Unpacking Indonesia’s long-term climate strategy

In late July 2021, in the lead up to COP26 in Glasgow, the government of Indonesia submitted two documents to the UNFCCC:

1. An updated nationally determined contribution (NDC)

2. A long-term strategy for low carbon and climate resilience 2050 (LTS-LCCR)

While some have criticized Indonesia’s topline commitments for emission reductions in 2030, which remain unchanged from its initial 2016 goals, as falling short of what’s needed to meet the goals of the Paris Agreement; many have applauded Indonesia’s submission on its first long-term strategy to the UNFCCC. The LTS-LCCR outlined Indonesia’s plans to peak emissions by 2030, while aiming for net-zero GHG emissions by 2060 or sooner. This is the second significant net-zero pledge from an emerging economy, besides China, and comes a decade earlier than the first net-zero commitment announced by President Joko Widodo in March 2021.

This marks an important shift in the right direction for Indonesia, bringing the country one step closer to reaping the benefits of embracing a new climate economy. This move also comes at an opportune time. With Indonesia taking on the helm as the leader of G20 next year, this could serve as a great example for other emerging Asian countries to raise their climate ambitions and come up with their own net-zero pledges.

Continued coal use would leave net-zero pledge as a pipe dream

Though largely commended, Indonesia’s net-zero roadmap is not without flaws. Perhaps to mask its economic reliance on thermal coal, the energy sector failed to receive much coverage in Indonesia’s long-term climate strategy, with much of the spotlight placed on forestry and land-use. This is despite energy emissions being the second largest emitter of emissions in Indonesia, accounting for 38% of total emissions in 2019.

Most notably, fossil fuels are still set to play a major role in 2050. Despite its net-zero commitment, Indonesia will continue to burn domestically produced coal well into the 2050s, with coal and gas plants accounting for 38% and 10% of the power mix, respectively. In fact, to make up for declines in export volumes, Indonesia will see its domestic consumption of coal increase between 2019 to 2050. To accommodate for the continued use of coal, Indonesia’s net-zero ambitions in the energy sector is based on flimsy assumptions of equipping 75% of its fossil fuel plants with carbon capture and storage by 2050, which is unrealistic, uneconomic and mostly untenable to most observers.

With energy sector emissions set to overtake forestry and land use change as Indonesia’s largest share of emissions by 2026-2027, Indonesia’s continued fossil fuel use in the energy sector raises much cause for concern, leaving some disregarding Indonesia’s net-zero ambitions as brash showmanship.

Worrying terminology underscores inconvenient truths

While many observers worry about the risk of stranded assets as investments locked in coal plants as the world decarbonizes, the term takes on a different meaning in Indonesia’s LTS-LCCR. The national energy rhetoric frames “stranded assets” primarily as an economic loss of about USD$218 billion due to production loss as a result of reduced global demand for coal.

This warped use of the term “stranded assets'' reveals an inconvenient truth for Indonesia: the tendency to focus on resource exploitation, particularly fossil fuel exploitation, limits any true transformation of Indonesia’s long term energy strategy. Just speak to any Indonesian, and one would realize that the sentiment that exploitation of fossil fuel assets should be optimized, if not maximized, is a unifying cry for the country that is still trying to lift 10% of population, or roughly 27 million people, out of poverty.

However, the reality is that Indonesia’s growth story cannot be built on unsustainable exploitation of its fossil fuel resources and continued investments into a high-carbon growth trajectory, to the detriment of its natural capital. Coal mines have been repeatedly blamed for increased occurrences of landslides, while increased coal-fired generation has led to air pollution concerns endangering millions, particularly around the highly-populated Jakarta area. Indonesia is also highly vulnerable to the adverse impacts of climate change, with high exposures to extreme weather events (such as floods, droughts and heatwaves), sea-level rise and changes in precipitation patterns, which will negatively impact its large agrarian population.

Renewables: an unmet promise

Compared to a national grid bogged down by fossil fuels, a zero carbon grid, powered by more renewables, is a realistic aspiration for Indonesia that comes with none of the added social costs. Blessed with an abundance of renewable resource potential, including solar, wind, hydro and geothermal, Indonesia can look to power its economy three to four times over with purely renewable energy.

However, policy impediments largely inhibit greater uptake of these renewable resources. Compared to its high resource potential, renewables (solar and wind) only accounts for 0.2% of Indonesia’s generation in 2019. Current policies, including fossil fuel subsidies and domestic market obligations for fossil fuels, among others, have kept prices for baseload fossil fuel plants artificially low. On the other hand, the republic’s punishing local content requirement for solar projects, complex and ever-changing renewable energy policies and regulations have inflated renewable energy costs in the archipelago.

