Indonesia pledged to reduce emissions by 29% (unconditional) and up to 41% (conditional) by 2030. The country also aims to achieve net zero emissions by 2060 or sooner, through initiatives in energy, waste, IPPU, agriculture, forestry, and other land uses (UNFCCC, 2022).
Given its geographical uniqueness, Indonesia needs to diversify its climate projects across all regions. Achieving these ambitious goals requires exploring financing mechanisms available to regional governments and fostering collaboration among stakeholders at all levels to secure the necessary funding for sustainable development initiatives. Climate actions or projects ideally replace existing or new low-emission infrastructures that suit each region’s needs. For instance, Pambudi et al. (2023) identified renewable energy potential in various islands, such as hydroelectric power plants in some areas and solar or wind energy in others. By diversifying energy sources, these regions can also enhance their resilience.
Unfortunately, climate projects require intensive upfront investment, and according to the Climate Policy Initiative (2023), the investment gap to meet Indonesia’s 2030 NDC target is estimated at USD 146 billion. As financial sectors and government climate budgets alone cannot close this gap, innovative sustainable financing instruments must be leveraged. Darwin Djajawinata, ex-director of PT Sarana Multi Infrastruktur, explained during a workshop facilitated by Tri Hita and co-funded by GGGI in West Nusa Tenggara (October 2024), that several sustainable finance options are applicable at the local level to fund green infrastructure development, such as:
- Business to Business/Pure Private
The project operates commercially through licensing schemes or B2B partnerships, involving collaborations like tariff payments, profit-sharing, and concessions.
- Public-Private Partnerships (PPP)
Collaboration between government and private enterprises involves risk-sharing and government support. These partnerships include project risk allocation and guarantees, regulated by Presidential Regulation No. 38/2015 and Ministerial Regulation PPN No. 4/2015.
- Regional Loans
Financing for capital expenditures is sourced from government loans and banking/non-banking institutions, directed toward priority infrastructure projects under regional authority.
- Assignment of Regional-Owned Enterprises (ROEs)
Allocating capital expenditures for ROEs bridges developmental and commercial goals, supporting sustainable development while maintaining commercial viability.
- Regional Budget (APBD)
Capital expenditures from the Regional Budget (APBD) represent conventional project financing, with additional funding from Foreign Loans (PHLN) or municipal bonds. This approach aligns with sustainable finance practices in Indonesia, ensuring diverse and reliable funding for regional development projects.
Other challenges
Bridging the knowledge gap between actors and investors is essential, with a focus on raising awareness and understanding of sustainable finance instruments that can effectively support the green projects. In addition, Additionally, inconsistent government policies hinder the growth of green projects, coupled with a lack of incentives for implementation (The Green Fiscal Policy Network, 2023). Green projects also face significant risks during planning, construction, and operational stages, necessitating insurance mechanisms to mitigate these risks (AON, 2023). Unfortunately, insurance options for green projects remain limited (Marwany, 2023). As some potential next steps, awareness raising for two different stakeholders was identified:
- Downstream stakeholders
By disseminating an understanding of sustainable finance and its instruments, seeking best practices and benchmarks from outside to evaluate and identify gaps, and continuing to analyze to improve practices in Indonesia (The Green Fiscal Policy Network, 2023).
- Upstream stakeholders
In addition to the efforts just mentioned, the central government needs to provide incentives (can be in the form of policies to facilitate, up to tangible profits) for green projects so that the penetration of their development can accelerate, considering that we are racing against climate risk & crisis (Friday, et al, 2022).
To achieve Indonesia’s net zero ambition, every region must play an active role in independently developing and implementing green projects that not only address local challenges but also contribute to mitigating the impacts of climate change. Collaborative platforms, such as the workshop facilitated in West Nusa Tenggara, serve as critical steps toward equipping regional governments with the tools and knowledge needed to access innovative financing mechanisms. By fostering such discussions and partnerships, Indonesia can accelerate its transition toward a low-carbon, sustainable regional economy. Tri Hita remains committed to supporting these efforts and enabling regions to unlock their full potential in combating the climate crisis.
References
- AON. 2023. Insurance Plays a Key Role in Transitioning to a Low Carbon Future. AON Blog: https://www.aon.com/en/insights/articles/insurance-plays-a-key-role-in-transitioning-to-a-low-carbon-future (Accessed 29 November 2024)
- Climate Policy Initiative. 2023. Landscape of Climate-Aligned Investment in Indonesia’s Financial Sector.
- Friday, C., Mills, M., McQueen, J. 2022. Six Ways that Governments Can Drive The Green Transition. EY Global: https://www.ey.com/en_gl/insights/government-public-sector/six-ways-that-governments-can-drive-the-green-transition (Accessed 29 November 2024)
- Marwany, H. 2023. Green Insurance a Promising New Climate Opportunity. The Jakarta Post: https://www.thejakartapost.com/paper/2023/07/07/green-insurance-a-promising-new-climate-opportunity.html (Accessed 29 November 2024)
- Pambudi, N. A., Firdaus, R. A., Rizkiana, R., Ulfa, D. K., Salsabila, M. S., Suharno, & Sukatiman. 2023. Renewable energy in Indonesia: current status, potential, and future development. Sustainability, 15(3), 2342. DOI: doi.org/10.3390/su15032342
- The Green Fiscal Policy Network. 2023. Accelerating Green and Sustainable Finance in Indonesia. Green Fiscal Policy Blog: https://greenfiscalpolicy.org/blog/accelerating-green-and-sustainable-finance-in-indonesia/ (Accessed 29 November 2024)
- United Nations Framework Convention on Climate Change (UNFCCC). 2022. Enhanced Nationally Determined Contribution Republic of Indonesia.
