Jakarta, IO – Indonesia is the world’s largest archipelago with more than 17,500 islands. Stretched between the Pacific Ocean and the Indian Ocean, it is considered to be a ‘biodiversity hotspot’ ‘, enjoying vast tropical forests and marine habitats. However, this diverse climate and topography that blesses the country with plenty of natural resources, is also a major factor in making it one of the most vulnerable to the impacts of climate change.
With an extensive coastline and millions of people living on low-lying land just above sea level, Indonesia is among the world’s most exposed countries to sea level rise. Along with this, the country faces great threats of other weather-related disasters such as forest and land fires, landslides, storms, and drought that have already destroyed infrastructure and degraded forest and coastal ecosystems.
This year, as the world adjusts to an El Nino weather pattern, Indonesian farmers have been impacted by a longer than usual dry season that has disrupted rice production and pushed up rice prices. Not only is it forecast to be the most severe dry season since 2019, but the extreme temperatures threaten entire harvests and greatly increase the risk of forest fires.
In January and February, once the rainy season is expected to peak, the government agency for meteorology (BMKG) has warned of severe risks of fooding and landslides in many provinces. In other words, extreme weather patterns are already underway and having real consequences on food security.
Although Indonesia has made great strides in its economic development over the past two decades— from an overall GDP of USD 1.65 billion in 2000 to USD 1.19 trillion in 2021—, the country’s growth model has – like developed nations for centuries – heavily relied upon the extraction of its natural resources, particularly coal.
Much of Indonesia’s greenhouse gas emissions are from land-use change and forestry, followed by energy, agriculture, waste, and industrial processes. According to the World Resources Institute (WRI), GHG emissions from energy production, land-use change and forestry (LULUCF) comprise approximately 82% of Indonesia’s total emissions.
Since 2021, however, Indonesia’s government led by President Joko Widodo (Jokowi) has signaled that a net-zero agenda will become an integral part of the country’s national development strategy. That year marked his government’s release of its Long-Term Strategy, which stated that it would set a 2030 goal of reducing GHG emissions by 30 percent or 40 percent if his efforts were supported by international funding. Along with this, the strategy outlined that net-zero emissions would materialize by 2060.
One of the major ways this was first put into action was in September 2022, when President Jokowi issued a regulation – the Presidential Decree on Renewable Energy – that forced an early retirement of certain coal plants and set a new pricing system for renewables – geothermal, hydro power, and solar power – to encourage investment. With Indonesia accounting for around 25 percent of the world’s geothermal potential, these policies obtained positive support and recognition from climate activists and much of the international community.
Alongside its natural richness in fossil fuels, Indonesia is also home to vast reserves of a mineral critical for electric vehicle (EV) batteries: nickel. Not only does this provide ample opportunity for the country to incorporate EVs into its net-zero strategy, but for Indonesia to become a genuinely global hub for EV production.
Jokowi’s government has thus sought to utilize its nickel reserves to ensure that decarbonization will also stimulate economic growth. In 2020, it placed a ban on the export of unprocessed nickel to attract investment into domestic downstream processing. Despite the controversy this policy change ignited, it has proven to be successful in attracting foreign and private investment into the domestic EV industry. In just three years, Indonesia has signed more than a dozen deals worth more than $15 billion for battery materials and electric vehicle production with global manufacturers, including Hyundai, LG, and Foxconn.
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On the consumer side, there has been a plethora of initiatives to build up the country’s EV ecosystem. In March 2023, the Ministries of Finance and Industry announced generous subsidies for EV consumers, offering around USD 500 for e-motorcycles, and a 10 percent value-added tax (VAT) reduction for cars and buses. Not long after, during a meeting of the Major Economies Forum on Energy and Climate (MEF), Indonesia agreed to a zero-emission vehicles (ZEVs) collective goal that aims, by 2030, to electrify over 50 percent of light-duty vehicles (LDVs) and at least 30 percent of medium and heavy-duty vehicles (MHDVs). Although the government has made many important steps to place Indonesia on its path to net-zero, it is not realistic to expect the government to fund all the necessary climate initiatives. According to the Green Climate Fund, the state budget allocated to climate change mitigation is around USD 5.7 billion per year, representing only about 30 percent of the financial needs to achieve its nationally determined contribution (NDC) targets. This has prompted a notable response from both, international investors and the country’s private sector.
Bringing dynamic capabilities, Indonesia’s private sector has already mobilized investment into green growth in many ways. Most notably, energy companies have established their own net-zero agendas and expanded their profile into a range of green businesses, such as clean nickel mining technology, the EV ecosystem, nature-based solutions, and land restoration. Now, with the upcoming finalisations of the JETP financing (USD 20 billion), private energy companies are expected to take on an even greater role in leading Indonesia’s decarbonization and energy transition.As a country that has no choice but to reckon with the reality of climate change because of its inherent vulnerabilities, Indonesia undoubtedly faces many challenges. However, it has also demonstrated its ability to leverage its unique characteristics and innovative private sector to turn them into opportunities.
ABOUT THE AUTHOR Azis Armand is Vice President Director and Group CEO at Indika Energy