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2023
World Bank Group
PACIFIC
OVERVIEW

EAST ASIA

INDONESIA

iChina Country Climate and Development Report

 © 2023 The World Bank Group

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I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W I
E A S T A SI A PAC IFIC

INDONESIA

COUNTRY
OV E RV I E W

CLIMATE AND
DEVELOPMENT
REPORT

2023

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W II
CONTENTS

1 3 7
Climate Action Development Putting Climate
as a Catalyst for Transitions Commitments
Development & Carbon into Action
Emissions

12 17 20
Economic Policy Climate Actions The Climate &
Foundations for Could Support Development
a Low-Carbon & Faster Growth To-Do List
Climate-Resilient
Future
I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W III
FIGURES
Figure 1 Per Capita Emissions Remain Below Those of Major Developed Economies
and in Line With Developing Country Peers.......................................................................................................................................3

Figure 2 With Signs of Slowing in Recent Years...............................................................................................................................................3

Figure 3 Reducing Supply of, and Demand for, Carbon-intensive Resources Through Sector
and Enabling Policy and Institutional Reforms..................................................................................................................................6

Figure 4 Per Capita Emissions of Major Economies under Stated Targets ..................................................................................................8

Figure 5 Absolute Emissions of Major Economies under Stated Targets......................................................................................................8

Figure 6 High but Decreasing Fossil Fuel Support......................................................................................................................................... 13

Figure 7 Fossil Fuel Support for Consumption............................................................................................................................................... 13

Figure 8 Overview of Modelled Scenarios....................................................................................................................................................... 16

Figure 9 Policies to Reduce Land-based Emissions Have Significant Co-benefits................................................................................... 18

Figure 10 Faster Coal Phasedown Drives Lower Emissions........................................................................................................................... 18

Figure 11 Positive Growth Impacts From Decarbonization............................................................................................................................ 19

Figure 12 Requiring a Boost to Investment...................................................................................................................................................... 19

Figure 13 Household Expenditure Expected to Increase................................................................................................................................. 19

Figure 14 Poverty Rates Projected to Decline.................................................................................................................................................. 19

Figure 15 Building Blocks for the Transition..................................................................................................................................................... 20

Figure 16 Climate and Development Policy Framework................................................................................................................................. 23

ABBREVIATIONS AND ACRONYMS

ADS Accelerated Decarbonization Scenario

BAU Business-as-usual

CCDR Country Climate and Development Report

CGE Computable General Equilibrium

DMO Domestic Market Obligation

EIP Eco-Industrial Park

EU European Union

FOLU Forestry and Land Use

GHG Greenhouse Gas(es)

IDS Intermediate Decarbonization Scenario

LCR Local Content Requirement

LTS-LCCR Long-Term Strategy for Low Carbon and Climate Resilience

NDC Nationally Determined Contribution

NTM Non-tariff Measure

NUMP National Urban Mobility Policy

NZP Net Zero Policy

PLN Perusahaan Listrik Negara (State-owned Electricity Company)

PPP Public Private Partnership

PSO Public Service Obligation

RUPTL Rencana Usaha Penyediaan Tenaga Listrik (National Electricity Supply Business Plan)

SoE State-owned Enterprise

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W IV
CLIMATE ACTION
AS A CATALYST
FOR DEVELOPMENT

B OROB U DU R
• YO GYAK AR TA 1
 I
ndonesia has made important commitments to meet its climate and
development targets. Indonesia’s strong track record of growth and pov-
erty reduction was thanks in part to its natural resources, including coal,
oil, forests, and peatlands. Indonesia’s development gains have also
contributed to rising greenhouse gas (GHG) emissions, which have been in
line with its level of income. GHG emissions weigh on Indonesia’s development
through climate shocks, and through associated environmental degradation
and pollution. Indonesia has set out a new path in its Long-Term Strategy for
Low Carbon and Climate Resilience (LTS-LCCR) 2050. As stated in the Low
Carbon Development Initiative, Indonesia is looking for ways to “maintain
economic and social growth through development activities with low GHG
emissions and minimizing the exploitation of natural resources” (Bappenas
2021). Ongoing efforts are helping to slow GHG emissions while maintaining
growth and strengthening resilience.

The Country Climate and Development Report (CCDR) explores options

for Indonesia to continue aligning its climate and growth ambitions. It is
anchored in a framework that links the supply of carbon-intensive resources
(such as land and primary energy) to the demand for those resources by the
major drivers of economic growth (for example, electricity, industry, transpor-
tation, urban expansion, agriculture, and forestry). Policies that cut the supply
of carbon resources can be complemented by policies that help reduce the
demand for those resources and promote their alternatives. In addition to
sector-specific policies (such as those that restore degraded forests and phase
down coal use), the low-carbon transition will require economic policies (that is,
fiscal, financial, investment, and trade policies) that enable firms and workers
to participate in a greener economy. The CCDR explores actions that could
help Indonesia to reduce the tradeoff between emissions cuts and short-term
growth. It further explores the actions needed for a resilient transition to reduce
Indonesia’s losses from the climate change already underway.

The CCDR is divided into five parts:

CHAPTER 1 Examines how the supply and demand for carbon-intensive resources in In-
donesia, together with their climate impacts, interact with Indonesia’s growth
and development.

CHAPTER 2 Reviews Indonesia’s climate commitments and capacity to reduce the supply
of, and demand for, carbon-intensive resources, while increasing resilience to
climate change.

CHAPTER 3 Reviews fiscal, financial, investment, and trade policies to enable a low-carbon,
resilient transition.

CHAPTER 4 Analyzes the economic impacts of climate actions to assess how reductions in
GHG emissions could affect growth, trade, households, and firms.

CHAPTER 5 Proposes a climate and development policy framework that integrates sup-
ply, demand, adaptation, and enabling policy measures. It prioritizes actions
based on their expected climate impact and their synergy with Indonesia’s
development needs.

C limate & D e v elopment in I ndonesia 2

1 DEVELOPMENT TRANSITIONS &
CARBON EMISSIONS

T
he supply of, and demand for, carbon-intensive resources in In-
donesia have contributed to rising GHG emissions which are in
line with Indonesia’s stage of development (Figure 1). Indonesia’s
emissions–1,495 million tonnes of carbon dioxide (CO2) equivalent
(MtCO2eq) annual average in 2018-20–are high compared to structur-
al peers in absolute terms but encouragingly show signs of slowing, including
in per capita terms (Figure 2). The abundant supply of land (from carbon-rich
forests and peatlands) and energy resources (from fossil fuels, particularly
coal), have driven Indonesia’s emissions profile. On the demand side, large
parts of the economy have made use of these resources to drive development
(for electricity, industry, transportation, urban expansion, agriculture, and for-
estry). These trends are reinforced by the underpricing of carbon in land and
energy resources (explored in Chapter 2).

F I G U RE 1
Per Capita Emissions Remain Below Those of Major Developed Economies
and in Line With Developing Country Peers
Per capita GDP (PPP constant 2017) vs. Per capita emissions (1990-2019)

Sources: World Development Indicators (World Bank databank); Climate Watch Data Explorer; Ministry of Environment and Forestry MoEF) data (figures compiled by WBG staff).
Note: Figure 1 shows polynomial trends for per capita GDP and per capita emissions 1990-2019.