To clear the way for more renewables in the power mix, Indonesia will have to reassess the role of fossil fuel vis-à-vis renewables in its energy mix and implement the right set of policies to incentivize capital flow into renewables and shift away from its current pro-fossil fuel policies.

Build back better, stronger – but, how?

As nations try to build back from the COVID-19 crisis, many organisations, such the IEA and WRI, have identified this as a rare opportunity to start shifting the economy from grey to green, through the use of “green stimulus” packages. Unsurprisingly, Indonesian policymakers, too, have been quick to proclaim a green recovery.

Recent modelling by the Ministry of Development Planning (BAPPENAS) shows that a more ambitious net-zero target can not only generate stronger economic growth, but also contribute to higher quality and more resilient jobs in the long run. This clearly showcases that a green economy and transition towards low carbon development can be a strong economic driver and may be a way to help Indonesia “escape the middle-income trap by 2045”.

However, having built on fossil fuel exports to power its economy in the past few decades, it is not easy for Indonesia to turn its back against coal, oil and gas. The BAPPENAS study, though encouraging, is insufficient to drive the shift away from fossil fuels towards a low-carbon development trajectory. One key shortcoming of such macroeconomic modelling-backed reports is the inability to translate results into actionable policies and roadmaps. To propose ditching key export dollars from fossil fuels based on hopes of stronger economic growth and better jobs, without first securing a viable pathway to the economic transformation, is unlikely to gain popularity.

In fact, the current developments seem to suggest that Indonesia is missing the boat entirely on locking in deeper emissions reductions through its pandemic recovery. The state-backed National Economic Recovery (PEN) plan, which earmarked US$49 billion to support the pandemic recovery, continues to see state funds flow into bailing out fossil fuel backed state-owned entities, while low carbon related projects only received 0.9% of total allocations. In the absence of strong signalling, private investments are also being poured generously into fossil fuel projects, including US$1.34 billion on new upstream oil and gas assets, and 22 GW worth of new coal plants in the pipelines.

To add to the decarbonization challenge, the coal industry is a key source of employment for Indonesia, particularly in coal-rich regions such as Kalimantan. In fact, fossil fuel related extractive industries account for as much as half of the provincial GDP in some resource-rich areas. While a pivot to a green economy is bound to create new opportunities, the spread of these opportunities is likely to be uneven. Thus, an energy transition will leave many behind, unless proper Just Transition policies are introduced to reduce employment friction, maintain job/economic security and minimize social unrest.

Step-by-step approach

Needless to say, the challenge for Indonesia in managing an inclusive energy transition, while maintaining strong economic growth and lifting its population out of poverty, is a herculean task. But, it is not unsurmountable. With properly thought-out policies and religious implementation, marrying the economic realities, particularly in fossil fuel-dependent communities, with low carbon development goals will not only be possible, but also be the key to reshaping the economy to deliver on multiple policy goals spanning economic, climate and social themes.

To that end, Indonesia is looking to unveil a host of new regulations aiming to slowly turn its economic engine to a “low carbon” gear. The Environment and Forestry Ministry (MENLHK) is looking to unveil a series of climate related regulations to support its climate goals, including instruments such as a carbon tax, carbon offset and trade, results-based payments etc. Complementary finance and investment policies, such as tax incentives for renewable energy projects, and sustainable finance roadmaps and instruments, also contribute to lifting the attractiveness of renewables against fossil fuels.

Concurrently, Indonesia is taking steps to reassess its reliance on coal. The state utility, Perusahaan Listrik Negara (PLN), has pledged to phase out fossil fuels by 2056 and reach net neutrality by 2060. Concrete roadmaps are also laid out for the retirement of over 50 GW of subcritical coal-powered plants in the coming decades. Although these ambitions are slightly undercut by mixed messaging such as continued fossil fuel subsidies and an implicit policy preference for baseload fossil plants, the presence of high-level signalling is useful as policymakers work to nail down policies and instruments to facilitate the low-carbon transition. Complement that with green-growth industrial policies aimed at developing and promoting low carbon technologies, we may be on our way to the suite of policy instruments that will support an energy and economic transformation in Indonesia.

Looking to the future

While Indonesia’s latest long term climate strategy has not catapulted the country to the ranks of a global leader on climate change, the underlying intention and ambition of a net-zero pledge should be applauded. Having made the first step through its net-zero pledge, Indonesia now has to embark on the long and difficult road to implementation. Coupled with a national economy reliant on fossil fuels, entrenched interests in high-carbon development pathways and a need to continuously improve socioeconomic standing of its growing population, the decarbonization challenge is not expected to be easy for the country. Though flawed, Indonesia’s current plans could be the springboard to more ambitious climate goals, and should be commended, lest it pave the way for more emerging economies to take bolder climate pledges and spur further mitigation efforts.