Written by Ahmad Yasri Zaenuri (Public Relations), Sharon Felicia Davidson (External Events), and Priya Danuputranto (Protégé)
Green Investments: A Closer Look at Indonesia’s Progressive Approach
The emphasis on addressing climate change is widespread across Indonesia. The significant risk faced by the younger generation is becoming increasingly apparent. Climate change influences not only natural resources, but also various aspects of social life. The challenges the world faces with climate issues are particularly threatening, especially for developing countries, and have a notable effect on their economic growth. Due to economic challenges, the number of investments in developing countries is not as substantial as in developed countries. That is why developing countries face a higher risk of climate issues.
In the past decade, especially after UN member states adopted the Paris Agreement, green investment has become a continuous strategy to carry out the agreement’s goals. To encourage the resolution of climate issues, countries and companies are starting to utilize green investment instruments, where “green” represents a novel approach to building an economic ecosystem to maintain climate stability. The key to green investments is to maintain business practices that minimize the release of greenhouse gas emissions into the atmosphere. Companies that have begun green investments are undertaking projects to encompass the prevention, control, and address contamination from climate issues. Additionally, green investments are moving into the field of utilizing sustainable natural resources.
Indonesia, as a developing country with abundant natural resources, has already started green investments. The Indonesian government has facilitated investor access by enacting Law No.25 of 2007, which prioritizes the principle of investment that pays attention to the protection and maintenance of the environment for investors in Indonesia. This step demonstrates Indonesia’s commitment to take a step forward for the environment. The Indonesian government is also committing to green investment by including the Renewable Energy program in the National Energy General Plan, in line with the mandate from the Law on Energy Usage. As such, President Widodo’s government is making a significant movement to position Indonesia as a country that can provide green investment domestically. This involves building a new capital city with a concept of a green smart city, developing downstream industries, maintaining and prioritizing the usage of renewable energy sources in Indonesia, and much more.
Indonesia’s Lagging Sustainability: The Profound Impacts of Coal Dependency
Paradoxically however, Indonesia’s role as the third-largest global coal producer highlights the imbalance in investments between renewable and non-renewable energy sectors. Addressing factors contributing to industrial pollution and emphasizing the need for comprehensive policies and sustainable practices is important in this discussion. This article will later argue for a collaborative, cross-sectoral approach to foster environmental sustainability in Indonesia, urging a paradigm shift and increased investment in the energy sector.
As of 2022, Indonesia ranks third as the world’s largest coal producer, following China and India (IESR, 2023). According to data from the Ministry of Energy and Mineral Resources (ESDM), Indonesia’s coal exports reached 405 million tons in 2020 (Kementerian ESDM, 2020). This indicates that Indonesia’s investment still heavily relies on mining as a business field in the unsustainable energy sector. Dominant investments in this sector, particularly coal, have positioned Indonesia as a major player in the global non-renewable market.
However, the imbalance in renewable energy investments, such as geothermal and bioenergy, poses a serious challenge to environmental sustainability. In 2020, investments in this sector amounted to $1.4 billion, reaching only 60% of the initial target set by the Ministry of Energy and Mineral Resources of $2.3 billion. While the geothermal and other renewable energy sectors almost met their targets, investments in bioenergy fell far below expectations, accounting for less than 1% of the total investment target. In Indonesia, sustainable investment progress lags behind the non-sustainable sector, significantly impacting industrial pollution (Pramana and Dewi, 2023).
Industrial pollution and environmental degradation often stem from a combination of factors. Inadequate industrial control policies contribute by failing to set and enforce stringent standards for emissions and waste disposal. Unplanned industrial growth then exacerbates the problem, as expansions can lead to increased pollution without proper infrastructure in place. The use of outdated technology compounds the issue, as older equipment may lack modern, eco-friendly features (Kementerian Perindustrian, 2023). Additionally, inefficient industrial waste disposal practices contribute significantly to environmental harm. Addressing these factors through robust policies, sustainable industrial practices, and technological upgrades is essential to mitigate the adverse impacts of industrial activities on the environment (CNBC Indonesia, 2023). To effectively address this ecological damage, a green movement involving all layers of Indonesian society is crucial, from the government to non-governmental organizations, socio-political groups, and every individual concerned about environmental sustainability.
