN LONG TERM NATIONAL DEVELOPMENT PLANNING Mission #6 Goals National/Sector Policy & Existing Initiative, i.e. Realizing an In donesia that is balanced and sustainable a. that is improving the management of develop- ment that can maintain the balance among the utilization, sustainability, availability, and uses of the natural resources and environment, while still preserving the functions, capacity, and comforts of life in the present and in the future through the utilization of space that is harmonious for use for human settlement, for social economic activities, and for conservation purposes •Strategic Plan 2010-2014 of MoEv, MoAg, MoPW, •Government Regulation No.32/2009: Protection and Environmental Management. b. Increases the economic use of natural resources and the environment in a sustainable manner •Strategic Plan 2010-2014 of MoFr; •Gov Reg. No.03/2008: Forest & Forest Management Plan & Forest Utilization MoF: Act 28/2009 on Regional Tax and Regional Retribution MoEv:Act 32/2009 Economic Instrument,incetive system of environmental financing, Green GDP, Develop the guidance & application of economic valuation of Natural Resources & Environment & Environmental Impact; BNI & Bank Mandiri: Green Banking; Bappepam: Green Investment c. Improves the management of natural resources and the environment for supporting the quality of life Strategic Plan 2010-2014 of MoEMR d. Provides beauty and comfort of life, and increases the preservation and utilization of bio‐diversity as the basic asset of national development. Strategic Plan 2010-2014 of MoFr MoAg: ISPO, sustainable agricultural development; MoPW: Green Infrastructure; MoFr: Sustainable Forest Management; MoEv, MoHA, Bappenas: SEA. Bappenas: ICCSR, ICCTF, RAN-GRK; MoEv: Implementation B3, waterwaste investment program B3; MoEMR: Development of Renewable Energy MoT: Green Transportation; MoEMR: Energy Efficient Equipment 11 Labeling Source: Bappenas, 2010 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Agriculture Building Urban/Cities Energy Fisheries Forestry Manufacture Tourism Transportation Waste Water 1. Renewable energy, 2. Low carbon transport, 3. Energy efficient buildings, 4. Clean technology, 5. Improved waste management, 6. Improved freshwater provision, 7. Sustainable agriculture and forest management, 8. Sustainable fisheries. TRANSITIONAL PROCESS Source: Bappenas, 2012 Green jobs 12 Learning from the past experiences (1) Focus on getting the market price of environment right 1. Shifting away levies from items that are valued highly by society (manual work, intellectual creativity) to undesirable items (pollution); 2. Tax-subsidies to correct distortions (taxing private for subsidizing public transportation, taxing fossil fuel to subsidize wind energy); 3. Environmental service user pays the provider (down-stream river user pays upstream river people to prevent sedimentation) Integrating decentralized policy making • 13 Provinces and Districts are autonomous to impose levies on natural resources with Central Government’s approval. Learning from the past experiences (2) Effective implementation in nature • Possible and reasonable cost to implement, falls as clearly and directly as possible on the ultimate payer, embody no favoritism or special exception, correspond to the payer’s ability to pay, and NOT bring about undesirable economic distortions. Public and Private Involvement • 14 Actively involvement of stakeholders are crucial Act 32/2009, article 42-43: Economic Instruments for Environmental Protection and Management PLANNING FINANCE/FUND Green GDP/GDRP Environmental Performance Bond Environmental Compensations (Payment for Environmental Services between regions) Natural Resources and Environmental Accounting (NREA) Environmental Emergency Fund for Mitigation and Rehabilitation INCENTIVE/DISINCENTIVE Environmental Taxation (retribution, tax, subsidy, fee, etc) Environmental Labelling (Ecolabel) Green Procurement Green Banking and sound Capital Market Environmental Trust Fund Internalization of Environmental Cost Payment for Environmental Services (PES) Tradeable permit Article 45: Green Budget Environmental Performance Award 15 Environmental Insurance 15 Fiscal Policy incentives Grant mechanism for transport system for REDD/ forestry / other Climate Change sector Subsidy/ fiscal incentives for renewable energy • Streamlining DAK for Environment Fiscal mechanism/ tax exemption for manufacturing to encourage low emission Carbon Tax • • Develop charge mechanism for waste • Develop protocol for Payment for Environmental Services (PES) • Capacity Building For EI’s • Develop protocol for environmental damage assessment Develop protocol for economic valuation in • Legal framework relation to spatial planning Time 2010 2011 2012 2013 2014 16 Not only MoE…. • Collaboration with Indonesian central bank, to internalized environmental measurements into bank’ policies i.e. - BI regulation no. 2/2005 and Circulate Letter of BI No. SEBI No 7/3/DPNP which includes inclusion of environmental performance within bank credit policy i.e. create direct financial disincentive for PROPER’ participating companies; - Currently, joint taskforce in developing “Green Banking Policies” and capacity building • Ministry of Finance, – 2009, Ministry of Finance Green Paper: Economic and Fiscal Policy Strategies for Climate Change Mitigation in Indonesia – 2009, Act 28/2009 regarding Regional Taxes and Regional Retribution, includes some taxes/retribution on environmental related – 2011, Ministry of Finance Green Paper-follow up: Regional Incentive Mechanism for emissions reductions from land based sectors & Geothermal Policy and Electricity Supply Efficiency, • National Development Planning Agency • • • National Statistic Bureau • • Regional Natural Resources Accounting, SEA, etc Ministry of Industry • • Natural Resources Accounting System, SEEA, etc Ministry of Home Affairs • • Presidential Instruction no. 61/2011 on National Action Plan on GHG Emission Reduction Presidentian Instruction no. 71/2011 on GHG Inventory Green Industry Policy, including