F I G U RE 2
With Signs of Slowing in Recent Years *Note: This report uses a standard
basket of peers where data allows.
Peers are Nigeria, China, India, Ukraine,
Annual GHG emissions per capita Thailand, the Philippines, Mexico, the
(All GHG, 3-year moving average) Arab Repub­lic of Egypt, the Russian
Federation, and Brazil, selected based
* on their statistical similarity in terms of
population, GDP per capita, and total
GDP. An additional set of aspirational
peers is also used when relevant:
Republic of Korea, Chile, Poland, and
the Czech Republic. In some instances,
developed countries are also used as
comparisons when discussing emissions
levels and targets.

Sources: Climate Watch Data Explorer (figures compiled by WBG staff).

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W 3
 The supply of land and energy account for about 90 percent of emissions.
Deforestation and fires historically accounted for over 42 percent of Indonesia’s
GHG emissions.1 Agriculture and forestry activities were the primary drivers of
land cover change. About 8.49 million hectares (ha) of forest cover have been
lost since 2000,2 however, the loss rate has slowed considerably in recent
years as the authorities significantly tightened forest and peatland protection.
Deforestation in 2020 and 2021 (of about 0.15 million ha per year) was at its
lowest since 1990. Meanwhile, primary energy sources account for about 40
percent of Indonesia’s GHG emissions and have been growing over time. About
93 percent of energy is sourced from fossil fuels‒namely coal (43 percent),
oil (31 percent), and gas (19 percent). The share of coal in Indonesia’s energy
mix has more than doubled in the past 20 years.

On the demand side, drivers of economic development are big consumers

of land and energy. Expansion of oil palm and timber plantations accounted
for approximately two-fifths of total land conversion over the past two decades.
Meanwhile, energy emissions on the demand side are driven by electricity (40
percent of energy-related GHG emissions) due to a reliance on coal for more
than one-half of all generation. Manufacturing contributes 18 percent of en-
ergy-related emissions, and transportation 26 percent.

Efficiency gains in agriculture and transportation are improving outcomes

for Indonesia’s natural asset base and human capital. Historical patterns of
agricultural development in peatlands, for example, drove economic growth
but also caused costs. Between 2007 and 2018 these activities generated an
estimated US$48 billion in value (about 5.7 percent of GDP); but associated air
pollution and fire-related damages offset over one-half of this gain. Stronger
fire-prevention measures and peatland restoration are now reducing such costs.
In urban areas, there has been rapid growth in the use of personal vehicles,
with the resulting congestion estimated to cost about 0.5 percent of GDP.4
Air pollution is estimated to cost the average Indonesian citizen between one
1 Total of forest, land and four years in life expectancy (Greenstone and Fan 2019), while costing
use and peat fire emis-
sions between 2000-20 the economy a loss of labor income equivalent to 0.6 percent of GDP (World
as a proportion of total
emissions over the same Bank 2021). Recent investments and policies are supporting lower transport
period (MoEF 2021
data). Energy emissions
emissions, including Jakarta’s Mass Rapid Transit system and investment in
proportion is calculated busways and feeder systems.
for the same period.

2 Deforestation aver-
aged 1.13 million ha per Emissions are only one-half of the story‒continuing to adapt to climate
year between 2000-06
and 0.53 million ha per
shocks will be central to avoiding large drops in economic output and
year between 2014-20.
Deforestation was 0.11
household welfare. Between 1990-2021, Indonesia experienced more than
million ha in 2020 (MoEF 300 natural disasters, including 200 flooding events affecting more than 11
data).
million people. The frequency of these disasters is increasing‒with climate-re-
3 Estimate based on
a World Bank comput- lated disasters accounting for about 70 percent of the total. Settlements with
able general equilibrium
(CGE) model custom increased exposure to climate impacts tend to be poorer and, while climate
designed to represent
Indonesia’s lowland
change affects the whole population, the poor and vulnerable‒one-third of
agriculture sector. the population–are likely to carry a disproportionate burden. Their livelihoods
4 World Bank are more often reliant on agriculture and they often live in areas prone to nat-
estimates based on
analysis of traffic data in ural hazards, but without the necessary resilience to cope with shocks and to
28 metropolitan areas of
Indonesia. protect their assets.

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W 4
 Agriculture is vulnerable to climate change impacts, with implications
for food and nutrient security. In the absence of countermeasures to boost
yields, rising temperatures and shifting rainfall are projected to reduce yields
of irrigated rice (-0.72 percent by 2030), maize (-7.1 percent), and palm oil
(-1.19 percent). Pest and disease outbreaks, induced by higher temperatures,
are expected to intensify, along with the impact of floods, droughts, and salt-
water intrusion. These factors contribute to a higher risk of crop failure which,
in turn, leads to loss of income for farmers and more volatile food prices for
consumers. Indonesian consumers already pay among the highest prices in the
region for staples and nutritious food‒contributing to poor nutrition outcomes.
While stunting levels have fallen considerably in recent years, 24.4 percent
of Indonesia’s children under five years of age still suffered from stunting in
2021 (MoH 2021).5

Adaptation efforts aside, Indonesia’s efforts to decarbonize could also help

build resilience, as acknowledged in the authorities’ climate strategies.
While underlying climate changes–as a function of global emissions–are largely
beyond Indonesia’s control, resilience is a function of Indonesia’s infrastructure,
human capital, and natural assets. Many of these are connected directly or
indirectly to decarbonization measures. Indonesia’s plans to phase down coal
use, and the country’s improvements in fire prevention measures will reduce
air pollution and confer health benefits. The vulnerability of Indonesia’s cities
can be lessened from changes in land clearing patterns and groundwater
extraction. The country’s recent commitment to mangrove protection and res-
toration will protect communities and infrastructure from increased flood risks,
while sequestering carbon.

At the same time, the transition to a low-carbon economy also poses chal-
lenges. Indonesia aims to balance a phase-down of coal use with rising elec-
tricity demand. International coal demand and prices have risen since the start
of Russia's invasion of Ukraine, while tightening global monetary policy impacts
the cost of financing the low-carbon energy transition. Increased protection
of forests and peatlands will constrain some forms of agriculture‒requiring a
boost to yields and a shift of production toward already degraded land to allow
for continued growth. Real sector impacts will affect the banking system given
that almost three-quarters of Indonesia’s bank loan portfolio comprises sectors
that will be impacted by decarbonization policies.

5 The rate of stunting

is down from 30.8
percent in 2018.