Furthermore, based on the evaluation by BMKG of 116 observation stations, the average air temperature during September 2023 reached 27.0 °C, with a positive anomaly of 0.4 °C, ranking it as the fourth-highest anomaly value since 1981 (BMKG, 2023). Examining data from 1981 to 2022 on average air temperatures, along with maximum and minimum values, reveals a national temperature increase of 0.6°C per 30 years in Indonesia. Moving beyond temperature, the World Air Quality Report by IQAir in 2021, unveiled in March 2022, highlights Indonesia’s global standing in air pollution. Ranking 17th globally, Indonesia records a PM2.5 concentration of 34.3 μg per cubic meter. The report emphasizes Indonesia as the leading country in Southeast Asia with the highest pollution levels (Sofyan, 2023). The data highlights that Indonesia faces challenges in achieving sustainable development, particularly in the context of industrial activities and environmental conservation. Additionally, the reference to the evaluation by BMKG reveals a concerning trend in rising average air temperatures, indicating potential impacts of climate change. Therefore, it is crucial to emphasize that Indonesia must not only focus on sustainable development, but also undergo a paradigm shift and significantly increase greener investment in the energy sector. This represents a crucial step in preventing the adverse impact of industrial activities on our environment.
Act Wiser by Learning from Others: the United States and the Philippines
Green investment plays a pivotal role in driving infrastructure development and the adoption of renewable energy. Understanding the driving factors behind successful green investment programs is crucial for achieving optimal progress. To map these driving factors, a comparison between programs needs to be conducted to create a comprehensive overview of what is feasible to implement according to each country’s capacity. To provide a broader perspective, this article will cross-examine different programs to easily identify successes that could be emulated by Indonesia and ineffectiveness that should be avoided.
In the context of quantifiable green investment, investment numbers serve as a measurable parameter. The United States provides a notable example with the Inflation Reduction Act (IRA), enacted on 16 August 2022, by President Joe Biden. The IRA, designed to control inflation, allocates funds to reduce the federal government’s budget deficit, lower prescription drug prices, and invest in domestic clean energy production. This comprehensive bill revolutionized the energy sector, offering tax incentives for clean electricity generation and encouraging investments in renewable energy projects and facilities. The IRA also provides tax breaks for companies involved in various aspects of renewable energy production.
The impact of IRA on green investment in the United States has been profound. Goldman Sachs Asset Management’s analysis reveals at least $282 billion in announced investments from 280 clean energy projects, creating 174,547 new jobs within one year (see Figure 1). The IRA has demonstrated a multiplier effect, positively influencing both national and international economies.
On the other end of the spectrum, the Green Energy Auction Programme by the Philippine Government shares a similar goal with the IRA but operates on a different scale. The program aims to kickstart the procurement of renewable energy supply, with a target of 35% renewable energy composition by 2030 and 50% by 2040. Employing auction systems and tax incentives, the program encourages private companies to complete projects within three years. While the first round was successful, with 19 investors adding a capacity of 2.000 MW, the second round’s progress has been slower, reaching only a quarter of the 11.600 MW target.
Indonesia, recognizing the importance of green growth, has established the Global Green Growth Institute (GGGI). GGGI collaborates with the Government of Indonesia on the Indonesia Green Growth Program, supported by the Green Climate Fund. This program, focusing on sustainable energy, landscapes, and infrastructure in Special Economic Zones (SEZs), aims to attract private sector investments. GGGI’s Phase II secured an initial investment of $178 million from the Green Climate Fund.
Adopting the OECD conceptual measurement framework for green economies, Indonesia internalizes green investment in policies, benchmarks, and opportunities. An example is the Palm was Oil Green Economic Zone (POGEZ) program, a collaboration with Malaysia to develop an environmentally friendly palm oil industry.
Despite Indonesia’s roadmap outlining its path up to 2030, uncertainties still linger, especially regarding the sustainability of green investment programs. The recent proliferation of green investment initiatives, such as the Just Energy Transition Program in collaboration with G7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union), signals positive momentum. However, many of these programs are still in the negotiation process post-pandemic recovery.
Conclusion
The global focus on addressing climate change is crucial, especially regarding the significant risks it poses to the younger generation and its impact on both natural resources and social life. Developing countries, like Indonesia, face heightened economic challenges due to climate issues. Despite government initiatives, Indonesia’s energy production still heavily relies on coal, leading to environmental sustainability concerns. The investment imbalance, particularly in renewable energy sectors, contributes to environmental challenges, industrial pollution, and ecological damage. Amidst climate change, Indonesia faces challenges in food production, clean water availability, and potential social conflicts. Evidently, green investments play a key role in infrastructure and renewable energy development. Successful programs, like the Inflation Reduction Act in the US, demonstrate positive impacts on clean energy projects, a path Indonesia can follow to take part in a collective global effort in transition towards sustainable practices and mitigate climate change consequences.
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