FINANCING GREEN INDUSTRIES: Incentives for Environmental Investment in Indonesia

1. FINANCING GREEN INDUSTRIES: Incentives for Environmental Investment in Indonesia Laksmi Dhewanthi Assistant Deputy Minister for Incentive and Environmental Fund State Ministry of Environment International Conference on Green Industry in Asia Manila, Phillippines, 9-11 September 2009

2. CONTENT • Rationale • Existing Policy Initiatives • Experiences and Lessons Learned • Further Developments

3. RATIONALE Indonesia is of the view that Financing the environment is essential

4. This is Indonesia, …......

5. This is also Indonesia......

6. Why Financing Environment matters? for development pollution and natural degradation are not just environmental challenges and that the economic consequences of environmental problems require a long-term response, because: • threatens on poverty eradication and achievement of MDGs • actions to address environmental challenges correlates to issues of equity and justice  developing countries have limited options as they could not shift resources from their development agenda and poverty alleviation to environmentally sound. • Threatens national security, in term of food, energy, defense, and others

7. Why Financing Environment matters? for finance regime • Finance regime can play a more active role in responding to environmental challenges  affect countries’ spending priorities, revenue raising opportunities, insurance markets, investment options & capital markets. • The global interest to improve existing international financing mechanisms  to develop innovative approaches to financial/fiscal activities related to environment, esp. climate change adaptation and mitigation • It is a must to be look for win-win-win solutions and new commitments of resources,  such as new policies, incentives, and integrating approaches • engage the machinery of government, the private sector and society in helping to solve these problems.

8. Existing Policy Initiatives POLICIESas well as MARKETFAILURES (subsidized growth, distorted energy prices, no pollution cost) are main causes of the current environmental problems POLICY INTERVENTIONS & MARKET CORRECTIONS POLICY INITIATIVES includeINCENTIVE/DISINSENTIVE SCHEMES 8

9. Non Monetary Incentive Initiatives(recognition, publication, technical facilitation, etc) • ADIPURA(a Clean and Green Cities award programme) • KALPATARUaward program (for individual/group/ company for their dedication to the environmental management practices) • PROPER (Business Environmental Performance Rating) • ICPC (Indonesian Cleaner Production Centre) • Demonstration Project, etc

10. MONETARY INCENTIVE SCHEMES FOR ENVIRONMENTAL MANAGEMENT IN INDONESIA Fiscal Instruments Financing Instruments Market Instruments Subsidies Soft Loans Technological Procurements Tax Exemptions Grants Implemented Deposit Refunds User Taxes Alternatives source of fund Royalties Performance Bonds User Taxes Performance Bonds Reduced Loan Interests Product Taxes Bulk Purchasings Alternatives Emission Taxes Deposit Refunds Environmental Fund Tax Differentiations Liabilities Payments Financing Guarantees Tax Exemptions No Compliance Fees

11. Other incentives • Collaboration with Indonesian central bank, to internalized environmental measurements into bank’ policies i.e. BI regulation no. 2/2005 and Circulate Letter of BI No. SEBI No 7/3/DPNP which includes inclusion of environmental performance within bank credit policy  i.e. create direct financial disincentive for PROPER’ participating companies; • CDM (Clean Development Mechanism) • Special “environment” Budget Allocation for Local Government • PES (Payment for Ecosystem/ecological Services)

12. EXPERIENCES AND LESSONS LEARNED Environmental related industries, MSMEs

13. Environmental Soft Loan Schemes

14. ELIGIBLE INVESTMENTS • Pollution prevention equipment: • Cleaner production equipment: energy efficiency and changing sound environmentally technology. • Non ozone depleting substance (ODS) equipments. • All equipment to save natural resources and reduce wastes (recycling of waste, plastics, metals, and woods). • End-of-pipe technologies: • Waste water treatment plants; • Air pollution treatment plants; • Solid waste treatment plants. • Environmental analysis equipment: • Emission analysis equipments for auto repairs; • Laboratory equipment. • Financing environmentally materials: raw materials and additive materials or substitution of bleaching agent. • Certificationof environmentally sound industries (environmental management system certificate). MoE 3 2 4 Financial Institutions 5 1 Industries, SMSEs

15. We finance… • Pollution control • Waste minimization/reduction • Solid waste management • Production and Energy Efficiency • Utilization of waste • 3R, organic fertilizer • Alternatives energy • renewable energy • etc

16. Consultant WWTP Recycle 1% 14% 13% APC 2% Cleaner Production 70% LESSONS LEARNED • Perception toward environmental investment has changed  from cost center into profit center, thus environmental investment is an investment • Demand on CP increased • from almost 80% “end of pipe” type of investment (1997-2002) • MSMEs and FIs’ capacity built • Environmental performance improved  increase resource efficiency and utilization of waste Success factors  commitment, trust & active role of stakeholders, availability of criteria and standard, HRD, and risks sharing. Utilization of loans by type of Investment (2007)

17. Still, need to address • Absence of market/economic value of environmental friendly investment and technology • Lack of priority, both politically and technically, to support environmental friendly initiatives • Limited type and amount of fund sources • Limited options of policy instruments, incl. legal basis to develop other incentives, law enforcement, etc

18. Preventifvs Kuratif FURTHER DEVELOPMENTS: Taking Benefits from Climate Change Regime Cost and level of environmental degradation early prevention is cheaper (Stern) $1 now prevent $40 future Time dimension

19. Develop other “tailored” env’l financing scheme, i.e. ERI, for technology developer, PPP, etc • Develop further incentive schemes  Embark toward Environmental Fiscal Reform • Mobilized more financial resources, incl. DNS, etc • Involve broaden FIs and stakeholders • BASIC NOTIONS for further initiatives: • Focus on getting the market price of environment right • Integrating decentralized policy making process • Effective implementation in nature Newly Indonesian Act on Environmental Protection and Management of 2009

20. Overview of development of incentive instruments for the environment PRACTICE 1 - Analysis of EFR instruments Diagram based on Emerton, L. et al. (2006) Sustainable Financing of Protected Areas, IUCN and Fischer, A. / Petersen, L. / Hubbert, W. (2004): Natural Resources and Governance: Incentives for Sustainable Resource Use, GTZ).

21. Thank you for further information: Assistant Deputy for Incentive and Environmental Fund State Ministry of Environment, Republic of Indonesia A Building, 4th floor, Jl D.I PanjaitanKav 24 Kebun Nanas - Jakarta 13410 INDONESIA Tlp/Fx. +62 21 851716 Website: http://www.menlh.go.id/pinjamanlunak Contact person: LaksmiDhewanthi (ldhewanthi@menlh.go.id) DamayantiRatunanda (tolo@menlh.go.id)