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W 5
 F I G U RE 3 Reducing Supply of, and Demand for, Carbon-intensive Resources
Through Sector and Enabling Policy and Institutional Reforms
SUPPLY D EM A N D
5 ENABLING 4 DEMAND
PRIM A RY RE SOU RC E S F IN A L RE SOU RC E S GROW T H D RI V ER S
ECONOMIC POLICIES
POLICIES

3 RESOURCE
DEMAND
AGRIC U LT U RE
6 ECONOMIC 7 CLIMATE A N D FORE S T RY
GROWTH IMPACTS
1 RESOURCE
SUPPLY

URBAN
E XPA N SION
9 WEALTH AC- 2 SUPPLY 8 DEVELOP- LAND
CUMULATION POLICIES MENT COSTS
EL EC T RIC T Y

IN D U S T RY
Source: Figure compiled by WBG staff. C OA L

Note: The left-hand side of the figure illustrates the interactions between resource
supply and demand and how these influence climate and development outcomes. FO S SIL F U EL S ,
The right-hand side presents key economic sectors that supply and demand natural B IOF U EL S
resources and are discussed in the CCDR.
T R A N SP OR TA -
OIL T ION

“ The CCDR proposes a framework to

illustrate how Indonesia’s ongoing and
future reforms could support a just and IN T ERN AT ION AL
TRADE

affordable transition through positive

climate and development dynamics“
The CCDR proposes a framework to illustrate how Indonesia’s on-
going and future reforms could support a just and affordable tran-
sition through positive climate and development dynamics (Figure
3). A reduction in the supply of carbon-intensive resources (land and
non-renewable energy) (1) can be supported through policy and in-
stitutional reforms, some of which are already in place or underway
(2). This will, however, also require a reduction in demand for those
resources (for electricity, agriculture, urban expansion, transport, in-
dustry, and trade) (3) which requires reforms to incentivize more ef-
ficient use of resources (for example, through a carbon price, spatial
planning) or alternative resources (for example renewable energy) (4).
Complementing these measures with enabling economic policies can
help allocate resources to greener and more productive parts of the
economy (5). A combination of these measures could help decouple
growth from carbon emissions (6) which could strengthen the econo-
my’s resilience to a rising incidence of climate impacts (that is, higher
temperatures, sea level rises, flooding) (7). This could help reduce the
development costs of climate-related shocks (for example, physical
damage, human capital loss) (8).

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W 6
2 PUTTING CLIMATE
I
6 The Ministry of Finance (MoF) esti-
mates the required international support
at about US$114 billion. See MoF 2021.
7 The LTS-LCCR extends the uncondi-
tional 2030 commitment through three
scenarios: (i) current policies, where
emissions will continue to increase after
2030; (ii) transition, where emissions
will decrease but are insufficient to
reach the 2050 target; and (iii) low-car-
bon, where emissions will decrease
rapidly after 2030. See Republic of
Indonesia. 2021.
8 The common but differentiated
responsibilities principle is formalized
within the United Nations Framework
Convention on Climate Change. It rec-
ognizes that all countries have a shared
obligation to address climate change
but that responsibility for addressing
the issue differs between countries,
given different capabilities and historical
contributions.
I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W
COMMITMENTS INTO ACTION
T E G A L L A L AN G • BA LI
ndonesia has committed to addressing climate and development chal-
lenges. Mitigation and adaptation commitments are captured in Indo-
nesia’s Enhanced Nationally Determined Contributions (NDCs) under
the 2015 Paris Agreement (Republic of Indonesia 2022). There are two
emissions targets for 2030: an unconditional 31.9 percent reduction in
emissions against business-as-usual (BAU) projections, and up to 43.2 percent
reduction conditional on international support.6 Estimated per capita emissions
under the Enhanced NDC’s unconditional target are projected to be 6.5 tCO-
2
eq per year in 2030‒lower than most other large economies including Brazil,
China, Japan, and the United States. Total emissions in 2030, of an expected
1,953 MtCO2eq, will be on par with those of the EU and the Russian Federation,
and below those of the US, China, and India. Indonesia has also mapped out
longer-term emissions trajectories toward a net-zero target by 2060 or earlier7
(Figures 4 and 5). This CCDR does not take a position on what Indonesia’s NDC
targets should be. It acknowledges the principle of common but differentiated
responsibility8 and assesses options for Indonesia to meet its commitments
while also achieving its development goals.
7
 F I G U RE 4 Per Capita Emissions of Major Economies under Stated Targets
Projected per capita emissions (tCO2eq per year) in line with stated commitments

F I G U RE 5
Absolute Emissions of Major Economies under Stated Targets
Projected absolute emissions (GtCO2eq per year) in line with stated commitments

Source: WBG staff using data from NDCs, Climate Watch, and UN population projections. Figure depicts Indonesia’s unconditional 2030 commitment and 2060 net zero target.

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W 8
 More than 60 percent of the emission reduction target in Indonesia’s En-
hanced NDC is intended to be met through actions in forestry and other
land uses (FOLU). FOLU emissions are projected to fall from a BAU projection
of 714 MtCO2eq to 214 MtCO2eq in 2030 under the Enhanced NDC’s uncon-
ditional target. While already ambitious, the Government of Indonesia further
aims to make FOLU a net carbon sink by 2030 (that is, zero or negative net
emissions) under its FOLU Net Sink 2030 plan.9 Stipulated actions to achieve
these goals include restoring 2.7 million hectares of peatlands, rehabilitating
5.7 million hectares of degraded forestlands, and continuing recent progress
in reducing deforestation and forest degradation rates.

These commitments are built on a foundation of strengthened policies and

institutions. In 2011 the government placed a moratorium on new licenses for
forest conversion in primary forests and peatlands (a measure made perma-
nent in 2019) and in 2016 strengthened the moratorium for areas of deep peat.
In 2016, the Peat Restoration Agency was established and later expanded to
include mangroves in 2021 (it is currently known as Badan Restorasi Gambut
dan Mangrove: BRGM). The Indonesian Environment Fund Management Agency
(Badan Pengelola Dana Lingkungan Hidup: BPDLH) was established in 2019
to channel financing for FOLU Net Sink 2030 investments, energy investments,
and other climate-related activities.

After FOLU, the energy sector would need to deliver the largest tranche of
emission cuts. About 39 percent of the emission reduction target in Indonesia’s
Enhanced NDC would be met through actions in the energy sector. Absolute
emissions from the energy sector are projected to increase from approximately
600 MtCO2eq in 2020 to 1,311 MtCO2eq under the unconditional target in
the Enhanced NDC‒an increase in absolute terms but a 21 percent reduction
relative to the estimated 1,669 MtCO2eq of energy sector emissions by 2030
under a BAU scenario. By 2030, the energy sector would have overtaken FOLU
as the biggest source of carbon emissions in Indonesia.

To implement cuts in energy emissions, Indonesia aims to change its primary

energy mix which can be supported through recent reforms. Given Indone-
sia’s intensive use of fossil fuels the scale of the effort required is substantial.
Indonesia plans to cut the share of coal (43 to 30 percent between 2020 and
2030) and oil (31 to 25 percent) and increase the share of renewables (6.1
to 25 percent). To support this, a recent Presidential Regulation (September
2022) removed renewable energy price caps linked to the average cost of gen-
eration (which is dominated by coal generation) and established competitive
principles for procurement of renewable energy technologies. These could sig-
nificantly improve the enabling environment for renewable energy investments.

