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China Country Climate and Development Report

EAST ASIA

PACIFIC

April, 2023

INDONESIA

World Bank Group

Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized

INDONESIA COUNTRY CLIMATE AND DEVELOPMENT REPORT I

1818 H Street NW, Washington, DC 20433

Telephone: 202-473-1000; Internet: www.worldbank.org

This work is a product of the staff of The World Bank Group with external contributions. “The World

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COUNTRY

CLIMATE AND

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EAST ASIA PACIFIC

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APRIL, 2023

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iChinaCountryClimateandDevelopmentReportEASTASIAPACIFICApril,2023INDONESIAWorldBankGroupPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORTI©2023TheWorldBankGroup1818HStreetNW,Washington,DC20433Telephone:202-473-1000;Internet:www.worldbank.orgThisworkisaproductofthestaffofTheWorldBankGroupwithexternalcontributions.“TheWorldBankGroup”referstothelegallyseparateorganizationsoftheInternationalBankforReconstructionandDevelopment(IBRD),theInternationalDevelopmentAssociation(IDA),theInternationalFinanceCorporation(IFC),andtheMultilateralInvestmentGuaranteeAgency(MIGA).TheWorldBankGroupdoesnotguaranteetheaccuracy,reliabilityorcompletenessofthecontentincludedinthiswork,ortheconclusionsorjudgmentsdescribedherein,andacceptsnoresponsibilityorliabilityforanyomissionsorerrors(including,withoutlimitation,typographicalerrorsandtechnicalerrors)inthecontentwhatsoeverorforreliancethereon.Theboundaries,colors,denominations,andotherinformationshownonanymapinthisworkdonotimplyanyjudgmentonthepartoftheWorldBankGroupconcerningthelegalstatusofanyterritoryortheendorsementoracceptanceofsuchboundaries.Thefindings,interpretations,andconclusionsexpressedinthisvolumedonotnecessarilyreflecttheviewsoftheorganizationsoftheWorldBankGroup,theirrespectiveBoardsofExecutiveDirectors,andthegovernmentstheyrepresent.Thecontentsofthisworkareintendedforgeneralinformationalpurposesonlyandarenotintendedtoconstitutelegal,securities,orinvestmentadvice,anopinionregardingtheappropriatenessofanyinvestment,orasolicitationofanytype.SomeoftheorganizationsoftheWorldBankGrouportheiraffiliatesmayhaveaninvestmentin,provideotheradviceorservicesto,orotherwisehaveafinancialinterestin,certainofthecompaniesandpartiesnamedherein.NothinghereinshallconstituteorbeconstruedorconsideredtobealimitationuponorwaiveroftheprivilegesandimmunitiesofanyoftheorganizationsofTheWorldBankGroup,allofwhicharespecif-icallyreserved.RightsandPermissionsThematerialinthisworkissubjecttocopyright.BecauseTheWorldBankGroupencouragesdissemi-nationofitsknowledge,thisworkmaybereproduced,inwholeorinpart,fornoncommercialpurposesaslongasfullattributiontothisworkisgivenandallfurtherpermissionsthatmayberequiredforsuchuse(asnotedherein)areacquired.TheWorldBankGroupdoesnotwarrantthatthecontentcontainedinthisworkwillnotinfringeontherightsofthirdparties,andacceptsnoresponsibilityorliabilityinthisregard.AllqueriesonrightsandlicensesshouldbeaddressedtoWorldBankPublications,TheWorldBankGroup,1818HStreetNW,Washington,DC20433,USA;e-mail:pubrights@worldbank.org.COUNTRYCLIMATEANDDEVELOPMENTREPORTEASTASIAPACIFICINDONESIAAPRIL,2023IIClimate&DevelopmentinIndonesiaEconomicImpactsofClimateActionsCommitments&CapacitiesClimate&DevelopmentPolicyFrameworkEnablingEconomicPolicies&InstitutionsINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORTIIICONTENTS0159217738IVFIGURESFigure1ImportantDevelopmentTransitions.........................................................................................................................................................3Figure2AccelerationinIncomeConvergence.......................................................................................................................................................3Figure3GHGEmissionsHighbutSlowing..............................................................................................................................................................4Figure4PerCapitaGHGEmissionsStartingtoDecline........................................................................................................................................4Figure5PerCapitaEmissionsRemainBelowThoseofMajorDevelopedEconomiesandinLineWithDevelopingCountryPeers........5Figure6GrowthBecomingLessCarbonIntensive.................................................................................................................................................5Figure7SomeSignsofRelativeDecoupling..........................................................................................................................................................5Figure8SourcesofIndonesia'sEmissionsoverTime...........................................................................................................................................7Figure9TheRateofDeforestationHasFalleninRecentYears..........................................................................................................................8Figure10CoalintheEnergyMixhasIncreased.......................................................................................................................................................8Figure11EnergySupplyDrivenbyElectricity..........................................................................................................................................................9Figure12CoalDominatesPowerGeneration...........................................................................................................................................................9Figure13ManufacturingEmissionsIncreasedalongwithEfficiency...................................................................................................................9Figure14PeatlandAgriculture:CostsandBenefits.............................................................................................................................................10Figure15IncomeLossfromPrematureDeaths....................................................................................................................................................10Figure16RisingIncidenceofClimate-relatedDisasters......................................................................................................................................12Figure17ClimateChangewillReduceAgriculturalYieldsWithoutAdaptiveMeasures.................................................................................15Figure18Deforestationextentperyear(mil.ha)..................................................................................................................................................15Figure19OilPalmLivelihoodsareConcentratedinKalimantanandSumatraLowlands..............................................................................17Figure20LendingExposureofIndonesianBankstoTransition-sensitiveSectorsisHigh..............................................................................18Figure21Indonesia’sStockMarketsareWeighedTowardEmissions-exposedSectors................................................................................18Figure22ReducingSupplyof,andDemandfor,Carbon-intensiveResources.................................................................................................19Figure23PotentialtoAccelerateConvergenceinPerCapitaWealth................................................................................................................20Figure24IncludingThroughFasterGrowthinHumanCapitalStock.................................................................................................................20Figure25PerCapitaEmissionsofMajorEconomiesunderStatedTargets....................................................................................................23Figure26AbsoluteEmissionsofMajorEconomiesunderStatedTargets........................................................................................................23Figure272030CommitmentsPerCapita:Top-10Emitters...............................................................................................................................24Figure28PossiblePost-2030PathwaysforIndonesia........................................................................................................................................24Figure29ConditionalandUnconditional2030NDCTargets..............................................................................................................................25Figure30PlannedSectoralContributionsto2030NDCTargets........................................................................................................................25Figure31TheLandUsePolicyFramework:AChronology...................................................................................................................................28Figure32RenewablesasaShareofTotalEnergyConsumption........................................................................................................................29Figure33EmissionsfromLandCoverChangesinRapidlyDevelopingCities..................................................................................................34Figure34EmissionsfromProvisionofUrbanServices........................................................................................................................................34Figure35HighbutDecreasingFossilFuelSupport...............................................................................................................................................41Figure36MostSupportisGearedtoConsumers..................................................................................................................................................41Figure37MostSupportGoesTowardPetroleum..................................................................................................................................................41Figure38ResultinginLowPetrolEnd-userPrices................................................................................................................................................41INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORTVFigure39AndLowResidentialElectricityPrices..................................................................................................................................................41Figure40ExpectedContingentLiabilitiesfromNaturalDisasters.....................................................................................................................43Figure41GreenDebtMarketSize..........................................................................................................................................................................49Figure42MaturityofGreenDebt............................................................................................................................................................................49Figure43TypesofGreenDebt................................................................................................................................................................................49Figure44UseofGreenDebtProceeds...................................................................................................................................................................49Figure45TariffsonGreenGoodsareLow..............................................................................................................................................................53Figure46ButNTMscanbeBurdensome...............................................................................................................................................................53Figure47ContributingtoHigherImportCosts......................................................................................................................................................53Figure48AndLossofCompetitiveness.................................................................................................................................................................53Figure49GoodSignsonthePrevalenceofSomeGreenPracticesinIndonesia.............................................................................................55Figure50ForeignandLargeFirmshaveHigherGreenPracticeScoresinIndonesia.....................................................................................55Figure51IndonesianFirmsPerformWellRelativetoFirmsinSelectedECACountries.................................................................................55Figure52ElectricityandEnergyUseareWeaklyAssociatedwithGreenPractices.........................................................................................55Figure53ReasonsforFirms'(Lackof)AdoptionofEnergyEfficiencyMeasures.............................................................................................56Figure54PaybackPeriodsforEnergyEfficiencyMeasures................................................................................................................................56Figure55GreenTasksbyOccupationCategory.....................................................................................................................................................58Figure56WomenareUnder-representedinGreenJobs......................................................................................................................................58Figure57OverviewofModelledScenarios.............................................................................................................................................................61Figure58PoliciestoReduceLand-basedEmissionshaveSignificantEconomicCo-benefits.......................................................................64Figure59AcceleratedDecarbonizationisConsistentwithNetZeroEmissionsBefore2060......................................................................65Figure60ThisWouldRequire50percentHigherInvestmentComparedtoBAU............................................................................................65Figure61RenewableGenerationCapacityIncreasesStronglyafter2030.......................................................................................................65Figure62FossilFuelsRemainintheGenerationMixbutatGreatlyReducedLevelsthrough2040............................................................65Figure63AchievingDecarbonizationObjectives...................................................................................................................................................69Figure64WithPotentialPositiveGrowthPayoffs.................................................................................................................................................69Figure65ForeignInvestmentscanAlleviateTrade-offsinMoreAmbitiousScenarios...................................................................................70Figure66ThereWillBeGainsandLossesAcrossSectors..................................................................................................................................70Figure67ImpactsonEmployment........................................................................................................................................................................72Figure68ImpactonHouseholdExpenditure........................................................................................................................................................72Figure69DriversofExpenditureChange................................................................................................................................................................72Figure70ImpactonPrices.......................................................................................................................................................................................72Figure71ImpactonExpenditurebyWorkerType...............................................................................................................................................72Figure72ImpactonPoverty...................................................................................................................................................................................72Figure73TradeImpactsofNDCsareSlightlyNegative.......................................................................................................................................74Figure74PartlyDrivenbyDecliningManufacturingExports...............................................................................................................................74Figure75BuildingBlocksfortheTransition...........................................................................................................................................................77Figure76PrioritizationApproachforRecommendations....................................................................................................................................77Figure77TimeframeandExpectedImpactofSupply-(S)andDemand-side(D)MitigationMeasures.......................................................86Figure78TimeframeandExpectedImpactofAdaptationMeasures................................................................................................................90Figure79TimeframeandExpectedImpactofEnablingConditionMeasures..................................................................................................97VIThisCountryClimateandDevelopmentReport(CCDR)wasacollaborativeeffortoftheWorldBank,InternationalFinanceCorporation(IFC),andMulti-lateralInsuranceandGuaranteeAgency(MIGA)undertheoverallguidanceofManuelaV.Ferro(WorldBankRegionalVicePresident),AlfonsoGarciaMora(IFCRegionalVicePresident),EthiopisTafara(MIGAVicePresidentandChiefRisk,LegalandAdminOfficer),SatuKristiinaKahkonen(WorldBankCountryDirectorforIndonesiaandTimor-Leste),HassanZaman(WorldBankRegionalDirector,EquitableGrowth,FinanceandInstitutions),BenoitBosquet(WorldBankRegionalDirector,SustainableDevelopment),Kim-SeeLim(IFCDirector),MerliMargaretBaroudi(MIGADirector,EconomicsandSustainability),AadityaMattoo(ChiefEconomist,EAP),LarsChristianMoller(WorldBankPracticeManager,MacroeconomicsTradeandInvestment),AnnJeannetteGlauber(WorldBankPracticeManager,Environment,NaturalResources,andtheBlueEconomy),JohnNasir(IFCPracticeManager),andBolormaaAmgaabazar(OperationsManagerforIndonesiaandTimor-Leste).TheCCDRwaspreparedbyacoreteamledbyHabibRab(LeadEconomist)andDavidKaczan(Sr.Economist)andincludingAbdoulayeSy(LeadEcon-omist),AchimSchmillen(ProgramLeader,HumanDevelopment),AndhytaFirsellyUtami(EnvironmentalEconomist),AndredeAquino(ProgramLeader,SustainableDevelopment),BryceQuillin(Sr.Economist),BipulSingh(Sr.En-ergySpecialist),ClaudiaVasquez(ProgramLeader,Infrastructure),EugeniuCroitor(MIGARiskManagementOfficer),FrancescoStrobbe(LeadFinancialSectorSpecialist),GauravTrivedi(FinancialSectorConsultant),HasanDudu(Sr.Economist),HectorPollitt(Sr.Economist),MuthukumaraS.Mani(LeadEnvironmentalEconomist),RalphVanDoorn(Sr.Economist),ReidinarWardoyo(CommunicationsSpecialist),StephanClaudeFredericGarnier(ProgramLead-er,Infrastructure),TehminaNawab(StrategyOfficer),UtzPape(Sr.Economist),YulitaSariSoepardjo(ProgramAssistant),andZahraKarimDidarali(ClimateChangeConsultant).TheCCDRsynthesizesfindingscontainedinanalyticalworkundertakenbyanextendedtechnicalteam(listedbelow).Detailedfeedback,suggestions,andcommentswerereceivedfrompeerreview-ers:RichardDamania(WorldBankChiefEconomist,SustainableDevelopment),VivekPathak(IFCDirector,ClimateBusiness),SomikV.Lall(LeadEconomist),ApurvaSanghi(LeadEconomist),GiovanniRuta(LeadEnvironmentalEcono-mist),andFernandoBlanco(IFCPrincipalEconomist).CommentswerealsogratefullyreceivedfromAhmadBaihaki(Sr.FisheriesConsultant),AhmadouMoustaphaNdiaye(Director,EquitableGrowth,Finance,andInstitutions),Al-exanderLotsch(SeniorClimateChangeSpecialist),AndyMason(LeadEcono-mist),AnnaFruttero(Sr.Economist),ChristianSchoder(Jr.ProfessionalOfficer),ClaudioRojas(OperationsOfficer),CraigMeisner(Sr.Economist),DanielHalim(Economist),DinaUmali-Deininger(PracticeManager),DuongLe(Economist),EthelSennhauser(Director,StrategyandOperations),FlorentMcIsaac(Econ-ACKNOWLEDGMENTSINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORTVIIomist),FrancescadeNicola(Sr.Economist),GeorgesBiancoDarido(LeadUrbanTransportSpecialist),GuillermoDiaz-Fanas(PublicPrivatePartnershipsSpecialist),HelenGall(PublicPrivatePartnershipsConsultant),IraDorband(Jr.ProfessionalOfficer),JamesP.Walsh(IMF),JasonRuss(Sr.Economist),JennyChao(Sr.PublicPrivatePartnershipsSpecialist),JonathanLindsay(LeadCounsel),JukkaStrand(Sr.InfrastructureFinanceSpecialist),JulieRieger(ChiefCounsel),KhafiWeekes(PublicPrivatePartnershipsConsultant),LestariBoedi-ono(Sr.ExternalAffairsOfficer),MasudMozammel(Sr.ExternalAffairsOfficer),MustafaZakirHussain(Manager),NickKeyes(Sr.ExternalAffairsOfficer),OlivierMahul(PracticeManager),PabloFajnzylber(GlobalDirector,Infrastructure),PaoloMiguelLazaroTabuena(InvestmentAnalyst),PennyWilliams(ProgramManager),RoumeenIslam(EconomicAdvisor),SamuelFreije-Rodriguez(LeadEconomist),StephaneHallegatte(Sr.ClimateChangeAdvisor),SumatiRajput(FinancialSectorSpecialist),VictorBundiMosoti(LeadCounsel),andYoominLee(Jr.ProfessionalOfficer).LayoutdesignbyKamalMuhammed.SupportfortheCCDRfromtheAustralianDepartmentofForeignAffairsandTradethroughtheAustralia-WorldBankIndonesiaPartnership(ABIP)isgrate-fullyacknowledged.Thissupportcontributedtoresearchintospecializedtopics(seebackgroundanalyses,below)aswellassynthesisanddissemination.Theland-relatedanalysiswassupportedbytheSustainableLandManagementMulti-DonorTrustFund(SLM-MDTF),supportedbytheGovernmentsofNorwayandAustralia.Land-relatedanalysisbuildsonamodeldevelopedaspartoftheWorldBank’sGlobalProgramonSustainability(GPS).FinancialsupportofthedonorstoGPSisgratefullyacknowledged,includingtheUK’sDepartmentforEnvironment,Food&RuralAffairs(DEFRA);Germany’sFederalMinistryforEconomicCooperationandDevelopment(BMZ);andSwitzerland’sStateSecretariatforEconomicAffairs(SECO).FinancialandtechnicalsupportbytheEnergySectorManagementAssistanceProgram(ESMAP)forthepowersectoranalysisisalsogratefullyacknowledged.BACKGROUNDANALYSISAdaptiveSocialProtection,HumanCapital,andClimateChange:IdentifyingPolicyPrioritiesforIndonesia.ByAshaWilliams(Sr.SocialProtectionSpecialist)GraciaHadiwidjaja(SocialProtectionSpecialist),RabiaAli(Sr.Economist),andImamSetiawan(Economist).Carbonuse,wealthaccumulation,andenvironmentalqualityinthegrowthprocessinIndonesia.ByAhyaIhsan(Sr.Economist),DwiEndahAbriningrum(ResearchAnalyst),KhudadadChattha(YoungProfessional),andIndiraMaulaniHapsari(Economist).CitiesandClimateChange:Indonesiancitiesattheforefrontofclimatesmartdevelopment.ByGayatriSingh(Sr.UrbanDevelopmentSpecialist),TiffanyMinhTran(UrbanDevelopmentConsultant),ApoorvaNarayanShenvi(ClimateChangeSpecialist),AlexandrinaPlatonova-Oquab(SeniorClimateChangeSpecialist),DaoHHarrison(Sr.HousingSpecialist),andDenadaStotteleIshmi(UrbanDevelopmentConsultant).ClimateChangeVulnerabilityProfilesandLocalAdaptationStrategiesinIndonesia.ByJamesT.Erbaugh(ResearchAssociate,DartmouthCollege),ArunAgrawal(Professor,UniversityofMichigan),EmcetO.Tas(Sr.SocialDevelopmentSpecialist),andHannahJ.Duncan(SocialDevelopmentConsultant).ClimateChange:RisksandOpportunitiesfortheFinancialSectorinIndonesia.ByFrancescoStrobbe(LeadFinancialSectorEconomist),MartijnRegelink(Sr.FinancialSpecialist),OwenNie(FinancialSectorEconomist),NepomukDunz(Jr.ProfessionalOfficer),RachelMok(ClimateChangeSpecialist),NepomukDunz(Jr.ProfessionalOfficer),DorraBerraies(ClimateChangeConsultant),GauravTrivedi(FinancialSectorConsultant),andTehminaNawab(StrategyOfficer).ThefollowinganalysissupportedtheCCDR:VIIIClimateSmartLivestockTechnicalNote;andClimateSmartRiceTechnicalNote.ByVikasChoudhary(Sr.AgricultureSpecialist)andAlikaTuwo(AgricultureSpecialist).DecarbonizationandthePrivateSector.ByAlexandreHugoLaure(SrPrivateSectorSpecialist),AufaDoarest(PrivateSectorSpecialist),TrangThuTran(SrEconomist),MariemMalouche(SrEconomist),andAlvaroGonzalez(LeadEconomist).DecarbonizingUrbanMobilityinIndonesia.ByNupurGupta(Sr.UrbanTransportSpecialist),ElenaY.Chesheva(Sr.TransportSpecialist);AmiliaAldian(TransportEngineer),andTomásHerrero(TransportConsultant).DistributionalImpactsofClimateChangeinIndonesia.ByUtzPape(Sr.Economist),EnglandRhysCan(Consultant),AnissaRahmawati(Consultant),CitraKumala(Consultant),andVirgiAgitaSari(Economist).FiscalRisksfromclimateshocks.ByRichardPoulter(DisasterRiskManagementConsultant)andBenediktSigner(ProgramCoordinator).GenderDimensionsinClimateChangeinIndonesia.ByDewiNovirianti(SocialDevelopmentConsultant),KateAnnaShanahan(Sr.SocialDevelopmentSpecialist),andEmcetOktayTas(Sr.SocialDevelopmentSpecialist).IndonesiaClimateChangeInstitutionalAssessment.ByArunArya(Sr.PublicSectorManagementSpecialist),ErwinAriadharma(Sr.PublicSectorManagementSpecialist),KhudadadChattha(YoungProfessional),HariPurnomo(Sr.PublicSectorSpecialist),AhmedZakiFahmi(Economist),UnggulSuprayitno(Sr.FinancialManagementSpecialist),andAndhytaUtami(EnvironmentalEconomist).Indonesia’sGreenInternationalCompetitivenessandGreenTrade;GreenGoodsTrade-AFirmLevelPerspective;andTheRoleofTradePoliciesinIndonesia’sGreenTransition.ByCsillaLakatos(Sr.Economist),AngellaFaithMontfaucon(Economist),VickyChemutai(YoungProfessional),andBayuAgnimaruto(TradeConsultant).JustTransitionintheTransitionAwayfromCoal.ByMichaelStanley(LeadOilandGasSpecialist),BaladaAmor(Sr.MiningSpecialist),andJasminahWoodhouse(EnergyandExtractivesConsultant).Low-carbonTransitioninthePowerSector(publishedinIndonesiaEconomicProspects,December2021).ByStephaneGarnier(LeadEnergySpecialist),SabineCornieti(EnergySpecialist),ClaireNicolas(Sr.EnergyEconomist),HasanDudu(Sr.Economist),andAbdoulayeSy(LeadEconomist).ManagingIndonesia’sForestsandLandsforClimate,HealthandWealth.ByDavidBrown(ForestryConsultant),TimBrown(Sr.NaturalResourcesManagementSpecialist),PasqualeLucioScandizzo(UniversityofRomeTorVergata),DanieleCufari(UniversityofRomeTorVergata),DavidKaczan(Sr.Economist),AnnaLeenaEmiliaHenttinen(NaturalResourcesConsultant),AndhytaUtami(EnvironmentalEconomist),IwanGunawan(Sr.NaturalResourcesManagementSpecialist),andAndredeAquino(Sr.NaturalResourcesManagementSpecialist).PreparingIndonesia’sWorkforceforGreenJobs.ByJosefinaPosadas(Sr.Economist),JuliaGranata(SocialProtectionConsultant),GraceHadiwidjaja(SocialProtectionSpecialist),andHarsaSatrio(SocialProtectionConsultant).RoleofCarbonPricinginAchievingIndonesia’sClimateCommitments.ByAndhytaUtami(EnvironmentalEconomist).TheClimate-WaterNexusinIndonesia:WaterResourceVulnerabilities,CoastalHazards,andGreenhouseGasEmissions.ByMicahFisher(WaterConsultant),AdilahKhalis(WaterConsultant),andIrmaSetiono(Sr.WaterSupplyandSanitationSpecialist).GreenFiscalPolicyInstruments.ByRalphVanDoorn(SrEconomist),AnthonyObeyesekere(Economist),andDwiEndahAbriningrum(Re-searchAnalyst).AligningtheStateBudgettoClimatePrioritiesinIndonesia.ByArunArya(Sr.PublicSectorSpecialist),Dr.MuhamadChatibBasri(NDCEconomicAdviserfortheGovernmentofIndonesia),MelisaSudirman(SrCarbonFinanceConsultant),AndhytaFirsellyUtami(Environ-mentalEconomist),RalphvanDoorn(SrEconomist),CutDianAgustina(Economist),HariPurnomo(SeniorPublicSectorSpecialist),MuhammadKhudadadChattha(YoungProfessional),BambangSuharnoko(SrEconomist),andRetnoHandini(PFMConsultant).