World Bank Group Report Proposes Policies, Investments to Enable Indonesia to Achieve its Development and Climate Goals

JAKARTA — Indonesia can align its climate and growth ambitions with policies that reduce reliance on fossil-based energy, according to a World Bank Group report. The country can also implement reforms to enable firms and workers to participate in a greener economy while protecting its people and resources from the immediate impacts of climate change.

The abundant supply of land – carbon-rich forests, peatlands – and energy resources (from fossil fuels, particularly coal), has driven Indonesia’s emissions profile. Land and energy account for about 90 percent of Indonesia’s greenhouse gas emissions. Deforestation and fires alone have historically accounted for over 42 percent of emissions.

The World Bank Group’s Indonesia Country Climate and Development Report (CCDR) notes that emissions are only one-half of the story and continuing to adapt to climate shocks will be central to avoiding large drops in economic output and household welfare. Between 1990-2021, Indonesia experienced more than 300 natural disasters, including 200 flooding events affecting more than 11 million people. The frequency of these disasters is increasing‒with climate-related disasters accounting for about 70 percent of the total. While climate change affects the whole population, the poor and vulnerable‒one-third of the population–are likely to carry a disproportionate burden.

“Indonesia has committed to addressing its climate and development challenges in its Nationally Determined Contributions (NDCs). The World Bank supports Indonesia’s policy reforms and investments to decouple growth from carbon emissions, which could strengthen the economy’s resilience to a rising incidence of climate impacts,” said World Bank Vice President for East Asia and Pacific Manuela V. Ferro.

The Indonesia CCDR illustrates how the country can ensure an affordable transition to a low carbon and climate-resilient economy. A reduction in the supply of carbon-intensive resources can be supported through, for example, continued expansion of forest protection, gradual removal of the Domestic Market Obligation for coal, and enhancing incentives for renewable energy. Reforms, such as the relaxation of Local Content Requirements for production of solar panels, can also contribute. This will, however, require a reduction in demand for carbon-intensive resources through, for example, improving agricultural yields, strengthening the capacity of electricity networks to absorbs additional renewable energy, and catalyzing public and private investments in low-carbon transport.

Indonesia can also complement these measures with policies to allocate resources to greener and more productive parts of the economy. Fiscal policies that increase the price of carbon, deepen green finance markets, and strengthen the financial sector’s capacity to assess climate risks can all help.

Indonesia has committed to addressing climate and development challenges. Mitigation and adaptation commitments are captured in Indonesia’s Enhanced NDCs under the 2015 Paris Agreement. In addition to an unconditional 31.9 percent reduction in emissions against business-as-usual (BAU) projections emissions target for 2030, there is a target of up to 43.2 percent reduction conditional on international support. More than 60 percent of the emission reduction target in Indonesia’s Enhanced NDC is intended to be met through actions in forestry and other land uses (FOLU). After FOLU, the energy sector would need to deliver the largest tranche of emission cuts.

“Indonesia has made welcome commitments to climate mitigation and resilience, including efforts to decarbonize the land and energy sectors,” said World Bank Country Director for Indonesia and Timor Leste Satu Kahkonen. “Complementary efforts in fiscal, financial sector, investment, and trade policies would enable the country to deliver on its climate-related goals. Reforms that help raise fiscal resources for development can help build support for the transition to a sustainable long-term economic growth model that will benefit all Indonesians.”

The contribution of solar and wind to the energy mix will need to accelerate rapidly but is challenged by the over-capacity in coal. To expand climate investment, policies such as carbon taxation and subsidy targeting could provide incentive for green investments. Trade policies such as reduced non-tariff barriers could help support firms’ access to green inputs and markets.

“While the challenges presented by the climate crisis are profound, and already taking a heavy toll on the lives and livelihoods of Indonesians, there are also enormous opportunities to bring in private sector investment to help forge a sustainable path,” said IFC Regional Vice President for Asia and the Pacific Riccardo Puliti. “In the energy sector alone, an estimated two-thirds of capital investments, about US$200–220 billion between 2022 and 2040, could be mobilized from the private sector, driven substantially by renewable energy projects. IFC has a strong history of pioneering innovations in climate finance, including leading the green bond market in Indonesia, and stands ready to continue to support the country’s climate ambitions.”

Key Recommendations

To help Indonesia transition to a low-carbon growth path and strengthen its resilience to climate change, reforms for a climate transition could include:

Strengthening the policy framework to support net zero emissions from forests and land use and developing a financing strategy for FOLU Net Sink 2030 plan.

Carrying out an energy transition strategy based on a comprehensive decarbonization plan, accelerating pricing and subsidy reform, improving the investment climate for renewable energy, and managing the social and poverty impacts of such a transition.
Developing a national urban mobility policy framework to support low-carbon transport and cities.
Establishing a roadmap of reforms that include development of a carbon pricing trajectory and replacement of electricity subsidies with targeted cash transfers.
Strengthening the enabling environment for green investment for financial and private sector, including by developing a financial sector risk assessment strategy.
Improving flood resilience through spatial planning and early-warning systems.