Two other fundamental reforms will be needed to incentivize the move away
from coal. As noted above, recent global developments create headwinds
for the coal exit‒including rising coal prices and higher costs of financing
9 Ministerial Decree for the energy transition. Reforms that can help reduce the relative cost of
No. 168/Menlhk/PKTL/
PLA.1/2/2022, the
renewables will be even more important in the current environment. Priority
Operational Plan for changes include: (i) reform of the Domestic Market Obligation (DMO) for coal,
Indonesia’s FOLU Net
Sink 2030. where coal producers are obliged to sell a minimum amount of their output to

I N D O N E S I A C O U N T R Y C L I M AT E A N D D E V E L O P M E N T R E P O R T : O V E R V I E W 9
 the state-owned power utility (PT. Perusahaan Listrik Negara (Persero): PLN)
at capped prices; and (ii) reform of Local Content Requirements (LCRs) which
set a minimum threshold for local content both for materials and services used
in renewable energy generation, including solar power, thereby raising the cost
of renewable investments in Indonesia.

On the demand side, Indonesia drew heavily on its domestic coal reserves to
increase electricity generation in the decade to 2020. The installed capacity
of coal-fired power plants increased from 13 GW in 2010 to 37 GW in 2020.10
An additional 13.8 GW of grid-connected coal capacity is under development
and expected to come online before 2030,11 and there are more captive coal
plants planned for industrial use. Indonesia is considering options to curb
these increases. A shortfall in demand growth (exacerbated by the COVID-19
pandemic) has contributed to an over-supply of capacity. Of the planned 13.8
GW of coal plants, 9 to 10 GW are at advanced stages of construction. These
are expected to be commissioned in the next two years. In an important recent
step forward, Indonesia set out for the first time a legally binding restriction on
building coal-fired power plants connected to the country’s electricity grid in
Presidential Regulation No. 112/2022, however, the regulation also provides
for significant exemptions for plants integrated with industries aimed at the
transformation of raw natural resources or that support projects deemed of
national strategic importance. This exemption poses a significant risk to Indo-
nesia’s coal phase-down if new coal-fired plants materialize and could further
lock industrial processes into a high-carbon content development path.

The contribution of solar and wind to the energy mix will need to accelerate
rapidly but is challenged by the over-capacity in coal. Electricity demand is
expected to grow at an average of 4.9 percent per year over the next ten years (a
downgrade from earlier projections).12 PLN plans to add 40.6 GW of new power
10 These figures do not
generation capacity by 2030‒with generation from renewable energy plants
include captive power accounting for 20.9 GW (51.6 percent) of the new capacity. This will require
from coal that is off-grid
and outside of the accelerated uptake. From 2010 to 2019, the share of renewable electricity
Java-Bali system.
output increased from 14.1 to 15.3 percent overall,13 leaving a considerable
11 These are part of
the government’s plan gap to the National Energy Policy target of 23 percent by 2025. The over-supply
that was approved in
2015 for an additional
of capacity in the system, mainly from coal, has reduced the ‘space’ for adding
35 GW of capacity. renewable energy without creating stranded coal power assets, most notably
12 Electricity demand
under the previous Na-
in the Java-Bali grid.
tional Electricity Supply
Business Plan (Rencana
Usaha Penyediaan To enable the phase-out of coal, Indonesia has established an Energy Tran-
Tenaga Listrik: RUPTL)
2019-28 was projected
sition Mechanism Country Platform. The Energy Transition Country Platform
to grow at 6.4 percent creates the institutional set-up to organize, achieve scale, and coordinate
per year.

13 The proportion
funding and financing for the energy transition. The Country Platform, to be
of renewables in the managed by PT. Sarana Multi Infrastruktur (PT. SMI), will channel the state
generation mix moves
considerably from year budget, donor funding, and proceeds from carbon trading for energy transition
to year given fluctuations
in local conditions (for ex­ projects. Financial solutions have the potential to reduce the costs of the ener-
ample, hydropower dam
storage). The average
gy transition by harnessing multilateral, donor, and philanthropic funding and
of the three years up financing to blend it with state budget and private sector capital to maximize
to 2010 and 2019 is
reported to account for resources. Investments and activities expected to benefit from these mecha-
these fluctuations (Inter­
national Energy Agency: nisms include, among others, renewable energy projects and early retirement
IEA data).
of coal-fired power plants.

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 Beyond these important efforts, there are other parts of the power sector
policy framework that require attention to enable the energy transition.
The first is to review PLN’s revenue model. Since 2017, tariff adjustments that
would allow costs to be passed on to consumers have been restricted. This has
resulted in losses that are covered by the state budget, typically with a delay
resulting in cash flow challenges. The second is that PLN sets tariffs below cost
recovery to provide low-cost electricity to poor and vulnerable households. This
is known as the Public Service Obligation (PSO), however, the PSO’s efficiency
is challenged by imprecise targeting. The third is that PLN has a significant debt
burden. Servicing debt has become challenging given the revenue model, and

“ Commitments
to reduce
investments are constrained because of debt overhang.

Commitments to reduce the carbon intensity of the power sector are being
the carbon
complemented by the government’s electric mobility targets. The National
intensity of Electric Vehicle (EV) Program for Road Transportation,14 initiated in 2019, es-
the power tablished a target for domestic EV production to represent 20 percent of total
sector domestic sales by 2025 (Maghfiroh and Pandyaswargo 2021). By 2030, the
are being Ministry of Energy and Mineral Resources aims for 0.6 million electric cars,
complemented and 2.45 million electric two-wheelers on Indonesia’s roads. These targets aim
by the to reduce fossil fuel use, improve air quality, and develop the country’s nickel
government’s reserves (the largest in the world) for lithium-ion batteries. Market uptake has
electric been limited to date, owing to higher up-front EV costs (which are exacerbated
mobility by LCRs). Higher uptake, provided it occurs in concert with grid decarbonization,
targets“ will help lower emissions.

There are further opportunities to harness city planning and construction

processes to reduce urban emissions. Urban footprints, and associated emis-
sions from land use and service provision will expand dramatically over the
next decade in Indonesia, especially those of cities with populations below 1
million. Indonesia has mandated efficiency standards (green certification) for
high-rises. Including landed houses under certification standards (Sertifikasi
Bangunan Gedung Hijau) would reap further energy efficiency gains. Regional
Low-Carbon Development Plans (Rencana Pembangunan Rendah Karbon
Daerah) are under preparation. The first such plan‒approved for Jakarta in
2021‒targets GHG emissions reductions of 50 percent by 2030. Expansion of
this process to other locations will strengthen the alignment of national climate
goals with actions at the subnational and city level.

The policy and institutional framework for resilience has improved in recent
years. Strengthened disaster risk management and social protection capac-
ity are improving resilience to shocks, with a National Disaster Management
Authority (Badan Nasional Penanggulangan Bencana) improving response
coordination and a new regulatory framework better incorporating disaster
risks into spatial plans. The provision of social assistance is being enhanced
through an Adaptive Social Protection Roadmap and a new social registry (Data
Terpadu Kesejahteraan Sosial). Continued efforts to close gaps and expand
14 Presidential Decree
No. 55/2019 on the Pro-
access to the registry will improve impact. There are also opportunities for
motion of Battery Electric
Vehicles (EVs) for Ground
further detailed consideration of disaster risks in spatial planning, as well as
Transportation. in infrastructure standards.