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORTIXADSAcceleratedDecarbonizationScenarioAMDALAnalisisMengenaiDampakLingkungan(EnvironmentalImpactAssessment)ASIAvoid-Shift-ImproveASPAdaptiveSocialProtectionBAUBusiness-as-usualBMKGBadanMeteorologi,Klimatologi,danGeofisika(Meteorology,Climatology,andGeophysicsAgency)BNPBBadanNasionalPenanggulanganBencana(NationalDisasterManagementAuthority)BPDLHBadanPengelolaDanaLingkunganHidup(EnvironmentFundManagementAgency)BPSBadanPusatStatistik(StatisticsIndonesia)BRGMBadanRestorasiGambutdanMangrove(PeatandMangroveRestorationAgency)BSPBenefit-sharingPlanCBAMCarbonBorderAdjustmentMechanismCCDRCountryClimateandDevelopmentReportCDPCarbonDisclosureProjectCGEComputableGeneralEquilibriumCNGCompressedNaturalGasCSAClimateSmartAgricultureDMODomesticMarketObligationDRIPDisasterResilienceImprovementProgramDTKSDataTerpaduKesejahteraanSosial(IntegratedSocialWelfareDatabase)E&SEnvironmentalandSocialEGAEnvironmentalGoodsAgreementEIPEco-IndustrialParkEM-DATEmergencyEventsDatabaseEPCEngineering,Procurement,andConstructionESGEnvironmental,Social,andGovernanceETSEmissionsTradingSchemeEUEuropeanUnionEVElectricVehicleFAOFoodandAgricultureOrganizationFCPFForestCarbonPartnershipFacilityFDIForeignDirectInvestmentFOLUForestryandOtherLandUsesGDPGrossDomesticProductGGPGreenGrowthPlanGHGGreenhouseGasHCVHighConservationValueIDMIndeksDesaMembangun(DevelopingVillageIndex)IDSIntermediateDecarbonizationScenarioIEAInternationalEnergyAgencyIFCInternationalFinanceCorporationILOInternationalLabourOrganizationIPPIndependentPowerProducerJKNJaminanKesehatanNasional(NationalHealthInsurance)KURKreditUsahaRakyat(ABusinessCreditSchemeforMicro,Small,andMediumEnterprises)LCDILowCarbonDevelopmentInitiativeLCRLocalContentRequirementLGSTLuxuryGoodsandServicesTaxLTS-LCCRLong-TermStrategyforLowCarbonandClimateResilienceLTVLoan-to-valuationLUCFLandUseChangeandForestryMoAMinistryofAgricultureMoEFMinistryofEnvironmentandForestryMoEMRMinistryofEnergyandMineralResourcesMoFMinistryofFinanceMoHMinistryofHealthMoIMinistryofIndustryMRVMonitoring,Reporting,andVerificationMSoEMinistryofState-ownedEnterprisesND-GAINNotreDame-GlobalAdaptationIndexNDCNationallyDeterminedContributionNPLNon-performingLoanNTMNon-tariffMeasureNUMPNationalUrbanMobilityPolicyOJKOtoritasJasaKeuangan(FinancialServicesAuthority)PFBPoolingFundBencana(PoolingFundforDisasters)PKHProgramKeluargaHarapan(FamilyHopeProgram)PLNPerusahaanListrikNegara(State-ownedelectricitycompany)PPAPowerPurchaseAgreementPPPPublicPrivatePartnershipPROKLIMProgramKampungIklim(ClimateVillageProgram)PSOPublicServiceObligationPVPresentValueRILReducedImpactLoggingRKPRencanaKerjaPemerintah(GovernmentWorkPlan)RPJMNRencanaPembangunanJangkaMenengahNasional(NationalMedium-TermDevelopmentPlan)RPJPNRencanaPembangunanJangkaPanjangNasional(NationalLong-TermDevelopmentPlan)RTRWRencanaTataRuangWilayah(DistrictSpatialPlan)RUENRencanaUmumEnergiNasional(NationalEnergyPlan)RUPTLRencanaUsahaPenyediaanTenagaListrik(BusinessPlanforElectricityProvision)SEZSpecialEconomicZoneSNIStandarNasionalIndonesia(IndonesiaNationalStandard)SoEState-ownedEnterpriseSSESustainableStockExchangeTORATanahObyekReformaAgraria(NationalLandReformProgram)UNDPUnitedNationsDevelopmentProgrammeUNFCCCUnitedNationsFrameworkConventiononClimateChangeABBREVIATIONSANDACRONYMS1CLIMATE&DEVELOPMENTININDONESIAPAGE1—201BOROBUDUR•YOGYAKARTAINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT2ClimatechallengesinIndonesiaareintertwinedwiththecountry’sgrowthanddevelopmenttrajectories.Chapter1ofIndonesia’sCountryClimateandDevelopmentReport(CCDR)takesahistoricallookatclimateanddevelopmentchallengesinIndonesiato:(i)presentabaselineforthefuturelow-carbonandclimate-resilientjourney;and(ii)developaframeworktoillustrateclimate-growthdynamics.TheframeworkiscenteredaroundIndonesia’sabundantsupplyofcarbon-intensivenaturalresources–landandenergy–matchedbyhighdemandforthoseresourc-esinpartsoftheeconomythatdrivegrowth–agriculture,urbanexpansion,industry,transportation,andtrade.Theresultingemissionshavedirectandindirectcosts.Theyerodeclimateresilienceandincreasecostsfromclimateshocks.Risingcarboncontentintheeconomyalsoimposessunkcostsforthelow-carbontransition.Althoughthesechallengesareknown,andeffortsarebeingmadetotacklethem,theframeworkaimstolinktheseeconomy-wideissuestotheongoingandfuturereformsthatarediscussedlaterintheCCDR.Indonesiahasmadeimportantcommitmentstomeetitsclimateandde-velopmenttargets.Ongoingeffortsarestartingtopaydividendsinslowinggreenhousegas(GHG)emissions,maintaininggrowth,andstrengtheningeco-nomicandsocialresilience.Thetransitioninvolvestrade-offsbetweenclimateactionsandnear-termdevelopmentpriorities‒especiallyasIndonesia’sstrongtrackrecordofgrowthandpovertyreductionwasthanksinparttoitsnaturalresourceendowments‒includingcoal,oil,forests,andpeatlands.IndonesiahassetoutanewpathinitsLong-TermStrategyforLowCarbonandClimateResilience(LTS-LCCR)2050tosustainandpotentiallyaccelerateitseconomictransformationfromamiddle-tohigh-incomecountry.AsstatedintheLowCarbonDevelopmentInitiative(LCDI),Indonesiaislookingforwaysto“maintaineconomicandsocialgrowththroughdevelopmentactivitieswithlowGHGemis-sionsandminimizingtheexploitationofnaturalresources”(Bappenas2021).TheCCDRdoesnottakeapositiononIndonesia’sclimatecommitments.IndonesiahasbeenclearinitsEnhancedNationallyDeterminedContribution(NDC)(RepublicofIndonesia2022)anditsLTS-LCCR(RepublicofIndonesia2021)ontheemissionsreductionsitintendstoachievewithandwithoutin-ternationalsupport.1Similarly,Indonesiahassetoutcleardevelopmentgoals,asperitsnationalmedium-termandlong-termdevelopmentplans(RencanaPembangunanJangkaMenengahNasional:RPJMNandRencanaPembangu-nanJangkaPanjangNasional:RPJPN),towardachievinghigh-incomestatusby2045.Newmedium-andlong-termplansarenowunderdevelopment‒withthemainstreamingofclimatemeasuresapriority.Inlinewiththispolicyfocus,theintentoftheCCDRistoassesshowIndonesiacanachieveitsclimategoalswhilemaximizingitsdevelopmentoutcomes.Indonesiahasmadeimportantcommitmentstomeetitsclimateanddevelopmenttargets”“1AsdiscussedinChapter2,IndonesiahascommittedinitsEnhancedNDCtoa31.9percentreduction(belowbusiness-as-usualorBAUemissions)by2030,andupto43.2percentwithinternationalfinancialsupport.TheEnhancedNDCwasreleasedinSeptember2022.Climate&DevelopmentinIndonesia3DEVELOPMENTTRANSITIONS&CARBONEMISSIONS1.1Indonesiahasexperiencedimportantdevelopmenttransitionsinthe25yearsto2022thathaveinvolvedrapidandpositivechangeinashortperiodoftime.Since1997,Indonesiahasseenrapidchange(Figure1)initsphysicalcapitalstock;accesstoelectricity(67percentofthepopulationin1995to99percentin2020);urbanization(36percentofthepopulationin1995to56percentin2020);non-agriculturalemployment(57percentofemploymentin2006to71percentin2020);andfertilityrates(decliningtoslightlyabovethepopulationreplacementratein2020).Therearemanyotherexamples,includinginternetandmobilephoneaccess,andthemajorpoliticalandgovernancechangesofreformasianddecentralization.Economicgrowthoverthisperiodaveragedfivepercentperyear‒contributingtoincomeconvergencethatacceleratedrapidlyrelativetopeercountries2since2009(Figure2).Thepovertyrateconcurrentlyfellfrom19percentin2000to9.4percentby2019.Indonesia’stransitiontoalow-carbonandclimate-resil-ienteconomyisatransformationthatcoulddefinethenextphaseofeconomicgrowthandpovertyreduction.FIGURE1FIGURE2ImportantDevelopmentTransitionsAccelerationinIncomeConvergenceIndicatorsofdevelopmenttransitions(Index1995=1)Indonesiaandstructuralpeersvs.US(GDPpercapita,PPP2017)Source:WorldDevelopmentIndicators(WorldBankdatabank),figurescompiledbyWorldBankGroup(WBG)staff.Note:Figure2showsrateofincomeconvergenceofIndonesiaversusrateofincomeconvergenceofstructuralpeers(relativetotheUS).SeeFootnote2.2Thisreportusesastandardbasketofpeerswheredataallows.PeersareNigeria,China,India,Ukraine,Thailand,thePhilippines,Mexico,theArabRepub-licofEgypt,theRussianFederation,andBrazil,selectedbasedontheirstatisticalsimilarityintermsofpopulation,GDPpercapita,andtotalGDP.Anadditionalsetofaspirationalpeersisalsousedwhenrelevant:RepublicofKorea,Chile,Poland,andtheCzechRepublic.Insomeinstances,developedcountriesarealsousedascomparisonswhendiscussingemissionslevelsandtargets.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT4Historically,thoseeconomictransitionsmeantrisingcarbonemissions,inlinewithIndonesia’sstageofdevelopment.Indonesiaaccountsforabout3.5percentofglobalGHGemissions.3Indonesiahasthe4thlargestpopula-tion,the16thlargesteconomy,andaccountsfor1.25percentoftheworld’sGrossDomesticProduct(GDP).Indonesia’semissions–1,495milliontonnesofcarbondioxide(CO2)equivalent(MtCO2eq)annualaveragein2018-2020–arehighcomparedtostructuralpeersinabsoluteterms(Figure3)butencour-aginglyshowsignsofslowing‒includinginpercapitaterms(Figure4).PercapitaemissionsinIndonesiainrecentyearshavebeeninlinewiththoseofotherlargedevelopingeconomies,andlowerthanthoseoflargedevelopedeconomies(Figure5).ThehighemissionsbasehasmeantthatGHGemissionsoverallincreasedonlymoderatelybetween1990and2018(by35percent).ChinaandIndia,whichhadhigherbaseemissionsin1990,sawmuchlargeroverallincreasesinGHGemissions(above400percentand300percentre-spectively)butalsohavelargerpopulationsandeconomies,andexperiencedfastergrowth.ThechallengeforIndonesiaandotherlargedevelopingeconomiesishowtodecouplegrowthandGHGemissions.Nocountryhastransitionedtohigh-in-comestatuswhilealsoreducingemissions,yetthisisthechallengeimplicitinthelow-carbontransition.GHGemissionsinIndonesiahavetranslatedtohighbutdecliningGHGsemittedperunitofGDP(Figure6);GHGemissionsfromenergyperunitofGDPhasnotincreasedasdramaticallyasinpeercountriesdespitetheincreaseddependenceoncoal.IndonesiahasseensomedecouplingbetweengrowthinpercapitaGDPandgrowthinGHGemissions(Figure7),4buttheextentofdecouplingnarrowswhenadjustedforthecarboncontentinIndonesia’stradedgoods.HighergrowthcountrieslikeChinaandIndiashowstrongerrelativedecouplingbutalsohigheremissions.Only14countries(mostlydevelopedones)haveachievedabsolutedecouplingfrombothproductionandconsumption-basedemissions.5FIGURE3FIGURE4AbsoluteGHGEmissionsPerCapitaGHGEmissionsStartingtoDeclineAnnualGHGemissions(AllGHG,3-yearmovingaverage)AnnualGHGemissionspercapita(AllGHG,3-yearmovingaverage)3ClimateWatch.“DataExplorer.”Emis-sionsfor2018includeforestryandlanduse,andallmajorgreen-housegases(link).4RelativedecouplingiswhenemissionsgrowthispositivebutlessthanGDPpercapitagrowth;absolutedecou-plingiswhenemissionsarestableordecreasingwhiletheGDPpercapitaisgrowing.5Production-basedemissionsarefromdomesticoutput;de-mand-basedemissionsadjustforcarboncontentintrade.SeeHubaceketal.2021.Climate&DevelopmentinIndonesia5FIGURE5FIGURE6FIGURE7PerCapitaEmissionsRemainBelowThoseofMajorDevelopedEconomiesandinLineWithDevelopingCountryPeersGrowthBecomingLessCarbonIntensiveSomeSignsofRelativeDecouplingPercapitaGDP(PPPconstant2017)vs.Percapitaemissions(1990-2019)Carbonintensityofgrowth(AllGHG,3-yearmovingaverage)DecouplingGHGemissionsandGDPpercapita(Index1990=1,5-yearmovingaverage,dataupuntil2019)ThechallengeforIndonesiaandotherlargedevelopingeconomiesishowtodecouplegrowthandGHGemissions.““Sources:WorldDevelopmentIndicators(WorldBankdatabank);Cli-mateWatchDataExplorer;MinistryofEnvironmentandForestry(MoEF)data;figurescompiledbyWBGstaff.Notes:Linesshowpolynomialtrendsfor1990-2019inpercapitaemissions.LUCF=landusechangeandforestry.Note:Interquartilerangereferstoperformanceofstructuralpeers(seeFootnote2).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT6SOURCESOFCARBONEMISSIONS1.2ThecarboncontentofgrowthinIndonesiaderivesfromacombinedhighsupplyof,anddemandfor,resourceswithahighcarboncon-centration.Theabundantsupplyofland(fromcarbon-richforestsandpeatlands)andenergyresources(fromfossilfuels,particularlycoal),havedrivenIndonesia’semissionsprofile.Onthedemandside,largepartsoftheeconomyhavemadeuseoftheseresourcestodrivedevelopment(forelectricity,industry,transportation,urbanexpansion,agricul-ture,andforestry).Thesetrendsarereinforcedbytheunderpricingofcarboninlandandenergyresources(exploredinChapter2).Onthesupplyside,muchofIndonesia’sGHGemissionscomefromland-basedsources.Deforestationandfireshavehistoricallyaccountedforabout42percentofIndonesia’sGHGemissions(Figure8).6Agricultureandforestryactivitiesweretheprimarydriversoflandcoverchange,notablyexport-orient-edtimberextraction,andpulpandpaperplantationswhichexpandedrapidlyfromthe1980s-90s,andoilpalm,whichfollowedinthe1990s-2000s(Tsu-jino,etal.2016).Theseactivitiesimpactedcarbon-richecosystemssuchaspeatlands–partiallyfloodedlowlandareasofKalimantan,Sumatra,andPapuawithcarbon-richsoils.7Mangroveconversionforagricultureandaquacultureincoastalareassimilarlycontributedtohighemissions(Goldbergetal.2020).86Totalofforest,landuse,andpeatfireemis-sionsbetween2000-20asaproportionoftotalemissions(MoEF2021data).7CarbonstoredinIndonesia’speatlandsisestimatedat13.6to40.5billiontonnesofcarbon,oneofthelargestbiologicalcarbonstoresonEarth.8At3.31millionhectares,Indonesiahasthelargestglobalstockofmangroves(about20percent).Lossrateshavebeenhighinpastyearsbuthaveslowedmorerecently.Climate&DevelopmentinIndonesia793%80%9Measuredfrommid-year,inlinewithMoEFdata.10Fireincidencewasmuchlowerin2020and2021thanin2018and2019(MoEFdata,ForestandLandFireEarlyWarningandDe-tectionSystem).Longertimeseries(MODISBurnedAreasatellitedataproduct)alsoshowsadecliningtrendinfireextent(2001-2021).FIGURE8SourcesofIndonesia'sEmissionsoverTimeoftheenergysupplycomesfromfossilfuelsofIndonesia’scoalisexported,accountingforabout10percentofmerchandizeexportsIndonesiaGHGemissionsbysector,2000-2020(MtCO2eq)Source:MoEF2021emissionsdata.Note:FOLU=ForestryandOtherLandUses;IPPU=Industrialprocessesandproductuse.Consideringthesetrends,theauthoritiessignificantlytightenedforestandpeatprotectionwhichhascontributedtoaslowdowninland-relatedemis-sions.About8.49millionhectaresofforestcoverwaslostbetween2000and2020(MoEF2021),butthelossratehasslowedconsiderablyinrecentyears(Figure9).Deforestationslowedfromanaverageof1.08millionhectares(ha)peryearbetween2000-07,to0.61millionhaperyearbetween2007-14andtoanaverageof0.48millionhaperyearbetween2014-21.9Deforestationin2019-21waslessthan0.12millionha(MoEF2021)peryear,thelowestratessince1990(exploredinChapter2).Firesalsocontributingtoland-basedemis-sions–someofwhichariseduetoburningforclearingpurposes(WorldBank2021).Thesealsohavedecreasedduetoreducedclearing,zero-firepolicies(thatbantheuseoffiresforclearing),peatrewetting,andfiresuppressioneffortsinrecentyears.10Primaryenergysupplyisheavilydominatedbyfossilfuelsanditisthesec-ondlargestsourceofcarbonemissions.Energyaccountsforapproximately39percentofGHGemissionsinIndonesiabetween2000and2020.About93percentoftheenergysupplycomesfromfossilfuels,namelycoal(43percent),oil(31percent),andgas(19percent).Abundantlyavailabledomestically,theshareofcoalinIndonesia’senergymixincreasedoverthetwodecadesto2019(Figure10).Thecoalindustry’sshareoftheeconomyislessthan2percentanditemploys0.2percentoftheworkforce,butIndonesiaisnowtheworld’ssecondlargestcoalexporter.About80percentofIndonesia’scoalisexported,accountingforabout10percentofmerchandizeexports.Theuseofcoalismostintensiveinthepowersector;90percentofwhatisnotexportedfuelsmorethan50percentofelectricitygeneration.Theshareofrenewableswaslow(10-15percent)overmostofthepasttwodecadesbuthasbeenincreasingslightlyinthepastsixyears(Figure10).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT8FIGURE9FIGURE10TheRateofDeforestationHasFalleninRecentYearsCoalintheEnergyMixhasIncreasedDeforestationextentperyear(mil.ha)Indonesiaprimaryenergyconsumptionbysource(%oftotal)Source:MoEF2022data,figurecompiledbyWBGstaff,basedonyearsforwhichannualdataisavailable.Source:BPStatisticalReviewofWorldEnergy;figurecompiledbyWBGstaff.Onthedemandside,thereispotentialtofurtherslowemissionsthroughefficiencygainsinlanduse.Themosteconomicallyimportantcommodity,oilpalm,11extendsover14.7millionhectares.Whileestimatesvary,anexpected20-30percentofland-useconversioninthepasttwodecadesisthoughttobeduetoplantationestablishment.Conversionforoilpalmpeakedin2009andhasdeclinedsince.Oilpalmsmallholderproductioninparticularhascon-siderablescopeforincreasingyieldswithintheexistingproductionarea(Sarietal.2021).12Urbanlanduse,whileonamuchsmallerscale,alsohasscopeforefficiencygains.PopulationgrowthhasrapidlyexpandedthefootprintofIndonesiancities,withspatialpatternsofgrowthhamperingconnectivityofresidentstoservicesandjobsinsomelocations.UrbanizationinIndonesia’speercountrieswasassociatedwithslightlyhighergrowthoutcomes.Forexample,between1996and2016,everypercentagepointincreaseintheshareofIndonesia’spopulationlivinginurbanareaswasassociatedwitha1.4percentincreaseinGDPpercapita‒thiscomparestoanaverageof2.7percentinotherlow-andmiddle-incomeEastAsiancountries,and3percentinChina(WorldBank2016).14.7Mil.Halandusedforoilpalm11Oilpalmistheplant.Palmoilistherefinedproduct.12Recentestimatessuggestthepotentialfor50percentlandsparingwithoptimaltechnicalefficiency(amongsmall-holders,representing34percentofproduction).Duetothereboundeffect,aboutone-halfofthisgainwouldbeoffset.Demandandsupply-sidemeasuresforlandman-agementare,therefore,importantcomplements.SeeDalheimeretal.2021.Climate&DevelopmentinIndonesia9FIGURE11FIGURE13FIGURE12EnergySupplyDrivenbyElectricityManufacturingEmissionsIncreasedalongwithEfficiency14CoalDominatesPowerGenerationGrowthofGHGemissionsfromenergyuse(1990=100)Decompositionanalysisofemissionsgrowth1991-2017Installedcapacity(GW)andelectricitygenerationbyfueltype(shareoftotal)Source:ClimateWatchData;figurecompiledbyWBGstaff.Source:WBGstaffdecompositionanalysisusingBPSdata.Source:MinistryofEnergyandMineralResourcesdata(MEMR,2020);figurecompiledbyWBGstaff.Thedemandforprimaryenergyhasbeendrivenbytheelectricitysector(representingfinalenergy)13whichhasbeenthelargestcontributortoemis-sionsfromenergyuse(Figure11).Thoseemissionsarelinkedtotherisingdominanceofdomesticcoalinelectricitygeneration(Figure12).Of70GWofinstalledgenerationcapacityin2020,52percentwasmadeupofcoal-firedpowerplants,withapproximately16GWofthe20GWofcapacitythatwasaddedin2011-20comingfromcoal.Thegridconnectedcapacityof70GWcomparestoapeakdemandofapproximately40GW;givencurrentratesofdemandgrowth,thisrepresentsseveralyearsofovercapacity,constrainingthedevelopmentoflower-carbontechnologies.ExpansionofthegridhassupportedelectrificationandthedevelopmentofIndonesia’smanufacturingsectorwhichaccountsforabout40percentofIndonesia’stotalenergydemand(Setyawan2020).Growthinmanufacturingandthegrid’sincreasingemissionsfactorcontributedtoincreasethesector’semissions.However,therearealsocleartrendstowardgreaterenergyefficiencyinmanufacturingwhichhelpedmitigatelargerpotentialincreasesinemissions(Figure13).13Primaryenergyreferstounpro-cessedenergysources,whereasfinalenergy(suchaselectricityorrefinedtransportationfuels)isprocessedforendusers.14Aggregateemissionsaredrivenbythemixedimpactfromanincreaseinindustrialoutputandreducedemissionintensitywithinsectors.Figure13pres-entsthetrendsinaggregateemissions(logscale)andthecontributionfromchangingoutputlevel(scaleeffect),technicaleffect(changingemissionintensitywithin2-digitsectors),andcompositioneffect(changingsectoralcomposition).Itshowsthatoutputhasgrownsteadilybutdecreasingemissionintensitywithin2-digitsectorshaslim-itedtheincreaseintotalemissionstoasignificantlylowerrate.Thecontributionofchangingsectoralcompositiontoag-gregateemissionshasbeennegligible.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT10Efficiencygainsintransportsystemsandurbanizationpatternscouldhelptoreduceenergydemand.ImprovedspatialgrowthpatternsofIndonesia’scities,alongwithadditionalinvestment,couldacceleratethedevelopmentoflow-carbonmobilityoptionssuchaspublictransit,walking,andcycling.Publictransitmodesharesrangebetween2-15percentinmostIndonesiancitiescomparedto50percentormoreinotherAsiancities.15Roadtransportisresponsibleforover85and90percentofpassengerandfreightmovementrespectively(Leung2016),andasimilarproportionofoverallfuelconsumption(Sukarnoetal.2016).Thevehiclefleethasgrownatover10percentperyearoverthetwodecadesto2021,atrendlikelytocontinuegivenmotorizationratesarestillcomparativelylow.Thetransportsector,whichisresponsibleforabout25percentofIndonesia’senergyemissionsandapproximately10percentoftotalemissions,isanimportantelementofIndonesia’sdecarbonizationefforts(see,forexample,MoEF2021aandBappenas2021).Recentinvestmentsandpoliciesarepromotingthisshift,includingJakarta’sMassRapidTransitsystem,andinvestmentinbuswaysandfeedersystems.EfficiencygainsinnaturalresourceusecouldfurtherimproveoutcomesforIndonesia’snaturalassetbaseandhumancapital.Historicalpatternsofagriculturaldevelopmentinpeatlands,forexample,droveeconomicgrowthbutalsocausedcosts.ThevalueoftotalagriculturalproductionintheseareaswasestimatedbytheWorldBankatUS$48billionbetween2008and2017(5.7percentofGDP),butwithforestclearingcontributingtohealthdamagesfromsmoke(estimatedtocostUS$23.5billionoverthesameperiod),andfiredamagestotimberandcrops(US$6.7billion)(Figure14).Thefiresthatoccurredin2019wereestimatedtohavecostIndonesiaUS$5.2billion(0.5percentofGDP)throughtheirimpactonagriculture,forestry,tourism,transpor-tation,health,andschoolclosures(WorldBank2019).Indonesia’sprogramoflarge-scalepeatlandrewettingandrestoration(discussedinChapter2)has,however,reducedsuchfiresandtheircostsinrecentyears(Kielyetal.2021).FIGURE14FIGURE15PeatlandAgriculture:CostsandBenefitsIncomeLossfromPrematureDeathsSocio-economicbenefitsandcostsofpeatlandsagriculture(US$billion)2008-17Laborincomeduetoprematuredeathsattributabletoairpollution,%ofGDPequivalentSource:WBGstaffusingacomputablegeneralequlibrium(CGE)modelofIndonesia’sagricultureandforestrysector.Source:ChangingWealthofNationsdatabase,figurecompiledbyWBGstaff.48-6.7-2315WBGstaffanalysisusing2019Sakernasdata.JakartaandBand-ungachieveapublictransportmodalshareofabout10percent,withothermajorIndonesiancitiesat2-5percent.Bycontrast,largeandrapid-lygrowingcitiesinChinagenerallyattract20-30percentpublictransportmodalsharewhilecitieswithwell-developednetworks,suchasSeoul;Singapore;Tokyo;HongKongSAR,China;Mum-bai;andKolkataachievemorethan50percent.Climate&DevelopmentinIndonesia11Existingevidencepointstothepotentialforsignificanthumancapitalgainsfromreducedemissions.AirpollutionlevelsinIndonesiaareestimatedtolowerlifeexpectancyby1.2yearsonaverage,withlossesofover4yearsinsomepollutionhotspots(atsustained2016levelsofpollution)(GreenstoneandFan2019).Theassociatedlossoflaborincomeisestimatedat0.6percentofGDPequivalent(2019)(Figure15).Efficiencygainsintransportandurbanizationnotedabovecouldalsocontributetosignificantgains.CongestionleadstosignificantlyhigheraveragecommutingtimeinIndonesiancitiesanddispro-portionatelyaffectsthepoorwhotendtolivefarfromthecitycenter.WastedtimeduetocongestionisestimatedtocostaboutUS$5.1billionnationallyperyear(equivalentto0.5percentofnationalGDP).16VULNERABILITIESTOCLIMATESHOCKS1.3Emissionsareonlyone-halfofthestory:continuingtoadapttoclimateshockswillbecentraltoavoidinglargedropsineconom-icoutputandhouseholdwelfare.Between1990-2021,Indonesiaexperiencedmorethan300naturaldisasters‒including200floodingeventsaffectingmorethan11millionpeople.Thefrequencyofthesedisastersisincreasing(Figure16)‒withclimate-relateddisastersaccountingforapproximately70percentofthetotal.Thesetrendsareexpectedtocon-tinue.Risingseasurfacetemperatureisassociatedwithgreaterseverityoftropicalcyclones,whileheavierrainfallwillexacerbatefloodsandlandslides.MorefrequentElNiñoeventsarelikelytoincreasedroughtandfirerisksforIndonesia’sagricultureandforestrysectors.Warmertemperaturesalsoimpactlaborproductivity.TheInternationalLabourOrganization(ILO)estimatesthatIndonesiawilllose2.97percentofitstotalworkerhours(orapproximately4.0millionfull-timeequivalentpositions)by2030duetoheatstress.Itisestimatedthatthetotalcostoftheseandotherclimate-relatedimpactswillreach1.24percentofGDPby2030,increasingto6.97percentinthe2060sunder3°Cwarming(Kompasetal.2018).16WorldBankstaffestimatesbasedonanal-ysisofweekdaytrafficdatain28metropolitanareasinIndonesia.Inadditiontotimecosts,congestioncontributedtoexcessfuelconsumptionisapproximatelyUS$500million.17Bytheendofthe21stcentury(2080-99)relativetoabenchmarkperiodof1986-2005.SeeWorldBankGroupandAsianDevelopmentBank.2021.18ILOestimatesbasedonaRCP2.6path-way.SeeInternationalLabourOrganization.2021.FIGURE16RisingIncidenceofClimate-relatedDisastersMeteorological,hydrologicalandclimatologicaldisasterincidenceinIndonesia,1990-2020.Source:DatafromtheinternationalEmergencyEventsDatabase(EM-DAT),figurecompiledbyWBGstaff.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT12300Weather-relateddisastershappenedinIndonesiabetween1990-2021CILACAP•CENTRALJAVAClimate&DevelopmentinIndonesia13Continuingeffortstoadaptcouldacceleratepovertyreductionasclimateshocksaredisproportionatelyfeltbythepoorandvulnerable.AreasofJavaarebetterpositionedintermsofbothdisasterincidenceanddevelopment,whileKalimantan,Sulawesi,EastNusaTenggara,andWestNusaTenggarafacegreaterdisasterincidenceandlaggingdevelopment.Althoughclimatechangeaffectsthewholepopulation,thepoorandvulnerable–one-thirdofthepopulation–arelikelytocarryadisproportionateburden.Theirlivelihoodsaremoreoftenreliantonagricultureandtheyoftenliveinareaspronetonaturalhazards‒butwithoutthenecessaryresiliencetocopewithshocksandtheabilitytoprotecttheirassets.Impactsarealsodifferentiatedbygender‒withwomenandgirlsatgreaterriskduetorelativelypooreraccesstoassets,services,andfinancialresources.19PreviousdisastersinIndonesia(includingthe2004tsunami)ledtoadisproprtionatenumberofdeathsamongwomen(Frankenbergetal.2011).Keyimpactsincludewaterscarcity‒whichcouldbepartiallyalleviatedthroughhigherwaterproductivityandpluggingofinfrastructuregaps.Inten-sificationofbothrainfallanddroughtareexpected‒withpartsofSumatraandKalimantan10-30percentwetterby2080fromDecembertoFebruary,andislandsbelowtheequatoranticipatinga15percentdeclineinprecipitation.20Inacontextofincreasingwaterdemand21theneteffectwillbeoneofscarcity:by2050,31percentofIndonesia’sdistrictswillnolongerrecordmonthsofsurpluswater,22morethandoublethenumberin2010.Moreerraticrainfallpatternsarecompoundedbyalaggingnationalwaterstoragecapacity,alevelofwaterproductivity(US$3.20percubicmeter)thatisoneofthelowestinAsia,andhighdependenceonalreadystrainedresources.Approximatelyone-halfofIndonesia’sGDPiscurrentlyproducedinriverbasinsexperiencing“severe”or“high”stressinthedryseason.Overall,alackofwateravailabilityisproject-edtoresultin2.5percentlowerGDPby2045intheabsenceofadaptationmeasures(WorldBank2021a).19Womenaremorelikelytoliveinpovertythanmen,havelessabilitytomovefreelyandownland,andmayfaceviolenceandharassmentthatescalatesduringperiodsoffinancialorhouseholdinstabilitycausedbynaturaldisas-ters.Theseinequalitiesmaybeworsenedbyclimate-relatedhazards,resultinginheavierworkloads,occupationalhazards,andpsychologi-calorphysicalharm.Di-saster-responseplanningisoftenmaledominated.ThesedisparitiesarenotuniquetoIndonesia.SeeThurston,etal.2021.20WorldBankClimateChangeKnowledgePortal:MeanClimateProjections(link).21Waterdemandisprojectedtoincreaseby31percentbetween2015and2045.SeeWorldBank2021a.22Monthsofsurpluswaterisakeyindicatorofwaterscarcityandreferstoexcesswateravailableinasystem.SeeWBGandADB2021.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT14Agricultureisvulnerabletoclimatechangeimpacts,withimplicationsforfoodandnutrientsecurity.Atthenationallevel,risingtemperaturesandshiftingrainfallareprojectedtoreduceyieldsofseveralproductionsystemskeytopovertyreductionandfoodsecurity‒includingrice(-0.72percentby2030),maize(-7.1percent)andpalmoil(-1.21percent)(Figure17).Yield-en-hancingmeasuresandinvestmentsinclimate-resilientagriculturecouldmorethanoffsetthesedeclines(discussedfurtherinChapter2).Pestanddiseaseoutbreaks‒ofteninducedbyhighertemperatures‒areexpectedtointensifyalongwiththeimpactoffloods,droughts,andsaltwaterintrusion.Thesefac-torscontributetoahigherriskofcropfailure,lossofincomeforfarmers,andpricevolatilityforconsumers.Indonesianconsumersalreadypayamongthehighestpricesintheregionforstaplesandnutritiousfoodwithpricevolatilitylikelytofurtheraffectnutritionoutcomes.Whilestuntinglevelshavefallenconsiderablyinrecentyears,24.4percentofIndonesia’schildrenunderfiveyearsofagesufferedfromstuntingin2021(MinistryofHealth:MoH2021).23Adaptationeffortsaside,Indonesia’seffortstodecarbonizecouldalsohelpbuildresilienceasacknowledgedintheauthorities’climatestrategies.Whileunderlyingclimatechanges‒asafunctionofglobalemissions–arelargelybeyondIndonesia’scontrol,resilienceisafunctionofIndonesia’sinfrastructure,23Therateofstuntingisdownfrom30.8percentin2018.Climate&DevelopmentinIndonesia15FIGURE17FIGURE18ClimateChangewillReduceAgriculturalYieldsWithoutAdaptiveMeasuresElevatedTemperaturesinCitiesandShareofVegetatedLandCoverProjectedImpactofClimateChangeonCropYieldinIndonesia(%)2030Populationexposedtospecifiedaveragesurfacetemperaturesintencities(%),andvegetatedlandcover(%)(2021)humancapital,andnaturalassets.Forexample,thevulnerabilityofIndone-sia’scitiescoulddecreasethroughimprovedpatternsoflanduseandreducedgroundwaterextraction.Between2000and2014,Indonesiancitiesexpandedby6,904km2(3.9percent).Nearlythree-quartersofthisexpansionwasoncultivatedlandornaturalecosystems(CoalitionforUrbanTransitions2021)(inDKIJakarta,forexample,thevegetatedareadecreasedfrom60to29percentbetween1990and2018),increasingrunoffratesandvulnerabilitytofloods.24Atthesametime,urbanizationtrendsweredrivinggroundwaterextractionandconsequentlandsubsidence‒therebycompoundingthefloodrisksbyloweringtheheightoflandincriticalareas.Jakarta,forexample,continuestosubsideat1-15cmperyear(amountingtoabout3.5meterssubsidencesincethe1980sinthemostaffectednortherncoastalareas).ThevulnerabilityofIndonesia’surbanpopulationtoheatstresshassimilarlybeendrivenbyurbandevelopmentpatterns(Figure18).Theconflationoflanduse,wateruse,andrisingsealevelshascreatedsomeofthemostclimate-vulnerableurbancentersintheworld.Source:WBGstaffcompilationofIMPACTmodelresults(seeIFPRI,Bappenas,andADB2019).Resultsareintheabsenceofyield-en-hancingresearchanddevelopmentwhichcanbeexpectedtocounteractsomelosses.Source:WBGstaffanalysis.Temp.