financial incentives,etc Others 17 CLIMATE CHANGE INITIATIVES: TOWARD LOW CARBON DEVELOPMENT BAPPENAS 2007: COP-13 on Bali and National Action Plan on Climate Change (RAN-PI) 2007: ‘Yellowbook’: Integrating CC into development planning (regularly revised) 2009: Technology Needs Assessment (TNA) 2009: Indonesia Climate Change Trust Fund (ICCTF) 2009: President announces mitigation targets (-26% /-41%) 2010: Indonesia Climate Change Sectoral Roadmap (ICCSR) 2010: Indonesian Second National Communication (SNC) 2011: Presidential Regulation on National Mitigation Action Plan (Perpres RAN GRK) 2011: Presdential Regulation on GHG Inventory Current Activitie: • Coordination with central government institutions for RAN-GRK implementation • Coordination with local stakeholder -> Development of Local Action Plans (RADGRK) Source: Bappenas, 2012 MoF FISCAL POLICY FOCUS FISCAL Minister of Finance (MoF) Regulation on Taxation and Customs Facility for Renewable Energy Sources Utilization Activities FINANCIAL ∗ Mobilization of International Climate Finance The Indonesia Climate Change Trust Fund (ICCTF) The Indonesia Green Investment Fund (IGIF) The Climate Investment Funds ( CTF & SCF) ∗ Optimalization of Domestic Finance Banks and Insurance Public: APBN, APBD Private: MoF Regulation on Exemption or Reduction of Corporate Income Tax MoF Regulation on VAT burden by the Government on the Import of Goods for Geothermal Activities MoF Regulation on VAT burden by the Government for Bio Fuel Price subsidy for Bio Fuel Revolving fund for geothermal exploration Government Guarantee CSR Carbon Market 19 Source: MoF Indonesia, 2012 Transfer to Region for Climate Change Programs To support climate change-adaptation and mitigation in the region, the Government attempt to fund activities related to climate change trough the Special Allocation Fund (DAK). There are two sectors related to climate change activities that are DAK Forestry and DAK Environment Sector/Year 2006 2007 2008 2009 2010 2011 2012 Environment 113 352 352 352 352 400 480 100 100 250 400 490 Forestry DAK Forestry Improve watershed function, in order to maintain and increase the carrying capacity of forest resources, land and water, and to support climate change mitigation. The policy is sated by preventing more damage of forest resources, soil water that is in the watershed through implementing land rehabilitation, forest management in the scope of the district / city / province affairs, including the development of village nurseries and peat land conservation. DAK Environment Support the national priority targets of pollution loads reduction and alleviation of 50 percent pollution level by the implementation of water pollution control, air and solid waste in the region and to strengthen the implementation of regional environmental field of Minimum Service Standard (SPM). Source: MoF Indonesia, 2012 20 Policy Framework for Reducing Fuel Subsidy Target Condition • Rising fuel consumption • Fuel prices increases • Bottleneck domestic refineries • Restricting domestic fuel stock • Insufficient infrastructure and transportation • Ineffective fuel subsidy Fuel Subsidy Alleviation Current Condition • Decreasing energy intensity • Provision of sufficient infrastructure and transport of fuel • Alleviating fuel subsidy along with compensating variation • Energy diversification •Lower volume of subsidized fuels • Minimum subsidy on fuels • Non-fuel diversified renewable energy sources Strategy (2005) Strategy of Fuel Subsidy Reform Source: MoF Indonesia, 2012 – The phasing out of inefficient fossil fuel subsidies in Indonesia is to be implemented in a gradual manner in order to minimize the spill-over impact on the poor noting that a large part of the consumption basket of the poor is affected by higher fossil fuel prices 2005, reducing subsidized from 5 to 3 commodities, by removing diesel oil from industry and fuel oil from subsidy, Carrying out Kerosene to LPG conversion program, Putting the removed subsidy budget for poverty alleviation related program. – The phasing out strategy is to be sequenced through managing the demand side by adopting measures that will reduce fossil fuel energy consumption and then by gradually narrowing the gap between domestic and international prices. 21 Overview of development of incentive instruments for the environment in Indonesia (emphasized by Act 32/2009) Objectives of Environmental Finance Incentives towards sustainable resource use Incentives set by the State Creation of markets Emission charges Product charges Environmental taxes Environmental Fiscal Reform Waste and water fees Payments for Environmental Services Tradable permits Access and Benefit Sharing Funds linked to resource use (selfgenerated) certification Concessions or performance bonds Reform and removal of adverse subsidies Revenue mobilisation Carbon Offsets Refund systems Environmental funds Mechanisms for administrating funds Debt-for-nature swaps Funds from government and donors budegts Private donations Funds from outside resource management Diagram modified from Emerton, L. et al. (2006) Sustainable Financing of Protected Areas, IUCN and Fischer, A. / Petersen, L. / Hubbert, W. (2004): Natural Resources and Governance: Incentives for Sustainable Resource Use, GTZ). 22 Remarks Although Indonesia is still facing challenges in ensuring poverty eradication as well as in managing the environment, Indonesia continue commit and strengthen its efforts towards “sustainable growth with equity”. • Leader’s commitment is strong, yet various domestic agenda are also at important, such as democratization and decentralization; • Continue to strengthen public awareness and various stakeholders involvement; • Continue to enhance understanding towards sustainable development at all level; • Continue to engage with various partners/institutions for enhancing our sustainable development agenda. 23 Thank You Contact us: Assistant Deputy for Environmental Economic A Building, 4th floor Jl D.I Panjaitan Kav 24 Kebun Nanas - Jakarta Timur Ph/fx. +62 21 8517161 24