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3 ECONOMIC POLICY
FOUNDATIONS FOR A LOW-
CARBON & CLIMATE-
RESILIENT FUTURE

S
ector-specific policies and institutions are critical but are not
the only building blocks needed to meet Indonesia’s stated com-
mitments. The CCDR identifies four reform areas‒fiscal, financial,
investment, and trade‒that can complement the country’s planned
sector policies. Fiscal policies help set price signals and provide
incentives for green investments. Financial sector policies affect the cost
and availability of capital for green investments‒which are complemented by
investment climate policies that influence private sector activity. Meanwhile,
trade policies support firms’ access to green inputs and markets. Reforms in
these areas will help firms and workers participate in the new, greener economy.

Indonesia’s fiscal framework has historically incentivized carbon consump-

tion, although ongoing reforms are trying to redress this. Incentives are driven
by low taxation of, and subsidies for, fossil fuels. Fiscal support for fossil fuels
as a share of tax revenue in Indonesia has declined‒with a sharp drop in 2015
(Figures 6 and 7). Generalized subsidies, however, disproportionately benefit
better off households.15 Sustaining efforts to cut subsidies on final energy
15 An estimated 80
and channeling the savings to eligible households would send better price
percent of gasoline sub-
sidies go to households
signals, protect poor households, and create fiscal space. Meanwhile, most
at the 5th expenditure tax policies do not yet disincentivize carbon consumption. Carbon taxation can
decile and above. For
diesel and LPG subsidies cut emissions and be a source of government revenue. A recently proposed
to households, 95
percent and 68 percent carbon tax‒initially applying to coal-fired power plants‒would be an important
respectively go to the
top 60 percent of house-
first step; a roadmap for its expansion (across sectors and price levels through
holds. For electricity, time) would further help encourage long-term planning by firms. Over time,
all connections to the
PLN grid are categorized expanded carbon taxation can help remedy Indonesia’s overall shortfall of
as either subsidized or
unsubsidized, but even public tax revenue.
unsubsidized users
benefit from subsidies
due to below-cost tariffs. The government has raised administered energy prices in response to the
It is estimated that 42
percent of total electrici- recent energy price shock.16 This will relieve some subsidy pressures, howev-
ty subsidies in 2022 will
accrue to unsubsidized er, significant energy subsidy reforms or carbon pricing may be difficult under
grid connections. The
estimates of fuel sub-
current economic conditions. At a time of high energy prices, maintaining
sidy incidence are MoF general subsidies instead of replacing them with targeted transfers may be
estimates, while that of
the electricity subsidy easier because some poor households that consume fuel do not receive social
incidence is a World
Bank estimate. transfers to compensate for higher fuel prices. Additionally, price controls can
16 The government in- shield producers from higher input costs. As the authorities already know, how-
creased electricity prices
for selected households ever, these subsidies are costly in the context of limited fiscal space. Moreover,
in July 2022 and raised
the administered price
general subsidies disproportionately benefit better-off households. It is, there-
of gasoline and diesel by fore, important to sustain efforts for strengthening the delivery infrastructure
30 percent in
September 2022. for social protection and devise timebound transfers to affected households.

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 F I G U RE 6 F I G URE 37

High but Decreasing Most Support is

Fossil Fuel Support Geared to Consumers
Total fossil fuel support Fossil fuel consumer support

Source: WBG staff estimates using

OECD Green Growth Data.

Note: See note in figure 2 regarding

structural peers

The financial system is a critical enabler of climate action; deepening of risk

management capacity and green finance instruments can help. The financial
sector is small in Indonesia17 and has high exposure to climate risks, however,
its capacity to identify, assess, and monitor those risks is nascent. Capacity to
identify and monitor green investments is similarly limited. The government is
working to address these limitations, for example, through a 2017 regulation
on sustainable finance requiring Indonesian financial institutions to incorporate
sustainable practices in their business operations. The publication of a green
taxonomy for the financial sector in 2022 was another important step. As in
most emerging economies, green finance markets are still small (0.4 percent
of GDP), dominated by sovereign bond markets, with limited instruments, and
most credit options available in the market having shorter maturity terms.

Private sector investment could be encouraged by allowing more private

participation in, for example, infrastructure projects currently dominated
by State-Owned Enterprises (SoEs). Participation could be increased through
changes to the investment and regulatory environment: (i) reform of SoEs pref-
erential access to financial resources (credit, capital injections) could create
greater space for private firms; (ii) strengthened structuring and documentation
of Public Private Partnerships (PPP) could help encourage foreign investors;
(iii) streamlining of the legal framework governing cooperation projects could
17 For example, similarly help; and (iv) further guidance regarding the methodologies and rules
private credit amounts
to 38 percent of GDP, governing environmental impact assessments for cooperation projects.
compared to a Middle-In-
come-Country average of
over 120 percent. Trade policies can also contribute to Indonesia’s decarbonization objec-
18 Based on a CCDR tives.17 Despite low average tariffs on imports of green goods and technolo-
survey of the emis-
sions, environmental gies, World Bank analysis finds that non-tariff measures (NTMs) in Indonesia
practices, and drivers
and constraints of 700 impose an additional cost to green goods of about 20 percent. Adjustments
manufacturing firms
based in Java. to LCRs could also improve the investment climate. While LCRs aim to provide
19 Based on World incentives for local manufacturing, they impact short-term uptake. For instance,
Bank analysis of
140,000 Indonesian job
LCR regulations set the level of domestic components for solar modules at a
advertisements retrieved minimum of 40 percent. Domestically produced solar panels are still more
in 2020 from more than
200 online sources. expensive and their efficiency is lower than those available in foreign markets.

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 LCRs may also act as barriers to international public procurement, reducing the
attractiveness of major renewable energy sector public procurement projects.
Stringent LCRs for EVs may face similar issues.

Firms in carbon-intensive manufacturing industries are adopting green man-

agement practices, but a lack of knowledge and financing is constraining
their decarbonization. The CCDR surveyed over 700 firms, and found that
green management practices (for example, green strategies, dedicated energy
personnel, and monitoring of emissions from energy use) are prevalent, driven
partly by government regulations on environment and energy efficiency. Nev-
ertheless, 58 percent of respondent firms did not consider energy efficiency
investments to be a priority or were constrained by a lack of information (43
percent) or financing (32 percent). The estimated payback period for energy
investments is three years for medium firms and five years for large firms, but
most credit options available in the market have shorter maturity terms.

Indonesia is developing Eco-Industrial Parks (EIP) to improve the climate

footprint of manufacturing firms. EIPs promote more environmentally friend-
ly production approaches through shared infrastructure and knowledge but
there are constraints. EIP development could be further supported through
development of an EIP strategy with environmental performance indicators and
targets, and a shift away from heavily leveraged SoE utilities and operators with
insufficient capital for the investments required for low-carbon energy supplies
and other green infrastructure.

The supply and demand for green skills is small but likely to grow. Indonesia’s
economy has a small share of firms producing green outputs (6 percent), and
only 5 percent of online job advertisements analyzed by a World Bank survey
required at least one green skill.19 Although not all green-related jobs have high
skill requirements, trends in high-income countries suggest that the demand
for green labor in Indonesia will increasingly require higher-value skills and
will grow over time, requiring a commensurate shift in training and education.