(°C)►20–2122–2324–2526–2728–2930–3132–33%ofvegetatedareaBalikpapan194130773.5Sorong2436319162.9Medan11634438144.2Manado1253831536.7Palembang1264231132.4Semarang1173446330.8Banajarmasin102855827.2Denpasar218701126.4Makassar1136381619.0Bandung1383150816.3Note:Darkercolorsindicatealargershareofpopulationexposed.24Projectedpeakrunoffrateshavebeenestimatedtoincreaseby20percentfrom2007levelsunder2030projectedlandcoverchangesintheCiliwungRiverBasin,Jakarta.SeeEmametal.2016.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT16Changestolandandwatermanagementplannedorunderwaywillimproveresilienceinruralareas.Restorationandrewettingofdrainage-basedagri-culturalcultivationinlow-lyingareasofSumatraandKalimantan,whichcauseemissionsandlandsubsidence,willhelpreducefloodrisksthatarefurthercom-poundedbysea-levelrise.Haltingmangrovelossforaquaculturedevelopment(concentratedinKalimantanandSulawesi)andforoilpalm(concentratedinSumatra)willstrengthentheprotectivebenefitsthatintactmangrovesprovideforcommunitiesandinfrastructurealongcoastlines.Theprotectivebenefitofmangrovesisrecognizedbythegovernmentinitsrecentcommitmenttorestore600,000hectaresofmangrovesby2024‒thelargestsucheffortintheworld.TRANSITIONRISKS1.4Whilethelow-carbonandclimate-resilienttransitioncanbringbenefits,therearealsosubstantialtransitioncosts.Tight-eningglobalmonetarypolicyimpactsthecostoffinancingthelow-carbonenergytransitionwhilesubsidiesincreasedduetosoaringenergypricesandbelow-costpricingdomestically.Thesupplyofcheapland,andtheexpansiveagriculturalmodelthatdependsonit,willbeconstrainedbyland-emissionsmitigationpolicies.Shiftswithinthesesupplychainswillhavespillovereffectsonworkersandthefinancialsector,whileglobalcapitalandtradepreferencesforgreenergoodswillintro-ducefurtherpressures.Thereisthechallengeofdealingwithstrandedassetsresultingfromdecarbonizationefforts,withspillovereffectstotherealsectorandthefinancialsystem.RenewedglobalturbulencesincethestartofRussia’sinvasionofUkrainehasaddednewdynamicstothetransitionoutofcoal.Indonesiawastheworld’slargestthermalcoalexporterin2020.Coalpriceshaveincreasedsharplyandareprojectedtoremainhigherthanhistoricalaveragesoverthenext5-10years.25Thisisdriveninpartbyrisingdemand,includingfromEuropeduetocutstogassuppliesfromRussia,thatcouldslowtheplannedexitfromcoal.Atthesametime,therisingcostofcoalandotherfossilfuelsshouldencourageashifttowardrenewables,however,therearecountervailingforces.First,progressoneliminatingenergysubsidies(andreplacingthemwithtargetedtransferstothepoor)hasbecomemoredifficultintheverynear-term.Second,theincreasedcostoffinancingandhigherinvestmentcostsduetotighteningofglobalsupplychainscreatesfinancialchallengesfornewinvestmentinrenewables.Third,highenergypricesmakeitdifficulttoimplementcarbonpricingtoshiftincentivestowardrenewables.Inaddition,coalmakesalargeeconomiccontributioningeographicallyconcentratedareaswithfeweconomicalternatives‒makingthoseareasvulnerabletosevereandmultiplicativeimpactsfrommineclosures.2625ConsensusEconomicsInc.,EnergyandMetalsForecasts(September2022).26East,South,andNorthKalimantan,andSouthSumatra,withtheEastandSouthKalimantanlocalecon-omiesbeingrelativelymoredependent.InEastKalimantan,forinstance,coalcontributed35percentofprovincialGDPin2017.Tighteningglobalmonetarypolicyimpactsthecostoffinancingthelow-carbonenergytransitionwhilesubsidiesincreasedduetosoaringenergypricesandbelow-costpricingdomestically.”“Climate&DevelopmentinIndonesia17Indonesia’sothermajorresourceexport–palmoil–facesitsownrisks.In2019,Indonesiaproduced52milliontonsofpalmoilproduct‒mainlyfromplantationsinthelowlandsofKalimantanandSumatra(Figure19)‒contrib-uting72percentofglobalsupplyand4.5percentofIndonesia’sGDP(BPS2020).Palmoilfacesgrowingglobaldemand,butthelow-carbontransitionimpliesrestrictionsonthesupplyofnewlandandrisingcostsoffuelandfertilizer.Landavailabilitymaydecreaseasforestedareasaremorestronglyprotected(Orbitas2021).Severalsuchprotectionshavebeenimplementedinrecentyears,includingprotectionofhighconservationvalue(HCV)forestswithinconcessions(describedinChapter2).Producerswillneedtouseexistingland,fuel,andfertilizermoreefficiently.Smallholderoperations(representing60percentoftotalproduction)haveyieldsupto40percentbelowthoseofthelargerproducers;closingthisgappresentsaproductivityopportunitybutwillrequirefinanceandtechnicalsupporttoreplaceolderplantationswithnewhigh-yieldingvarieties.FIGURE19OilPalmLivelihoodsareConcentratedinKalimantanandSumatraLowlandsVillagesinwhichoilpalmprovidestheprimaryincomesourceforamajority.Source:WBGstaffanalysisbasedonPODES(2018)data.ClimateactionsbytheinternationalcommunitycouldalsoimpactIndo-nesia’seconomyandinternationaltrade.Theseactionsincludeindividualcountries’actionsundertheirNDCsandtheEuropeanUnion’s(EU)CarbonBorderAdjustmentMechanism(CBAM).WorldBankmodellingresultsindicatethatwhenbothNDCsandtheEUCBAMareimplemented,Indonesiafacesarealincomedecreaseof0.5percentin2030,relativetoa2030counterfactual.ThedecreaseofrealincomeforIndonesiaisaconsequenceofafallinoutputof1.1percent,includingduetoadecreaseincoaloutputof20.3percentorUS$47billion.27TheeffectoftheEUCBAMisnegligible;thereductionismainlyduetoNDCimplementationbycountriesglobally.TheimpactonIndonesiaislowercomparedtotherestofEastAsiaandPacific(0.6percent),buthigherthanforhigh-incomecountriesinAsia(0.4percent).ThesetransitionrisksintherealeconomycouldaffectIndonesia’sfinancialsector.Almostthree-quartersoftheIndonesianbankingsystem’slendingportfoliocomprisessectorsthatarepotentiallyexposedtoclimatetransitionrisks(Figure20).28Theprocessingindustrycomprises24percentofIndone-sianbanks’loanportfolio,whileagriculture(includingpalmoil)comprises11percent,followedbyconstruction(10percent),transportation(8percent),andrealestate(7percent).Shockstothesesectorsandthustothefinancial27Allfiguresarein2014USdollars.28Measuredasthecarbonfootprintadjustedloanstototalloansfordeposits.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT18sector,couldresultfromrapidandunanticipateddecarbonizationcoupledwithlackofindustrypreparedness.StockmarketsinIndonesiaarealsoexposedtoclimatetransitionriskwith75percentofstocksbelongingtotransition-sensitivesectors(Figure21).FIGURE20FIGURE21LendingExposureofIndonesianBankstoTransition-sensitiveSectorsisHighIndonesia’sStockMarketsareWeighedTowardEmissions-exposedSectorsDistributionofnon-transitionandtransitionsensitiveloansDistributionoftransitionsensitiveequitiesSource:IMFClimateChangeDashboard(2021).Notes:Somesectorsmaybeincorrectlyclassifiedduetoaggregation.Indirectimpactssuchassupplychainsarenotcaptured.Source:IMFClimateChangeDashboard(2021).Notes:Transition-sensitivesectorsarethosewitheitherhighabsoluteemissions,highemissionintensities,highexposuretoemission-intensivesectors,orareexpectedtobedirectlyaffectedbyclimatepolicies.AVIRTUOUSCYCLEOFDECARBONIZATION,RESILIENCE,&GROWTH1.5TheCCDRproposesaframeworktoillustratehowIndonesia’songoingandfuturereformscouldsupportajustandaffordabletransitionthroughpositiveclimateanddevelopmentdynamics(Figure22).Areductioninthesupplyofcarbon-intensiveresources(landandnon-renewableenergy)(1)canbesupportedthroughpolicyandinstitutionalreforms,someofwhicharealreadyinplaceorunderway(2).Thiswill,however,alsorequireareductionindemandforthoseresources(forelectricity,agriculture,urbanexpansion,transport,industry,andtrade)(3)thatrequirereformstoincentivizemoreefficientuseofresources(forexample,throughcarbonprice,spatialplanning)oralternativeresources(forexample,renewableenergy)(4).Complementingthesemeasureswithenablingeconomicpoliciescanhelpallocateresourcestogreenerandmoreproductivepartsoftheeconomy(5).AcombinationofthesemeasurescouldhelpdecouplegrowthClimate&DevelopmentinIndonesia19ELECTRICTYAGRICULTUREANDFORESTRYURBANEXPANSIONINDUSTRYINTERNATIONALTRADETRANSPORTA-TIONFOSSILFUELS,BIOFUELSfromcarbonemissions(6)whichcouldstrengthentheeconomy’sresiliencetoarisingincidenceofclimateimpacts(thatis,highertemperatures,sealevelrises,andflooding)(7).Thiscouldhelpreducethedevelopmentcostsofcli-mate-relatedshocks(forexample,physicaldamage,humancapitalloss)(8).ThiscyclecouldhelpaccelerategrowthinIndonesia’snationalassetbase(9).Indonesia’stotalwealthincreasedbetween1995and2018.Indonesiahasdiversifieditsstockofwealththroughabuildupofhumanandphysicalcapital.Thereis,however,scopetoaccelerateoverallwealthaccumulationandwealthconvergencerelativetostructuralpeers(Figure23).Thenaturalcapitalstockhasincreasedoverthistimebuthasinvolvedareductioninthestockofrenewableresourcesontheonehand(likeforests)andincreaseddepen-denceonnon-renewableresourcesontheother(likecoal).Theaccumulationofhumancapitalstockalsohasscopetoaccelerate(Figure24).Giventheroleofwealthaccumulationasthebasisforfuturegrowth,thistrajectorycouldsupportIndonesia’sefforttotransitionfromamiddle-tohigh-incomecountry.FIGURE22SUPPLYPRIMARYRESOURCESFINALRESOURCESGROWTHDRIVERSDEMAND5ENABLINGECONOMICPOLICIES4DEMANDPOLICIES3RESOURCEDEMAND6ECONOMICGROWTH9WEALTHAC-CUMULATION7CLIMATEIMPACTS8DEVELOP-MENTCOSTS1RESOURCESUPPLY2SUPPLYPOLICIESReducingSupplyof,andDemandfor,Carbon-intensiveResourcesThroughSectorandEnablingPolicyandInstitutionalReformsLANDCOALOILSource:FigurecompiledbyWBGstaff.Note:Theleft-handsideofthefigureillustratestheinteractionsbetweenresourcesupplyanddemandandhowtheseinfluenceclimateanddevelopmentoutcomes.Theright-handsidepresentskeyeconomicsectorsthatsupplyanddemandnaturalresourcesandarediscussedintheCCDR.TheCCDRproposesaframeworktoillustratehowIndonesia’songoingandfuturereformscouldsupportajustandaffordabletransitionthroughpositiveclimateanddevelopmentdynamics““INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT20FIGURE23FIGURE24PotentialtoAccelerateConvergenceinPerCapitaWealthIncludingThroughFasterGrowthinHumanCapitalStockPerCapitaWealthex.nonrenewablesource,convergencetoUS,IndonesiaandinterquartilerangeIndonesiachangeinnationalwealth(Index1995=100)Note:ThefigureabovepresentstherateofpercapitawealthconvergenceofIndonesiaagainstthepercapitalwealthconvergenceofstructuralpeers,relativetotheUS.Seefootnote2onstructuralpeers.Source:ChangingWealthofNationsDatabase,figurecompiledbyWBGstaff.Commitments&Capacities212COMMITMENTS&CAPACITIESPAGE21—3721TEGALLALANG•BALIINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT22IndonesiahasembarkedonapathofpolicyandinstitutionalreformstoaddresstheclimateanddevelopmentdynamicsdiscussedinChapter1.Low-carbonandresilientdevelopmentpoliciesareanationalpriorityundertheRPJMN2020–24,theNDCs,andtheLTS-LCCR.Chapter2oftheCCDRconsidersthepolicies,tools,andresourcesthatIndonesiaisusingtodeliverontheseambitions,andopportunitiesforfurtherstrengthening.Thischaptercoversthreeissues:(i)climatemitigationthroughsupply-sideemissioncuts(thatis,landandenergy);(ii)climatemitigationthroughdemand-sideemissioncuts(thatis,electricity,industry,transportation,urbanexpansion,andagriculture);and(iii)climateadaptation,includingthemanagementofdisaster-relatedcon-tingentliabilities.Itfocusesonsector-specificpolicies,ratherthancross-cuttingeconomicpoliciesthatimpactthosesectors(forexample,fiscal,financialsector,investment,andtradepolicies)asthesearediscussedinChapter3.POLICIES&INSTITUTIONSFORTHESUPPLY-SIDE2.1IndonesiahascommittedtocuttingemissionsaspartofitsNDCsunderthe2015ParisAgreement.Indonesia’sEnhancedNDC,releasedinSeptember2022,setsoutanunconditional31.9percentreductioninemissionsagainstBAUprojectionsby2030,anduptoa43.2per-centreductionconditionaloninternationalsupport.29Itproposesactionsacrosstheeconomy,includingforenergy,agriculture,industrial,waste,andFOLUsectors.30EstimatedpercapitaemissionsundertheEnhancedNDC’sunconditionaltargetareprojectedtobe6.5tCO2eqperyearin2030,lowerthanmostotherlargeeconomiesincludingBrazil,China,Japan,andtheUnitedStates(Figure25and26).Totalemissionsin2030,ofanexpected1,953Mt-CO2eq,willbeonparwiththoseoftheEUandRussia,andbelowthoseoftheUS,China,andIndia(Figure27).ThisCCDRdoesnottakeapositiononwhatIndonesia’sNDCtargetsshouldbe.Itacknowledgestheprincipleofcommonbutdifferentiatedresponsibility31andassessesoptionsforIndonesiatomeetitscommitmentswhilealsoachievingitsdevelopmentgoals.Indonesiahasalsomappedoutlonger-termemissionstrajectoriestowardanet-zerotargetby2060orearlier.TheLTS-LCCR32isadetailedroadmapthatdemonstratesthetechnicalfeasibilityofalow-carbontrajectory,reach-ing1.61tCO2eqpercapitaemissionsby2050underitslow-carbonstrategyscenario(alignedwiththeParisAgreement).WhiletheNDCisaquantitativecommitment,theLTSisalonger-termvisionthatdemonstratespossibilitiesandpathways(Figure28).Thenet-zerovision–andpathwaystowardit–arefurthermappedoutbythegovernment’sLCDI(Bappenas2021a).Recently,Indonesiasignaledamoreambitioustargetofpeakingpowersectoremissionsby2030andachievingnet-zeroemissionsinthepowersectorby2050inthecontextoftheJointStatementbytheGovernmentofIndonesiaandtheInternationalPartnersGroup(IPG)undertheJustEnergyTransitionPartnership(JETP).TheJETPisexpectedtomobilizeUS$20billionoverthenextthreetofiveyearsofwhich,ofwhich$10billionareexpectedtobemobilizedbyIPGmembersandtheremainingwillconsistofprivatefinancingmobilizedbytheGlasgowFinancialAllianceforNetZero(GFANZ)WorkingGroup.3329TheMinistryofFinance(MoF)esti-matestherequiredinternationalsupportataboutUS$114billion.SeeMinistryofFinance(MoF)2021.30WhiletheCCDRcoversawiderangeofsectorsinlinewithitsdemandandsupply-sideframework(seeChapter1),relativelymoreattentionisdevotedinChapter2toFOLUandEnergy,giventheirrelativelylargerfractionofemissions.Chapter3includesdiscus-sionofindustryinthecontextoftheprivatesectorandtheoverallenablingenvironment.31ThecommonbutdifferentiatedresponsibilitiesprincipleisformalizedwithintheUnitedNationsFrameworkConventiononClimateChange(UNF-CCC).Itrecognizesthatallcountrieshaveasharedobligationtoaddressclimatechangebutthatresponsibilityforaddressingtheissuediffersbetweencountries,givendifferentcapabilitiesandhistoricalcontributions.32LTS-LCCRextendstheuncondi-tional2030commitmentthroughthreescenarios:(i)currentpolicies,whereemissionswillcontinuetoincreaseafter2030;(ii)transition,whereemissionswilldecreasebutareinsufficienttoreachthe2050target;and(iii)low-car-bon,whereemissionswilldecreaserapidlyafter2030.SeeRepublicofIndonesia2021.33JointStatementbytheGovernmentofIndonesia,andtheGovernmentsofJapan,theUnitedStatesofAmerica,Canada,Denmark,theEuropeanUnion,Germany,France,Norway,Italy,andtheUnitedKingdom(togetherthe“InternationalPartnersGroup”orIPG)(link).TheGFANZisagroupoffinancialinstitutionsincludingBankofAmerica,Citi,DeutscheBank,HSBC,Macquarie,MUFG,andStandardChartered.Commitments&Capacities23FIGURE25FIGURE26PerCapitaEmissionsofMajorEconomiesunderStatedTargetsAbsoluteEmissionsofMajorEconomiesunderStatedTargetsProjectedpercapitaemissions(tCO2eqperyear)inlinewithstatedcommitmentsProjectedabsoluteemissions(GtCO2eqperyear)inlinewithstatedcommitmentsSource:Countries’NDCs,ClimateWatchdata,andUNpopulationprojections.FigurescompiledbyWBGstaff.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT24FIGURE27FIGURE282030CommitmentsPerCapita:Top-10EmittersPossiblePost-2030PathwaysforIndonesia2018andprojected2030percapitaemissions(tCO2eqperyear)basedonNDCcommitmentsEmissionstrendsmodelledinIndonesia’sLong-TermStrategy(2021)Source:Countries’NDCs,ClimateWatchdata,andUNpopulationprojections.FigurecompiledbyWBGstaff.Source:RepublicofIndonesia(2021).Note:FOLU=ForestryandOtherLandUses;IPPU=Industrialprocessesandproductuse.CURRENTPOLICIESTRANSITIONSTRATEGYLOW-CARBONSCENARIOCOMPATIBLEWITHTHEPARISAGREEMENTCommitments&Capacities25ThelowcarbonandresilienttransitionsarealsoreflectedinIndonesia’sdevelopmentplans.“Strengtheningtheenvironmentandimprovingresilienceagainstnaturaldisastersandclimatechange”isoneofsixmajordevelopmentthemesundertheRPJMN2020-24whichguidesthegovernment’sannualplans(RencanaKerjaPemerintah:RKP).Inthemostrecentannualplan,26outof39priorityprojectsmakeadirectorindirectcontributiontowardNDCmitigationandadaptationtargets.Newmedium-andlong-termplansarenowunderdevelopment‒withthemainstreamingofclimatemeasuresakeypriority.Thisisbeingsupportedbytheinclusionofclimatechangeindicatorsintheformulationofdevelopmenttargets.Morethan60percentoftheemissionreductiontargetinIndonesia’sEn-hancedNDCisintendedtobemetthroughactionsintheFOLUsector.FOLUemissionsareprojectedtofallfromaBAUprojectionof714MtCO2eqto214MtCO2eqin2030undertheNDC’sunconditionaltarget(Figure29and30).Whilealreadyambitious,thegovernmentfurtheraimstomakeFOLUacarbonsinkby2030(thatis,negativenetemissions)underitsFOLUNetSink2030plan.34Stipulatedactionstoachievethesegoalsincluderestoring2.7millionhectaresofpeatlands,rehabilitating5.3millionhectaresofdegradedforestlands,andcontinuingrecentprogressinreducingdeforestationandforestdegradationrates(Table1).Reforestation,peatlandrestoration,andmangroverestorationtargetsarealsoincludedintheRPJMN2020-24.FOLUNetSink2030activitiesarealsoexpectedtohaveimportantco-benefitsforbiodiversityandsoilandwatermanagement3534MinisterialDecreeNo.168/Menlhk/PKTL/PLA.1/2/2022,theOperationalPlanforIndonesia’sFOLUNetSink2030.35Indonesiaishometo10percentoftheworld’sfloweringspeciesandisamajorcenterforagrobiodiversityofplantcultivarsandlivestock.About12percentoftheworld’smammalspeciesliveinIndonesia,rankingsecond(afterBrazil),17percentofbirdspecies(rankingfifth)and16percentofreptiles(fourth).FIGURE29FIGURE30ConditionalandUnconditional2030NDCTargetsPlannedSectoralContributionsto2030NDCTargetsEmissions(MtCO2eq)bymajoremittingsector,2019,and2030(NDCtargets)Emissionsreduction(MtCO2eq)fromprojectedBAUunderNDCtargetsSource:IndonesiaEnhancedNDCandMoEFdata(2022).FigurescompiledbyWBGstaff.60%Morethan60percentoftheemissionreductiontargetinIndonesia’sEnhancedNDCisintendedtobemetthroughactionsintheFOLUsectorINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT26TABLE1Actions(andTargets)toReachNegativeFOLUEmissionsby2030ACTIONTARGET1ReducedeforestationonmineralsoilsAveragerateofdeforestationnottoexceed241,000hectares/year2Reducedeforestationonpeatsoils3ReduceforestdegradationonmineralsoilsAveragerateofdegradationnottoexceed131,000hectares/year4Reduceforestdegradationonpeatsoils5Developindustrialtimberplantations12.8millionhectaresby20506SustainableForestManagementandReducedImpactLogging(RIL)1.7millionhectaresofforestconcessionsprac-ticeRILby2030and8.8millionby2050;allconcessionsgov.certifiedby20507Forestrehabilitationusingnon-nativespecies5.3millionhectaresrehabilitatedby2030,and10.6millionhectaresby20508Forestrehabilitationusingnativespe-cies9Peatlandrestoration2.7millionhectaresby203010Improvedpeatlandwatermanagement950,000hectaresby2030Source:MoEF2021.Note:Aneleventhactioncallsforconservingbiodiversity(anon-quantifiedtarget).Commitmentsarebuiltonafoundationofstrengthenedpoliciesandin-stitutions.In2011thegovernmentplacedamoratoriumonnewlicensesforforestconversioninprimaryforestsandpeat(ameasuremadepermanentin2019)andin2016strengthenedthemoratoriumforareasofdeeppeat.Thesemoratoriumsprotectacombined66millionhectares.In2015,thegovernmentmergedtheMinistryofEnvironmentandMinistryofForestryandmandatedthenewbodytoleadthecountry’sclimatecommitment.Twofurtheragencieswereestablished:(i)thePeatRestorationAgencyin2016responsiblefordeliveringpeatlandrestorationtargets(laterexpandedtoincludemangrovein2021asthePeatandMangroveRestorationAgency(BadanRestorasiGambutdanMan-grove:BRGM);and(ii)theIndonesianEnvironmentFundManagementAgency(BadanPengelolaDanaLingkunganHidup:BPDLH)in2019,aunitunderMoFthatisresponsibleforchannelingfinancingforclimateandenvironmentalprojects(inFOLUactivities,energyinvestments,andbeyond).Morerecently,PresidentialRegulationNo.98/2021ontheEconomicValuationofCarbonwasintroducedtosupportresult-basedpaymentsandothermarket-basedinstrumentsthatincentivizeclimatemitigationactivities.Theseandotheractionsareshowingprogress‒MoEFdataindicatesthatdeforestationslowedfromanaverageof1.13millionhectares(ha)peryearbetween2000-06,to0.12millionhaand0.11millionhain2019-20and2020-21respectively(seeFigure9inChapter1).Thisrepresentsadownwardtrendthatstandsincontrasttoothermajortropicalforestcountries.FurtherCommitments&Capacities27measuresareexpectedtosupportthistrajectorygoingforward(Figure34).MoEFrevoked3.1millionhaofforestconcessionlicensesin2022andrequiredconcessionairestoprotectHCVforestareas.Restorationof1.3millionhectaresofpeatlandshasbeenundertakenbyBRGMtodate,withafurther3.6millionharestoredbytheprivatesectorwithinconcessionsunderthegovernment’speatlandmanagementregulations(MoEF2022).Incontrasttoearlieryears(2001-15),theriseinoilpalmpricessince2016doesnotappeartohaveledtoanupswinginforestclearing(Kielyetal.2022).Thismaysuggestadecou-plingofcommoditymarketpricesanddeforestation.Manypolicymeasureshavelongleadtimestoimpact,withfurtherresultsexpectedinfutureyears.Thegovernment’scommitmenttolandrightsreformisanotherimportantsteptowardreducingland-basedemissions.Manysmallholderactivitieswithinforestareasareinformal,encouraginglandconversionandpreventingaccesstosocialsupportandmarkets.Indonesiahasembarkedonmajorlandtenurereforms,includingacommitmenttoaward12.7millionhectaresofsocialforestrylicenses.Theseareaformoflanduserightheldatthecommunitylevelthataimtoreverseincentivesforforestclearingandencourageinvestmentinlower-impactlandusessuchastourism,selectivelogging,andagroforestry.Approximately4.1millionhectaresofsocialforestryaccesshadbeengrant-edbyMay2020.Similarly,theNationalLandReformProgram(TanahObyekReformaAgraria:TORA)aimstoformalizelandownershipofanadditional9millionhectaresoutsidetheforestestate.Thesearesomeofthelargestlandreformprogramsintheworld(MoEF2021).Overtime,theseprogramscouldbefurthertargetedtowardhighdeforestation-riskareastomaximizeimpactandcombinedwithlivelihoodprogramstoimprovecommunities’accesstocapitalandtechnicalresourcesforlow-impactlivelihoods(Resosudarmoetal.2019;Krausetal.2021).AfterFOLU,theenergysectorwouldneedtodeliverthelargesttrancheofemissioncuts.About39percentoftheemissionreductiontargetinIndonesia’sEnhancedNDCwouldbemetthroughactionsintheenergysector.Absoluteemissionsfromtheenergysectorareprojectedtoincreasefromapproximately600MtCO2eqin2020to1,311MtCO2equndertheunconditionaltargetintheEnhancedNDC(Figure32)‒anincreaseinabsolutetermsbuta21percentreductionrelativetotheestimated1,669MtCO2eqofenergysectoremissionsby2030underaBAUscenario(Figure33).By2030,theenergysectorwouldhaveovertakenlandasthebiggestsourceofcarbonemissionsinIndonesia.“deforestationslowedfromanaverageof1.13millionhectares(ha)peryearbetween2000-06,to0.12millionhaand0.11millionhain2019-20and2020-21respectively”INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT28Permentan14:PeatforOilPalmPlantationPermenLHK36:LicensingproceduresforcarbonsequestrationprojectsinproductionandprotectionforestsESTABLISHMENTOFICCTFLaw18:Law18StrengtheningForestLawEnforcementPeatRestorationAgency(BRG)establishedPP57:NewmoratoriumforlandclearingonpeatlandsLaw16:ParisAgreementRatificationPermenLHK83:SocialForestrytarget(4.1millionha)PP9:OneMapPolicyESTABLISHMENTOFPEATRESTORATIONAGENCY(BRG)InPres5:Permanentmoratoriumoflicenseissuance,protectingover66millionha.PermenLHK10:Managementofpeat-basedhydrologicalunits(peatdomes)SIMATAG,SIPALAGA,andPRIMSinitiativesbyBRGESTABLISHMENTOFINDONESIAENVIRONMENTFUND(BPDLH)PP22:EnvironmentalprotectionPP23&24:non-taxrevenuefromtheforestrysectorPP26:EnvironmentalconsiderationsandcoordinationintheagriculturesectorPP43:ResolutionofInconsistencyinSpatialPlanning,ForestArea,Licensing,andLandTenurePermenLHK9:SocialForestryManagementPermenLHK8:ReducedImpactLoggingwithinConcessionsPerPres98:EconomicValueofCarbonPP120:EstablishmentofPeatandMangroveRestorationAgency(BRGM),withmandatetorestore1.2millionha.in7provincesand600,000ha.in9provincesby2024InPres3:ManagementofForestandLandFiresPermentan38:IndonesiaSustainableOilPalmCertificationTRANSFORMATIONFROMBRGTOBRGM3.1mil.haforestlicensesrevoked4.1mil.hahighconservationvalueforest(HCVF)protectedinconcessions3.6mil.hapeatlandrestorationinconcessionsInPres15:ImprovedLandandForestFireControlInPres8:MoratoriumonoilpalmplantationlicenseissuanceandreviewESTABLISHMENTOFREDD+TASKFORCEFIGURE34DecentralizationofmanylandusedecisionstodistrictsEliminationofrestrictionsonplywoodexportsTariffreductionsonroundwoodandsawntimberexportsLaw41onForestry:EstablishedIndonesia’ssystemformanagingforestsintermsofconservation,protection,andproductionInPres4:AcceleratingActionagainstIllegalLoggingPermenLHK2:Non-taxstaterevenuefromforestutilizationPermenLHK68:onREDDDemonstrationActivitiesInPres10:Moratoriumonlicenseissuanceforlog-gingandagricultureconcessionsinprimaryforestsandpeatlands(renewedin2013,2015,2017)PP71:ProtectionandmanagementofpeatecosystemsRatificationofASEANAgreementonTransboundaryHazeMERGEROFMINISTRIESOFFORESTRYANDENVIRONMENTTOBECOMEMOEF,ESTABLISHMENTOFDGCLIMATECHANGEPP46:EconomicInstrumentsfortheEnvironmentFourMinisterialRegulationsonpeatlandrestorationPP6:onForestAdministration,Management,Planning,andUtilizationTheLandUsePolicyFramework:AChronologySource:FigurecompiledbyWBGstaff.199820072009201320162019202119992005200820102011201420152017201820202022Notes:PP=PeraturanPemerintah(GovernmentRegulation);PerPres=PeraturanPresiden(PresidentialDecree);InPres=InstruksiPresiden(PresidentialInstruction);UU=UndangUndang(law),PermenLMK=MinisterialRegulation(MoEF);BRG=BadanRestorasiGambut(PeatRestorationAgency);ICCTF=IndonesiaClimateChangeTrustFund.Commitments&Capacities29Toimplementcutsinenergyemissions,Indonesiaaimstochangeitspri-maryenergymix.GivenIndonesia’sintensiveuseoffossilfuelsascoveredinchapter1above,thescaleoftheeffortrequiredissubstantial.Thisincludestargetedcutstotheshareofcoal(43to30percentbetween2020and2030)andoil(31to25percent)andtargetedincreasesintheshareofrenewables(6.1to25percent)36(Figure31).Therehasbeensomeincreaseinrenewableenergyconsumptiontodate,drivenmainlybybiofuels(Figure32).Biofuelshaveincreasedsince2016onthebackofsubsidiesandmandates,withagovernmentrulerequiringdieselfuelstohave30percentbiodieselcontentby2020(and40percentby2025).However,theuseofotherrenewableenergyresourceshasnotprogressedsubstantially,andnotatthescaleneededtoimplementtheNDC’senergycommitments.Mostsourcesofprimaryenergy(includingcoalbutexcludingoil)willcontinuetoincreaseinabsolutetermsuntil2050.FIGURE31FIGURE32CommitmentstoChangesintheEnergyMixRenewablesasaShareofTotalEnergyConsumptionPrimaryenergymix(%shares)Indonesiarenewableenergyconsumption(%shareoftotalenergyconsumption)Source:OurWorldinData,IndonesiaNDC2022(p.7),figurecompiledbyWBGstaff.Source:OurWorldinData,figurecompiledbyWBGstaff.Againstthisbackdrop,animportantinitialstepinenablingincreasedre-newableenergypenetrationintheenergymixwastherecentdecisiontoestablishamorefavorablepricingschemeforthesetechnologies.Presiden-tialRegulationNo.112/2022overridestheexistingregulationwhichcapssuchpurchasepricesatorbelowtheaveragecostofgridelectricitygeneration(whichismostlydeterminedbycoal-basedgeneration).Instead,theregulationsetsoutnewceilingpricesdifferentiatedbyrenewableenergytechnologies,size,andlocationwhich,overall,arehigherthanthepreviouscaps.Italsoestab-lishedcompetitiveprinciplesforprocurementofrenewableenergytechnologiessuchasSolarPVandprovidesfordirectfiscalsupportforthestate-ownedelectricitycompanyPLN(PT.PerusahaanListrikNegara)tobecompensatedifthedevelopmentofnewrenewablecapacityincreasesitsaveragegenerationcost.Facilitatedbytheseregulatoryreforms,theimplementationoflarge-scalecompetitiveselectionprocesseswillbeneededgoingforwardtoachievethedeploymentofrenewableenergyatthescalerequiredforthetransition.36UndertheJustEnergyTransitionPart-nership,thetargetshareofrenewablesin2030isnow34percentofthepowermix(thatis,notprimaryenergymix).