Indonesia’s Coal Conundrum and The President’s Climate Leadership

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Harya S. Dillon, Ph.D
Harya S. Dillon, Ph.D. He earned his Doctorate from the University of California, Irvine, and is a Fulbright Scholar (2009)

IO – About this time last year, President Joko ‘Jokowi’ Widodo called upon world leaders to take ‘Extraordinary Measures to Tackle Climate Change”. In his powerful address at the 2021 Climate Adaptation Summit, President Jokowi urged all countries to meet their Nationally Determined Contribution (NDC), strengthen global partnerships, and continue to promote green development. When in Rome, upon taking the G20 presidency in late October 2021, President Jokowi, in the company of global leaders, remarked that Indonesia wants the G20 to set an example on how to tackle climate change and that he wants to lead through concrete actions.

Indeed, Indonesia has a lot to gain from a more sustainable, lower-carbon, and greener economy. According to a study by the Institute for Essential Services Reform (IESR), a transition towards renewable energy would not only pave the way towards zero emissions by 2050, but it would also create 3.2 million new jobs along the way. However, coal’s considerable contribution to the state’s coffers and the now partially-lifted coal export ban paints a not-so-perfect picture.

The conundrum does not end there. An estimate by Faisal Basri, a seasoned economist, indicates that coal bosses raked in up to IDR 500 trillion in exports last year, thanks to the bullish market. Remarking off the cuff, if coal bosses were to cough up a mere 10 percent of their windfall profits, they could own the state palace and governor’s mansions in key coal provinces. Basri’s predicament might as well have come straight out of Acemoglu and Robinson’s 2012 best-selling ‘Why Nations Fail’: extractive economic institutions begets extractive political institutions.

How, then, can President Jokowi break the vicious cycle that is Indonesia’s coal conundrum, deliver his prolific climate agenda, and also leave an impactful legacy as the global leader that he is with less than 3 years of office? Here are my takes.

First and foremost, the Government, especially the Ministry of Energy and Mineral Resources (MOEMR) should never enact export bans ever again, worse still, in an abrupt manner with little to no consultation with coal exporters. While the now partially lifted export ban was imposed under the pretext of energy security, citing concerns of impending domestic shortages and widespread blackouts, the seemingly hurried decision does not reflect good governance nor sound decision-making processes. I understand that political supporters of the export ban are all too eager to play the resource-nationalism card. However, global leaders are expected to practice certain norms and disrupting trade on a whim is definitely not one of them.

Indonesia is the world’s biggest exporter of thermal coal in 2021, exporting upwards of 400 million tons, 73% of which are shipped to China, India, Japan, and South Korea. The MOEMR export ban has rightfully earned an objection from the two latter trading partners, enjoined by neighboring Philippines. Furthermore, a blanket ban on coal exporters does not do justice to those who have fulfilled their Domestic Market Obligations (DMOs). Instead of punishing those who complied, spuriously prosecuting them with guilt by association, MOEMR should have been more selective and assertive against those who shirked their DMOs.

Second, the Government needs to reform its DMO policies. To its credit, the Coordinating Ministry for Maritime and Investment Affairs (CMMIA) has laid the groundwork for DMO reforms. To refresh, according to the DMO, coal miners are expected to set aside a quarter of their output for the state electricity company, PLN, and that miners who do not have coals that meet PLN’s standards will be subjected to fines. These standards specify calorific value, moisture, and sulfuric and ash contents. However, according to a CMMIA document, about 54% of Indonesia’s coal reserves do not meet the calorific value requirements for PLN plants. As such some well-intended coal miners would not be able to meet its DMO for PLN.

Furthermore, DMO relies on price controls which is bad economics to begin with. Having been given considerable market power, PLN sets the price at USD 70 per ton for products containing 6,322 Kilocalories (Kcal) in each kilogram of coal or equivalent to content adjusted USD 41 per ton at 4,659 Kcal/kg. As a result, profit-maximizing coal traders would want PLN to buy all their products when market prices dipped below USD 70 and, in turn, would want to wiggle their way out of their PLN contracts when prices soar above USD 200 as it did in the last quarter of 2021. Price control policies are, by nature, distortive and as such calls for a course correction.

To be clear, I agree that securing domestic energy supply is a legitimate government interest. However, the well-intentioned policy should be implemented in ways that least distorts the market, if any. For example, the United States created a Strategic Petroleum Reserve in the aftermath of the 1973 energy crisis to absorb supply shocks caused by natural disasters or embargos. The inventory is meant to be released when gasoline prices went through the roof, as it did during Thanksgiving weekend last November.

Currently, CMMIA has proposed a mechanism whereby miners would pay an output-based levy to cover the gap between fluctuating market prices and the USD 70 threshold. This levy, estimated at USD 3.87 a ton, could generate up to USD 2.5 Billion to help PLN source coal at the prevailing market price. CMMIA’s reform proposal also stipulates that this levy would be reviewed semi-annually, and that PLN’s coal procurement unit would be dissolved, so that miners can forgo rent-seeking middlemen in dealing with the state’s electricity company.

Last, but certainly not least, we need a plan to transition out of coal. At present, about 80 percent of Indonesian coal finds their way into power plants. Coal mining scars Mother Earth, leaving large swaths of deforested lands and degrading the environment to unacceptable levels. Coal mining concessions gobbled up more than 17 million hectares of forest cover and threaten about 19 percent of agricultural land. In 2020 alone, Kalimantan Selatan Province yielded 56,243 hectares of forest for coal mining. In total, we stand to lose 1.7 million tons of rice due to the loss of paddy felds to coal.

However, not all is lost. Plans to retire coal-fired power plants are necessary but are by no means sufficient. Investing in biomass power plants can help Indonesia transition away from coal without having to go through the natural-gas bridging-phase. Denmark, for example, has seen coal’s share in the energy mix drop from 46% in 2000 to just 6% in 2020 as a result of sustainably using woodchips to power biomass plants.

A well-prepared coal phase-out plan should include rehabilitation of existing mining sites and biomass investment with sustainable forest management to partially substitute for the displaced power from coalfired plants. This way, Indonesia can sustainably transition away from coal while keeping the light on.

With the spotlight on Indonesia’s G20 presidency, President Jokowi is at a critical juncture to take concrete steps towards net zero. These steps would not only solve Indonesia’s coal conundrum and break the vicious cycle of extractive political institutions, but also ink in gold the President’s place in history.