4 CLIMATE ACTIONS COULD

SUPPORT FASTER GROWTH

W
hat would climate action mean for Indonesia’s growth and
development? The CCDR explores how reforms to energy,
land, and fiscal policies could impact emissions, growth, pric-
es, and poverty. Like all modelling exercises, the results are
illustrative and subject to a wide range of uncertainties. They
are based on specific assumptions that may not hold precisely in reality, and
they are subject to uncertainties in how technological advances and global
conditions could evolve. The modelling focuses on the implications of mitigation.

Economic impacts of climate actions are modelled in three stages. Stage 1

uses two separate land and energy models to assess the potential impacts of
sector-specific reforms. Stage 2 integrates the land and energy reforms together
with fiscal reforms (subsidy cuts and carbon taxes) in an economy-wide CGE

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 model to assess possible long-term emissions and growth outcomes. Stage 3
integrates growth outcomes from the CGE model into two separate microeco-
nomic and trade simulation models to assess household and trade impacts.

The combined effects of land, energy, and fiscal policies are analyzed in
three scenarios with incremental levels of ambition to assess costs and
benefits of decarbonization over time. The baseline projection is a BAU case
in which current climate policies are maintained with no new additional policies,
while the three alternative scenarios are:

1
Redirection of electricity and
2Nationally Determined Con-
fuel subsidies: Refined target- tribution (NDC): This includes
ing of subsidies is expected retargeting of subsidies (that is,
to be a net gain for Indonesia. scenario (i) above) and is aug-
Savings from the elimination mented by three other climate
of subsidies are used to sup- actions: (i) land-related policies
port transfers to compensate (restoration, and extended mor-
the bottom 40 percent of the atoriums on deforestation); (ii)
population. energy-related policies (transi-
tion away from coal and toward
renewable energy); and a car-
bon tax that reaches US$40/
tCO2eq by 2040. The carbon tax
is applied to all sectors except
for agriculture. The reduction of
emissions under this scenario
enables Indonesia to lower
negative externalities–such as
air pollution and losses from
fires related to land clearing.
Revenues from the carbon tax
are used for investment‒with
replacement of stranded fossil
fuel assets accounting for 25
percent of the new investment.
3
Nationally Determined Con-
tribution Plus (NDC+): This
includes all the actions from
the NDC scenario above (that
is, retargeting of subsidies,
land-related policies, and ener-
gy-related policies), along with a
higher carbon tax rate, reaching
US$200/tCO2 by 2040. The
reduction of emissions in this
scenario is twice as rapid as in
the NDC scenario. Such a rapid
reduction involves higher net
costs for Indonesia than the
projected emissions reduction
in the NDC scenario because of
the more ambitious emissions
cuts, however, it also produc-
es greater global benefits. To
help compensate Indonesia for
the higher costs, a sensitivity
analysis is performed in which
increased foreign investment
(1 percent of GDP) accrues to
Indonesia throughout the pro-
jection period.

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 F I G U RE 8 Overview of Modelled Scenarios

1 Energy Policies Land Policies

Green RUPTL in 2020-30 (BAU) Current land policies and restoration extent (BAU)

Intermediate decarbonization scenario (IDS) (Green RUPTL in Peatland restoration (3 million ha)
2020-30 and economic least-cost expansion in 2030-40)
Extended forest and peatland moratoriums
Accelerated decarbonization scenario (ADS)
Land-based emissions tax with redistribution
(a cap on emissions is used to drive an 80%
($US5/tCO2eq)
power sector emissions reduction)
Combination of above land interventions

2 Economy-wide Scenarios
C U RRE N T P O L ICY S E T T IN G S

Eliminate fuel and electricity subsidies NDC by 2030 scenario NDC+

No additional energy policies Carbon tax → $US40/tCO2eq by 2040 Carbon tax → $US200/tCO2eq by 2040

No additional land policies Energy Policies → decarbonization Energy Policies → decarbonization

Land policies → Selection of above Land policies → all of above combined

(NDC consistent)
Foreign Investment

3 Further Implications
DI S T RI BU T I ONAL I MPAC T S T R A DE IM PAC T S

Note: RUPTL: Rencana Usaha Penyediaan Tenaga Listrik (Business Plan for Electricity Provision).

In summary, the proposed climate actions could help reduce emissions

while contributing to economic growth and poverty reduction. Actions that
retarget energy subsidies have minor impacts on GHG emissions. Their impact
on growth, as in other scenarios, depends on whether fiscal gains are recycled
through transfers (lower growth than BAU but better household welfare out-
come) or through investment (higher growth than BAU but short-term welfare
challenges). Public transfers to compensate poor households against high
energy prices are mandated by law. Combining subsidy redirection with land
and energy policy measures, together with a carbon tax (US$40.00 per ton
of CO2eq by 2040), allows Indonesia to meet its NDC targets while adding
an average of 0.7 percentage points of GDP over the long term. The (slightly)
higher GDP in this scenario comes from the elimination of distortions but also
higher investment in land restoration and energy infrastructure. A more ambi-
tious carbon tax (US$200.00 per ton of CO2eq by 2040) would over the long
term cause a (slight) reduction in GDP relative to BAU. External financing could
reverse this to add 0.8 percentage points to GDP. The scenarios assume car-

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 bon tax revenue recycling through investment. Incremental investment needs
range from 0.4 percent to 1.6 percent of GDP per year. Poverty is expected to
decline in all modelled scenarios.

Going into more detail, land-based measures drive substantial emissions

reductions and have small positive impacts on GDP. Peatland restoration,
strengthened moratoriums, and a land-based emissions tax20 combined are
estimated to reduce annual emissions by 987 MtCO2eq by 2030, sufficient
to meet the government’s 2030 NDC commitments and FOLU 2030 Net Sink
objective (Figure 9). These measures combined are positive in terms of GDP
(an additional US$16.19 billion between 2018 and 2030) and have further
benefits in terms of reduced health impacts and losses due to fires: avoided
losses are estimated at US$65.04 billion between 2018-30.

Decarbonizing the power sector requires going beyond the government’s

current plans (RUPTL 2021-30). The analysis focuses on generation connect-
ed to the electricity grid managed by PLN. In 2020, this represented 64 GW
out of a total installed capacity of 72 GW. As a result, the modelling does not
cover, for example, coal-generation in captive power plants or in off-grid systems
due to data constraints. Scenarios include capacity expansion plan as per the
RUPTL 2021-30 (BAU), intermediate decarbonization (IDS), and accelerated
decarbonization (ADS) that achieves an 80 percent emissions reduction relative
to BAU by 2040 (Figure 10). The investment requirements of the power sector
are expected to be at least 50 percent higher under ADS (US$157 billion in
discounted terms) than BAU (US$104 billion in discounted terms). The levelized
cost of electricity in ADS will be 11 percent higher than under BAU.

Modelling suggests that it will be economically advantageous to exit 4 GW

out of 13.8 GW of pipeline coal plants that have not started construction or
are at early stages of development. Given the excess capacity in the system,
these plants will not be needed to meet electricity demand. Their power purchase
agreements will be financially onerous on PLN and deter development of renew-
able energy. It will also be important for Indonesia to pursue its plans for early
retirement of coal plants to benefit from low-cost renewable energy generation.