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT30Twootherfundamentalreformswillbeneededtoincentivizethemoveawayfromcoal.Asnotedabove,recentglobaldevelopmentscreateheadwindsforthecoalexit,includingrisingcoalpricesandhighercostsoffinancingfortheenergytransition.Reformsthatcanhelpreducetherelativecostofrenewableswillbeevenmoreimportantinthecurrentenvironment.Prioritychangesinthisregardwouldremove:TheDomesticMarketObligation(DMO)forcoalIndonesiancoalproducersareobligedtosellaminimumamountoftheirout-puttoPLNforelectricitygeneration‒ataratecappedatUS$70/tonne,aratewellbelowrecentmarketprices.Thiscreatesincentivesforrelianceoncoalforelectricitygeneration,andartificiallyreducesthecostofelectricity,leadingtolessefficientuseoffinalenergybyendusersonthedemandside.Localcontentrequirements(LCRs)Existingregulationssetaminimumthresholdforlocalcontentbothformaterialsandservicesusedinrenewableenergygeneration,includingsolarpower,withtheambitionofsupportingdevelopmentofdomesticmanufacturingcapability.37Localsolarpanelmanufacturershavenotyetreachedsufficientscaleandcom-petitiveness,however,resultinginpanelsthataremoreexpensiveandoflowerqualitythanthoseontheinternationalmarket.Localcontentrequirementsthere-foreincreasethecostofrenewableenergy,makingitlesscompetitivevis-à-visfossilfuelgeneration.12POLICIES&INSTITUTIONSFORTHEDEMANDSIDE2.2AtCOP26in2021,Indonesiacommittedtothe‘GlobalCoaltoCleanPowerTransitionStatement’ensuringtransitionawayfromcoal.37Followingthisannouncement,PLNremovedinits2021-203010-yearinvestmentplan20GWofnewcoalplantscomparedtotheprevious10-yearplan(2019-2028).Some13.8GWofplannedgrid-connectedcoalcapacityis,however,alreadyunderdevel-opmentandexpectedtocomeonlinebefore2030.39Indonesiaisconsideringoptionstoreducetheseincreases.Oftheplanned13.8GWofcoalplants,9to10GWareatadvancedstagesofconstruction.Theseareexpectedtobecommissionedinthenexttwoyears.AsmentionedinChapter1above,additionalcoalgenerationwillresultinstrandedassetswhichwillbecomeaconstraintforthetransition.Inanimportantrecentstepforward,Indonesiasetoutforthefirsttimealegallybindingrestrictiononbuildingcoal-firedpowerplantsconnectedtothecountry’selectricitygridinPresidentialRegulationNo.112/2022.Theregulationalsoprovides,however,forsignificantexemptionstothiscoalplantmoratorium.Theseexemptionsincludecoalplantsthatwerealreadyapprovedandthoseintegratedwithindustriesaimedatthetransformationofrawnaturalresourcesorthatsupportprojectsdeemedofnationalstrategicimportance.37MinistryofIndustry(MoI)RegulationNo.54/2012(updatedthroughMoIRegulationNo.5/2017,andfurtherdetailedinMoIRegula-tionNo.4/2017).38Likesomeothercountries,Indonesiaexcludedthethirdpointofthestatement,whichrequiresnofurtherissuanceofnewpermitsfortheconstructionofunabatedcoal-firedpowerplants.Over40countriessupportedthestatementinwholeorinpart.Indonesiahasstatedawillingnesstoconsideracceleratingthecoalphase-outintothe2040s,conditionalonadditionalinternationalfinancialandtechnicalassistance.39Thesearepartofthegovernment’splanthatwasapprovedin2015foranadditional35GWofcapacity.Commitments&Capacities31Indonesiahasbannedtheexportofnickelandbauxite,andthegovernmenthasplanstograduallystopexportingotherrawmaterialstoo.Energydemandfortheprocessingofmineralshasthepotentialtoincreasesubstantiallyoverthenextfewyears.TheexemptionintheregulationposesasignificantrisktoIndonesia’scoalphase-downifnewcoal-firedplantsmaterializeandcouldfurtherlockindustrialprocessesintoahigh-carboncontentdevelopmentpath.Toenablethephaseoutofcoal,IndonesiaisestablishinganEnergyTran-sitionMechanismCountryPlatform.ThisPlatformcreatestheinstitutionalset-uptoorganize,achievescale,andcoordinatefundingandfinancingfortheenergytransition.TheCountryPlatform,tobemanagedbyPT.SaranaMultiInfrastruktur(PT.SMI),willchannelstatebudget,donorfunding,andproceedsfromcarbontradingforenergytransitionprojects.Financialsolutionshavethepotentialtoreducethecostsoftheenergytransitionbyharnessingmultilateral,donor,andphilanthropicfundingandfinancingtoblenditwithstatebudgetandprivatesectorcapitaltomaximizeresources.Investmentsandactivitiesexpectedtobenefitfromthesemechanismsinclude,amongothers,renewableenergyprojectsandearlyretirementofcoal-firedpowerplants.Thecontributionofsolarandwindtotheenergymixwillneedtoacceleraterapidlybutischallengedbyover-capacityincoal.From2010to2019,theshareofrenewableelectricityoutputincreasedfromapproximately14.1per-centto15.3percentoverall,40leavingaconsiderablegaptothe2025NationalEnergyPlan(RencanaUmumEnergiNasional:RUEN)targetof23percent,andthe2030targetsabove.Theover-supplyofcapacityinthesystem,mainlyfromcoal,hasreducedthe‘space’foraddingrenewableenergywithoutcreatingstrandedcoalpowerassets,mostnotablyintheJava-Baligrid.ReformingPLN’scurrentrevenuemodelandretargetingofend-usersub-sidiesisneededtoputtheelectricitysectorinasolidfinancialfootingtoimplementthetransition.Scalingandintegratingvariablerenewableener-gy(solarandwind)willrequirebothPLNandtheprivatesectortoinvestingridandtransmissioncapacity,energystoragesuchaspumpedhydroandbatterystorage,digitizingthegrid,andimprovingsystemdispatch,amongothers.Since2017,however,tariffadjustmentsthatwouldallowcoststobepassedontoconsumershavebeenrestricted,limitingPLN’sabilitytomakenecessaryinvestments,andresultinginlossesthatarecoveredbythestatebudget.Thisrequisitepayment(ortop-up)fromthebudgettoPLNistypicallydelayed‒sometimesbyuptotwoyears‒resultingincashflowchallenges.PLNalsosetstariffsbelowcostrecoverytoprovidelow-costelectricitytopoorandvulnerablecustomersbut,astheyarebasedonweaktargeting,theyfurtherexacerbateinefficientsubsidies.PLN’scurrentrevenuestructure,setasacost-plussevenpercentmargin,isnotsufficienttocoveroperatingcostsanddebtservice.Theincrementalcostofthetransitionwillbesubstantialasdiscussedinchapter3belowandtherefore,improvingPLN’sfinancialsustainabilitywillbekeytoenableitsimplementation.AddressingPLN’sdebtburdenwillalsobeimportanttoenableittoin-vestintheenergytransition.Therapidgrowthinoutstandingdebthasfedthroughintoincreasingchallengesinmeetingdebtservicecommitments.Thisdependenceonsubsidieshasposedseveralchallenges.Ithasheavily40Theproportionofrenewablesinthegenerationmixmovesconsiderablyfromyeartoyeargivenfluctuationsinlocalconditions(forex-ample,hydropowerdamstorage).Theaverageofthethreeyearsupto2010and2019isreportedtoaccountforthesefluctuations(Inter-nationalEnergyAgency:IEAdata).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT3232politicizedtheprocessofsettingtariffsandledtoanemphasisonshort-termcostminimizationattheexpenseofinvestingnowtoreducecostsandrisksinthelonger-term.Commitmentstoreducethecarbonintensityoftheelectricitysystemarebeingcomplementedbythegovernment’selectricmobilitytargets.TheNationalElectricVehicle(EV)ProgramforRoadTransportation,41initiatedin2019,establishesatargetfordomesticEVproductiontorepresent20percentoftotaldomesticsalesby2025(MaghfirohandPandyaswargo2021).By2030,theMinistryofEnergyandMineralResources(MoEMR)aimsfor0.6millionelectriccars,and2.45millionelectrictwo-wheelersonIndonesia’sroads.Thesetargetsaimtoreducefossilfueluse,improveairquality,anddevelopthecountry’snickelreserves(thelargestintheworld)forlithium-ionbatteries.Ambitioustargetsfortheelectrificationofpublictransitfleets(90percentby2030)arealsoinplace.Marketuptakehasbeenlimitedtodate,owingtohigherup-frontEVcosts(whichareexacerbatedbyLCRs).Higheruptake,provideditoccursinconcertwithgriddecarbonization,willhelploweremissions(Box1).41PresidentialDecreeNo.55/2019onthePro-motionofBatteryElectricVehicles(EVs)forGroundTransportation.Commitmentstoreducethecarbonintensityoftheelectricitysystemarebeingcomplementedbythegovernment’selectricmobilitytargets.““3333WorldBankmodellingassessedpotentialemissionsre-ductionsfromthedeploymentofmodeshiftstrategies(publictransportandwalkingandcycling,demandman-agement)alongwithelectrification.Estimatesarebasedondataforurbancoresof29largeurbanagglomerationsinIndonesia,combinedwithtypicaltripratesandmodesplitsbetweenpublicandprivatetransport.Thesewereprojectedyear-by-yearfor20years,consideringpotentialchangesinvehicleownership,vehicleelec-trificationandelectricitycarbonemissions.Modesharesof25percentpublictransitby2034wouldleadtoreductionsof14percentinurbantransportGHGemissionsby2040(FigureB.1.1).Reductionscouldbescaledupto21percentbyimplementingmoresophisticatedandhigh-per-formancemassrapidtransitsystemsindenselytraffickedcorridors.ThesestrategiesfurthercontributetoreducedcongestionandthelivabilityofIndonesia’scities.Astrategyforvehiclefleetelectrificationinisolationshowslimitedresultsby2035owingtotheproportionofcoalintheenergymix.Combininganelectricmobilitystrategywiththeurbanmobilitystrategyleadstobiggerclimateimpactsandreducedcongestion.Ahighelectrificationscenarioaloneresultsinloweremissionreductionsof2percentby2030and19percentby2040(asthegridbeginstodecarbonize).Combiningwithimprovedpublictransportmodeshare(25percent)andimplementationofmassrapidtransitsystemsleadstoemissionreductionsof31percentand38percentrespectively.BOX1ModellingurbantransportGHGemissionsreductionsFIGUREB.1.1.CommitmentstoChangesintheEnergyMixReductioninurbantransportGHGemissionsthroughsustainabletransportstrategiesNotesandsource:Highvehicleelectrificationof25percentcar,50percentmotorcycle,and100percentbuselectrificationby2034.EstimatesassumeBAUelectricityemissionfactorsasdescribedintheenergymodel.WBGstaffestimates.Commitments&CapacitiesINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT34Buildingonrecentinvestmentsinurbantransportinfrastructure,thereareopportunitiestoincludebroadertransportstrategiesinnationalplansandcommitments.“Avoid-Shift-Improve”(ASI)strategiesfordecarbonizingthetransportationsectorwouldcomplementexistingNDCplansforthetransportsector.“Avoidstrategiesfordecarbonizingurbanmobilityreducethenumberandlengthoftripsviaintegratedlanduseandtransportplanning.Theyrequireseveraldecadestoshowresults.‘Shift’strategiespromoteamovetowardlessGHG-intensivemodesoftransitviainvestmentinreliableandintegratedpublictransit,improvementstothepedestrianandcyclingenvironment,anddemandmanagementtools(parkingpolicies,personalvehicletaxes,andgradualre-movaloffuelsubsidies).‘Improve’strategiesincludeadoptionofcleanerfueltechnologies‒suchasfromdieseltocompressednaturalgas(CNG)orelectric,improvedfuel,orefficiencystandards.IncludingASIstrategiescanguideeffortstoreducetransport-relatedemissionswhilesupportingcompetitivenessandurbanlivability.Therearealsofurtheropportunitiestoharnesscityplanningandconstruc-tionprocessestoreduceurbanemissions.Urbanfootprints,andassociatedemissionsfromlanduseandserviceprovisionwillexpanddramaticallyoverthenextdecadeinIndonesia(Figures33and34).Indonesiahasmandatedefficiencystandards(greencertification)forhigh-rises.Includinglandedhous-esundercertificationstandards(SertifikasiBangunanGedungHijau)wouldhelpfurtherenergyefficiencygains.RegionalLow-CarbonDevelopmentPlans(RencanaPembangunanRendahKarbonDaerah)areunderdevelopment.ThefirstsuchplanapprovedwasforJakartain2021,whichtargetsGHGemis-sionsreductionsof50percentby2030.Expansionofthisprocesstootherlocationswillstrengthenthealignmentofnationalclimategoalswithactionsatthesubnationallevel.FIGURE33FIGURE34EmissionsfromLandCoverChangesinRapidlyDevelopingCitiesEmissionsfromProvisionofUrbanServicesExpectedemissionsduetolandusechange(MtCO2)Expectedincreaseinemissionsduetourbanservicesafterurbanexpansion(%)Source:WorldBankmodellingofexpectedurbandevelopmentfortenmetropolitanareasbetween2015and2030.Commitments&Capacities35COPINGWITHCLIMATECHANGE2.2Policiesandinstitutionsthatarekeytoadaptationhaveimprovedinrecentyears.Indonesia’shigh-leveladaptationcommitmentistominimizeGDPlossto2.87percentby2050.42TheLTSandNDCprovideframeworksforadaptationactionsthatareintendedtoguidetheRPJMNandbudgetallocations;regulationsguidetheirincorpora-tionintoregionalandsectoraldevelopmentplansalongwithvulnerabilityandclimateriskassessments.43MajoradaptationandresilienceinitiativesincludeIndonesia’sDisasterResilienceImprovementProgram(DRIP)whichinvestsinresilientinfrastructureanddisasterpreparednessandtherecentlyestablishedPoolingFundforDisasters(PoolingFundBencana:PFB)‒acentralmechanismformanagingdisaster-relatedcontingentliabilitiesinacost-effectivemanner.AnAdaptiveSocialProtection(ASP)Roadmaphasbeendevelopedtoprovideaguideforleveragingsocialprotectiontoaddressriskstoclimate-relatedhazardsandothershocks.TheseandotherinitiativeshavecontributedtoimprovementsinIndonesia’soverallclimate“readiness”.Empowereddecision-makingatalocallevel‒incollaborationwiththepri-vatesector,academia,andcivilsociety‒isalsocontributingtoimprovedresilience.ThesuccessofIndonesiainachievingadaptationgoalsundertheNDCwillbestronglyinfluencedbytheactionsofnon-partystakeholders,andcommunities’awarenessandempowerment.TheClimateVillageProgram(Pro-gramKampungIklim:PROKLIM)isakeycontributiontowardsuchparticipation.Launchedin2012andexpandedin2016,theprogramhelpscommunitiesunderstandclimaterisks,determinetheiradaptationneedsandmitigationpotential,andimplementandmonitorprogress,whilebringinglocalauthoritiestogetherwithcivilsocietyactors,theprivatesector,andacademia.Asof2021,3,270villageshadestablishedPROKLIMactivities,towardatargeted20,000villagesby2024undertheRPJMN2020-24.Communitiesarealsoreceivingsupportthroughrelatedsector-specificprograms,includingFireCareCom-munities,theDisaster-ResilientVillagesProgramundertheNationalDisasterManagementAuthority(BadanNasionalPenanggulanganBencana:BNPB),andtheClimate-HealthyVillagesProgramundertheMoH.ClimateinformationatlocallevelisbeingprovidedbytheVulnerabilityIndexDataInformationSys-tem(SistemInformasiDataIndeksKerentanan)‒anationaldataplatformfortrackingvillagevulnerability.42Governmentmodelledlossesintheabsenceofadaptation.SeeMoEF2021a.43Notably,MoEFRegu-lationsNo.33/2016andNo.7/2018.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT36Recentexpansionstosocialsystems–socialprotectionandhealthpro-grams–willunderpinclimateresilienceandthehumancapitalaccumulationneededforgrowth.AkeysocialprotectioncommitmentundertheRPJMN2020-24istofacilitateaccesstosocialprotectionfor98percentofthepopula-tion.Socialprotectionprogramshaveseenasignificantexpansionofcoverageoverthedecadeto2021‒complementedbyasuiteofnon-contributorytransferprogramsforemergencysituations.Aunifiedsocialwelfareregistrylist(DataTerpaduKesejahteraanSosial:DTKS)ofnearly29millionpoorandvulnerablehouseholdshasbeendevelopedtoidentifypotentialbeneficiariesforarangeofprograms.Healthinsurancecoverage(JaminanKesehatanNasional:JKN)hasincreasedfrom130millionpeopletoover220millioninthefiveyearsto2021,withanRPJMN2020-24commitmenttoincreasecoverageto98per-centofthepopulation.Inadditiontofinancialprotectionagainstimpoverishinghealthepisodes,JKNhelpspromoteclimateresilienceofhealthfacilitiesandimprovecareforclimate-sensitivehealthconditions.In2021,socialassistancespendingwas1.5percentofGDP‒closetotheglobalaverage(1.54percent),however,asisthecaseincountriesglobally,thesesystemswillbestretchedfurtherbyclimatechange.Disasterriskmanagement(DRM)hasimprovedsignificantly.Thegovern-ment’s30-yeardisastermanagementmasterplanaimstoreducethenumberofcitieswithhighdisasterriskfrom75percentto40-45percentby2045.ImportantstepstowardthisgoalincludethelawsonDisasterManagementandSpatialPlanningpassedin2007whichclarifiedresponsibilitiesfordisasterpreparednessandresponseandensuredidentificationandprotectionofevac-uationareasandhigh-riskareas.TheBNPBwhichwasestablishedin2008,improvedcoordinationacrossgovernment.Anewregulatoryframeworkhasfurtherincorporateddisasterriskintospatialplans‒animportantstepwiththepotentialtochangethetrajectoryofcommunityandinfrastructurevulnerabilitylongterm.44Asaresult,Indonesiahasinternationallyrecognizedgoodpracticesinemergencyresponseandcommunity-basedpost-disasterrecovery,however,financingforcontingentliabilitiesremainsbelowneeds;theCCDRreturnstothisdifficultissueinChapter3.ComplementingtheseDRMreforms,thereareopportunitiesforfurtherdetailedconsiderationofdisasterrisksindevelopmentspatialplanning,andininfrastructurestandards(seeChapter5).Somestructures–notablytariffsinthewatersector–contributetoincreasedvulnerability(WorldBankForthcoming).JustasPLN’srevenuemodelcon-strainsitsabilitytoexpandrenewableenergycapacity,therevenuemodelforsomewaterutilitiesmayindirectlycontributetourbanflooding.TherapidsinkingofJakartaandnorthcoastalareasofJavaispartiallyduetoground-waterextractionwhichisitselfaresponsebyresidentialandcommercialwateruserstothecities’lowcoverageofpipednetworks.InGreaterJakarta,itisestimatedthatabout43percentofpipedwaterneedsarecurrentlycovered.Waterutilitiesfacetechnicalandfinancialconstraintstoexpandingthesenet-worksasthewatertariffdoesnotfullycovertheoperationandmaintenanceofexistingsystems,letalonetheexpansionofservices.Mayorsorheadsofdistrictshaveauthoritytoapprovetariffincreases,however,theyoftenaskforapprovalfromthecity/districtcouncilandrateincreasesarepoliticallychallenging.Whilegroundwaterpumpingisnottheonlycauseofsubsidence44FloodmodellingforIndonesiancitiesshowsthatrigorouslyenforcedspatialplanningcanreducefloodexposureby50to84percentandisparticularlyeffectiveincitieswithrapidurbanexpansion.SeeMuisetal.2015.Commitments&Capacities37andflooding,aligningincentivesinthetariffstructurecouldhelptoalleviateinvestmentconstraintsandtoimprovewateruseefficiency.Thesemeasureswouldbewell-complementedbydisincentivestopumpinggroundwaterdirectly,includingincreasedchargesforgroundwateruseandstrongerlimitsonneworextendedpermitissuances.Theagriculturesectorhasadoptedreformstoadapttoclimatechangeandbuildresilience.InFebruary2022,theMinistryofAgriculture(MoA)releasedthedraftGrandDesignonClimate-ResilientandLow-CarbonAgriculturewhichoutlinestheministry’soverarchingstrategytoimprovetheadaptivecapacityofthecountry’sagriculturalsectortoclimatechangewhilesimultaneouslyachiev-ingitsNDCcommitments.Theframework,togetherwiththeestablishmentoftheMoAClimateChangeWorkingGroup,providesanopportunitytoimprovethelinkagesandcoherenceofClimateSmartAgriculture(CSA)-relatedinitiativesthatcurrentlyresideunderdifferenttechnicalunitswithintheministry.TheMoAisintheprocessofdevelopingroadmapsandactionplanstooperation-alizetheGrandDesign.Afurtherusefulstepcouldbetoestablishmonitoring,reporting,andverification(MRV)systemstotrackandevaluateprogress,alongwithcoordinationmechanismswithotherlineministries,suchastheMinistryofPublicWorksandPublicHousing,MoEF,andtheMeteorology,Climatology,andGeophysicsAgency(BadanMeteorologi,Klimatologi,danGeofisika:BMKG),tosupportMoAinachievingitsclimateobjectives.Climateresilienceintheagriculturesectorwouldbenefitfromfurthersite-specificservicestobuildadaptivecapacity.45Manycountriesfacechal-lengesinscalingCSApractices.46Suchchallengesincludefragmentedlandholdings(closeto90percentofIndonesia’sfarmersownlessthan2hectaresofland)(BPS2018),andgenderbarrierstofarmergroupsthatlimitswomen’saccesstoextensionservicesandnewtechnologies(FoodandAgricultureOrga-nization2019).Fragmentationofprogramsacrossgovernmentdepartmentsisalsocommon,andfarmerdemographicstendtobeolderandlesseducated.Thesechallengesarenoteasytoovercome.Graduallyredirectingresourcesfrominputsubsidiestomoretargetedformsofclimate-sensitivesupport–in-cludingextensionservicesfornewtechnologiesandexpansionofagriculturecredit(suchasKreditUsahaRakyat:KUR)–couldhelp.47Improvedsmallholderaccesstoformalcreditandinsuranceenablesfarmerstofinanceclimate-smartinvestmentsandbettermanagerisks(Savelietal.2021).45CSApackageswouldtypicallycompriseamixofadvisoryservices(forexample,agronomic,climatic,andbusinessdevelopmentadvisoryservices),improvedinputs(forexample,higheryieldingand/ordrought-/flood-tolerantvarieties),climate-re-silientinfrastructureandtechnologies(forexample,water-savingirrigation,improvedpost-harvestinfrastruc-turetominimizelosses,digitaltechnologies),andothersupportingservices(forexample,financialservices).Adaptationmeasuresinagriculturetypicallyalsohavemiti-gationco-benefits.46Forexample,thepromotionoftheSystemofRiceIntensification,in-tegratedcropcalendars,climatefieldschools,riceandlivestockinsuranceschemes,andthedevel-opmentofflood-and/ordrought-tolerantricevarieties.47In2020,Indonesiaspentapproximately20timesmoreonfertilizersubsidies(US$16.4billion)thanonitsagriculturalknowledgeandinnovationsystems(US$81.6million;com-prisingUS$23.6millionforagriculturalresearchanddevelopmentandUS$58.0millionforextensionservices).Recentexpansionstosocialsystems–socialprotectionandhealthprograms–willunderpinclimateresilienceandthehumancapitalaccumulationneededforgrowth”“INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT383ENABLINGECONOMICPOLICIES&INSTITUTIONSPAGE38—58SCBD•JAKARTA38EnablingEconomicPolicies&Institutions3939BUILDINGTHEFOUNDATIONSFORALOW-CARBON&CLIMATE-RESILIENTFUTURE12343.1Thesector-specificpoliciesandinstitutionsformitigationandadap-tationdiscussedinChapter2arecritical,butnottheonlybuildingblockstowardIndonesia’sstatedcommitments.ForatransitionthatalsodeliversonIndonesia’sdevelopmentambitions,abroadsetofpolicyandinstitutionalenablerscanbeusedtocomplementthesector-specificmeasures.Theseenablersaimtoraiseandallocatefinancial,physical,andhumanresourcesforclimateaction.Theyarealsoimportantfoundationsforcapitalaccumulationandefficientresourceallocationthatwillunderpinlong-termeconomicgrowth:Thefiscalframeworkcanbeusedtoaddressmarketfailuresinmitigationandadaptation,raiserevenues,andprovidebuffersduringthelow-carbonandclimate-resilienttransitions.Thefinancialsystemcanbeusedtoraiseandchannelsavingstomitigationandadaptationactivities,providedthatstructuralconstraintsandexposuretoclimateandstranded-assetsriskscanbealleviated.Investmentclimateandregulationscanbeusedtoengageprivatesectorparticipationinmitigationandadaptation.Tradepoliciescanbeusedtofacilitategreenexportsandimports,moveIndonesiatowardthegreentechnologyfrontier,andmodifyincentivesforcarbon-intensivecommodityproduction.Theseenablingpoliciesandinstitutionsareinterrelatedandmutuallyrein-forcing.Thefiscalframeworkhelpssetpricesignalsandprotectinvestments.Indoingsoitaffectsthecostandavailabilityoffinancialcapitalforgreenin-vestments.Greeninvestmentsarefurtherinfluencedbytheinvestmentclimateandbusinessregulations.Meanwhile,tradepoliciessupportfirms’accesstogreeninputsandmarkets‒furtherfacilitatinggreeninvestments.Theseinteractionsfurtherdeterminetheincentivesandopportunitiesforfirmsandworkerstoparticipateinthegreeneconomy.Chapter3firstconsiderstheseenablingconditions,beforeturningtoIndonesia’sprivatesectordirectlytoask:towhatextentisitreadyandwillingtostepuptomaketheinvestmentsandoperationalchangesthatwillmovethetransitionforward?INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT40FISCALPOLICYFORTHECLIMATEANDDEVELOPMENTCHALLENGE3.2Indonesia’sfiscalframeworkhashistoricallyincentivizedcarbonconsump-tion,althoughongoingreformsaretryingtoredressthis.Incentivesaredriv-enbylowtaxationof,andsubsidiesfor,fossilfuels.SupportforfossilfuelsasashareoftaxrevenueinIndonesiahasdeclined,withasharpdropin2015(Figure35).Thisdropwasdrivenbyambitioustransportfuelsubsidyreformin2014-15.Transportfuelsreceivearoundone-halfoftotalfossilfuelsupport.Thishasdeclinedoverthe20yearsto2020(Figure36).Cutsintotalsupport(from3.9percentofGDPin2000to1.8percentin2020)47createdspaceforhigherspendingonhealth,infrastructure,andsocialassistance.Socialassistancein-creasedfrom0.3percentofGDPin2004to1.5percentofGDPin2021.Totalfuelsubsidyexpenditurerosebecauseoftheenergycrisisin2022,althoughthegovernmenthasincreasedadministeredpricestocontainthesepressures.Thereareopportunitiesforfurtherreductioninfossilfuelsupportthatcouldenhanceeconomicefficienciesandwelfare.Mostfossilfuelsupportistarget-edtoconsumersratherthanproducers(Figure37).Thisresultsinlowpetrolend-userprices(Figure38)designedtoassisthouseholds;however,benefitsaccruemoretothebetter-offhouseholdsastheyarelargerconsumersoffuelthanthepoor.Inthepowersector,asdiscussedinChapter2,electricitytariffsaresetbelowcostrecoveryunderaPSOarrangement(Figure39).Althougheffortshavebeenmade(especiallybetween2015and2017)toreassignconsumerstonon-orless-subsidizedtariffclassesthroughmeanstesting,manyrelativelybetter-offhouseholdsstillreceivethebenefitofthePSOtariff.Approximately45percentofthePSOisusedtosubsidizehouseholdsthatdonotfallwithinthedatabaseforpoorandvulnerablehouseholds.48Asperthe2020nationalbudget.Thisincludesreporteddirectsubsidyspendingandestimatedimplicitsubsi-diesaccruingaspaymentobligationstoPertamina,thestate-ownedoilandgasenterprise.45%ofthePSOisusedtosubsidizehouseholdsthatdonotfallwithinthedatabaseforpoorandvulnerablehouseholdsEnablingEconomicPolicies&Institutions41FIGURE35FIGURE37FIGURE36FIGURE38FIGURE39HighbutDecreasingFossilFuelSupportMostSupportisGearedtoConsumersMostSupportGoesTowardPetroleumResultinginLowPetrolEnd-userPricesAndLowResidentialElectricityPricesTotalfossilfuelsupportFossilfuelconsumersupportPetroleumsupportPetrolend-userpriceResidentialelectricitypriceSources:OECDGreenGrowthData,figurescompiledbyWBGstaff.Note:Interquartilerangereferstoequivalentdataforthe25thand75thpercentileofstructuralpeers(seeFootnote2).Thecurrenteconomicenvironmentdoescreatechallengesforthereduc-tionoffossilfuelsubsidiesalthoughtherearestepsthatcanbetakentohelpgraduallymovetheprocessforward.Somegovernmentschoosefuelpricesubsidiesovertargetedtransfersattimeswhenenergypricesarehighbecauseforexample:(i)manypoorhouseholdsdonotreceivesocialtransferstocompensateforhigherfuelprices;(ii)pricecontrolscanshieldproducersfromhigherinputcosts;and(iii)pricecontrolshelpkeepinflationexpectationsincheck.Reducingandredirectingfossilfuelsubsidieswillrequiresustainedeffortstostrengthenthedeliveryinfrastructureforsocialprotectionanddevis-ingtransfersthatareconsistentwithpoliticalimperatives‒suchastimeboundtransferstoaffectedhouseholds.Fiscalinstrumentscouldbeusedtodisincentivizeemissionsinotheremis-sions-intensivesectors.Severalfuelsandsectorscurrentlylackdirectfiscalincentivestoincreaseefficiency,includingoilandgas,industrialprocessesandproductuse,andresidentialelectricity.Althoughtheforestrysectorandplantationagriculturearesubjecttolicensesandexportlevies–formsoffiscalinstruments–thesearenotdifferentiatedbetweenproductiononlandassoci-atedwithhighemissionsandthatinmoresuitableareas.4949Theemissionsfootprintofonetonneofcrudepalmoilvariesspatiallybyafactorof35(0.7-26.0tCo2eq-1).SeeLametal.2019.