Economic Governance & Public Financial Management for Climate Change Policies in Indonesia

1. Economic Governance & Public Financial Management for Climate Change Policies in Indonesia Policy research paper for The 5th CRISU-CUPT Conference Chiang Mai, 8-9 July 2010 Efa Yonnedi (Andalas University) Kurnya Roesad (Australian National University) Frank Jotzo (Australian National University)

2. I. Introduction • Research questions • How can Indonesia’s central government structure its economic governance framework to better tap into international carbon finance? • How do regions benefit from carbon finance flows? • Methodology • Interviews • Review of policy documents, market data etc. • Jakarta and Sumatra components • Funding • Australia-Indonesia Governance Research Partnership (AIGRP) • Additional funding from Environmental Economics Research Hub, ANU

3. International climate policy and carbon finance and why it matters to Indonesia • A sophisticated international climate policy and carbon finance architecture is evolving • Post-Kyoto mechanisms: scaling up, broadening out – the economic crisis may not deter for long • Indonesia: large potential for reducing emissions exists, but other domestic policy objectives take precedence

4. The Carbon Finance Framework Global Financial Flows Bilateral Multilateral Private Investment International Financial Institutions (IFIs) ODA Capital Markets Global Mechanisms National Mechanisms Private Sector Voluntary & CSR Budget CDM REDD (and other) Regional Mechanisms Local Government and Investment Community

5. The Clean Development Mechanism • Global project pipeline • expected offset credits 2,700 MtCO2-equivalent by 2012 • prices: > 10 euro/t, total revenue > $ 40 billion to 2012 • Largest project categories: industrial and energy • Industrial gases, hydro, energy efficiency, landfill gas, fuel switching, biomass • CDM excludes deforestation, very limited in forestry • Indonesia’s CDM share • Pipeline: 40 Mt = 1.4% of total • Comparison: Indonesia 2.8% of developing country emissions excl deforestation and agriculture • Reduction potential much greater than realised under the CDM • An issue of CDM coverage and procedures, and investment climate

6. Global CO2 emissions, business-as-usual Post-2012 necessities • Substantial emissions reductions in developing countries must be achieved to limit climate change • Emerging global goal 50% reduction by 2050 • Developing countries around half of global emissions right now, and growing fast (combustion emissions growth >5% pa) • Developing countries must be comprehensively involved • Will require support from high-income countries 50% Source: Garnaut, Jotzo & Howes China Update 2008

7. Post-2012 proposals • Bali Roadmap • ‘measurable, reportable and verifiable nationally appropriate mitigation actions’ • sectoral agreements, deforestation (‘REDD’) • financing, technology transfer • Policy proposals (Stern, Garnaut, many others) • Comprehensive commitments/targets for developing countries ASAP, supported by international trading • Effective sectoral agreements fast • Create incentives to slow deforestation fast • Improve the CDM • Provide substantial funding for technology development and diffusion

8. Indonesia CO2 emissions: history and a business-as-usual future

9. Large potential for mitigation in Indonesia, if policy frameworks are broadened • Electricity supply • Power consumptions grows at around 7%pa, limited by supply capacity • Expansion largely in coal-fired plants: 10,000 MW crash program • Currently: ca 29,000 MW capacity, emissions 96 MtCO2, ca half of electricity output from coal, emissions 61 MtCO2 • South Sumatera expansion plan for new coal plants: • 23,000 MW by 2015, 36,000 MW by 2025 • implies roughly 100 MtCO2 by 2015, 160 MtCO2 by 2025 • Compare CDM pipeline: ~8Mt/year to 2012 • Industry: many options for energy savings • eg cement plants – Semen Padang • Deforestation remains the big emissions source in the medium term

10. Mainstreaming climate change into the national economic governance framework • Indonesia’s climate change policy framework still evolving: complex coordination issues and competition for leadership • Integration beginning, but no clear low carbon development strategy or consistent climate finance approach – yet • Potential institutional overlaps: policy dialogue, climate finance and donor coordination to be resolved