The net impact of combined land, energy, and fiscal reforms on long-term
GDP are very slightly positive (Figure 11). Across scenarios, GDP is 0.03 to 0.8
percentage points higher on average than under BAU over the 2022-40 model-
20 While Indonesia has plans to in- ling period. Domestic investment needs range from 0.4 to 0.7 percent of GDP
crease restoration and forest protections
(and has done so already), a land-based per year; more ambitious decarbonization scenarios require higher investment
emissions tax is not currently being
considered. This instrument is thus
rates (Figure 12). In the more ambitious decarbonization scenario (NDC+), GDP
hypothetical and included to explore
potential complementarities between
is very slightly diminished by the high carbon tax, however, this small negative
fiscal- and regulatory-based policy impact can be offset by an additional one percent of GDP in external financing.
approaches. This hypothetical scenario
would entail a US$5.00 per ton charge
on high-emissions agricultural activity
(including forest conversion) to provide
While the policies have mixed effects on labor incomes, they could boost
a disincentive on the development of government revenues significantly‒thereby allowing for increased social
the most carbon-rich forest or plantation
concessions. Such an instrument would assistance. The primary driver of the growth of consumption across the three
be relatively novel. One approach would
be to apply a downstream tax on select scenarios is the growth in social assistance (that is, government transfers).
commodities produced on designated
high-carbon landscapes via adjustments
Assuming the higher revenues are recycled into social assistance, the net effect
to the existing fiscal instruments used
in the agricultural sector (such as the
is an increase in household expenditures and a decline in poverty relative to
palm oil levy). BAU across all three scenarios (Figure 13 and Figure 14).

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 F I G U RE 9 Policies to Reduce Land-based Emissions have Significant Economic Co-benefits

F I G U RE 1 0 Faster Coal Phasedown Drives Lower Emissions

2022 EMI S S I ON S = 190M t C O 2 e q

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 F I G U RE 1 1 F IG U RE 12

Positive Growth Impacts From Decarbonization Foreign Investments can Alleviate Trade-offs
GDP percentage difference from BAU in More Ambitious Scenarios
Investments (difference from BAU, % of GDP)

Source: WBG staff analysis using the MANAGE CGE model.

F I G U RE 13 F IG U RE 14

Household Expenditure Expected to Increase Poverty Rates Projected to Decline

Percent Change in Expenditure vs BAU by 2040 Change in Poverty Rates vs. BAU by 2040 (percentage points)

Sources: WBG staff analysis based on integrated economic and biophysical CGE model (Figure 9); power sector
modeling (Figure 10); MANAGE CGE model (Figures 11, 12); and Microsimulation Model (Figures 13, 14)

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5 THE CLIMATE &
DEVELOPMENT TO-DO LIST

W
hat are the implications of the above for policy priorities? To
recap, Indonesia has drawn on its abundant supply of natural
resources while achieving impressive development transitions
in income, social services, infrastructure, economic growth,
and poverty reduction‒particularly over the quarter-century
to 2022. Nevertheless, climate change poses physical and economic risks for
Indonesia, and some aspects of the earlier growth model have imposed costs
on development. In response, Indonesia has embarked on a transition toward
low carbon and climate-resilient growth, that “balances between emission
reductions and economic development” (Republic of Indonesia 2021).

The CCDR draws on the government’s strategic documents as well as its

own analysis to propose a policy framework that balances climate and
development (Figure 15). Policies aim to balance changes in the supply of
carbon-intensive inputs (1) with adjustments to demand for those inputs (2).
They create the enabling conditions to facilitate a reallocation of resources from
carbon-intensive to greener parts of the economy (3), and from low productivity
to high productivity areas of the economy, while raising new financing. Adapta-
tion policies (4) aim to provide certainty and insurance for the economy (and
people) via measures that protect against shocks, reduce risks, and ensure
inclusion. All four policy areas work together, with the transition expected to be
more efficient when simultaneous progress is made in each area.

There are six policy priority areas that can be addressed in the next two
years that will help place Indonesia on a pro-development climate transi-
tion trajectory. These measures are starting points, with longer-term reforms
and investments required in the medium and long term to capitalize on the
pathway they set.

F I G U RE 1 5
Building Blocks for the Transition

Reduced transition
Supply-side Demand-side costs
Measures Measures
TO G E T H ER Efficient resource
PROMOT E allocation
Adaptation Enabling
Conditions Certainty and
insurance

“ The CCDR policy framework is

built around considerations of
urgency and synergy ”
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 Selected short-term priorities
BY 2 0 2 5

1 Continue to strengthen the

policy framework for net zero
(i) build on recent regulatory reforms to further expand forest
protections over areas of peatland not already covered; (ii) in-
emissions from forests and land tegrate mangrove protection into subnational (provincial and
use and develop a financing district) spatial plans (focused on non-forest areas) and help
roadmap for the FOLU Net Sink ensure AMDAL assessors correctly designate mangroves as
2030 plan: ecosystems of high conservation value; (iii) finalize OneMap
and continue to clarify the tenure of different land functions
as a stronger basis for enforcement; (iv) use fiscal incentives
plus increased enforcement to ensure district governments
complete their spatial plans to direct new agriculture away
from high-carbon and sensitive ecosystems; (v) develop a
financing roadmap to support restoration investments and
other planned FOLU Net Sink 2030 activities; (vi) support
(longer-term) expansion of farmer extension and financing‒
focused on smallholders‒to improve agricultural yields.

2 Implement an energy transition

strategy founded on five pillars:
(i) adopt a comprehensive approach to decarbonization plan-
ning and energy transition; (ii) accelerate carbon pricing and
subsidy reform when circumstances allow (including remov-
al of the DMO and the price cap for coal), to increase the
incentives for investment in renewable energy and energy
efficiency; (iii) improve the investment climate for renewable
energy through institutional and regulatory reforms, including
lifting of LCRs in the solar industry; (iv) strengthen the capac-
ity and flexibility of electricity networks to absorb additional
renewable energy; and (v) manage the poverty and social
impacts of the energy transition.

3 Further catalyze investments in

low-carbon transport through
Unplanned urbanization risks locking in suboptimal energy
use patterns in the building sector and in transportation
the development of a national networks. A NUMP will set goals for achievement of green
urban mobility policy (NUMP) mode share targets, and develop planning, institutional, and
framework and increase energy funding frameworks for prioritizing investments in efficient
efficiency of commercial and modes (public transport, walking, and cycling) and efficiency
residential buildings through improvements (electrification of vehicles) in the longer-term.
green certification. Meanwhile, cost-effective green standards already exist but
are not yet applied to all building types. These could be con-
sidered for extension.

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4 Improve flood resilience through
spatial planning and ear-
Re-map flood-prone zones with climate-sensitive hydrological
predictions and update spatial plans. Prioritize enforcement
ly-warning systems. of mandated groundwater abstraction limits or prohibitions
at subsidence hot spots to reduce coastal flooding risks.
Continue investing in an integrated and people-oriented
multi-hazard early warning system based on a user needs
study for improving weather warning services and develop a
roadmap for shifting from weather-prediction to “impact-pre-
diction” services.