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT42Thereareopportunitiestopromotegreaterconsistencyacrossfiscalin-strumentsforstrongeroverallincentivestodecarbonize.Insomeinstances,fiscalinstrumentswithinthesamesectorthathavecountervailingeffectscouldbeaddressedovertime:1234Royaltiesandtheupcomingcarbontaxoncoal-firedpowerplantscombinetodiscouragetheuseofcoal.Thisispartiallyoffsetbyazero-royaltypolicyoncoalusedfordomesticvalue-addedactivities,includingcoalusedforcoal-firedpowerplants.Fertilizersaccountforover10percentofagriculture-relatedemissions,implicitlyencouragedthroughfertilizersubsidies.Acrudepalmoilexportlevyaimedatboostingdomesticsupplyimplicitlydiscouragesemissionsfromthepalmoilsector(thesecondlargestconsumeroffertilizersinagriculture),yetexpenditureofthelevy’sproceedsonsubsidizingbiofuelsmaybeincreasingproductionand,therefore,emissions.50Emissionsareencouragedbyelectricitysubsidiesprovidedbybelow-costretailpricesandacommitmenttocompensatePLNforlosses.Atthesametime,thecarbontaxwillraisePLN’scostforsupplyingelectricity,butnottheadministeredretailprices‒therebycreatinganeedforlargergovernmentsubsidies.Provincialgovernmenttaxesontransportfuelsdiscourageemissionsbutarecounteractedbycentralgovernmentsubsidiesondieselandapopularbrandoflow-quality,high-emissiongasoline.Theneteffectoffiscalpolicyistopromotetransportemissions(representingapproximately25percentofenergy-relatedemissions).CoalSECTORAgriculturalSECTORResidentialSECTORTransportSECTOR50Thereisariskthatincentivesforbiofuelsproductioncouldpromoteland-associatedemissionsintheabsenceofforestprotectionmeasuresandsustainablepalmoilproductionstandards.Whilebiodieselproducedbyoilpalmislessemissionsintensivethanconventionaldieselatpointofuse,itcanbemoreemissionsintensiveiflandconversionisrequired.Fiscalinstrumentscouldbeusedtodisincentivizeemissionsinotheremissions-intensivesectors”“EnablingEconomicPolicies&Institutions43Beyondemissionsmitigation,fiscalpolicyisequallycriticalforclimateresil-ience.IndonesiahasmadeimportantadvancesinDRMinstitutions,includingthenewPFB.Asfiscalspacepermits,increasedcontributionswillbeneededtomatchclimateshockrisks.Post-disasterspendingwas0.11-0.38percentoftotalgovernmentexpenditurefrom2014-18.51WorldBankanalysisfindsthat,undercurrentratesofdisasterincidence,IndonesiacanexpecttofaceaveragedirectdisasterlossesofUS$1.3billionperyear(excludingpost-disastereconomicsupport).Greatercostsarepossibleinmoresevereyears,witha2percentprobabilityofUS$6.4billioninlossesinagivenyear.52Climate-relatedriskrepresents63percentoftheseaveragedirectdisasterlossesandcanbeexpectedtorise.Thegovernment’snewPFBisanimportantsteptowardcoveringthesecosts,addingtotheallocationsmadetotheexistingdisasterreservefund(atotalofUS$560millionin2022)(Figure40).FIGURE40ExpectedContingentLiabilitiesfromNaturalDisastersExpectedliabilitiesfromdisasterevents,withcomparisonto2004and2018earthquakes(forscale),basedonpast(20-year)recordsSource:WBGstaffanalysisbasedontheEM-DATdatabase.Note:Lossestimatesarecalculatedbasedonpastdisasterincidence,notprojectedrisks.Climatechangeisexpectedtoincreasesomerisks.2004and2018earthquakesrefertoallearthquakesinthoseyears,althoughthemajorityofdamageoccurredintheNorthSumatraandCentralSulawesieventsinthoseyearsrespectively.Expectedliabilitiesareestimateddisasterdamagesatvariouspercentilesofthedistributionofdamagesfittedtohistoricaldata(allthoserecordedinEM-DAT).TheCCDRrecognizesthatreformstofiscalpolicyandenergysubsidiesarepoliticallychallenging,particularlyatatimeofrisingglobalfoodandfuelprices.Itisunlikelythattheremainingfossilfuelsubsidiescanbeaddressedonshorttimelinesandthesameappliestotheintroductionofcarbonpricing.Nevertheless,inthecontextofIndonesia’slowtaxrevenue(8-10percentofGDP),thesedistortionsbecomeincreasinglyexpensiveaspricesrise,andtherevenuetheyabsorbisneededforIndonesia’sexpandingandimprovingsocialinfrastructure(seeChapter2).Resilienceinvestmentsandcontingentliabilitieswillalsorequirefurtherfinancing,consistentwithtrendsglobally.Despitethechallenges,targeted,incrementalreformsarecurrentlybeingpursuedbyIn-donesia,suchasthoseunderwayonelectricitytariffsandfuelprices.53Thesewillgraduallyreshapeincentivesforemissionsandhelpcreatefiscalspace.AsoutlinedinChapter5oftheCCDR,furthersuchadjustments,timedforwhencircumstancesallow,willbeimportantfordevelopmentofanefficient,incentive-compatiblefiscalsystemforthemediumandlongterm.51Thisunderestimatesspendingonreconstructionwhichisoftenintegratedinfuturecapitalinvestmentprojectsorreallocatedfrombudgetitemssuchasmaintenance.BasedonaWorldBankreviewofdisaster-relatedpublicexpendi-turesfrom2016-20.52WorldBankstaffanalysisbasedontheEM-DATdatabase.Thesefiguresesti-matethetotaldamagesfromadisaster,whichdoesnotnecessarilyrepresentthegovernment’scontingentliabilityarisingfromadisaster.Governmentsalsofacecostsfromlonger-termsupportneeds.53ThegovernmentincreasedelectricitypricesforselectedhouseholdsinJuly2022andraisedtheadministeredpriceofgasolineanddieselby30percentinSeptember2022.2022COMBINESBUDGETALLOCATIONFORDISASTERRESPONSE(EXISTINGRESERVEFUNDANDPFB;APPROX.US$560MIL.)INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT44PUTTINGAPRICEONCARBON3.3Notwithstandingthenear-termchallengesofhighenergyprices,theeventualexpansionofcarbon-pricingwhentheeconomiccondi-tionsallowwillhelpcomplementtheabovefiscalreforms.InOc-tober2021,thegovernmentenactedlegislationthatprovidesalegalbasistointroducecarbon-pricinginstruments‒includinganemissionstradingsystem(ETS)54andacarbontax.55Carbon-pricinginstrumentsshiftthecostsassociatedwithGHGemissionsfromsocietytoemittersandhelpincen-tivizeinvestmentsinlow-carbonoptions.Carbonpricingalsobenefitscountrieswithalargeinformalsector‒suchasIndonesia(carbonpricesmaybeimposedupstreamwherefuelenterstheeconomyordownstreamwherecommoditiesareexportedorprocessed,indirectlyincentivizing,andraisingrevenuefrom,informalactors).Onceimplemented,Indonesiawilljoinabout40countriesandmorethan20cities,states,andprovincesthatusecarbonpricingmechanisms(coveringabout20percentofannualGHGemissionsglobally).TheauthoritiesplantointroduceanETSinthepowersector.Buildingontheexperienceofavoluntarycap-and-tradesystemintroducedin2020(covering84coal-firedpowerplants),theMoEMRispreparingthelaunchofamanda-toryemissionstradingsystemtobefullyimplementedby2024.AnMoEMRregulationwillintroducean‘emissionscap’forcoal-firedpowerplants,tieredbytheircapacityattheunitlevel.Attheendofthereportingyear,unitswithemissionsexceedingthecapwillneedtoeitherpurchaseallowancesfromotherunitsorthroughcarbonoffsetcredits(fromenergyefficiencyorrenew-ableenergyprojects),althoughtheformerwillbeprioritized.Givenhighenergypricesglobally,thepreviousplantocomplementtheabovemechanismswithacarbontax(plannedatapproximatelyUS$2.10pertonne)hasbeendelayed.Indonesiahasamechanismtoensurealignmentacrosscarbon-pricinginstrumentswhichcouldbestrengthenedwithcoordinationwiththebroad-eremissionsreductionspolicies‒asbotharecriticaltoavoid“waterbedeffects.”InOctober2022,MoEFissuedanimplementingregulationwhichmandatesNDC-relevantsectoralministriestoissueacarbon-tradingroad-mapbasedonemissionsconsiderationspriortointroducinganETS.Thiswillbeharmonizedwiththecarbon-taxroadmaptobeissuedbytheMoF.Thisisimportanttoensurethateachsectorwillbecoveredbyonecarbon-pricingin-strument.56Thiswillhelpavoidwaterbedeffects,whichoccurwhenemissionscutsinonesectorareoffsetbyhigheremissionsinanother.Forexample,ifpoliciestopromoteenergyefficiencylowercoal-firedpowerplants’demandforemissionsallowances,thepriceofthoseallowancesinthemarketwilldrop.ThisbenefitsotherindustrieswithintheETSthatcanpurchasecheaperallowancesresultinginhigheremissions(intheabsenceofadjustmentstotheoverallcap).Similarly,carbontaximplementationwillinteractwiththecap-and-trademechanism.Furtheranalysisonmarketdesigncouldsupportdevelopmentofthesys-tem’soperationalplansandimplementation.Regulationsthatformalizethetechnicaldesignandunderlyinginfrastructureofcarbonpricingwilldetermine54PresidentialRegu-lationNo.98/2021onEconomicValuationofCarbon.55LawNo.7/2021onTaxHarmonization.56ThemostrecentdraftoftheroadmapspellsoutthatthepowersectorwillbecoveredbytheETS,transportationbycarbontax,buildingswilluseacarbonoffsetmechanism,andcarbontradingfortheindustrysector.EnablingEconomicPolicies&Institutions45theefficiencyandimpactofthesystem.Thesedesignelementsincludethelevelofpricingovertime,revenuecollectionpoints(upstreamordownstream),GHGandsectoralcoverage,MRVmechanisms,andthecarbonexchangemarketsetup.Analyticalworktobetterunderstandtheimpactofthecarbonpriceatdifferentlevels,instrumentdesignoptions,andinteractionswithotherpolicies,canalsohelpguidetheseoperationalplans.ThiscouldbuildonexistingstudiessuchastheLCDIwhichfoundrevenue-generatingpotentialof2.6percentofGDPby2031undermoderatecarbontaxandsubsidyreforms57(Bappenas2021).TheCCDRalsoconsidersasubsetoftheseissuesinChapter4,whereitpresentsGDP,price,andpovertyoutcomesforcarbonpricesincombinationwithsectoralpolicies.Indonesiaisharnessingotherformsofcarbonpricing,includingresults-basedpaymentsandcarboncreditstrading.Thereareoptionsforinternationalpay-mentsforemissionreductionsthatdonotrequirecorrespondingadjustmentstoIndonesia’sNDC.Forexample,Indonesiaisharnessinginternationalemis-sionsreductionpaymentstoincentivizejurisdiction-wideactionsinJambiandEastKalimantanProvinces(Box2).Thiscouldbescaledtootherprovinces.Therearealsoemergingopportunitiestoutilizeotherinternationalpaymentmechanismstoincentivizeprivatesectoractionswithouttransferofmitigationoutcomes(correspondingadjustments)‒therebyensuringthatIndonesia’sNDCprogressisnotcompromised.ThroughtheMoEFandprovincialgovernments,Indonesiaisimplementingambitiousjurisdictional-levelprogramstoreduceemissionsfromdeforestationandforestdegradation(REDD+).Jurisdictionalprogramsprovidepaymentsforverifiedemissionsreductionsfromadefinedregionoverall‒helpingtoavoidtheproblemofleakagethatcanarisefromproject-levelpayments.Thepay-mentshelpcovertheinvestmentcostsneededforemissionsreductionandprovideafinancialincentivetothejurisdictionforsuccess.Unlikecarboncredits,wherepricesaredeterminedbymarketforces,negotiationbetweendonorsandrecipientjurisdictionssetsthepaymentrates.IndonesiahasjurisdictionalprogramsunderformaldevelopmentinEastKalimantanandJambi.InEastKalimantan,TheForestCarbonPartner-shipFacility(FCPF),aglobalpartnershiptoachieveREDD+,pledgedtoprovideuptoUS$110millioninpaymentsforreducedemissionswithintheprovincebetween2020and2025,verifiedbyexternalthirdparties.ActionstoreduceemissionsincludedtheprotectionofHCVforestlocatedwithinoilpalmconcessionsandtighterregulationsonmining.Todate,theEastKalimantanREDD+programhasachievedsignificantresults.Whilestillunderverification,itisexpectedthattheprovincereachedabout30millionEmissionsReductions(equivalenttotonsofCO2eq)from2019to2020,aratethreeyearsaheadofschedule.AfirstpaymentofUS$20.9millionwasmadeinNovember2022.BOX2RealizingtheEconomicValueofReducedEmissions57UnderacarbontaxthatstartsatlessthanUS$5.00pertonnein2022andrisestoUS$40.00–60.00by2040.SeeBappenas(2021).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT46InJambi,theBioCarbonFundInitiativeforSustainableForestLandscape(BioCF-ISFL)haspledgedtoprovidepaymentsforanexpected14milliontonnesofemissionsreductions.Thepaymentswillhelpsupporttheprov-ince’sGreenGrowthPlan(GGP)‒along-termvisionforlow-emissioneco-nomicgrowth.TheimplementationofGGPaimstoreducetheaveragerateofdeforestationto1,770ha/yearcomparedtotheBAUof4,730ha/year.Inbothprovinces,paymentswillbedistributedtostakeholdersaccordingtoabenefit-sharingplan(BSP),acrucialpartofjurisdictionalprogramdesign.TheBSPdefinestheproportionofpaymentsthatwillflowtopro-vincialanddistrictgovernments,privatesectoractors,andcommunities,andinreturnforwhatactions.TheprogramsthusbringtogetherawiderangeofstakeholderstocontributetoIndonesia’snationaltargetsforemissionreductions.Thisisanexampleofhowlarge-scaleGHGemissionsreductionscanbeincentivizedacrossIndonesia’scomplexgovernancestructure,withopportunitiesforscale-uptootherprovincesacrossIndo-nesia.Additionally,theWorldBankintendstoprovidefurthersupportforresults-basedpaymentsforREDD+throughanewmulti-donortrustfund,ScalingClimateActionthroughLoweringEmissions(SCALE).Source:WorldBankstaffbasedonEastKalimantanEmissionsMeasurement,Monitoring,andReportingPortal(2022)(link)SeealsoSCALE(link).EnablingEconomicPolicies&Institutions47DEEPENINGTHEFINANCIALSYSTEMFORCLIMATE&DEVELOPMENTACTION3.4Allcountries’financialsystemsmustrespondtotwoimportantclimate-relatedchallenges:(i)themanagementofclimateandenvironmentalriskstothefinancialsector;and(ii)mobilizationoffinancialcapitalformitigationandadaptationinvestments.Thetwoareinterrelated.Climate-relatedrisks,ifnotwell-managed,cancauseshockstothefinancialsystemthatreducetheappetiteforinvest-ments,whethergreenornot.Fiscalpolicy,asdiscussedabove,isconstrainedinitsabilitytoprotectagainstsuchshocks.Onthepositiveside,measurestoexpandgreenfinancealsoaddressfactorsthatmayotherwiseimpedethedepth,efficiency,andreachofthefinancialsectormoregenerally.Thesemea-suresarecrucialforlong-termefficientcapitalallocation.Thefinancialsectorisexposedtoclimate-relatedrisks.58Thoserisksaregroupedintwomaincategories.Thefirstarephysicalrisksfromclimateshocks(forexample,businessdisruptionandpropertydamage)thatreduceborrowers’abilitytoservicetheirdebt,therebycausingfinancialinstability.Thesecondaretransitionrisksfromfinancialsectorexposuretohigh-emissionssectorsthatwillshrinkbecauseoflow-carbonpoliciesathomeandabroad.Indonesiahasthefourthhighestcarbonintensityofitsloanportfolioofanycountry.59ThesechallengesaremagnifiedbytherelativelysmallsizeofIndonesia’sfinancialsectorintermsofitstotalassetsandprivatecreditrelativetoGDP(WorldBank2022).Asisthecaseinmanycountries,thefinancialsector’scapacitytomonitorandmanageclimate-relatedrisksisnascent,however,therehasbeenre-centprogress.Indonesiaparticipatesininternationalandnationalnetworksonmanagingclimateriskstothefinancialsector.60TheFinancialServicesAu-thority(OtoritasJasaKeuangan:OJK)releasedaSustainableFinanceUmbrellaPolicyin2017,includingregulationsrequiringbankstodevelopproceduresformonitoringandmanagingEnvironmental,Social,andGovernance(ESG)risks.OJKhasalsolaunchedtworoadmapsonsustainablefinance.61Theseoutlineprioritiesincluding:(i)agreentaxonomy;(ii)sustainabilitydisclosurerequire-ments;(iii)aclimatefinancialriskmanagementframeworkandrisk-basedsupervision;(iv)innovativegreenfinancinginstruments;and(v)aNationalTaskforceonSustainableFinance.Overtime,detailedguidancetofinancialinstitutionswillhelpthemassess,manage,andpriceclimaterisks.Thiscouldbecomplementedbycapacity-buildingtoconductdetailedclimate-riskassess-ments,includingondataandmodelling.Climate-riskmanagementchallengesaside,thegovernmentisworkingtocatalyzeabroadergreeningofthefinancialsystem.AnimportantstepforwardwastheissuanceoftheOJKRegulationontheImplementationofSustainableFinancein2017,requiringfinancialinstitutionstoincorporate58Forexample,privatecredittoGDPaccountsforonly38percent,comparedtoamiddle-in-come-countryaverageofover120percentofGDP.59Measuredasthecarbonfootprintadjustedloanstototalloansfordeposits.DatafromIMFClimateDashboard(2021).60Forexample:(i)OJKisamemberoftheIn-ternationalFinanceCor-poration’sSustainableBankingandFinanceNetwork;(ii)BankIndo-nesiaisamemberoftheNetworkforGreeningtheFinancialSystem;(iii)In-donesiaisamemberoftheCoalitionofFinanceMinistersforClimateAction;(iv)theIndonesiaSustainableFinanceInitiativewasestablishedasamarket-ledplatform;and(v)OJKimplementedapilotprojecton“firstmoversonsustainablebanking”.61IndonesiaSustain-ableFinanceRoadmapPhaseI(2015-19)andII(2021–2025).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT48sustainablepracticesintheirbusinessoperations.OJK’sSustainableFinanceRoadmapsandtheGreenFinanceTaxonomyarepromotingthedevelopmentoffinancialinstrumentssuchasgreenbondsorSukuk(Islamicbonds),alongwiththetechnologyandinformationinfrastructuretoensuretheintegrityofthegreenbondmarketandbuildcapacityforindustry’sparticipation.OJKhasmandatedfinancialinstitutionstopublishsustainabilityactionplanstoraiseawarenessofESGissuesamonginvestorsandissuers,andtheIndonesianStockExchangejoinedtheSustainableStockExchanges(SSE)initiativein2019tostrengthenitscommitmenttoESGissues.Indonesia’sgreenfinancialmarketscancontributetothecountry’sclimateambitionsifsufficientlyscaled.ApproximatelyUS$6.4billion,orabout0.6percentofGDP,hasbeenraisedbyIndonesiathroughgreenbondsandsyndi-catedloanssincetheirfirstissuancein2018.Thecountryranked42ndintermsofamountraised(asashareofGDP)overthe2017-21periodandcomparesfavorablytostructuralpeers(Figure41).Bondsaccountedfor92percentoftheamountraised.Issuancesbythegovernmentandgovernment-backedentitiesaccountedforasignificantfraction(almost70percent)‒acontrasttostructuralpeerswherecorporationswerethedominantissuers(Figure42).62IndonesiahasissuedSovereignandRetailGreenSukuk(Islamicfinance)amountingtoapproximatelyUS$3.9billionbetween2018to2021(thelargestissuanceofanycountry).Nevertheless,privatesectorinvolvementislimited,andtotalcorporategreenbondissuanceremainslowatUS$1.7billion.63Thecharacter-isticsofgreendebtinIndonesia(tenorandcurrencyofdenomination)reflectthedominanceofgovernment-backedentitiesinthemarket.Greenissuancesweremostlyinforeigncurrency,with93percentoftheamountraisedinUSdollars,64andhavesomeofthelongestmaturitiesamongpeercountries(over11yearsonaverage)(Figure43).Energydominatestheuseofgreenbondproceeds(Figure44).About98percentofallgreenissuancesfromIndonesiastatedthatproceedswouldbeallocated(eithertotallyorpartly)toprojectsintheenergysector.Onlytwonon-financialcorporationsissuedbondsforotherpurposes,namelyprojectsrelatedtogreenbuildingsandsustainablelanduse.Whileenergyusesalsodominateothergreenfinancemarkets,fundinguseinpeercountriesismorediverse(forexample,atleast30percentoftheproceedsofgreenissuancesinThailandflowedtothetransportsector).Indonesia’sgreenfinancesystemhasbothdemand(thatis,borrower)andsupply-side(thatis,investor)challenges.Onthedemandsidethereisaneedto:(i)increasemarketawarenessandlocalknowledgeofgreenandsustainableprojectsandtheapplicablefinancinginstruments;(ii)reducethehighcostofissuinggreenbonds–issuancesoflessthanUS$100millionhavecostsabovethoseofacomparable-sizedloanfromconventionalsources(ClimateBondsInitiative2019);and(iii)increasetheavailabilityoflonger-termcredits.Chal-lengesonthesupplysideincludealackofassetsandprojectstoinvestin,andreputationalrisks(Orbitas2021).,65Greatertransparencywillberequiredwithinthefinancialsectorandwithinsectorstargetedforgreeninvestmenttoincreasethesizeofthepipeline.62Corporationsissued80percentormoreofgreenbondsinBrazil,Mexico,Philippines,Thailand,andUkraine,andabout70percentinChinaandIndia.Indonesiahasoneofthelowestnumbersofcorporateissuersamongpeercountries.63AsianDevelopmentBankAsiaBondsonlinedatabase(link).64Aboutone-halfofthegreenissuancesfromBrazilandRussia,abouttwo-thirdsoftheissuancesfromChina,andalmostallissuancesfromThailandandNigeriawereinlocalcurrency.65Some66percentof125globalcompaniessurveyedbytheCarbonDisclosureProject(CDP)citedreputationalandmarket-relatedrisksasthegreatestchallengeswithinthepalmoilsupplychain.Bycontrast,16percentofcompaniesnominatedregulatoryrisks.SeeCarbonDisclosureProject(CDP)2020.6.4bil.hasbeenraisedbyIndonesiathroughgreenbondsandsyndicatedloanssincetheirfirstissuancein2018EnablingEconomicPolicies&Institutions49FIGURE41FIGURE43FIGURE44FIGURE42GreenDebtMarketSizeMaturityofGreenDebtUseofGreenDebtProceedsTypesofGreenDebtGreendebtmarkets(amountraisedasashareofGDP,2017-2021)Greendebtmaturityatissuance(shareofamountraised,2017-2021)Sectorallocationofgreendebtissuances(useofproceeds,2017-2021)IssuancesbyCorporatesvs.GovernmentBackedEntities(Shareoftotalraised)Source:WBGstaffanalysisusingClimateBondsInitiativedata.TheCCDR’ssurveyofIndonesianfinancialinstitutionsaffirmstheneedforstandards,informationtransparency,andcapacity-building.Three-quartersofrespondentsconsideredlawsandregulationsrequiringfinancialinstitutionstoreviewESGriskstobethemostimportantdriversofsustainableinvesting.Foraboutone-halfoftherespondents,integrationofESGprinciplesisdrivenby:(i)theperceptionthattheyaregoodforprofits;(ii)mandatesfromtheboardortopmanagement;and(iii)thepotentialforreputationalgainsfromsustainableinvesting.Nevertheless,only35percentoftherespondentsbelievedthatESGinvestmentswoulddriveeffectivechangeinrecipientfirms.MovingfromESGmotivatorstoclimateinvestmentopportunitiesmorebroadly,assetmanagersandbanksreportedtherangeofopportunitiestobelimited(althoughinsurancecompaniesweremoreoptimistic).Lackofinformationandinsufficientexpertisewereconsideredthemostbindingconstraintsforsustainableinvesting.Thishighlightstheneedforclear,consistent,andgloballyaccepteddefinitions,reportinganddisclosurestandards,andanalytics,toreduceuncertaintyandtheriskofgreenwashing.Three-quartersofrespondentsconsideredlawsandregulationsrequiringfinancialinstitutionstoreviewESGriskstobethemostimportantdriversofsustainableinvesting.”“INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT50CLEARINGTHEWAYFORTHEPRIVATESECTORTOSTEPUP3.5FurtherprogressoninvestmentclimateandregulatoryreformsinIn-donesiacouldenablegreaterprivatesectorparticipationinclimateaction.Sustainedmacroeconomicstabilityhasbeenanessentialingredientinpromotingprivatesectorcompetitiveness.Indonesia’skeyreformopportunitiesnowlieatthemicrolevel,includingcompetition,infrastructure,humancapital,andfinancing(Changetal.2019).Addressingfinancinggaps,asdiscussedabove,isnecessarytopromoteprivategreeninvestments.Boostinghumancapital,includinggreenskills,asdiscussedbe-low,willalsobeimportant.Evenmorecritical,however,willbecompetitivenessmeasurestoencourageprivatefirms’marketentryandexpansion.ThesewillsupportIndonesianfirms’abilitytoexpandgreeninvestmentswhileboostingprivatesectorproductivitymoregenerally.CompetitivenessmeasurescanalsohelpaddressIndonesia’sdecliningshareofmanufacturinginoutput,exports,andinwardforeigndirectinvestment(FDI).Somecompetitionconstraintswerealleviatedrecentlythroughtheremovalofsector-basedandotherrestrictionsonprivatedomesticandforeigninvestment.Addressingremainingissues,includingtraderestrictionsasdiscussedbelow,willhelpimproveprivatein-vestmentinclimatemitigationandadaptation.Privatesectorinvestmentcouldbeencouragedbyallowingmoreprivateparticipationin,forexample,infrastructureprojectscurrentlydominatedbyState-OwnedEnterprises(SoEs).ThegovernmenthasreliedheavilyonSoEsforinfrastructureinvestment‒oftenaccompaniedbystateequityinjections,subsidies,guarantees,andpreferentialaccesstofinance.ThisallowsSoEstoacceptriskallocationsandratesofreturnthatprivateinvestorscannot‒givingSoEsacompetitiveadvantagewhenbiddingonpubliclytenderedprojects.Pri-vateinvestmentininfrastructurehasconcurrentlydeclined,whileSoEleveragehasincreased(WorldBank2022a),partofwhichisalsoduetothepandemic.PrivategreeninvestmentscouldbesupportedbyfurtherstrengtheningtheframeworkforPublicPrivatePartnerships(PPP).Thegovernmenthasdevel-opedPPPinstitutions,instruments,andprocessesoverseenbytheMinistryofEnablingEconomicPolicies&Institutions51NationalDevelopmentPlanning(Bappenas)andMoF(InternationalFinanceCorporation2018).Variousgovernmentsupportinstruments(forexample,viabilitygapfunding,availabilitypayments,andguarantees)areavailabletosupportPPP.SomePPPprojectstructuresanddocumentationdonotmeetin-ternationalstandards,however,therebylimitingtheirappealtoprivateinvestors.Amongotherareas,theseconstraintsholdbackprogressonthedeploymentofrenewableenergy.ImprovementstothePPPframeworkcouldhelpsupportSoEsinpartneringwithindependentpowerproducers(IPPs),unlockingprivateinvestmentsandaccesstothelatestrenewableenergytechnology.Measurestostrengthenthelegalframeworkforcooperationprojectscouldalsofacilitateprivateinvestment.Atpresent,differentregulationsgoverndifferentaspectsoftheprojectpreparationandprocurementlifecycle,there-bycausinguncertainties.Forexample,IPPsarerequiredtoobtainabusinessviabilityletter,aformofgovernmentguarantee,eventhoughIPPsfallunderPresidentialRegulationNo.38/2015onPPPs.Totakeanotherexample,the2017ConstructionLawrequiresaprojectcompanytoselectandappointitsengineering,procurement,andconstruction(EPC)contractorusinganindepen-denttenderprocess.ThiseffectivelymeansthatprojectsponsorscannotbidontendersinconsortiumwithanEPCcontractor,incontrasttointernationalprac-ticesaswellastheprinciplessetoutintheregulationoncooperationprojects.Insomecases,complexityhasbeencompoundedbylegalandregulatoryregimechanges.Giventhatcooperationprojectstendtobebasedonlong-term(often20to40-year)contracts,stabilitywillhelpensureprivateinvestorconfidence.66Environmentalandsocial(E&S)standardswithintheinfrastructuresectorareimproving.E&Sstandardsareessentialtoattractforeignandprivatesectorfinancing‒helpingtomitigaterisksforinvestorsinlarge-scaleinfrastructureandotherinvestments.AwarenessandimplementationofE&Sstandardsforsustainableinfrastructurewouldfurtherbenefitfromguidanceregardingthemethodologiesandrulesgoverningtheenvironmentalimpactassessmentsthatarerequiredunderthelegalframeworkoncooperationprojects(WorldBank2018).RecentprogressincludesOJK’sdraftpolicyonsustainablefinancingandthedeploymentofanE&Sthatisbroadlycompliantwithinternationalstandardsbythegovernment-backedfinancierPT.SMI.Improvingtheinvestmentclimateinadditiontoaddressingthesector-spe-cificconstraintsdiscussedearlier(thatis,energy,land,transport)couldhelpunlockgreeninvestmentpotential.Preliminaryduediligencesuggestsprivatesectorinterestandopportunitiesformitigationinvestmentin:(i)energy,includ-ingrenewables(wind,solar,geothermal,distributedsolarrooftopgeneration)andbiofuel(sustainablepalm-basedbiodiesel);(ii)transportation,includingEVsandtheirsupportinginfrastructure;(iii)urbandevelopment,includinggreenbuildings,greenretrofitting,waste-to-energyprojects,andwastemanagement;and(iv)manufacturing,includingcementsectoremissionsreductionandbatterycellproduction.Carbonpricingwillimprovetheattractivenessofmitigationin-vestmentsandefficiencymeasures,whichwillbefurtherfacilitatedbyexpandedgreenfinancinginstruments.Whilethebulkofadaptationinvestmentstendtocomefromthepublicsector,therearealsoopportunitiesforprivateinvestmentinwaterstorage,climate-smartirrigation,andothers.66Theenergysector,forexample,wassubjecttomultiplechangesaf-fectingPowerPurchaseAgreements(PPAs)andIPPsin2016and2017,withmultiplenewregulationswithinayearofissuance.SeeWorldBank2018.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT52TRADINGINGREEN3.5TradepoliciescanalsocontributetoIndonesia’sdecarbonizationobjectives.Despitelowaveragetariffsonimportsofgreengoodsandtechnologies,non-tariffmeasures(NTMs)continuetoposecoststogreengoodsinIndonesia.Atanaverageof1.1percent,Indonesia’stariffsongreengoodsarelowerthanaggregateaveragetariffsonallimports(Figure45).CCDRestimates,however,findthatNTMsongreengoodshavebeengrowinginnumber(Figure46)andimposecostsequivalenttoanaverage20percenttariff,higherthanthoseon“non-green”goods(Figure47).AmongNTMs,importapprovals,compliancewithIndonesiannationalstandards(StandarNasionalIndonesia:SNI),andpre-shipmentinspections(PSIs),haveimpactsonproductscriticaltoclimate-changeadaptation(Figure48).TheirimpactinIndonesiaexceedsthatseeninregionalpeers.WhileLCRsmayprovideincentivesforlocalmanufacturing,theyimpactshort-termuptakeofrenewableenergytechnologies.LCRregulationssetthelevelofdomesticcomponentsforsolarmodulesataminimumof40per-cent.Domesticallyproducedsolarpanelsarestillmoreexpensiveandtheirefficiencyislowerthanthoseavailableinforeignmarkets(InstituteforEssentialServicesReform2021).Theseincrementalcostsalsonegativelyweighonthecompetitivenessofrenewableenergygenerationvis-à-visfossilfuels.LCRsmayalsoactasbarrierstointernationalpublicprocurement‒therebyreducingtheattractivenessofmajorrenewableenergysectorpublicprocurementprojects.EnablingEconomicPolicies&Institutions53FIGURE45FIGURE47FIGURE48FIGURE46TariffsonGreenGoodsareLowContributingtoHigherImportCostsAndLossofCompetitivenessButNTMscanbeBurdensomeIndonesia’saveragetariffsongreengoodsimports(%)TariffequivalentsofselectedNTMs(%)TariffequivalentofMostProblematicNTMsonGreenGoodsrelativetoEAP(averagedifference)(%)Indonesia’sNTMsongreengoods(number)Source:WBGstaffcalculationsbasedontheWorldBankJakartaNTMdatabaseandGreenTransitionNavigatorlistofgreengoods.Note:SPS:Sanitaryorphytosanitary;TBT:Technicalbarrierstotrade;EAP:EastAsiaandthePacific;SNI:StandarNasionalIndonesia;PSI:pre-shipmentinspectionsAVERAGE=1.1%INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT54Indonesiacouldconsidermakingfurtheruseofenvironmentalprovisionsintradeagreements.Atthegloballevel,closeto90percentoftradeagree-mentscurrentlyinforceincludesomeformofcommitmentsconcerningtheenvironment.OfIndonesia’s11tradeagreementsinforce,four(theASE-AN-RepublicofKorea,ASEAN-Japan,Indonesia-Chile,andIndonesia-Japanagreements)includeenvironmentalprovisions.Ofthese,theIndonesia-ChileandASEAN-Japanagreementsincludeenvironmentalprovisionsthatcouldbelegallyenforced.Theinclusionofsuchprovisionsintradeagreementshasbeenshowntomitigatepotentialadverseenvironmentaleffects.IndonesiaratifiedatradeagreementwithcountriesoftheEuropeanFreeTradeAssociation(asmallmarket)inMay2021whichstrengthenscertificationandMRVsystemsforthetradeofsustainablepalmoil.IndonesiacouldalsoconsiderhelpingtoshapetheEnvironmentalGoodsAgreement(EGA)attheWorldTradeOrganizationinwaysthatsupportitseconomy.IndonesiaisnotcurrentlyengagedinnegotiationstoeliminatetariffsongreengoodsundertheEGA.CCDRanalysisfindsthattheimplementationoftheEGAwithoutIndonesia’sparticipationwouldslightlyreduceexports(0.3percent)andimports(0.8percent)duetotradediversion,whileparticipatingwouldboostgreengoodsexportsby1.1percent(US$99million)andimportsby1.2percent(US$214million)‒valuableindirecttermsandinunquantifiedbenefitsfromtechnologytransferovertime.Indonesiacouldalsoconsiderjoin-ingandinfluencingrecentlylaunchedmultilateralinitiativesaimedattacklingclimatetradeissues:(i)theTradeandEnvironmentalSustainabilityStructuredDiscussions;(ii)theInformalDialogueonPlasticsPollutionandSustainablePlasticsTrade;and(iii)theFossilFuelSubsidyReform.AREBUSINESSES&WORKERSREADYTOGOGREEN?3.5Fiscal,financial,investment,andtradereformscouldincentivizefirmsandworkerstoparticipateinthegreeneconomy–butaretheyready?Indonesia’scompetitivenesshasimprovedovertimealthoughthereisscopeforfurtherprogressincludingthroughhigherFDIandgreaterfirm-levelconnectionswiththeglobalmarket.Thiscanhelpaccelerateinvestmentinnewtechnologiesincludingthoserequiredfortheclimatetransition.Thetransitionwillbedis-ruptiveforsomefirms‒particularlythoseincarbon-intensivesectors‒requiringatransformationinwhatandhowtheyproduce.Fiscal,financial,investment,andtradeenablersmayhelptheminthistransformation,buttheyarenotsufficient.Knowledge,accesstotechnology,accesstofinance,andskillsatthefirmlevelareneededtograspnewopportunitiesandadjusttoanewnor-malofcarbonpricesandlowerdemandforcarbon-intensiveproduction.TheCCDRassessesfirmlevelreadinessusingasurveyofmanufacturingfirms,67andassesseslabormarketreadinessusingjob-vacancyandemploymentdatathatindicatesgreenskillneedsacrossdifferentoccupations.67TheCCDRsurveyof750firmsgath-eredevidenceonfirm-levelemissions,environmentalmanagementpractices,anddriversof,andconstraintsto,greenpractices.ThesampledfirmscoverlargeandmediummanufacturingfirmsbasedinJava(whichaccountsformorethan75percentofallmanufacturingfirmsinIndonesia).Thesurveywascarriedoutforfirmsinsixindustriesthathaveahighshareofelectricityandfuelinbothoutputandtheenergymix.Thesearethefirmsthatwillbemostdisruptedbythelow-carbontransitionandwhereenvironmentalmanagementpracticeswill,therefore,bemostrelevant.ThesurveyfollowsasimilarstructuretothegreenmoduleinthemostrecentWorldBankEnterpriseSurveysintheEuropeandCentralAsiaRegion.EnablingEconomicPolicies&Institutions55FIGURE49FIGURE50GoodSignsonthePrevalenceofSomeGreenPracticesinIndonesiaIndonesianFirmsPerformWellRelativetoFirmsinSelectedECACountriesTariffequivalentsofselectedNTMs(%)GreenPractice(zscore)AnencouragingsignonfirmreadinessinIndonesiaistheprevalenceofgreenpracticesinmanufacturingindustries68thathavehighcarbonemis-sions(Figure49).IndonesianfirmsperformrelativelywellcomparedtofirmssurveyedinEasternEuropeandCentralAsia(wheretheWorldBankhasre-centlydeployedanequivalentsurveyinstrument,seefootnote67)(Figure50).Approximately40percentofIndonesianfirmsreportedhavingagreenstrategy,58percentoffirmsreportedhavingdedicatedenergyteamsorper-sonnel,and,whileabout37percentofsurveyedfirmsindicatedthattheymonitoremissionsfromenergyuse,only15percentsetenergyandemissionstargets.Foreign-owned,andlargefirmstendtohavehighergreenpracticescores(Figure51).PresenceofGreenStrategyPresenceofEnergyTeam/Per