11. Ministries Key Policy Documents Budget process National Climate Change Board Reports to President Long-term Development Plan (RPJP) 2004-2025 Bappenas Gov. Work Plan (RKP) 2010 Medium-term Development Plan (RPJM) 2009-2014 Coord. Economy National Development Planning: Indonesia’s Responses to Climate Change Coord. Welfare Annual Budget (APBN) Implementation National Action Plan Addressing Climate Change Environment Provincial and local governments Forestry National Strategy on Forestry and REDD Foreign Financing / Grant/ Loan Mines & Energy National Energy Strategy Finance Donor Agencies The Climate Change Policy Framework

12. Practical barriers to carbon finance • To date mainly projects under the CDM, but the record falls short of overall emissions reduction potential • Sumatra case studies: investment climate, capacity and information especially of local governments, regulatory uncertainties (land tenure!) • National policies on energy an electricity not conducive for carbon finance: fuel subsidies, electricity tariffs.

13. Strategically, low carbon economy path in Indonesia: • Adopting ‘green’ taxation and fiscal policies aiming to reduce fiscal and energy price distortions. • Incorporating carbon finance into public and private investment decisions. • Engaging internationally to shape post-2012 climate investment architecture

14. Institutionally, Indonesia: • A clearer division of labor between policy-formulating and budget/finance coordinating agencies. • Clarify the role of the new National Climate Change Council (DNPI), especially with regard to its role as a policy-formulating agency.

15. CDM-specific reforms: • Develop a national CDM plan (linked to an overall low carbon growth strategy) and identify key sectors and programs (e.g. renewable power like geothermal, hydro or nationwide landfill gas flaring) • Consider establishing a public carbon investment or program agency to facilitate program implementation, speed up CDM application, monitoring and verification procedures, clarify trading and ownership of CERs. • Raise awareness in financial/banking sectors to increase lending to CDM projects • Keep improving the general investment climate, as CDM investments are like any other investment flows which respond to sound incentives and transparent governance regimes • Improve the communication flow between central government and regional government on carbon finance investment opportunities • Increase CDM training programs for regional and local policymakers

16. Main Story and Key Messages International level • Scaling up and broadening international carbon finance • Comprehensively engage developing countries in mitigation effort National level • Integration of climate change policy into economic policymaking • Policy coordination roles still evolving • Carbon finance regime is limited to CDM projects Regional level • Significant barriers to CDM and carbon finance more broadly Policy Outlook • Need broader policy and financing framework • Need clear economic incentives at all levels • Need sound domestic investment climate

17. Terimakasih

18. Appendix

19. 3. Bank Project due diligence (environmental and social safeguards) Bureaucracy: CDM project cycle • Project Identification Note plus financials (1 month), 10. End of contract period (may be post-2012) 2. Project Design Document (2 months) 9. Certification and Issuance 8. Verification 4. Validation (4 months) 7. Construction and start up 6. Project Registration 5. Negotiate and sign Emission Reductions Purchase Agreement (ERPA) Project sponsor Accredited CDM auditor CDM Executive Board ENVCF/Region

20. Indonesia’s GHG Emissions Sources Strong Fossil Fuels Growth Data Source: IEA 2004 Forests / Land Use Projected Growth Stable Or Declining Data Source: IFCA (2007) All figures in MtCO2e. Forest data are compiled from various years

21. Barriers: Distorted Energy Prices Central government expenditure components (percent of GDP in 2005) Fuel Subsidies 15% (75 trn IDR) Non-Fuel Subsidies 2% (12 trn IDR) Fuel Subsidies Electricity Sector 4% (21 trn IDR) Non-Fuel Subsidies Electricity Sector 3% (13 trn IDR) Entry barriers to investment in power sector: Fixed fuel subsidies and electricity tariffs do not provide clear price signals Causing overconsumption Provides less incentives to innovate and invest in renewable energy Source: Compiled from World Bank (2007)

22. Increased Environmental Expenditures RKP 2009: around 1.7 trn IDR allocated to climate change actions with Public Works (23%) and Ministry of Forestry (21%) claiming the biggest shares.