5 Continue to shift fiscal policy to

disincentivize emissions.
Develop a roadmap for subsidy reform covering: (i) resump-
tion of transport fuel subsidy reductions building on recent
progress; (ii) replacement of the electricity price subsidy
(PLN’s PSO) with targeted cash transfers; and (iii) consistent
with the subsidy reform plan, develop a medium-term plan
for carbon pricing. This could include fossil fuel excises and
extension of the existing pilot Emissions Trading Scheme and
carbon tax across additional sectors.

6 Strengthen the financial and

private sector enabling environ-
(i) develop a comprehensive strategy for financial sector cli-
mate-risk assessment with detailed guidance for banks; (ii)
ment for green investments: develop further specific national climate finance strategies to
diagnose Indonesia’s climate finance gap; (iii) incentivize the
use of green bonds; (iv) reform SoEs to create new opportu-
nities for private investment in green infrastructure; and (v)
reform PPP project selection, preparation, agreement, and
concession procedures.

These measures are starting points; the full policy framework (Chapter 5 of
the full report) reflects medium- and longer-term needs of the climate transi-
tion. Urgency and synergy considerations are used to identify Indonesia’s best
reform opportunities. While many measures are important, some are urgent.
Inaction will lock in carbon-intensive development patterns or vulnerabilities
that increase costs. Other measures can be delayed in recognition of short-
term financing limits or potential benefits from the expected decline in the
cost of technologies. Meanwhile, some measures are expected to contribute to
both climate and development goals by improving the business environment,
helping to balance the budget, or by reducing negative externalities. Measures
with the highest potential impact on both are Indonesia’s best opportunities
(summarized in Figure 16 and detailed in Chapter 5 of the full report).

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 F I G U RE 1 6 Climate and Development Policy Framework
SUPPLY
Energy Land Adaptation
S.1 Adopt a comprehensive approach to decarbon- S.6 Continue strengthen- A.1 Continue to improve standards
ization planning and the energy transition ing regulations on forest and practices for more resilient
protection infrastructure
S.2 Continue energy pricing and subsidy reform
by phasing out coal DMO subsidies and phasing in S.7 Expand the integrated A.2 Improve flood resilience through
carbon pricing landscape management spatial planning and groundwater
approach pumping control
S.3 Lower regulatory barriers to renewable energy
development by the private sector S.8 Increase fiscal incen- A.3 Complete the ongoing reforms
tives for sustainable land to strengthen the social protection
S.4 Further invest in the capacity and flexibility of use practices at the local system’s adaptability to climate risk,
transmission and distribution networks, including level including finalizing links to the PFB
interconnections between island systems and completion of the ASP roadmap
S.5 Pursue a “Just Transition for All” for the coal A.4 Build resilience among house-
phaseout holds through social programs
DEMAND

Electricity Agriculture A.5 Improve DRM processes to

& Forestry
D.1 Increase the share of revenue received from
electricity tariffs D.7 Increase sustainable
intensification support for
D.2 Review alternative financing options for PLN to
smallholder agriculture
use to finance expansion of renewable energy
D.8 Repurpose public
Urban Design spending in agriculture to
address the needs of diverse and
vulnerable groups
A.6 Invest in city-level infrastructure
for urban flood resilience and livability
A.7 Further invest in an integrated
and people-oriented multi-hazard
early warning system

& Transportation incentivize resilient and

low-carbon agriculture
A.8 Deliver site-specific CSA
intervention packages based on local
D.3 Increase energy efficiency in commercial and D.9 Clarify peat and forest vulnerabilities
residential buildings through green certification land designations and
A.9 Leverage technology includ-
increase transparency in
D.4 Develop a NUMP to catalyze investments into ing telemedicine to strengthen the
concession-granting
public transport, walking, and cycling health system in the face of climate
D.10 Integrate spatial plan- challenges
D.5 Accelerate the adoption of electrified mobility
ning with capital investment
(e-mobility) in concert with decarbonization of the
planning in new, secondary-
electricity grid
and small cities
D.6 Integrate cities into medium- and long-term
climate change strategies at the national level with
dedicated city-level targets
ENABLING CONDITIONS

Fiscal Financial Investment Trade Firm-level

E.1 Develop a roadmap to
complete transport fuel subsi-
dy reforms
E.2 Convert the electricity
price subsidy (PLN’s PSO)
into targeted cash transfers
for eligible households
E.3 Review the inventory of
tax measures to better align
fiscal policy with low-carbon
objectives
E.4 Develop an integrated
roadmap for carbon pricing
E.5 Develop a comprehen-
sive strategy for climate-risk
assessment
E.6 Develop further guid-
ance on risk management
approaches and disclosure
requirements for banks
E.7 Develop a further
climate finance strategy
focused on Indonesia’s
climate finance needs and
opportunities
E.8 Incentivize the use of
green bonds through diverse
channels
E.9 Develop further
guidance and incentives to
stimulate green loans
Climate
E.10 Reform SoEs to create
new opportunities for private
investment in green infra-
structure
E.11 Reform PPP project
selection, preparation,
agreement, and concession
procedures
E.12 Develop an asset mon-
etization strategy to promote
private sector participation in
SoE assets
E.13 Consolidate the regu-
latory framework governing
Cooperation Projects
E.14 Unbundle investment
risks to promote foreign
participation
E.15 Liberalize remaining
tariffs on imports of green
goods, including through
multilateral participation
E.16 Review and streamline
NTMs on green goods
E.17 Harmonize existing local
standards with international
ones and develop new
standards that are aligned
with international standards
and practices
E.18 Reduce the stringency
of LCRs until demand can
sustain local economies
of scale
E.19 Include enforceable
environmental provisions in
trade agreements
Measures
E.20 Incentivize renewable
energy foreign direct
investment
E.21 Develop an Eco-Industri-
al Park roadmap
E.22 Implement circular
business and low-carbon
growth measures as per
Bappenas’ LCDI
E.23 Align business
support programs with
climate objectives
E.24 Continue modernizing
the skills development
system to respond to changes
in labor demand
E.25 Introduce climate
change education in schools 2 3
C limate & D e v elopment in I ndonesia KE RE N G BA N G KI R A I • CE N T R A L K A L I M AN TA2N4
REFERENCES

Greenstone, M., and Q. Fan. 2019. “Air Quality Life Index: Indonesia’s Worsening Air Quality and its Impact
on Life Expectancy.” (link)

Maghfiroh, M., and A.H. Pandyaswargo. 2021. “Current Readiness Status of Electric Vehicles in Indonesia:
Multistakeholder Perceptions.” Sustainability 13 (23): 13177.

Ministry of Environment and Forestry (Indonesia). 2021. “Roadmap of Climate Adaptation in NDC.” Jakarta.

Ministry of Health (MoH). 2021. “Buku Saku Hasil Studi Status Gizi Indonesia (SSGI) Tahun 2021 (Pock-
etbook of the Outcomes of the Indonesian Nutrition Status Study 2021). Jakarta: Research and De-
velopment Agency, Ministry of Health. (link)

Republic of Indonesia. 2021. “Indonesia: Long-Term Strategy for Low Carbon and Climate Resilience
2050.” (link)

Republic of Indonesia. 2022. “Enhanced Nationally Determined Contribution.” (link)

World Bank. 2021. “Changing Wealth of Nations: Managing Assets for the Future.” Washington, DC: World
Bank.

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