-sonnelPresenceofEmissionMonitoringPresenceofEmissionTargetBulgaria36%19%7%13%CzechRepublic39%38%17%7%Hungary43%30%13%10%Indonesia39%58%37%15%Kazakhstan22%17%11%7%Poland25%21%8%7%Romania24%21%12%9%RussianFederation23%13%6%4%FIGURE51FIGURE52ForeignandLargeFirmshaveHigherGreenPracticeScoresinIndonesiaElectricityandEnergyUseareWeaklyAssociatedwithGreenPracticesRelationbetweenfirmcharacteristicsandz-scoregreenpracticeElectricityandenergyusevs.greenpracticeSources:CCDRfirmsurveyandECAEnterpriseSurvey,WBGstaffestimates.68Includedfirmsarethosethatmanufacturechemicalsandchemicalproducts,othernon-me-tallicmineralproducts,rubberandplasticprod-ucts,paperandpaperproducts,textiles,andothermanufactures.ECA:EasternEuropeandCentralAsiaINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT56Someindustriesthatmakeupimportantsharesofenergyandelectricityuseinmanufacturinghavepotentialtoimprovegreenpractices.Chemicalsandchemicalproductsfirms,whichaccountforalargeshareofmanufac-turingelectricityandenergyuse,scorewellongreenpractices(Figure52).Non-metallicmineralproductsandtextilesperformlesswell.Unsurprisingly,governmentregulationsdriveadoptionofmanygreenpractices.Approximately60percentofsurveyedfirmsarerequiredtocomplywithEnvironmentalImpactAssessment(AnalisisMengenaiDampakLingkungan:AMDAL)environmentalregulations.Controllingforindustryandlocation,firmscoveredbyAMDALreg-ulatoryrequirementshavehigherenvironmentalpracticescores.Aboutone-halfoftherespondentsreportedinvestinginenergyefficiencymeasures–thosethatdidnotinvestdidnotconsideritapriorityorwereconstrainedbylackofinformationorfinancing.Approximatelyone-halfofthosethatdidinvestreportedincreaseduseofenergy-efficientmanufacturingequipmentandlightingandone-quarterreportedinvestmentinenergy-efficientequipment.Atthesametime,however,about58percentoffirmsreportedthatenergyefficiencyisnottheirpriority(Figure53).Otherimportantreasonsfornotadoptingenergy-efficiencypracticesincludelackofinformationonener-gy-efficienttechnologiesandlackofaccesstofinance.Theaccesstofinancechallengeisconsistentwiththeabovediscussiononfinanceasanenablerofthegreentransition–itisnotjusttheavailabilityoffinance,butalsoitscostanditstenor.Theestimatedpaybackperiodforenergyinvestmentsisthreeyearsformediumfirmsandfiveyearsforlargefirms,butmostcreditoptionsavailableinthemarkethaveshortermaturity(Figure54).FIGURE53FIGURE54ReasonsforFirms(Lackof)AdoptionofEnergyEfficiencyMeasuresPaybackPeriodsforEnergyEfficiencyMeasuresReasonsfornotadoptingenergyefficiencymeasures(shareofrespondents)Paybackperiod(inyears)Sources:CCDRfirmsurveyandECAEnterpriseSurvey,WBGstaffestimates.50%ofrespondentsreportedinvestmentsinenergyefficiencymeasuresSomeindustriesthatmakeupimportantsharesofenergyandelectricityuseinmanufacturinghavepotentialtoimprovegreenpractices”“EnablingEconomicPolicies&Institutions57IndustrialestatesandSpecialEconomicZones(SEZ)remaincarboninten-sive,however,Eco-IndustrialParks(EIPs)mayimprovetheclimatefootprintofmanufacturingfirms.SEZsaregearedtoexportfirms,whereasindustrialestatesincludedomesticfirms.Bothareequippedwithsupportingfacilitiesandinfrastructuretoencouragebenefitsfromagglomeration.ThenumberofindustrialparksinIndonesiaincreasedfrom45to122between1999and2021.IndustrialestatesandSEZsare,however,carbon-intensive‒accountingforapproximately20percentofIndonesia’sGHGemissions.Indonesiaisdevel-opingEIPs(GEIPP2022)toimprovetheclimatefootprintoffirms.Suchzonesfocusonsharedinfrastructureandknowledgeforlow-carbonandresource-ef-ficientproduction.69TheseapproachescouldbefurthersupportedthroughdevelopmentofanEIPstrategywithenvironmentalperformanceindicatorsandtargets,andashiftawayfromSoEutilitiesandoperatorswithinsufficientcapitalforinvestmentsinlow-carbonenergysupplies.Thesupplyanddemandforgreenskills70issmallbutlikelytogrow.Indone-sia’seconomyhasasmallshare‒sixpercent‒offirmsproducinggreenoutputs.FivepercentofonlinejobadvertisementssurveyedfortheCCDRrequiredatleastonegreenskill.71Ofthose,theskillsmostin-demandarethoserelatedtocleanenergy(9percent),naturalresourceconservation(8percent),GHGreductionsandpollutionreduction(6percent),andrecyclingandreuseofwastematerials(4percent).Notallgreen-relatedjobsinIndonesiahavehighskillrequirements,(Figure55),yettrendsinhigh-incomecountriessuggestthatthedemandforadvancedgreenskillswillgrow‒requiringacommensurateshiftintrainingandeducation.72Overall,Indonesiacanexpecttoseebothchangesinthenumberofnewgreenjobsandchangestothenatureofexistingjobs.Asdemandgrows,benefitswillaccruetothosewhocanaccessgreenjobs.Jobswithhighgreentaskintensitypay18percentmorethanjobswithoutanygreentasks.Thedifferencegraduallyshrinksforjobsthatarerelativelylessgreen,butevenjobswithlowlevelsofgreennessinIndonesiastillpayaboutthreepercentmorethanjobswithnogreentasks.73Accesstogreenjobsisnotyetequalaswomenarelesslikelytoholdagreenjob(Figure60),poten-tiallybecausegreenjobstendtodemandscience,technology,engineering,andmathematicsqualificationsthatwomenarelesslikelytopursue.ThiscompoundsexistinginequalitiesinIndonesia’slaborforcewhichhasa28-per-centagepointdifferencebetweenlaborforceparticipationratesformenandwomen(agapclosetotheglobalaverageof25percentagepoints)(ILO2022).69Forexample:solarphotovoltaicplant,wasteheatrecoveryattheon-sitepowerplant,solidwastemanagementin-cludingsegregationandrecycling,smartwatermeteringanddistribu-tion,andGHGemissionaccountingsystems.70TheCCDRconsidersgreenjobsandskillstobethosethatreduceafirm’simpactorcontrib-utetoenvironmentallyfriendlyoutputs.71WorldBankanaly-sisof140,000Indone-sianjobadvertisementsretrievedin2020frommorethan200onlinesources.72IntheU.S.60percentoftotalgreenemploymentbelongedtohighlyskilledoccupa-tionsin2006-14.73WorldBankstaffanalysisusingawageregressioncontrollingforgender,educationlevel,broadoccupationalgroups)(IndonesianStandardClassificationofPosition(KlasifikasiBakuJabatanIndone-sia)),andprovinceofresidence.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT58FIGURE55GreenTasksbyOccupationCategoryIntensityofgreentasks(contributingtodefinedgreenoutputs)byoccupationcategorySource:WBGstaffanalysisusingLaborForceSurvey(Sakernas)2017data.Note:High,medium,low,and“no”categoriesaredefinedasthe1st,2nd,3rd,and4thquartilesrespectivelyfortheproportionofgreentasks(thatis,activitiesproducingdefinedgreenoutputssuchasensuringcompliancewithenvironmentalregulations,fireprevention),andgreenskills.GTI=GreenTaskIndex.Accesstogreenjobsisnotyetequalaswomenarelesslikelytoholdagreenjob”“FIGURE56WomenareUnder-representedinGreenJobsShareofwomeninnon-agriculturalgreenandnon-greenjobsNote:GTI=GreenTaskIndex.EconomicImpactsofClimateActions59594ECONOMICIMPACTSOFCLIMATEACTIONSPAGE59—74SURAKARTACITY•SOLOINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT60THEIMPACTS&SIDE-EFFECTSOFCLIMATEACTIONS4.1TheCCDRexploresthepossibleeconomicandsocialimpactsofclimateactions.Itlooksathowenergy,land,andfiscalpoliciesdis-cussedinChapter2and3couldimpactemissionsandtheeconomy.Theimpactsofpolicyreformsaredifficulttopredictbecausetheypartiallydependonfactorsliketechnologicalchangeandglobalcir-cumstances.Themodelingresultsbelowdonot,therefore,prioritizeaparticularoutcomeaboveallotherpossibilities.Theintentionistohelpthinkthroughpossibleinteractionsbetweenpoliciesandeconomicoutcomes.Itfocusesontheimplicationsofmitigationgivenitschallengerelativetoadaptation.TheestimatedcostsofclimatechangearediscussedinBox3attheendofChap-ter4.Potentialadaptationcostsforthebudgetareanalyzedinthediscussiononcontingentliabilities.ToanalyzebroadercoststotheeconomywillrequiredevelopmentofdamagefunctionsthatcanbebroughtintotheCGEmodelingbelow;thiscouldbedoneseparatelyasafollow-uptotheCCDR.Theeconomicandsocialimpactsofclimateactionsaremodelledinanin-tegratedthree-stagemodellingexercise(Figure57).Instageone,separatelandandenergymodelsareusedtoassesstheimpactsofsector-specificpoli-cies.Instagetwo,thelandandenergymodellingresultsarebroughtintoaCGEmodelandcomplementedwithfiscalpolicies(eliminationoffossilfuelsubsidies,carbontaxes)toestimateeconomy-wideimpacts.Instagethree,theoutputsoftheintegratedCGEmodelarefurtherassessedusingmicroeconomicandtradesimulationmodelstoassesshouseholdandtradeimpactsofclimateactions.Themodellingscenariosarebasedonincrementalclimateactions;theystartwithactionsthatenableIndonesiatointernalizebenefitsthroughtomoreambitiousonesthatcouldbenefitothercountries.ClarifyinghowmuchIndonesiacaninternalizethebenefitsofitsclimateactionsisimportanttounderstandingwhatthecountryshoulddoonitsownandwhatitmightdoifinternationalsupportisforthcoming.Themacro-CGEmodellingexercise,therefore,looksatthreelevelsofclimateactionsforIndonesia:(i)actionstoremedydomesticpolicydistortionsthatcreatedeadweightloss(forexample,untargetedfossilfuelsubsidies)and,thereby,workagainstthenationaleco-nomicinterest;(ii)actionsthatreduceemissionstoaddresslocal(withinIndo-nesia)externalities(forexample,reducedpollutionfromfiresassociatedwithdeforestation),whichgoagainstIndonesia’snationalwelfare;and(iii)actionsthatreduceemissionstoremedyglobalexternalitiesandwould,therefore,requireexternalfinancialandtechnologicalsupport.74Insummary,theproposedclimateactionscouldhelpreduceemissionswhilealsogeneratinggrowthandpovertyreductiongains.Theeconomicimpact,however,dependsonwhethersavingsarechanneledtotransfers(resultinginslowergrowthbutlowerpovertythanbusinessasusual,BAU)ortoinvest-ments(highergrowthbutweakerwelfareoutcomes);thelatterisillustrative,asIndonesiaisrequiredbylawtoprovidesubsidiestoprotectthepoorfrom74Forexample,mitigat-ingthenegativeimpactsofairpollutionwouldimprovehealthoutcomeslocally,soitisinIndo-nesia’sbestinteresttoactonthis,regardlessofexternalsupport.Conversely,increasing(thescopeandthespeedof)emissioncutsyieldbenefitsnotonlyforIndo-nesiabutalsofortherestoftheworld,soexternalsupportinthisareamaybewarranted.EconomicImpactsofClimateActions61FIGURE57OverviewofModelledScenariosGreenRUPTLin2020-30(BAU)CURRENTPOLICYSETTINGSDISTRIBUTIONALIMPACTSTRADEIMPACTSEliminatefuelandelectricitysubsidiesNoadditionalenergypoliciesNoadditionallandpoliciesNDCby2030scenarioCarbontax→$US40/tCO2eqby2040EnergyPolicies→decarbonizationLandpolicies→Selectionofabove(NDCconsistent)NDC+Carbontax→$US200/tCO2eqby2040EnergyPolicies→decarbonizationLandpolicies→allofabovecombinedForeignInvestmentCurrentlandpoliciesandrestorationextent(BAU)Peatlandrestoration(3millionha)ExtendedforestandpeatlandmoratoriumsLand-basedemissionstaxwithredistribution($US5/tCO2eq)CombinationofabovelandinterventionsIntermediatedecarbonizationscenario(IDS)(GreenRUPTLin2020-30andeconomicleast-costexpansionin2030-40)Accelerateddecarbonizationscenario(ADS)(acaponemissionsisusedtodrivean80%powersectoremissionsreduction)EnergyPolicies123LandPoliciesEconomy-wideScenariosFurtherImplicationsNote:RUPTL:RencanaUsahaPenyediaanTenagaListrik(BusinessPlanforElectricityProvision).risingenergyprices.ActionsthatonlyremedyinefficientenergysubsidiesdonotsignificantlyreduceGHGemissions.Combiningsubsidyreformswithlandandenergyreforms,togetherwithacarbontax,phasedingradually(US$40pertonneofCO2eqby2040),couldhelpachievetheNDCtargetsandaddanaverageof0.7percentagepointstoGDPoverthelongterm.Amoreambitiouscarbontax(US$200pertonofCO2eqby2040,alsophasedingradually)wouldoverthelongtermseeareductioningrowthbelowthebaselineunlessthereisexternalfinancing‒whichcouldadd0.8percentagepointstoGDPonaverageoverthelongterm.Thesecarbontaxscenariosareillustrative–theyarenotrecommendations.Incrementalinvestmentcostscouldrangefrom0.4percentto1.6percentofGDPperyear.Povertyisexpectedtodeclineinthemodelledscenarios.Themodelinganalysisisbasedonspecificassumptions‒whichsuggestscautionininterpretingtheresults.TheanalysisinthepowersectorfocusesongenerationconnectedtotheelectricitygridmanagedbyPLN.In2020,INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT62thisrepresented64GWofatotalinstalledcapacityof70GW.Asaresult,themodellingdoesnotcover,forexample,coal-generationincaptivepowerplantsorinoff-gridsystems.Secondly,theCGEmodelassumesthatmarketsworkefficiently75andthattheeconomyalwaysoperatesatfullcapacity.Inreality,therearemanyfrictionsthatpreventmarketsfromclearing.Thirdly,themodelassumesthatagentsknowofalltechnologicaloptionsandthatthereisaninstantadjustment,however,ittakestimetoadoptnewtechnologies,sooutcomesmaytakelongerthanpredicted.Fourthly,themodelassumesfixedmoneysupply,soadditionalinvestmentinlow-carbonequipmentwilleithercrowdoutotherinvestmentorrequirehighersavingsandreducedconsump-tion.Fifthly,thecarbontaxassumptionsareonlyusedtoillustratetherangeofpossibleeconomicoutcomes,theyarenotrecommendationsforthecarbontaxrateinIndonesia.Finally,therearepoliticaleconomyfactorsthatmayimpedeprogressonreforms.Thesearenotpossibletomodel.75AlthoughtheCGEdoesassumelabormarketfrictions.76Suchaninstrumentwouldberelativelynovel.Oneapproachwouldbetoapplyadownstreamtaxonselectcommoditiesproducedondesignatedhigh-carbonlandscapesviaadjustmentstotheexistingfiscalinstrumentsusedintheagriculturalsector(suchasthepalmoillevy).Whilesomeimplemen-tationchallengesremain,Indonesia’sagriculturaltraceabilitysystemscanincreasinglydistinguishcommodityunitsbyproductionlocationormethod.Morebroadly,fiscalpoliciesonlandusecouldincludepaymentsforecosystemsservices(anincentiveratherthanadisin-centive)andresults-basedpaymentsatthelandholderlevel.MITIGATIONPATHWAYSFORFOREST-&LAND-BASEDEMISSIONS4.2Reductionsinforest-andland-basedemissionsarekeytoachiev-ingIndonesia’sNDC.Policyleversthatareorcouldbepursuedbygovernmentinclude:(i)strengthenedlimitsonforestconversion;(ii)restorationofpeatlandsandforests;and(iii)acarbontaxappliedtoland-basedemissions.Thefirsttwoleversareextensionsofexistingpoliciesandarealignedwiththegovernment’sapproach,notablytheFOLUNetSink2030plan(MoEF2022a).Therestorationscenarioassumesrestorationof3millionhectaresofdegradedpeatlands‒slightlyhigherthanthegovernment’stargetof2.7millionhectares(by2030).Restorationof1.3millionhectaresofpeatlandshasalreadybeenundertaken.Second,astrengthenedpeatandmangroveforestmoratoriumscenarioassumesincreasedprotectionson1.4millionhectaresofat-riskpeatlandsand0.5millionhectaresofat-riskman-grovesinsidetheexistingmoratoriumareaandgeographicextensionofthemoratoriumto1.0millionhectaresofat-riskpeatlandsoutsidethemoratoriumarea.Inthethirdscenario,aland-basedemissionstaxismodelled,althoughitisimportanttonotethatIndonesiahasnotimplementedsuchataxandtheCCDRdoesnottakeapositiononsuchaninstrument.Thishypotheticalscenar-iowouldentailaUS$5pertonnechargeonhigh-emissionsagriculturalactivity(includingforestconversion)toprovideadisincentiveonthedevelopmentofthemostcarbon-richforestorplantationconcessions.76Whilenotbasedonanexistingpolicy,itisincludedtoexplorepotentialcomplementaritiesbetweenfiscal-andmoratorium-basedoptions.Land-basedmeasuresdrivesubstantialemissionsreductionsandhaverela-tivelysmallimpactsonGDP.By2030,emissionsreductionsof521,453,and69MtCO2eqperyearareexpectedtoberealizedfromrestoration,strengthenedmoratoriums,andtheland-basedemissionstaxrespectively.Thecombined1.3MILhectaresofpeatlandrestorationhasalreadybeenundertakenEconomicImpactsofClimateActions63scenario(allthreepolicies)isestimatedtoreduceemissionsby987MtCO2eqby203077whichissufficienttomeetthegovernment’sFOLUNetSink2030objectiveandexceeditsNDCcommitmentsregardingland-basedemissions.Inaggregate,thispackageofcomplementaryforestryandlandusepoliciesispositiveintermsofGDP.Between2018-30,GDPisprojectedtoincreaseundertherestorationscenariobecauseoftheinvestmentrequired.78GDPisreducedunderthestrengthenedmoratoriumsandunderthehypotheticallandemissionstax.ThisresultsinanetgainofUS$16.19billionoverthe12-yearperiod.Thedistributionalimpactofthepackageofactivitiesisprojectedtofavorlow-incomehouseholds(thebottomquintile)‒withanincomeriseof4.6percent(relativetoBAU),duetoassumedredistributionofthelandemissionstaxproceedsandpositiveeconomicimpactsofrestorationactivities.Strength-enedmoratoriumsaloneareprojectedtohavelimitedimpactsonhouseholdincomesofthisgroup(0to-0.8percent).ForestryandLandUse-basedmeasureshaveconsiderableadditionalbenefitsintermsofreducedhealthimpactsandlossesduetofires.Firesstartedduringclearingprocessesriskcausingdamagetocropsandtimber,whileharmfulpar-ticulatematteremissionsfromfiresreducelaborproductivityandcauseillnessandfatalities.AvoidedlossesfromtheseimpactsisestimatedatUS$65.04billionbetween2018-30forthecombinedpolicyscenario,includingUS$34.90billioninavoidedhealthimpactsandUS$5.47billioninavoidedfiredamagestocropsandtimber.ThestrengthenedmoratoriumsalonereducehealthimpactsbyUS$22.38billion,alongwithafurtherUS$3.02billioninavoidedphysicalfiredamagesover12years.Thesecontributetosignificantnetbenefitsfromlandinterventionsindependentofcarbonemissionsreductions(Figure58).77Modeloutcomesarenotpurelycumulativeduetogeneralequilib-riumeffectswithinthemodel.Changestofactorpricesandquantitiesfromonepolicyinfluencetheeffectsofotherpolicies.78Allcumulativevaluesarecalculatedatafivepercentdiscountrate.EstimatesarebasedonWorldBankstaffanalysisusinganintegratedeconomicandbiophysicalCGEmodel(seeFigure58notes).INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT64Source:WorldBankstaffanalysisusinganintegratedeconomicandbiophysicalCGEmodel.Notes:Economicvaluesarecumulative(2018-30),discountedat5percent.Costsofhealthimpacts(prematuremortality,lostworkingdays)arisefromestimatedparticulatematteremissions.Forestlossesarethepresentvalue(post2030)oflossesintimber.GHGemissionsincludepeatoxidation,peatfires,andemissionsfrommineralsoils.Impactsonbiodiversityandwatershedprotectionarenotmodelled.AUS$5.00/tonnecarbonpriceisaconservativeassumption;internationalcarbonmarketsmayofferhigherpricesinfuture.FIGURE58PoliciestoReduceLand-basedEmissionshaveSignificantEconomicCo-benefitsMITIGATIONPATHWAYSFORTHEENERGYSECTOR4.3TransitionpathwaysforIndonesia’scoal-dominatedelectricitygridwillbecrucialfordecarbonization.Toinformthediscussiononcleanenergytransitionpathways,anexploratorydecarbonizationanaly-siswasperformedfortheCCDR.Asmentionedabove,theanalysisfocusedonPLN’ssystemwhichcovers64GWoutofaninstalledgenerationcapacityof70GWin2020.Theanalysisreviewedthecostsofdifferentdecarbonizationscenariosineconomicterms.77Threescenariosareconsidered(Figure59and60).First,aBAUscenariothat:(i)followsthecapacityexpansionplanintheGreenRUPTLinthe2020-30period;and(ii)maintainsthelevelofpeakcoalreachedin2030inthe2030-40periodwhileallowingrenewableenergyandgastomeettheincreaseindemand.Second,anintermediatedecarbonizationscenario(IDS)that:(i)followsthecapacityexpansionplanintheGreenRUPTLinthe2020-30period;and(ii)adoptsaneconomicleast-costexpansionplaninthe2030-40period.Third,anadvanceddecarbonizationscenario(ADS)thatadoptsanexpansionplantoachieveanearly80percentemissionreductioncomparedtotheBAUscenarioby2040.TheADSisconsistentwithIndonesia’sambitionstoachievenetzeroemissionsbefore2060,withcoalgenerationandcapacityfallingwellbefore2030andrenewablegenerationcapacityincreasingstronglyinthefollowingdecade(Figure61andFigure62).8079TheanalysisdoesnotconsiderfinancialcoststoPLNandMoFfromearlyretirementofcoalplants.80Themodel-ingdidnotincludecarboncaptureandotheremission-removaltechnologiesthatwouldbeexpectedtohavearoleinachievingnetzeroemissionsinthepowersector.Initsplace,agenericbackstoptechnologywasmodelledbyconsideringavalueofUS$300.00/tonCO2eq.EconomicImpactsofClimateActions65FIGURE59FIGURE61FIGURE62TABLE2FIGURE60AcceleratedDecarbonizationisConsistentwithNetZeroEmissionsBefore2060PresentValue(PV)ofTotalSystemCostsunderDifferentScenarios(2022-40)RenewableGenerationCapacityIncreasesStronglyafter2030FossilFuelsRemainintheGenerationMixbutatGreatlyReducedLevelsthrough2040ThisWouldRequire50percentHigherInvestmentComparedtoBAUSource:WBGstaffanalysisbasedonpowersectormodeling.HistoricalelectricitygenerationandcapacitydatabasedonEIAStatistics.ITEMBUSINESSASUSUAL(BAU)INTERMEDIATEDECARBONIZATION(IDS)ADVANCEDDECARBONIZATION(ADS)Capitalcosts(generation)(US$bil.)8091121Fuelcosts(US$bil.)120107106VariableOperatingandMaintenance(O&M)costs(US$bil.)16109FixedO&Mcosts(US$bil.)363239Capitalcosts(network)(US$bil.)242736Totalsystemcosts(US$bil.)276267311Levelizedcostofelectricity(average2022-40)(US$/MWh)5.75.66.3CumulativeGHGemissions(millionsoftonnes)4,5593,0372,351Localenvironmentdamagecosts(US$bil.)412920Globalenvironment(GHG)damagecosts(US$bil.)1249071Source:WBGstaffanalysisbasedonpowersectormodeling.Notes:Presentvaluescalculatedat6percentdiscountrate.Valuesincolumnsaretotals,notincrementalaboveBAU.GlobalandlocalenvironmentalcostscalculatedusingWorldBankstandardvaluesforGHGemissions(lowerbound)andlocalpollutants(SOx,NOxandPM2.5).HistoricalandForecastElectricityGenerationCapacity(GW)1990-2040(ADSScenario)HistoricalandForecastElectricityGeneration(TwH)1990-2040(ADSScenario)2022EMISSIONS=190MtCO2eqNote:BAU:Businessasusual;IDS:Intermediatedecarbon-izationscenario;ADS:advanceddecarbonizationscenarioINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT66ThemodellinganalysissuggeststhatitwillbeeconomicallyadvantageousforIndonesiatoexitfrom4GWoutof13.8GWofpipelinecoalplantsthathavenotstartedconstructionorareatearlystagesofdevelopment.Giventheexcesscapacityinthesystem,theseplantswillnotbeneededtomeetelectricitydemand.TheirPPAswillbefinanciallyonerousonPLNanddeterthedevelopmentofrenewableenergy.Inaddition,itwillalsobeimportantforIndonesiatopursueitsplansforearlyretirementofcoalplantstobenefitfromlow-costrenewableenergygeneration.AcceleratingthedecarbonizationofthepowersectorislikelytorequiresignificantinvestmentforIndonesia.Theinvestmentrequirementsofthepowersectorareexpectedtobeatleast50percenthigherunderADS(US$157billionindiscountedterms)thanBAU(US$104billionindiscountedterms)(Figure60).Atthesametime,thelevelizedcostofelectricityinADSwillbe11percenthigherthanunderBAU(Table2).Thedomesticandinternationalprivatesectorcanplayaleadingroleininvestments.Anestimatedtwo-thirdsofcapitalinvestments,aboutUS$200-220billion(undiscountedterms)between2022and2040,canbemobilizedfromtheprivatesector,drivensubstantiallybyrenewableenergyprojects(214GWby2040underADS).Thisestimateisbasedonthemixofenergytypespredictedbythemodel.Additionalopportunitiesexistfortheprivatesectortoparticipateinthecleanenergytransitioninthemediumterm,including:(i)greenbondsissuedbysectorutilities(SoEs);(ii)equitizationandrecyclingofexistingsectorassets;(iii)selectedtransmissionanddistributioninvestments(forinstance,linesconnectingprivatepowerplantstothegridnetwork);and(iv)theenergy-efficiencymarket.Indonesiacanalsodevelopitsexpertiseinthecleanenergysupplychain(solarpanels,windturbines,batteries)toenhanceprospectsforexportingsuchequipmentandservices.Publicsectorsupportcancreateanenablingenvironmenttoleveragepri-vateinvestmentsinlow-carbonpowerinfrastructure.Continuedpublicinvest-mentsupport,estimatedtobeaboutUS$100-120billion(undiscountedterms)between2022and2040,cande-riskpowersectorprojects(forexample,byalleviatinggridbottlenecksandbuildinginter-islandconnections,enhancingsystemflexibility),supportearlyretirementofcoalplants,helpmanagethepovertyandsocialimpactsoftheenergytransitionandprovidemarket-basedguaranteestounlockgreenfinance.Asignificantshareofthesepublicre-sourceswillhavetobeonconcessionaltermstosupporttheearlyretirementofcoalplants,improvethefinancialviabilityofPLN,andensureaffordabilityofelectricityforconsumers.US$200BIL.between2022and2040,canbemobilizedfromtheprivatesector,drivensubstantiallybyrenewableenergyprojectsEconomicImpactsofClimateActions67ECONOMY-WIDEIMPLICATIONSOFMITIGATIONPATHWAYS4.4Thecombinedeffectsofland,energy,andfiscalpoliciesareanalyzedinthreescenarioswithincrementallevelsofambitiontoassesscostsandbenefitsofdecarbonizationovertime.ThisisdoneusingaCGEmodelthatprovidesaneconomy-wideanalysisoflong-termemissionsandeconomicgrowth.ThebaselineprojectionisaBAUcaseinwhichcurrentclimatepoliciesaremaintainedwithnonewadditionalpolicies;theimpactsofthethreescenariosarepresentedaspercentagepointsofGDPdiffer-encecomparedtoBAU(attheequivalentpointintime).Thethreescenariosare:AsdiscussedinChapter2and3,theretargetingofremainingscenariosisexpectedtobeanetgainforIndonesia.Noadditionallandorenergypoliciesareassumedinthisscenario.Twosensitivityanalysesareconductedonuseofsavingsfromtheeliminationofsubsidies:first,transferstocompensatethebottom40percentofthepopulation;and,second,notransfersbutinvestmentinstead.ThelatterisonlyillustrativeasIndonesiaisrequiredbylawtoprovidesubsidiestoprotectthepoorfromrisingenergyprices.Thisincludesredirectionofsubsidies,newlandandenergypolicies(asperabovesector-basedmodelling),andacarbontaxthatreachesUS$40.00/tCO2eqby2040.Thecarbontaxisappliedtoallsectorsandgreenhousegasemissionsexceptforagriculture.Thereductionofemissionsunderthissce-narioshouldenableIndonesiatointernalizebenefitsbyloweringfireandfloodhazardsthatimposeeconomiccosts.Revenuesfromthecarbontaxareusedforinvestment‒includinginlow-carbonequipment.Itisassumedthatreplacingstrandedfossilfuelassetsaccountsfor25percentofthenewinvestment.ThisincludesalltheactionsfromtheNDCscenario,butalsoincludesamuchhighercarbontaxrate,reachingUS$200/tCO2by2040.ThiscouldreduceemissionstwiceasquicklyasintheNDCscenario.ThisisamoreambitiousscenariothatwouldinvolvehighernetcostsforIndonesiawhilealsoreducingglobalexternalities.Tohelpcompensateforthecostsandpositiveexternali-ties,asensitivityanalysisisaddedtothisscenariowithanincreaseinforeigninvestmentthatisequivalentto1percentofGDPinIndonesiathroughouttheprojectionperiod.811Redirectionofelectricity&fuelsubsidies2NationallyDeterminedContribution(NDC)3NationallyDeterminedContributionPlus(NDC+)81TheLCCRtargetistoreach540MtCO2eqtotalemissionsby2050(LTS-LCCR2050).TheCCDR’sNDC+scenarioislessambitious.UndertheNDC+scenariotrends,Indonesiacouldreach540MtCO2eqby2060.Thisis,however,justanillustrativescenario,notaprediction.Muchwilldependontechnologicalprogress,reforms,andinvestments.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT68ThemodelingresultsshowthattheimpactofclimateactionsonGHGemis-sionsreductionwillbedriveninlargepartbyland-relatedpolicies.SCENARIO1(redirectionofenergysubsidies)isexpectedtoreduceemissionsby3-4per-cent,buttheeffectsarelimitedonceredirectioniscompleted(Figure63).Thelandusepoliciesandcarbonpricesareprojectedtohaveamoresubstantialimpact,withcontinuedemissionsreductionasthecarbonpricesareincreased.By2030,GHGemissionsunderSCENARIO2(NDC)couldbelowerby27percentcomparedtoBAU;thisreductionwouldhelpmeetIndonesia’sconditionalNDCtarget.UnderSCENARIO3(NDC+),GHGemissionsare47percentbelowBAUby2030and63percentbelowBAUby2040.Beyondland,thepowersector,whichhasthetechnologiesavailabletoreduceemissionstonear-zerolevels,showsthebiggestreductionsinallscenarios.Therearealsosubstantialemis-sionreductionsfrommanufacturingandtransport.Thenetimpactofclimateactionsonlong-termGDPdepends,inpart,onhowincreasedcarbontaxreceiptsandreducedsubsidiesarerecycled.Inallscenarios,ifsavingsfromlowersubsidiesarerecycledthroughtransfers,thenGDPcouldbeslightlylowerthanintheBAUduringinitialyears.Ontheotherhand,iftheyarechanneledtoinvestment,therecouldbeasmallinitialreductionfollowedbyanincreaseinGDPthatissustainedthroughoutthepro-jectionperiod.InSCENARIO1(redirectionofenergysubsidies),thedifferenceinoutputcomparedtoBAUisprojectedtobepositive(Figure64).Thisreflectstheremovalofthedistortionaryeffectsofthesubsidies,andpossiblyadditionalindirectairqualityeffects.SCENARIO2(NDC)hasastrongerpositiveimpactonGDP(assumingcarbontaxreceiptsarechanneledtoinvestmentratherthantransfers),peakingat1.5percentagepointsofGDPaboveBAUintheearly2030s.Thisresultisdrivenbytheremovalofeconomicdistortionsfromenergysubsidies,higherinvestmentsfinancedoutofcarbontaxreceipts,anincreaseinagriculturalproductivity,andenhancedlaborproductivitythroughimprovedairquality.Theairqualityeffectgrowsinlinewiththephase-outofcoal.InthemoreambitiousScenario3(NDC+),theavailabilityofexternalfinanc-ingcouldplayanimportantroleindeterminingthelong-termeconomicgrowthpath.SCENARIO3isprojectedtohaveapositiveimpactonGDPupto2035whichishigherthantheNDCbenefitsinthemid-2020s.Beyond2035,thedistortionaryeffectsofthecarbontax,whichismuchlargerthaninSCE-NARIO2,outweighsthesepositiveeffects.Ahighercarbontaxcouldreducetheuseoffossilfuelsmorequickly(therebyreducinggrowth)thantheeconomycanoffsetthroughadoptionofnewtechnologies(whichwouldotherwiseaccelerategrowth).Itcouldalsodisincentivizeinvestmentduetohighercostfromcarbontaxontheonehandanddomesticfinancingconstraintsontheother.Theseconstraintscouldbealleviatedthroughexternalfinancing.Anadditional1percentofGDPfinancingcouldleadtoapositiveimpactonGDP(Figure65).Theprimaryenergysectorwillbenegativelyimpactedbydomesticde-carbonizationandglobalreductionindemandoverthelongterm,despiteshort-termwindfallsduetoRussia'sinvasionofUkraine.Modelresultsshowareductioninoutputforfossilfuelproducersacrossallscenarios.Overallout-putwoulddeclineaswouldemployment(bypotentiallyupto115,000workersby2040outof240,000currentlyemployed).GlobaldemandandcoalpricesEconomicImpactsofClimateActions69areprojectedtodeclinesharply.Althoughcoalproductionandpriceshavereceivedashort-termboostfromtheeffectsofthewar,ithasalsotriggeredenergysecurityconcernsandcommitmentstoacceleratethetransitiontorenewableenergy.Thelong-term(post2030)outlookisforsignificantlossesofcoalexportmarketopportunities,combinedwithdepressedprices.Therewillbegainsandlossesacrosssectors.Sectorsthatarelikelytobemostdirectlyaffectedbycarbonpricingandotheremissionsreductionmeasures(e.g.,energy,power,transport,waste)arelikelytoexperiencethesharpestdropsinoutput(Figure66).Thecoalsectoraccountsforsignificantexportearningsthathavefinancedimportantdevelopmentsintherealsector.Othersectors,whichmakeuplargesharesofGDP(e.g.,construction,finan-cialservices,hospitality,wholesaleandretailtrade)andwheretheimpactoftransitionpoliciesisnotasdirect,areprojectedtoexpandandoffsetlossesinthelongterm.Anytransitionwillbedisruptiveintheshortterm‒evenifbeneficialoverthelongterm;strongpoliticalsupportforacomprehensivedecarbonizationstrategywillbeessentialtopromoteasmoothtransition.Allthreescenarios,however,arewithinIndonesia’sreach.Althoughtheredirectionoffossilfuelsubsidiesischallengedbycurrentenergyprices,itisconsistentwiththelon-ger-termtrendinIndonesia,willgeneratefiscalsavingsfordevelopment,andincentivizemoreefficientresourceuse.TheNDCscenarioisalreadyconsistentwiththeauthorities’landandenergysectorcommitments.TheestimatedinvestmentaboveBAUthatisassumedacrosstheabovescenariosrangefromanaverageof0.4to1.6percentofGDPperyear.Themodelassumesafixedmoneysupplywhichmeansthatadditionalinvestmentinlow-carbonequipmentmustbefinancedeitherbydisplacing(‘crowdingout’)otherinvestmentorthroughincreasedsavingsandreducedconsumption.Thereis,therefore,nopossibilityforthefinancialsectortoplayapositiveroleinthetransitionunderthisassumption.Conversely,potentialissuesrelatingtoalackofaccesstofinancearealsonotcoveredbythemodel.Inallthreescenarios(removalofenergysubsidies,NDC,andNDC+),therefore,itisas-sumedthatinvestmentswillbefinancedoutofdomesticsources,whetherthroughcrowdingoutorincreasedsavings.OnlyinSCENARIO3,wheresensitivityanalysisassumesexternalfinancing,doadditionalinvestmentspeakatjustbelow2percentofGDPinthelate2020s.Table3presentsasummaryofallmacroeconomicresults.