Green is the New Gold: Unlocking Indonesia’s Prosperity through Climate Finance

This article was originally published in Jakarta Post

The Indonesian election dust has settled, and a new administration prepares to take the helm in a few months. Their in-tray is overflowing: ambitious economic growth targets hover around 8%, coupled with the urgent need to expand access to affordable healthcare, education, and free nutritious meals. However, Indonesia’s current financial landscape presents an intense challenge. In this tight fiscal environment, securing the necessary funds to achieve these goals is shrouded in uncertainty. The question isn’t just “how” to achieve these goals, but also “where” the necessary funds will come from. Tight finances demand creative solutions.

The challenge is also amplified by the need to address the climate crisis. Indonesia, like the rest of the world, faces a critical responsibility to transition towards sustainable practices. Accordingly, this agenda also requires substantial funding. By the estimates of Finance Minister Sri Mulyani in 2023, Indonesia needs at least Rp 4,000 trillion to meet its Nationally Determined Contribution (NDC) and achieve its greenhouse gas emission reduction targets by 2030—she added that the annual State Budget (APBN) can barely afford 20% of it. This, again, raises a precarious question: where will the 80% come from? Unfortunately, relying solely on state resources to take on both national development and climate change is simply not feasible in today’s economic climate. This is where climate finance emerges as a bridge to thrive on.

There’s a crucial misconception to bust: climate finance isn’t solely about mitigating climate change. It’s a powerful development tool in its own right. At its core, climate finance is about fostering people’s prosperity and well-being. By empowering communities, alleviating poverty, and strengthening a nation’s overall capability, climate finance enables sustainable economic growth. This, in turn, equips the country to tackle climate challenges with greater resilience and resources.

Multiple avenues exist to access climate finance, each offering unique advantages and considerations. International public sources like the Green Climate Fund offer grants and loans. The private sector offers carbon markets where companies can trade emission reduction credits called cap allowances, creating a financial incentive to sustainability. Indonesia currently has two carbon trading mechanisms. Compliance markets (mandatory participation) offer larger volumes but complex regulations, while voluntary markets (choice-based) provide flexibility with plausibly lower volumes and transparency. In September 2023, the Indonesian Stock Exchange launched IDXCarbon, the official platform for compliance-based carbon trading. With these diverse funding mechanisms in place, the question remains: how big is the funding potential for the climate sector, really?

While the exact figure is difficult to predict, the Climate Policy Initiative suggests global investments for climate finance should reach an increase of $9 trillion annually by 2030. Even within Europe, substantial resources require €800 billion specifically for energy infrastructure upgrades. Unlocking this prospect requires coordinated efforts from governments, businesses, and international organizations.

Examining recent policy developments around the world reveals a growing appetite for innovative approaches to climate finance. The United States’ Inflation Reduction Act (IRA) showcases large-scale financial commitment by allocating billions towards clean energy and green initiatives, offering tax breaks for electric vehicles and renewable energy production, while pushing for domestic clean energy production to ultimately reduce emissions. This act highlights the power of fiscal policy in driving a green transition. The Labor Energy Partnership predicts 1.5 million new jobs by 2030, while a joint report by BlueGreen Alliance and the Political Economy Research Institute estimates the number could be even higher, exceeding 9 million over the next decade. Supporting these projections, Climate Power’s recent report highlights the creation of over 170,000 jobs across 272 clean energy projects in 44 states.

China, the world’s largest emitter, is also taking steps to leverage financial instruments for climate action. Their “1+N” policy framework establishes a national emissions trading scheme (the “1”) alongside a network of provincial-level pilot programs (the “N”). This multi-tiered method can incentivize businesses to reduce emissions through a tradable permit system. If implemented effectively, China’s “1+N” policy has the latency to be a game-changer in terms of mobilizing private sector resources for climate action.

Turning to South America, Brazil’s Ecological Transformation Plan offers a unique perspective. This program prioritizes Amazon rainforest protection through a mix of financial instruments, including public-private partnerships, debt-for-nature swaps, and Payment for Environmental Services (PES) schemes. These approaches create financial incentives for sustainable practices, offering valuable insights for Indonesia’s climate finance strategies.

The Asia Zero Emission Community (AZEC), launched in 2023 by Japan and 10 partner countries, offers a distinct approach to climate finance. Unlike programs focused on domestic spending or emissions trading, AZEC leverages regional cooperation. Prime Minister Kishida estimates that achieving regional decarbonization requires 4,000 trillion yen, and AZEC’s launch is expected to create a new, large decarbonization market in Asia, attracting global capital. By facilitating resource pooling from member states, international donors, and the private sector, it intends to unlock larger sums for green projects in Southeast Asia, promoting sustainable development across the region. This collaborative approach complements Japan’s support for Asian decarbonization efforts, which includes technology transfer and over 350 tangible projects with Japanese companies.

Indonesia boasts significant potential for generating climate and development funds, especially through carbon markets. President Joko Widodo emphasized this strength, highlighting the potential of the country’s carbon market to reach 3,000 trillion rupiah. Coordinating Minister for the Economy, Airlangga Hartanto even pointed to the potential for Indonesia to earn 8,000 trillion rupiah through carbon trading in key sectors like forestry, mangroves, and peatlands. These figures were based on a carbon credit price of around USD 5 per metric ton. However, if Indonesia can develop an innovative and globally competitive market, there will be an opportunity to significantly increase the value of its carbon credits to reach USD 100 per metric ton, which would result in a cumulative potential of 160,000 trillion rupiah.

Building on this potential, Indonesia has the opportunity to explore its own adaptation of climate finance that aligns with its specific needs and development goals. Furthermore, this approach requires a comprehensive package of policies that address climate change through the lens of “climate-sensitive development”. This solution integrates climate action with essential development goals, ensuring both environmental and social progress. The ideal climate finance policy won’t be limited to traditional climate mitigation and adaptation strategies. It should act as a catalyst for wider development goals. By taking this integrated approach, Indonesia can chart a course towards a more sustainable and prosperous future for all its citizens.

Translating climate-sensitive development into reality requires meticulous preparation. First, a comprehensive policy framework anchored in legislation is essential, aligned with SDGs and Indonesia’s NDC for a cohesive process. Second, a dedicated institution directly reporting to the President is crucial to acquire and mobilize international funding, oversee implementation, and facilitate collaboration across sectors. This will include efforts to make sure that the funds are well-implemented and distributed to the society. The program’s effectiveness will be demonstrably linked to the well-being of Indonesian society by establishing a framework that monitors key metrics like job creation, SME growth, and sustainable housing development. Third, ensuring effective implementation tools through internationally recognized monitoring, reporting, and verification systems (MRV) is paramount. This allows for transparency while also promoting policy coherence across sectors and government levels, as well as identifying and resolving implementation bottlenecks.

While the technical considerations outlined above are essential for success, a critical, yet often overlooked element, lies in the power of  narrative. One of the best ways to get everyone on board with climate action is to show how it directly benefits their lives. This means effectively communicating how climate-sensitive development can improve basic needs like food, energy, and social security. This narrative should transcend technical jargon and complex policy frameworks, instead focusing on the tangible benefits it offers for the people.

Imagine a future free from poverty, where clean air, abundant jobs, and a thriving environment become the norm for all. This future is not only possible, but achievable through collective efforts on climate finance.

Find more about Indonesia’s carbon market in IBC’s White Paper.