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT70FIGURE65FIGURE66ForeignInvestmentscanAlleviateTrade-offsinMoreAmbitiousScenariosThereWillBeGainsandLossesAcrossSectorsInvestments(differencefromBAU,%ofGDP)SectorOutput%differencefromBAUin2040Source:WBGstaffanalysisusingtheMANAGECGEmodel.FIGURE63AchievingDecarbonizationObjectivesTotalGHGEmissions,differencefromBAU(MtCO2eq)FIGURE64WithPotentialPositiveGrowthPayoffsGDPpercentagedifferencefromBAUEconomicImpactsofClimateActions71IMPACTOFCLIMATEACTIONSONHOUSEHOLDS4.5Theeconomy-wideimpactsofclimatemitigationwillaffecthouse-holdsthroughemploymentandwages.82Byredirectingenergysub-sidies,thefirstscenariohasonlyminusculeimpactsonemploymentgrowth,whilethesecondandthirdscenarios(NDCandNDC+)leadtomarginalimpacts‒notexceeding0.7percentagepointsannuallyoverthe2020to2040period.Mostnegativeimpactsarefeltinenergy-inten-sivesectors(Figure67)giventheincreaseofcostsduetothecarbontax,butoverallemploymentinthesesectorsisrelativelylow(below10percentoftotalemployment).Wagegrowthinmostsectorsisnotsubstantiallyaffectedbythescenarios,exceptforlargeincreasesinelectricity,gas,andwatersupplysec-tors,byabout25percentintheNDCand215percentintheNDC+scenariosrelativetotheBAUscenario(by2040).Labordemandforrenewablesandgasincrease,leadingtohigherwagesgivenlaborfrictions(thatis,afunctionoftheskilltransferabilityofworkers).Theimplementationoflandpoliciestogetherwiththeintroductionofacarbontax(NDCandNDC+)progressivelyaffecthouseholdexpenditures‒drivenbyrecyclingofrevenuesintosocialassistance.Whiletheeffectivetaxonenergyincreasesenergypricesacrossscenarios,improvedagriculturalproductivityduetolandpoliciesintheNDCandNDC+scenariosmorethanmitigatestheaggregatepriceimpactthroughlowerfoodandnon-foodprices(whicharemuchlargercomponentsoftheoverallconsumptionbasketthanenergy)(Figure68).HouseholdexpendituresincreaseprogressivelyinabsolutetermsfortheNDCandNDC+scenarios(Figure69).Theprogressivegrowthofhouseholdexpendituresismostlydrivenbyincreasedsocialassistancewhichisgeneratedbyrevenuefromthecarbontax.ExceptintheSCENARIO1,householdexpendituresinruralareasincreasemorethaninurbanareasgiventhehigheragriculturalproductivityoflandduetothelandpoliciesandanincreaseofinvestmentintheagriculturesectorduetoitslowerenergyintensity(Figure71).Whilerevenuerecyclingcanmitigateadverseimpactsonpoverty,specificgroupsmightstillrequiretargetingwithtailoredsupport.Thepovertyrateishardlyaffectedinthesubsidyremovalscenario.PovertyissettodeclineintheNDCandNDC+scenarios(Figure72)‒drivenbysocialassistance.Althoughpovertyisnotworseninginanygeographicarea,specificgroupscanlosefromthereformsandwillneedtargetedasistance.Intheshortterm,however,povertymightbemorestronglyaffectedbypricevolatilityundermininghouseholds’purchasingpower.Afoodpriceshockof30percentcanincreasepovertybysevenpercentagepointswhileasimilarenergypriceshockincreasespovertybyonly1.4percentagepoints.82Distributionalimpactsareassessedusingmicro-economicsimulationsoftheresultsfromtheCGEmacromodel.Anoccupationalchoicemodelre-allocatesworkersbasedontheoutputsoftheCGEmodel.Incomeistransformedintoexpenditurebasedonthemarginalpropensitytoconsume.Consumptionsharesarekeptconstantassumingthathouseholdsdonotadapttheirbehaviorinresponsetochangesinprices.popula-tionparametersareadjustedbasedonUNpopulationgrowthprojections,witheducationlevelsadjustedbasedontheagingoftheyoungestcohorts.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT72FIGURE67FIGURE69FIGURE71FIGURE70FIGURE72FIGURE68ImpactsonEmploymentImpactonHouseholdExpenditureDriversofExpenditureChangeImpactonExpenditurebyWorkerTypeImpactonPovertyImpactonPricesEmploymentRelativetoBAUby2040(percentagepoints)PercentChangeinExpenditurevsBaUby2040ContributionstoExpenditureGrowth,byurban/ruralPercentChangeinExpenditurevs.BaUby2040ChangeinPovertyRatesvs.BaUby2040(percentagepoints)PriceChangevs.BaUby2040(percentagepoints)Source:WorldBankstaffestimatesbasedonaMicrosimula-tionModel.ModelisbasedonSUSENAS2019dataprojectedforwardto2020(toavoidperturbationsbyCOVID-19impacts).MacroeconomicprojectionsarederivedfromCGEresultsabove.EconomicImpactsofClimateActions73IMPACTOFCLIMATEACTIONSONTRADE4.6TABLE3SummaryofMacroeconomicModellingResults202220302040202220302040202220302040202220302040202220302040BAUMinusEnergySubsidiesNDCNDC+NDC+withForeignFundsDeviationfromBAU(Percent)DeviationfromBAU(Percent)DeviationfromBAU(Percent)DeviationfromBAU(Percent)AverageGrowth,%RealGDP5.215.024.66-0.080.030.030.130.05-0.060.22-0.12-0.110.16-0.04-0.12RealGDPpercapita4.134.194.06-0.080.030.030.130.05-0.060.22-0.12-0.110.16-0.04-0.12PerCapitaIncomeandConsumptionRealGDPPerCapita(Constant2020US$)6398931,329-0.080.260.62-0.090.391.04-0.010.12-0.58-0.061.010.47RealHouseholdConsumptionPerCapita(Constant2020USS)345511810-0.63-0.200.21-0.41-0.340.04-0.58-1.56-2.58-0.58-0.17-0.74RealExpenditureSharesinRealGDPPrivateConsump-tion(%ofGDP)54.0257.1860.91-0.30-0.26-0.25-0.17-0.41-0.61-0.31-0.96-1.22-0.28-0.67-0.73GovernmentConsumption(%ofGDP)8.758.758.750.00-0.07-0.130.000.000.000.000.000.000.000.000.00PrivateInvestment(%ofGDP)27.9625.9523.060.300.350.430.110.280.420.200.560.591.161.311.15GovernmentInvestment(%ofGDP)1.091.020.950.000.00-0.010.000.00-0.010.000.000.010.00-0.010.00Netexports(%ofGDP)4.964.964.980.00-0.01-0.030.060.140.210.110.400.61-0.88-0.61-0.41SectoralSharesinGDPAgriculture6.495.975.230.020.00-0.020.020.070.100.030.170.340.020.130.28Industry54.1154.6757.52-0.04-0.030.11-0.10-0.27-0.38-0.12-0.76-2.05-0.01-0.65-1.90Services39.4039.3737.240.020.03-0.090.080.200.280.090.591.71-0.010.521.61ExternalBalanceCurrentAccountBalance(%ofGDP)-5.11-4.77-4.460.000.010.030.000.020.050.000.01-0.031.001.041.02FiscalAggregatesFiscalrevenue(%ofGDP)8.779.149.950.750.740.820.591.602.521.144.045.891.214.166.05Fiscalexpenditure(%ofGDP)13.2715.6219.300.01-0.04-0.120.230.651.050.451.491.830.581.802.26Budgetdeficit(%ofGDP)-5.59-7.52-10.390.740.780.940.360.941.480.682.534.050.622.353.80Publicdebt(%ofGDP)0.000.000.000.000.000.000.000.000.000.000.000.000.000.000.00EmissionsEmissions(mil-lionsoftonsC02)1,8952,4873,538-3.27-3.67-3.47-12.87-30.90-44.63-25.40-65.50-68.86-25.28-64.98-68.28Emissionsperunitofoutput(tonsC02)1608.01410.21260.2-3.20-3.92-4.06-12.79-31.16-45.20-25.40-65.54-68.68-25.24-65.33-68.43TheredirectionofdistortiveelectricityandfuelsubsidieswillresultinefficiencygainsforIndonesiaandbenefitnotonlythedomes-ticeconomybutalsointernationaltrade.Exportsandimportsarefoundtoexpandby1.2percentand1.1percentby2040,respectively(Figure73).Gainsmaterializeoverthelongrun(thatis,after2033),INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT7474followingmutedinitialadjustmentlossesinearlieryears.Exportgainsaremostlyexplainedbytheexpansionofsectoralexportssuchasmanufacturingandextractives,whileontheimportssidetheincreaseinimportsofmanu-facturesandservicesisoutweighedbythedeclineinimportsofminingandenergyproducts.NDCsarefoundtohaveamutedbutnegativeimpactonIndonesia’stradeflows‒withanestimateddeclineof1percentand1.4percentby2040inexportsandimports,respectively.Thecontractionofexportsisdrivenbythedeclineofextractivesexports,whileothersectorsarefoundtoexpand(Figure74).Resultsshowthat,overtime,thenegativeimpactontradeisoutweighedbybenefitsfortheeconomyasawhole‒withaslightU-shapedrecoveryoftradeflowsoverthelongerterm.Whenworldwideclimateactionisconsidered,theimpactonIndonesia’seconomyandtradeismarginal,andexportsmainlydeclineincarbon-intensivesectorswhileothersectorsbenefit.Achievingamuchmoreambitiousnetzeroemissionsgoalisfoundtohaveamorepronouncedimpactontrade‒withadeclineof15.5percentinex-portsand13.9percentinimportsby2040,respectively(Figure73).Inthisscenario,exportsofenergyandextractivesdeclinesignificantlyandarealsoassociatedwithadeclineofmanufacturingexports.Astheadjustmentoftheeconomytothenetzerogoalcontinuesto2050,thedeclineoftradeovertheyearsiscumulativeandmorepronounced.Withtherightpolicies,however,Indonesiamaymitigatesomeofthisnegativeimpact‒forexample,throughpoliciesthatwouldenableaccesstogreentechnologiesfromtheglobalmar-ket‒includingthroughaddressingspecificNTMsandmultilateralagreementsongreengoodswithothercountries(throughtheWorldTradeOrganization).FIGURE73FIGURE74TradeImpactsofNDCsareSlightlyNegativePartlyDrivenbyDecliningManufacturingExportsTradeimpactsrelativetoBAUin2040(%)SectoraldriversoftradegrowthrelativetoBAUin2040(%)Source:WBGstaffestimatesusingtheWorldBank’sEnvironmentalImpactandSustainabilityAppliedGeneralEquilibrium(ENVISAGE)CGEmodel.EconomicImpactsofClimateActions75Indonesiaisrankedinthetop-thirdofcountriesintermsofclimaterisk,withhighexposuretofloodingandextremeheat.Withouteffectivead-aptation,populationexposedtothesehazardswillrise.Forexample,modellingsuggeststhatthepopulationexposedtoanextremeriverfloodcanbeexpectedtogrowby1.4millionby2035–2044intheabsenceofadaptationmeasuresandundermoderateclimatechange.Indonesiaisalsovulnerabletosea-levelrise,withthecountryrankedfifthhighestintheworldtermsofthesizeofthepopulationinhabitinglowerelevationcoastalzones.Withoutadaptation,thetotalpopulationlikelytobeexposedtopermanentfloodingbytheperiod2070–2100couldreachover4.2millionpeople(WBandADB2021).Theimpactsofclimate-relatedshockscanbehighlydisruptivetotheecon-omythroughtheireffectsonfirmsandhouseholds.Forexample,WorldBankmodellingsuggeststhatthecoststofirmsinIndonesiafromvariousinfrastructuredisruptionsin2019couldhavebeenintheorderof2.4per-centofGDP(Hallegatte,etal.2019).Mostofthosecostsareestimatedtohavebeendrivenbylossofsalesfollowedbyreducedutilizationrates(thatis,outputcapacitythatgoesunusedduetotransportandservicesinterruptions)(FigureB.3.1).Projectingforward,theapproximatelossinGDPundermidrangeclimateassumptionsisexpectedbearound1.4per-centofGDPby2030relativetoascenariowithnoclimatechange(FigureB.3.2).Concurrently,theincomeofthebottom40couldfallby2.2percentby2030relativetoascenariowithnoclimatechange(FigureB.3.3).BOX3PotentialImpactsofClimateChange&AdaptationCapabilitiesFIGUREB.3.1FIGUREB.3.2ClimateshocksposerisksthroughinfrastructuredisruptionsWhichcontributetolong-termlossinincomeCostofclimateshocksoninfrastructuredisruptions(%ofGDP,2019)ChangeinGDPwithclimatechangerelativetoascenariowithnoclimatechangeINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT76FIGUREB.3.3FIGUREB.3.4Includingthroughimpactsontheincomeofthebottom40GradualimprovementinreadinesstodealwithclimateshocksChangeinincomeby2030ofthebottom40%withclimatechange(%)ReadinessversuspeercountriesIndonesia’scapacitytoadapttotheseclimateshockshasgraduallystrengthenedasdiscussedinpartB,andfurthermeasureswillhelpbetterabsorbtheabovecosts.AccordingtotheNotreDame-GlobalAdaptationIn-dex(ND-GAIN),Indonesiaisthe87thleastreadycountrytotheimpactsofclimatechange(i.e.,aroundtheglobalmedian).Readiness(i.e.,country’sabilitytoleverageinvestmentsandconvertthemtoadaptationactions)isassessedbyconsideringindicesofeconomicperformance,governance,andsocialsystems.Indonesia’sperformanceonreadinessisimproving,includinggradualcatchupwiththeperformanceofpeers(FigureB.3.4).AnexampleofwhereIndonesiaisimprovingreadinessisinthecapacityoftheSocialProtection(SP)system.TheCCDRundertooka‘StressTest’(Senetal,2022)toassessthecapacityofIndonesia’sSPSystemtorespondtoclimateshocksandfoundthecountrytobeoperatingatamidrangeLevel.Indonesiascored3.26onascaleof1(Nascent)to5(Advanced)infourareas,includingtheeffectivenessofitsProgramsandDeliverySystems(score:3.47);DataandInformation(score:3.08);Financing(score:3.25);andInstitutionsandPartnerships(score:3.25).Thesescoresareinlinewithcountriesofcomparableincome.Whileopportunitiesremainforfur-therimprovement,recentprogresshasincludedexpansionofconditionalcashtransfersandestablishmentofasocialregistryofthepoorest40percent(seeChapter2).Otherareasofadaptationhavealsoimproved,suchasearlywarningsystems(EWS)fornaturalhazards.Sources:FiguresB.3.1-B.3.3areWBGestimates(Hallegatte,etal.2016;2019)Sources:DatafromNotreDameGlobalAdaptationInitiative(2022).StructuralpeersareNigeria,China,India,Ukraine,Thailand,Philippines,Mexico,Egypt,Russia,Brazilwithbenchmarkingchoicesbasedonpopulation,GDPpercapita,andtotalGDP.Source:Hallegatte,etal.2016;2019;NotreDameGlobalAdaptationInitiative(2022);WBandADB2021,“IndonesiaClimateRiskProfile”Climate&DevelopmentPolicyFramework7777775CLIMATE&DEVELOPMENTPOLICYFRAMEWORKPAGE77—99KERENGBANGKIRAI•CENTRALKALIMANTANINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT78THECLIMATE&DEVELOPMENTTO–DOLIST5.1Whataretheimplicationsofalltheaboveforprioritiesgoingforward?Torecap,Indonesiahasdrawnonitsabundantsupplyofnaturalresourceswhileachievingimpressivedevelopmenttransitionsinincome,socialservices,infrastructure,economicgrowth,andpovertyreduction‒particularlyoverthequarter-centuryto2022.YetclimatechangeposesphysicalandeconomicrisksforIndonesia,andsomeaspectsoftheearliergrowthmodelhaveimposedcostsondevelopment.Inresponse,Indonesiahasembarkedonatransitiontowardlow-carbonandclimate-resilientgrowththat“balancesbetweenemis-sionreductionsandeconomicdevelopment”(RepublicofIndonesia2021).Addressingmitigationandresilienceneedswillentailnotjustsectorpoliciesbutalsoenablersthatareimportantforlong-termgrowth.Reformsforacli-matetransitionwill,therefore,involvefourtypesofmeasures:(i)supply-side;(ii)demand-side;(iii)adaptation;and(iv)enablingpoliciesandinstitutions.Allfourworktogether,withthetransitionexpectedtobemoreefficientwhensimultaneousprogressismadeineacharea.TheCCDRdrawsonthegovernment’sstrategicdocumentsaswellasitsownanalysistoproposeapolicyframeworkthatbalancesclimateanddevelopment(Figure75).Policiesaimtobalancechangesinthesupplyofcarbon-intensiveinputswithadjustmentstodemandforthoseinputs.Theyfurtheraimtocreatetheenablingconditionsthatwillfacilitateareallocationofresourcesfromcarbon-intensivetogreenerpartsoftheeconomy,andfromlow-productivitytohigh-productivityareasoftheeconomy,whileraisingnewfinancing.PoliciesalsoaimtoprovidecertaintyandinsuranceforIndonesia’seconomyandpeopleviaadaptationmeasuresthatprotectagainstshocks,reducerisks,andensureinclusion.Whilemanyactionscouldcontributetotheseneeds,notallareurgentandnotallcontributetobothclimateanddevelopmentgoalstothesameextent.TheCCDRpolicyframeworkisbuiltaroundconsiderationsofurgencyandsynergy.Whilemanymeasuresareimportant,somearerelativelymoreurgentbecauseinactionwilllockincarbon-intensivedevelopmentpatternsorvulnerabilitiesthatincreasesubsequentcostsandfinancialrisks.Othermeasurescanbedelayedinrecognitionofshort-termfinancinglimitsorpo-tentialbenefitsfromtheexpecteddeclineinthecostofgreentechnologies.TheCCDRindicatesurgencybysuggestingeachactionaseitherashort-termpriority(by2025),amedium-termpriority(by2030),oralong-termpriority(beyond2030).Regardingsynergy,somemeasuresareexpectedtocontributetobothclimateanddevelopmentgoalsbyimprovingthebusinessenvironment,helpingtobalancethebudget,orbyreducingdevelopmentcostssuchaslocalairpollution.TheCCDRindicatesthosemeasureswithhighpotentialtowardbothgoals(Figure76).UrgencyandsynergyinformselectionofthemeasuresandtheirrelativeprioritizationpresentedlaterinthisChapter.Climate&DevelopmentPolicyFramework79FIGURE75Supply-sideMeasuresDemand-sideMeasuresAdaptationEnablingConditionsFIGURE76TOGETHERPROMOTEBuildingBlocksfortheTransitionPrioritizationApproachforRecommendationsReducedtransitioncostsEfficientresourceallocationCertaintyandinsuranceSource:WBGstaff.Note:Extentofsynergyisindicatedbyaqualitative(1-3)scoringofexpectedclimateanddevelopmentbenefits:mea-sureswithhighpotential(thatis,higherscores)towardbothgoalsareconsideredmoresynergistic.Urgencyisdefinedbyshort(by2025)medium(by2030),andlong-term(after2030)categories.URGENCYWhentoactSYNERGYExpectedclimateanddevelopmentoutcomesSHORTTERMPRIORITYVERYHIGHCLIMATEDEVELOPMENTHIGHLOW-MODERATES33M22L11MEDIUMTERMPRIORITYLONGTERMPRIORITYTheCCDRrecognizesthatthefeasibilityandultimatesuccessofreformsdonotdependonlyontheirtechnicalmeritsbutalsoonpoliticalsupportforthosereforms.Politicalsupportwilldependon,amongotherthings:(i)thedis-tributionalimpactsofreforms;(ii)thetradeoffsbetweentheshort-termcostsofreformsandtheirlong-termgains;and(iii)institutionalcapacitiestoimplementreforms.TheCCDRdoesnotclaimthatthesereformsarestraightforward,northattheycanbeallbeachievedwithinthetimeframespresented.Itislikelythatpoliticalconsiderationswillnecessitatetradeoffsandchoicesbetweencompetingpriorities.Nevertheless,theCCDRpresentsapolicyframeworkandtimelinefromatechnicalperspective,informedbyIndonesia’sstatedambition,whilerecognizingthatitisforIndonesiatodecidecollectivelyhow,when,andwhatreformstomoveforward.TheCCDRpolicyframeworkisbuiltaroundconsiderationsofurgencyandsynergy”“INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT80GETTINGSTARTED1Beforepresentingthefullpolicyframework(below),theCCDRoffersase-lectionofshort-termpriorities(by2025)basedonurgencyandsynergycon-siderations.Theseareshort-termprioritiesthataimtoplaceIndonesiaonasmoothtransitiontrajectory.Theyarestartingpoints‒withlonger-termreformsandinvestmentoptionstofollowtheplanningandinitialstepstheyestablish.Insomecases,theseshort-termpriorityareasrefertoactionsthattheCCDRdesignatesasmedium-andlong-termactions.Thisisbecauselonger-termimplementationdoesnotmeandelayedaction:planning,piloting,institutionalstrengthening,andinitialstepstowardlonger-termoutcomesmayneedtostartnowforrealizationoffutureresults.CHALLENGESADDRESSEDSELECTEDSHORT-TERMPRIORITIES(BY2025)Someremain-inggapsinforestandlandusepoliciesandfinanceStructuralbarriersimpedetheenergytransitionInefficienciesinenergyuseintransportationandbuildings123ContinuetostrengthenthepolicyframeworkfornetzeroemissionsfromforestsandlanduseanddevelopafinancingroadmapfortheFOLUNetSink2030plan.Buildonrecentregulatoryreformstofurtherexpandforestprotec-tionsoverareasofpeatnotalreadycovered.Integratemangroveprotectionintosubnational(provincialanddistrict)spatialplans(focusedonnonforestareas)andhelpensureAMDALassessorscorrectlydesignatemangrovesasHCVeco-systems.FinalizeOneMapandcontinuetoclarifytenurialstatusofdifferentlandfunctionsasastrongerbasisforenforcement.Usefiscalincentivesplusincreasedenforcementtoensuredistrictgovernmentscompletetheirspatialplanstodirectnewagricultureawayfromhigh-carbonandsensitiveecosystems.DevelopafinancingroadmaptosupportrestorationinvestmentsandotherplannedFOLUNetSink2030activities.Support(longer-term)expansionoffarmerextensionandfinancingtoimproveagriculturalyields,focusedonsmallholders.Implementanenergytransitionstrategyfoundedonfivepillars:(i)adoptacomprehensiveapproachtodecarbonizationplanningandenergytransition;(ii)acceleratecarbonpricingandsubsidyreformwhencircumstancesallow(includingremovaloftheDMOandthepricecapforcoal)‒toincreasetheincen-tivesforinvestmentinrenewableenergyandenergyefficiency;(iii)improvetheinvestmentclimateforrenewableenergythroughinstitutionalandregulatoryreforms;(iv)strengthenthecapacityandflexibilityofelectricitynetworkstoabsorbadditionalrenewableenergy;and(v)managethepovertyandsocialimpactsoftheenergytransition.Furthercatalyzeinvestmentsinlow-carbontransportthroughthedevelop-mentofanationalurbanmobilitypolicy(NUMP)frameworkandincreaseenergyefficiencyofcommercialandresidentialbuildingsthroughgreencertification.Unplannedurbanizationriskslockinginsuboptimalenergyusepatternsinthebuildingsectorandintransportationnetworks.ANUMPwillsetgoalsforachievementofgreenmodesharetargets,anddevelopplanning,institutional,andfundingframeworksforprioritizinginvestmentsinefficientmodes(publictransport,walking,andcycling)andefficiencyimprovements(electrificationofvehicles)inthelongerterm.Meanwhile,cost-effectivegreenstandardsalreadyexistbutarenotyetappliedtoallbuildingtypes.Thesecouldbeconsideredforextension.Climate&DevelopmentPolicyFramework81CHALLENGESADDRESSEDSELECTEDSHORT-TERMPRIORITIES(BY2025)CityplanningunderminesclimateanddevelopmenteffortsFiscalpolicydistortspricesignalsfordecarboniza-tionUnderinvest-mentingreenprojectsbyfinancialandprivatesectors456Improvefloodresiliencethroughspatialplanningandearly-warningsystems.Re-mapflood-pronezoneswithclimate-sensitivehydrologicalpredictionsandupdatespatialplans.Prioritizeenforcementofmandatedgroundwaterabstrac-tionlimitsorprohibitionsatsubsidencehotspotstoreducecoastalfloodingrisks.Continueinvestinginanintegratedandpeople-orientedmulti-hazardearlywarningsystembasedonauserneedsstudyforimprovingweatherwarningservicesanddeveloparoadmapforshiftingfromweather-predictionto“impact-prediction”services.Continuetoshiftfiscalpolicytodisincentivizeemissions.Developaroadmapforsubsidyreformcovering:(i)resumptionoftransportfuelsubsidyreductionsbuildingonrecentprogress;(ii)replacementoftheelectricitypricesubsidy(PLN’sPSO)withtargetedcashtransfers;and(iii)consistentwiththesubsidyreformplan,developamedium-termplanforcarbonpricing.ThiscouldincludefossilfuelexcisesandextensionoftheexistingpilotETSandcarbontaxacrossadditionalsectors.Strengthenthefinancialandprivatesectorenablingenvironmentforgreeninvestments:(i)developacomprehensivestrategyforfinancialsectorcli-mate-riskassessmentwithdetailedguidanceforbanks;(ii)developfurtherspecificnationalclimatefinancestrategiestodiagnoseIndonesia’sclimatefinancegap;(iii)incentivizetheuseofgreenbonds;(iv)reformSoEstocreatenewopportunitiesforprivateinvestmentingreeninfrastructure;and(v)reformPPPprojectselection,preparation,agreement,andconcessionprocedures.EASTKELAPAGADING•JAKARTAINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT82THECLIMATE&DEVELOPMENTFRAMEWORKSupply-SidePolicies&Institutions2APRIMARYENERGYSUPPLYS.1.Fragmentedapproachtodecarbon-izationplanningandenergytransitionS.2.CoalpricingdisincentivizesrenewablesS.3.DistortedinvestmentclimateforrenewablesSUPPLYAchievingIndonesia’stargetofrebalancingtheprimaryenergymixfromcoaltorenewablesrequiresshort-termregulatoryreformsandajusttransitionforthecoalsector.ThereareopportunitiestomaketheregulatoryframeworkmoresupportiveofIndonesia’senergymixobjectives,includingreformstoPLN(discussedinthenextsection)whichcouldhelpreducedemandforcar-bon-intensiveenergysources.Specificmeasuresinclude:Adoptacomprehensiveapproachtodecarbonizationplanningandtheenergytransition.Thisincludes:(i)incorporationofgovernmentclimatecommitmentsandtargetsinsectoralplanssuchastheRUPTLandcorporateplansofSoEssuchasPLN;(ii)furtherassessmentofcost-effectivedecarbonizationpath-ways,buildingontheLTS-LCCRandLCDI;(iii)developmentofadecommis-sioningtimetableforcoal-firedpowerplants,afinancingplan,andleast-costreplacementofcoalgenerationwithrenewableenergysourcesconsistentwithPresidentialRegulationNo.112/2022onRenewableEnergyissuedinSeptember2022;and(iv)astakeholderconsultationanddisseminationplan.Acoordinatinginter-ministerialcommissionwiththeparticipationofMoEMR,theMinistryofState-ownedEnterprises(MSoE),andMoFcouldbeestablishedtoensurealignmentofsector,climate,andfinancialtargets.ContinueenergypricingandsubsidyreformbyphasingoutcoalDMOsubsi-diesandphasingincarbonpricing.Thisincludes:(i)progressivelyremovingtheDMOforcoaltohelpleveltheplayingfieldforrenewables;and(ii)preparingaroadmapforcarbonpricing(extensionacrosssectorsandapricetrajectorythroughtime).SeealsorecommendationE.1-E.5.Lowerregulatorybarrierstorenewableenergydevelopmentbytheprivatesector.LCRswhichsetaminimumthresholdforlocalcontentbothformaterialsandservicesusedinsolarpowergenerationraisecostsforsolarIPPdevel-opersandreducePLN’swillingnesstoenternewPPAswiththem.Localsolarpanelmanufacturershavebeenunabletoproduceatscale,resultinginsolarPVpanelswhicharemoreexpensiveandoftenofalesserqualitythanwhatthedeveloperscouldprocureontheinternationalmarkets.Toaddressthis,thegovernmentcouldissueawaiverontheseprotectionsforseveralyears.Thiswillgivetimeforthedomesticsolargenerationsectortodevelop,therebycreatingabasefordemandforequipment.Thegovernmentcouldkeepthewaiverunderreview,returningtothedomesticproductionprotectionswhenthatnolongerunderminesdemand.CLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTClimate&DevelopmentPolicyFramework83BSUPPLYOFLANDRESOURCESS.4.LackofcapacityandflexibilityofelectricitynetworksS.5.ThecoalphaseoutwillhavenegativeeconomicimpactsS.6.GapsinforestconservationmeasuresS.7.FragmentationinmanagementofkeynaturalresourcesIndonesiahasaclearpathwaytowardnegativeemissionsfromthelandsectorby2030.Themostcost-effectivefirststepisfurtherstrengtheningconserva-tionofprimaryforestsandpeatlands,buildingonrecentregulatorytighteningthatisprotectingHCVforestsandpeat.LandmanagementinIndonesiawillrequireanintegratedlandscapesapproachwithcoordinationacrosssectorsandlevelsofgovernment.Specificmeasuresinclude:Furtherinvestinthecapacityandflexibilityoftransmissionanddistributionnetworks,includinginterconnectionsbetweenislandsystems.Theseinvest-mentswouldbesupportedbypricingmechanismsandassociatedregulationsforenergystoragesystemsandancillaryservicesthatsupportrenewableenergyintegration.PlanningbyMoEMRisunderwaytowardislandintercon-nections‒withmajorislandsintendedtobeconnectedby2024andsmallerislandssubsequently.Pursuea“JustTransitionforAll”forthecoalphaseout.Ajusttransitioncanbeunderpinnedby:(i)continuousdialogueandconsultationwithawidevarietyofstakeholderstodeterminescope,scale,andtimingofcoalfacilities’closures;(ii)upfrontplanning,sustainedthroughdialogueandparticipatorymonitoringduringthestagesofclosureandtransition;(iii)provisionoftemporaryincomesupporttocoalworkersandtheirfamiliesthatiscomplementarytootherex-istingsocialprotectionprograms;and(iv)deploymentofactivelabormarketpoliciesthatofferservices,programs,andincentivestoencourageandenablere-employmentamonglaid-offworkers.Continuestrengtheningregulationsonforestclearing.Indonesiahasimposedregulationsthathavebeeneffectiveinslowingdeforestation(seeChapter1).Continuedstrengtheningofmeasurestoprotecthigh-value,carbon-densepeatlandandprimaryforestwillsupporttheNetSink2030objective.Formangroves,thiscouldbesupportedbyintegratingmangroveprotectionintosubnational(provincialanddistrict)spatialplans(focusedonnon-forestareas)andbyhelpingtoensurethatAMDALassessorscorrectlydesignatemangrovesasHCVecosystems.ForforestsoutsideoftheForestEstate,technicalsupportandfiscalincentivescouldbeprovidedtodistrictswillingtodesignatehigh-val-ueforestsasEssentialEcosystemAreas(conservationzoning).Expandtheintegratedlandscapemanagementapproach.BRGMhassuc-cessfullydemonstratedhowanagencywiththemandatetoachievespecificecosystemoutcomescanoperateeffectivelyinacomplexadministrativeenvi-ronment.Thislandscapesapproachcouldbebroadenedforthemanagementofcriticalecosystemssuchasprimaryforestsandmangroves,inadditiontopeatlands.Thisapproachwouldentailtheadoptionofhigh-resolutionmapsforplanning,cumulativeimpactassessment,andcommonperformancemetricsacrossministriesandsubnationalgovernments.CLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT84S.8.MisalignmentbetweenlocallandincentivesandnationallandincentivesIncreasefiscalincentivesforsustainablelandusepracticesatthelocallevel.Indonesia’sdecentralizedsystemofgovernancerequiresverticalfiscaltransfersthatincentivizelocalactionsalignedwithnationalpriorities.AddpaymentmetricstotheRegionalIncentiveFund(DanaInsentifDaerah)forthecompletionandenforcementofdistrictspatialplans(RencanaTataRuangWilayah:RTRW),and/orincentivizewithinternationalresults-based-paymentschanneledthroughBPDLH,potentiallythroughastreamlinedBPDLHfundingwindowthataggregatesdonorcontributionsandprovidesongoingandsimpli-fiedresults-basedsupporttoprovinces.Increasetheknowledgeandcapacityofthemostvulnerablevillagesregardingclimateresilienceandmitigationactivitieswithlivelihoodco-benefits,andprovideimplementationsupport(forexample,technicaltrainingandmulti-yearbudgetingflexibility).Providetop-upfundsratherthandivertingalreadystretchedrevenuesundertheVillageFund(DanaDesa)andVillageFundBudget(AlokasiDanaDesa).Village-levelservicescouldbeestablishedtoprovidesubsidizedlandpreparationservicesasanalternativetoburning,althoughprioritiesshouldbedeterminedatthelocallevelinlinewithvillagefundingprinciples.CLIMATEURGENCYDEVELOPMENTDemand-SidePolicies&InstitutionsDEMANDATHEDEMANDFORENERGYEffortstorebalancethesupplyofprimaryenergywillbemosteffectiveifcom-plementedwithreformsthatsupportareductioninthedemandforcoalintheelectricitysector.PLN’simpairedbalancesheetfurtherpreventsamoveawayfromcoal.ThisisdrivenbyPLN’scurrentrevenuestructurethatisnotsufficienttocoveroperatingcostsandserviceitsdebt.Itisalsodrivenbytariffssetwellbelowcost-recovery.Inaddition,highexternalleverageofPLNcreatesdebtoverhangwhichisaggravatedbylowviabilityofrenewableenergycreatedbyregulatorypricingdistortions.ThesemakeitdifficultforPLNtoscaleuptheinvestmentandattracttheprivateinvestmentneededforrenewableenergy.Specificissuesandmeasuresinclude:D.1.PLN’stariffarrangementsanduntargetedsubsidiesweighonbalancesheetIncreasetheshareofrevenuereceivedfromelectricitytariffs.PLN’stariffad-justmentarrangementsweighonthebalancesheet.Reformscouldinclude:(i)improvingtheautomaticadjustmentformulatoaccountforfutureinvestments,includingrenewables;(ii)revisingthetariffstructuretomakeitmoretrans-parentandprovidegreaterpricingsignalstocustomers,shiftingdemandfrompeakperiodsandgreaterenergyefficiency,andpotentialprogressivetariffsforcertaincategoriesofcustomers.Thesemeasureswouldbewellcomplementedbyelectricitysubsidyreform(seerecommendationE.2.).Sometariffreformsareunderway,alongwithsubsidytargetingefforts.CLIMATEURGENCYDEVELOPMENTClimate&DevelopmentPolicyFramework85Furtherdownstreamintheenergyvaluechainareopportunitiestoimproveefficiencyinuse.Regulationsforefficiencyhavebeenappliedinsometypesofbuildingsandcouldbeextendedtoothers.Transportationhasscopeforreductionsthroughfurtherspatiallyinformedinfrastructureplanningandcom-pacturbandesign,shiftingtolow-emissionstransportmodes,andimprovingefficienciesandelectrificationofexistingtechnologies.Substantialeffortsarealsoneededtoencouragethedevelopmentofcleanenergysuppliesforindus-trialprocessessuchasthosetransformingrawminerals.Energyefficiencyandelectrificationmeasureswouldbewellcomplementedbymeasurestoreducethecarbon-intensificationoftheelectricitygrid.Specificmeasuresinclude:D.3.LackofgreendesignstandardsinconstructionleadstoenergyinefficienthousesD.4.Highdependenceonenergy-inefficientprivatetransportmodesinurbanareasD.2.TraditionalfinancingisinsufficientforPLNtoexpandrenewableenergyIncreaseenergyefficiencyincommercialandresidentialbuildingsthroughgreencertification.InvestingingreenbuildingswillsignificantlyreduceGHGemissionsandresultinlowerhousingcostsforhouseholdsanddevelopers.Integratecost-effectiveclimate-smartcomponentsandgreenstandardsintogovernmentprogramssuchasOneMillionHomesandCreditforHomeOwn-ership(KreditPemilikanRumah:KPRSubsidi).Intheshortterm,conductastudyongreenbuildingfeasibilityfortheBantuanStimulanPerumahanSwa-daya(StimulusAssistanceforPrivateHousing)retrofitprogram,andconsiderexpandinggreenstandards(SertifikasiBangunanGedungHijau)forawiderrangeofbuildingtypes.DevelopaNUMPtocatalyzeinvestmentsintopublictransport,walking,andcycling.Thiswouldinclude:(i)nationalgoalsettingforgreenmodeshares;(ii)sustainableurbanmobilitystrategiesandactionplansforurbanareasaboveacertainsizethatprioritizetransit,walking,andcycling,demandmanagementandintegratedspatialplanning;and(iii)integratedinstitutionstoplan,fund,andmanageurbantransportacrossmetropolitanareasandacrossmodes(forexample,MetropolitanTransitAuthoritieswithstatutoryauthority).Thesecouldbesupportedbydedicatedsourcesoffunding(forexample,transporttaxrevenues)andanationalassistanceschemeformasstransitthatwouldrein-forcetheNUMPframework.Thiswouldbetheprimarydecarbonizationstrategyfortransportwhichyieldsrobustimpactsirrespectiveofenergysource‒withelectrificationasacomplement(seerecommendationD.5).ReviewalternativefinancingoptionsforPLNtousetofinanceexpansionofrenewableenergy.TraditionalfinancingisunlikelytobesufficientforPLN’sexpansionplansforrenewableenergy.Alternativefinancingcouldinclude:(i)furtherdevelopingtheuseofasset-basedsecuritiesandassetrecyclingandmonetizationmodels;(ii)expandingtheuseofgreenbondsandgreenfinancingthroughfullimplementationoftheESGandsustainablefinancingframework;and(iii)introducingindependenttransmissionproviders.CLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT86D.5.LowuptakeofelectrifiedmobilityoptionsD.6.Nationalclimatetargetsarenotyetfullytranslatedintocity-levelpolicymakingD.7.Inefficienciesremaininplantationagriculture,particularlyamongsmallholdersAcceleratetheadoptionofelectrifiedmobility(e-mobility)inconcertwithdecarbonizationoftheelectricitygrid.Thiscouldinvolve:(i)mandatesfortheprocurementofelectrifiedpublicfleetsonatimedschedulethatprovidesasig-naltoEVmanufacturers;(ii)directmonetaryincentivesforEVs,asisbeingpur-suedthroughtheLow-CarbonEmissionVehicleProgramthatincreasesvehicletaxesproportionallytovehicleCO2emissions;and(iii)revisedbusinessmodelsforpublicbusservicesto:(a)addresstheshortcontractduration(ofuptothreeyears)thatcurrentlymakesitdifficulttorecouplargee-buscapitalexpenses;and(b)explorepossibilitiesforfleetaggregationandleasing,andcharging-as-a-servicemodels,whichprovidesflexibilityforprivatesectorinnovation.Integratecitiesintomedium-andlong-termclimatechangestrategiesatthenationallevelwithdedicatedcity-leveltargets.Engagingcitiesinthelow-carbontransitioncouldhaveasubstantialimpactonthedistributionofmitigationeffortsandtheircosts.Dedicatedclimatetargetsatthecitylevelwillincentivizelocalauthoritiestomainstreamclimatechangeintoplanning,developimplementationstrategies,andprioritizelow-carboninvestments.Thisisunder-wayinsomecities(forexample,Jakarta)withopportunitiestoexpandfurther.Bridgeyieldgapsthroughsustainableintensification.Smallholderoperationsinpalmoilhaveyieldsonaverage25percentlowerthanlargeplantations.Im-provedaccesstotechnologiesandinputs(forexample,high-yieldingvarieties,balancedmixoffertilizer,digitalandprecisionfarmingtechnologies);technicaladvisoryandsupportingservices(forexample,veterinary,climateadvisory,equipmentrentalandmaintenanceservices);andfinancecouldhelpimproveyields.Theprivatesectorwillplayanimportantroleinincentivizingtheadoptionofclimate-smartpracticesandinco-financingnecessaryinvestments.Furtherenhancementstotraceabilitysystemscouldbeusedtoenabletherewardingofsustainablepracticesatfarmlevel‒forinstance,throughconcessionlicenserenewalsandpricepremiumsforsustainablyproducedgoods.CLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTBTHEDEMANDFORLANDMitigationactionsbasedoninfluencingthesupplyoflandwouldbebestcom-plementedbymeasuresthatsimultaneouslyimproveefficiencyoflanduse.Supply-siderestrictionsonlandconversion,forexample,restrictplantationexpansion.Theseimpactscanbeoffsetbyincreasedintensificationofexistingplantations.Betteruseoflandcouldalsobeachievedthroughfiscalincen-tivesalignedwithclimateobjectives,someofwhichareunderway.Specificmeasuresinclude:Climate&DevelopmentPolicyFramework87D.8.PublicexpenditureforagricultureismisalignedwithclimategoalsD.9.Lackofclarityonlandtenureandspatialplanningleadstounder-investmentanddeforestationD.10.InefficientspatialgrowthpatternsincitiesRepurposepublicspendinginagriculturetoincentivizeresilientandlow-car-bonagriculture.PublicsupporttoagricultureinIndonesiaisamongthehigh-estinemergingandOECDeconomies‒buthasbeenlargelydirectedtowardfertilizersubsidiesandirrigationthatispredominantlyfocusedonrice‒withoutcommensurategainsingrowthandproductivity.Thereareopportunitiestograduallyre-orientagriculturalspendingtosupportincreasedproductivityandfarmerincomesandachieveclimateobjectives.Thisrequires:(i)shiftinginputsubsidiestowarddirectpaymentsthatareconditionalonenvironmentallysus-tainablepractices;(ii)promotingdiversificationtohigh-value,locallysuitable,lessemissions-intensivecrops;(iii)incentivizingadoptionofclimate-smartpractices(forexample,useofimprovedcropvarietiesandlivestockbreeds);(iv)conservationagriculture;(v)water-useefficiency;and(vi)integratedpestmanagement.Thesewouldneedtobeenabledbybusinessdevelopmenttrainingforsmall-scaleproducers,thedevelopmentofproducergroups,andfinancingmechanisms.Clarifypeatandforestlanddesignationsandtenurerights,withinandbe-yondtheforestestate,withafocusonhigh-riskareas.Landrightsissuesarebeingaddressedthroughmajorlandrightsreformprogramsunderway(TORAandsocialforestry)thatarehelpingtoincentivizeimprovedlocallandmanagement.Theseprogramscouldbespatiallytargetedbasedon‘prioritiza-tionmaps’(combiningenvironmentalvalue,socioeconomicdisadvantage,andhighdeforestationrisk).A‘high-priority’areatargetfortenurereformcouldbeusedalongsideexistingtargetstoincentivizeandmeasureprogressinareaswherelandrightsissuesaremostpressing.LandadministrationwouldbefurtherstrengthenedbypublicationoftimberandplantationconcessionmapsundertheOneMapPolicy,andthroughcompletionofhigh-resolutionmapsofpeatlandsandlowlands.IncreasedtechnicalguidanceandfundingcouldhelpdistrictgovernmentstocompletetheirRTRWsandincorporateclimateconsid-erations(risksandland-basedemissions).Integratespatialplanningwithcapitalinvestmentplanningandprioritiza-tion‒especiallyinnew,secondary,andsmallcities.PromotingacompacturbanformwillbecrucialinIndonesia’ssecondaryandsmallercities(withpopulationsunder1million),wheremostoftheinfrastructureneedstobebuiltandcarbon-intensivespatialpatternsareyettobelockedin.Integratingspatialandcapitalinvestmentplanningmayhelpreduceemissionsarisingfromurbanexpansionandtreecoverloss,andimprovelivability,whilecreatingconditionsforlow-carbontransportmodes.CLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTSimilarlandusedynamicsplayoutintheurbanspace.Spatialplanningthatprotectsnaturalland–includingforestsattheurbanperipheryandhigh-riskfloodzones–wouldbewellcomplementedbyefficienturbandesignmeasuresandtransportationsystemsthatmakehigherdensitylivable.Themeasureproposedbelowaimstoimprovesynergiesbetweenmeasuresinfluencingthedemandandsupplyoflandinurbanareas:INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT88Mitigationmeasurescanbeprioritizedbasedonurgencyanddevelopmentsynergies(Figure77).Recommendationsassessedasbeingrelativelymoreurgentarethoseneededtoavoidlocked-incarbon-intensivedevelopment(suchasavoidinglossofpeatlandandprimaryforest),startorstrengthencrucialplanningprocesses(forexample,thecoaltransitionframework),andputinplacesettingsneededforlonger-terminvestments(forexample,renewableenergyregulatoryreforms).Short-andmedium-termactionswiththegreatestexpectedmitigationimpacts,combinedwithlarge,expecteddevelopmentco-benefits,includereformofenergysubsidies,reformofagriculturalsubsidies,andthecoaltransitionframework.S.5S.3S.7S.1S.2D.8VeryHighD.8S.8HighD.4D.3D.5Low-mod.S.6S.4D.2D.6D.10D.9D.1CoalandsubsidyphaseoutplanInvestinpowerinterconnectionsAg.subsidyreformVERYHIGHSHORT-TERMPRIORITYHIGHMITIGATION&ADAPTATIONIMPACTURGENCYMEDIUM-TERMPRIORITYLOW-MODERATELONG-TERMPRIORITYNon-debtREinvestmentsbyPLNE-mobilityGreenbuildingstandardsCity-leveltargetsFurtherforestprotectionsElectricitytariffreformNationalurbanmobilitypolicyDecarbonizationplanningIntegratedlandscapemanagementLowerREbarriersCoaltransitionframeworkForestboudariesandlandrightsreformDEVELOPMENTSYNERGIESImproveplantationyieldsFIGURE77TimeframeandExpectedImpactofSupply-(S)andDemand-side(D)MitigationMeasuresSource:WBGstaffassessment.Note:Actionsassessedasbeingmoreurgent,withthegreatestclimateimpacts,aretothetopright;thosewithgreatestdevelopmentco-benefitsarerepresentedbylarger/darkercircles.Short-termprioritiesarethoseenvisagedpriorto2025,mediumtermpriorto2030,andlongtermafter2030.LandusefiscalincentivesUrbanplanningandinvestmentalignmentClimate&DevelopmentPolicyFramework89Adaptation&ResilienceADAPTATIONIndonesia’sphysicalandhumancapitalstockunderpinlong-termgrowthprospectsbutarethreatenedbyclimatechange.ReformsinsocialprotectionandDRMarealreadyunderway,buildingonimportantinstitutionalandpolicyfoundationssuchastheDTKS,theBNPB,andthe2007lawsonDisasterMan-agementandSpatialPlanning.Complementaryrecommendationsaremadebelowwiththeaimofstrengtheningsynergiesbetweendisasterresponseandexanteriskreduction,ensuringcomprehensivenessofsocialprotectionsystems,andstrengtheningspatialplanning.Specificmeasuresinclude:A.1.Damagetoinfrastructurefromclimate-relateddisastersA.2.Floodmanagementremainschallengedbylimitstodata,planning,andenforcementA.3.GapsinsocialassistanceprogrammingContinuetoimprovestandardsandpracticesformoreresilientinfrastruc-ture.Intensifypost-disasterinvestigationtobetterunderstandclimate-relateddisasterimpactsoninfrastructure,revisetechnicalguidelines,strengthencon-structionsupervisionpractices,andenhanceBalailevelbudgetplanningandfundingflexibilityfordisasterneeds(forexample,high-prioritymaintenanceandmonitoring).Includeclimateresilienceconsiderationsinpublicinfrastructureimplementationprocessesvia:(i)specificguidelinesforconductingclimateandenvironmentalassessments;(ii)explicitinclusionincontractsofclimaterisks(andcontingentliabilities);and(iii)inclusionofclimaterisksinStateAssetConditionreports.Improvefloodresiliencethroughspatialplanningandgroundwaterpumpingcontrol.Mapflood-pronezonesanddelineateinspatialplans.Ensuredevelop-mentiscontrolledaccordinglyviazoning.Linkspatialplanstoinvestmentplansandannualbudgetsatcitylevels(seealsoD.9.onspatialplanningforefficienturbanspaces).AWaterInformationManagementSystemcouldbeusedforimproveddatasharingonfloodrisks.Furtherenforcemandatedgroundwaterabstractionlimitsathighsubsidenceareastoreducecoastalfloodingrisks.Consideropportunitiestoadjusttariffsforcost-recoveryandlong-terminvest-mentinpipedwaterinfrastructure(tooffsetgroundwaterabstraction).Completetheongoingreformstostrengthenthesocialprotectionsystem’sadaptabilitytoclimaterisk,includingfinalizinglinkstothePFBandcom-pletionoftheASProadmap.Continuetocloseremainingsocialprotectioncoveragegapstopoorandat-riskpopulationsandimproveexantequantifi-cationofpost-shocksocialprotectionfinancingneedstofacilitateimprovedpre-positioningofresources.Improvetheuseofsocialregistrysystemsforfasterprovisionofpost-shocksupportbyincreasingcoverageandupdatestotheDTKSwithlinkstoearlywarningsystems,necessarydataforpost-shockdelivery,andprovidingimprovedregistryaccesstohumanitarianagenciesduringshocks.CLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT90A.4.SocialassistanceprogramsarenotyetfullyharnessedtobuildresilienceA.5.DisasterresponseisnotyetfullysensitizedtogenderandinclusionofvulnerablegroupsA.6.Citiesareincreasinglyvulnerabletowater-andheat-relatedthreatsA.7.Earlywarningservicesarefragmentedandneedacoordinatedandimpact-basedapproachBuildresilienceamonghouseholdsthroughsocialprograms.Existingsocialprogramsprovidesupportbutdolesstoimprovepreparednessforclimateshocksandadaptivecapacityofhouseholds.Thiscanbeaddressedby:(i)providingeducationandinformationaboutclimate-relateddisasterprepared-ness;(ii)ensuringprogramshaveclimate-informeddesigns(forexample,disas-ter-resilientandenergy-efficienthousingsocialassistance);and(iii)improvingcross-sectoralcross-linkstoothersocialprogramsthatbuildcomplementaryaspectsofresilience(forexample,livelihooddiversificationprogramsandgreenjobs;supportforclimate-smartagriculture;andclimate-resilienthousingforsocialprotectionbeneficiaries).ImproveDRMprocessestoaddresstheneedsofdiverseandvulnerablegroups.Developtargetedmitigationandpreparednessinitiativesforpeopleofallages,abilities,andgenders;andensureinclusiveresponseandrecoverypro-grams.Thiscouldbeachievedby:(i)improvinginformationsharingonaffectedhouseholdswithvulnerablecategories;(ii)directtargetingofDRMprogramstowomenandpeoplewithdisability;(iii)ensuringthattemporarysheltersandreconstructedinfrastructureandbuildingsincludeuniversalaccessibilityandsafetymeasurestopreventgender-basedviolence;(iv)increasingtherepre-sentationofwomen,peoplewithdisability,andothervulnerablegroupstomakedecisionsonDRMprograms;and(v)increasinggender-specificresearch(includingsex-disaggregateddatacollection)insectorspronetoclimatechange.Investincity-levelinfrastructureforurbanfloodresilienceandlivability.Inte-gratedgreeninfrastructureandwater-sensitiveurbandesignscanreducefloodrisksandproduceco-benefitsforurbanlivability.Investmentscouldincludeintegratedwaterstorageinfrastructureforrainwatercaptureandfloodcontrolatstrategiclocationsand‘blue-green’urbaninfrastructuresuchasstreettrees,parks,andurbanwaterbodiestoreduceheatstress.Somestepstoimplementthisvisioninclude:(i)establishthefoundationsfortheproposedNationalUrbanFloodResilienceProgramwithasetofpilotcities;(ii)generateaknowledgeexchangeplatformforcapacitybuildingonurbanfloodresilienceforcities;and(iii)identifyrisk-financingmechanismsforlocalgovernmentforimplementingmulti-yearflood-resilientcityplans.Furtherinvestinanintegratedandpeople-orientedmulti-hazardearlywarningsystem.Indonesia’searlywarningservicesremainfragmentedwithmultipleagenciesresponsibleforupstreamhazardmonitoringanddownstreamwarningdisseminationtostakeholders.Furthercoordinatedinvestmentsinintegratingearlywarningmonitoringanddisseminationplatforms;instrumentation,equip-ment,anddecisionsupportsystems;andcapacitybuildingforimpact-basedwarnings(thatprovideclearadviceonearlyactions)isneeded.Short-termactionstowardthisgoalinclude:(i)conductingauserneedsstudytoinformweatherwarningservicesimprovements;and(ii)developingaroadmapforimpact-basedhydrometeorologicalwarningservices.CLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTClimate&DevelopmentPolicyFramework91A.8.ClimateimpactsonagriculturevarygreatlybylocationA.9.ClimatechallengeswillnecessitatestrengtheningofthehealthsystemDeliversite-specificCSAinterventionpackagesbasedonlocalvulnerabil-ities.Climateimpactsonagriculturevarygreatlybylocation.Tailoredpack-agescouldcomprise:(i)advisoryservices(forexample,expandedcoverageofKATAMIntegratedCropCalendar,climateinformationandearly-warningservicesdevelopedbyBMKG,closerlinkagesbetweenagricultureextensionandClimateFieldSchoolsrunbyBMKG);(ii)adviceonimproveduseofinputs(forexample,site-specificnutrientmanagement,balancedfertilization,anduseoflocallyadapteddrought-/flood-tolerantcropvarieties);(iii)climate-resilientinfrastructure(forexample,investmentsindamstocomplementwater-savingtertiaryirrigation,post-harvestinfrastructuretominimizefoodlosses);and(iv)enablingenvironmentmeasures(forexample,strengthenedcapacitiesofsubnationalgovernmentsandagriculturalextensionworkerstoformulatelocalCSAinterventionpackages,andexpandeduseofKURtofinancesmallholderinvestments).MeasurescanleveragetheprivatesectorindevelopinganddisseminatingCSAtechnologies,trainingfarmersandextensionworkers,andco-financingCSAinfrastructure).Leveragetechnologyincludingtelemedicinetostrengthenthehealthsysteminthefaceofclimatechallenges.Betterleveragingoftechnologyincludingtelemedicinecanimprovetheavailability,accessibility,andqualityofhealthservicesandhelppeopleadapttoclimate-sensitivediseasesandshockssuchasheatstroke,heatexhaustion,andtyphoidorcholera(fromincreasedflooding).Itcanalsohelpmaintainaccesstosupportincaseofmoreextremedisastersandeventsdisruptingtheavailabilityofphysicalhealthcentersandinruralandremoteareasthatfacepersonnelshortages.Severalactionswillenableincreaseduseoftelemedicine:(i)astandardizedregulatoryframeworkforthepublicandprivatesector;(ii)afocusondataprivacyandclearflowsofdata;(iii)clearcommunicationforimprovedpublictrustandknowledge;and(iv)continuedeffortstoincreasehouseholds’internetpenetrationrate.CLIMATECLIMATEURGENCYURGENCYDEVELOPMENTDEVELOPMENTAdaptationmeasurescouldfocusoncompletionofdisasterfinancingandsocialprotectionmeasuresasshort-termpriorities,whilecommencingplan-ningforlonger-termurbaninfrastructureinvestments(Figure78).Whilestepstowardresilienceinvestmentsareneededintheshortterm,suchasfur-therinvestmentsinthedisasterpoolingfundandsocialprotectionsystems,andstrengthenedspatialplanningtoavoidlockinginvulnerabilities,alon-ger-termhorizonisexpectedforphysicalurbaninvestmentsgiventheircapitalrequirements.Medium-termprioritiescouldfocusonsupportingfarmerswithsite-specificextensionprograms,financing,andtechnologyforhigherandmoredrought-resistantyields;developmentofimprovedwarningsystems(impact-basedforecasting);whilestrengtheningthebuiltinfrastructurethatwillberequiredtosupportgrowthoverfuturedecades.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT92VeryHighA.5A.2A.1A.9A.5A.7A.8A.3HighLow-mod.A.4VERYHIGHSHORT-TERMHIGHMITIGATION&ADAPTATIONIMPACTURGENCYMEDIUM-TERMLOW-MODERATELONG-TERMDEVELOPMENTSYNERGIESFIGURE78TimeframeandExpectedImpactofAdaptationMeasuresSource:WBGstaffassessment.Note:Actionsassessedasmosturgent,withthegreatestclimateimpacts,aretothetopright;thosewithgreatestdevelopmentco-benefitsarerepresentedbylarger/darkercircles.Short-termprioritiesarethoseenvisagedpriorto2025,mediumtermpriorto2030,andlongtermafter2030.DRMProcessforvulnerablegroupMulti-hazard-impactbasedearlywarningsystemCompletedisasterpoolingfundandsocialprotectionroadmapFloodresiliencethroughspatialplanningandupdatedmappingTelemedicineBuildhouseholdresiliencethroughsocialprogramsUrbangreen-blueinfrastructureforfloodresilienceResilientfarmingsystemsResilientinfrastructurestandardsEnablingPolicies&InstitutionsENABLERSFiscalpolicyreformscanhelpcreatepricesignalsthatpromotealow-car-bontransitionandraiserevenuesformitigationandadaptationinvestments.Althoughsubsidyspendingonenergyconsumptionhasdeclinedinrecentdecades,itcontinuestoprovidesignificantsupportfortheuseoffossilfuelsintheeconomy.Theseinefficientandpoorlytargetedelectricityandtransportfuelsubsidiesareinconsistentwiththelow-carbontransition.Inaddition,thecoverageoffossilfueltaxesislimited,whileinsomeinstancesfiscalinstru-mentswithinthesamesectorhavecountervailingeffectsontheincentivesforemissions.Fossilfueltaxescanraiserevenueforclimateexpenditures,whicharebelowmitigationandadaptationneeds,andnotyetfullyalignedwithNDCobjectives.Specificissuesandmeasuresinclude:AFISCALMEASURESE.1.Fuelsubsidiesareregressive,distortcarbonpricesignals,andweighonthebudgetDeveloparoadmaptocompletetransportfuelsubsidyreforms.Fuelsub-sidiesareregressive,distortcarbonpricesignals,andweighonthebudget.Risingglobaloilpricesmakeitpoliticallydifficulttoeliminatefuelsubsidiesintheshort-term,however,planningforreformcouldbeginnowinanticipationofmorefavorablemedium-termconditions.Reformplanningwouldincluderedis-tributionmechanismstooffsetimpactsonthepoorest.WorldBankanalysissuggeststhatremovingsubsidiesinisolationcouldincreasethepovertyrateby0.4percentagepoints,butfiscalsavings(fromreducedfuelandelectricitysubsidies)canbeusedtooffsetimpactsonhouseholdswithnetfiscalsavingsof0.3percentofGDP.CLIMATEURGENCYDEVELOPMENTClimate&DevelopmentPolicyFramework93FiscalreformscouldincludeextensionofIndonesia’simportantcarbon-pric-ingreformsthatwereadoptedbytheauthoritiesin2021.83TheauthoritiesfirstintroducedcarbonpricingthroughavoluntaryETSinthepowersector.Thisisslatedforextensiontoothersectorsfrom2024.Anyemissionsabovepredeterminedcapswouldbesubjecttothenewcarbontaxorwillneedtobeoffsetthroughtradingofallowances.ThisisanimportantstepforwardforIndonesia.Asiscommonwiththeintroductionofnewtaxinstruments,implementationchallengesarelikelytoarise,includingfromtheinteractionofdifferentcarbon-pricinginstruments(tax,ETS,andoffsets).ThefinancialsystemiscriticaltoIndonesia’sclimatetransition;addressingtwochallengeswillhelpitdoso:(i)strengtheningthemanagementofclimate-andenvironment-relatedfinancialrisks;and(ii)mobilizingsavingsforclimatemitigationandadaptationinvestments.Specificmeasuresinclude:BCARBON-PRICINGREFORMSCTHEFINANCIALSYSTEME.2.SomehouseholdsreceivingelectricitysubsidiesarenotpoorE.3.TaxpolicyinadequatelyshapingincentivesforGHGemissionsE.4.Carbon-pricinginstrumentshavecomplexinteractioneffectsConverttheelectricitypricesubsidy(PLN’sPSO)intotargetedcashtransfersforeligiblehouseholds.Thiswouldallowthechargingoftariffsthatcovergen-erationcostswhileusingcashtransferstocompensatethepoorandvulnerableforpricerises.ThismayrequireupdatestotheDTKS(seerecommendationA.3.),toensuresufficientinformationfortargeting,managing,andmonitoringcashtransfers.Reviewtheinventoryoftaxmeasurestobetteralignfiscalpolicywithlow-car-bonobjectives.Thereviewcouldconsider:(i)opportunitiestointroduceanexciseonfossilfuelsaftereliminatingexistingsubsidiesandintroducingcom-pensatorymeasuresforthepoor;(ii)removingtaxincentivesforcarbon-inten-sivesectors;and(iii)eliminatingconflictingeffectsoftaxpolicyonemissionswithinhigh-emissionsectors.ThiswouldbealignedwithPresidentialRegulationNo.98/2021ontheeconomicvalueofcarbon.Developanintegratedroadmapforcarbonpricing.Developaroadmapforexpandedcarbonpricingbasedonareviewoftheimpact,cost,andfeasibilityofalternativeinstrumentsforsectorsbeyond2024.Ensurealignmentacrossdifferentcarbon-pricinginstruments(ETS,carbontax,andpotentialoffsettingschemes).Estimatebaselinesdisaggregatedbysubsectorandprojectedan-nualemissions.Exploreoptionstotradecarboncreditsinternationally.CLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENT83PresidentialRegulationNo.98/2021providesthelegalumbrellatointroduceapriceoncarbonthroughcarbontrading(cap-and-tradeandcarbonoffsetsmechanisms),perfor-mance-basedpaymentsandcarbontax/levies.TheTaxHarmonizationLaw(2021)mandatestheintroductionofacarbontax.Thetaxes’introductionwasonholdattimeofwriting.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT94E.5.FinancialsystemlackscomprehensiveapproachtoclimateriskmanagementE.6.BanksdonothavedetailedpoliciesandproceduresformanagingclimaterisksE.7.LackofdetailedassessmentofclimatefinancinggapsandoptionstofillthemE.8.TherearelimitedincentivestoscaleupthecorporategreenbondmarketE.9.LackofmacroprudentialincentivescouldbehamperinggrowthofgreenloansmarketDevelopacomprehensivestrategyforclimate-riskassessment.Buildingontherecentprogressonregulationsandroadmapsforsustainablefinance,aclimateriskassessmentstrategycouldincludehowauthorities(forexample,BankIndonesiaandOJK)planto:(i)integrateclimaterisksintheirsupervisoryframeworks;(ii)addressclimateriskswithintheirinternalorganizationandgovernancestructure(forexample,dedicatedunitstomanageclimaterisks);and(iii)allocatetheneededresourcesandexpertisetoaddressclimaterisks,includingthroughoutreachandcapacity-buildingtokeyfinancialinstitutions.Developfurtherguidanceonriskmanagementapproachesanddisclosurerequirementsforbanks.OJKcoulddrawontheBaselCommitteeonBankingSupervision’sprinciplesforclimate-riskmanagement(BankforInternation-alSettlements2021).Guidancewouldincludestresstestingandscenarioanalysismethodologies,riskidentificationandmanagementapproaches,andproceduresfordisclosureofclimaterisks.DevelopafurtherclimatefinancestrategyfocusedonIndonesia’sclimatefinanceneedsandopportunities.ThisstrategywouldbuildontheSustainableFinanceRoadmapinthatitwouldspecifically:(i)estimatethecurrentandpro-jectedfinancinggaptomeetthecountry’sclimatemitigationandadaptationtargets;(ii)determinetheprioritysectorsrequiringclimateinvestments;and(iii)explorepotentialsourcesoffinanceforprioritysectors,includingregulatoryreformsthatwouldencourageprivatesectorfinancing.Incentivizetheuseofgreenbondsthroughdiversechannels.Thiscouldin-clude:(i)aggregationandsecuritizationsothatgreenbondscanreachthesizethatinvestorsaredemanding.Forexample,OJKcoulddevelopstandardizedcontracttemplatesandprocedurestocreateconsistencyandsimplicityinthebondissuanceprocess;and(ii)reducelistingrequirementsforlabeledbondsandsupportnewandexistingissuerstobringthesebondstothemarket.Developfurtherguidanceandincentivestostimulategreenloans.In2019,BankIndonesiaissuedaregulationonloan-to-valuation(LTV)forgreenmort-gagestosupportgreenbuildingdevelopment(Iswara2019).ThisregulationenablesafivepercentincreaseinthemaximumLTVforgreendevelopment(to90percent),therebyloweringthedownpaymentpaidbyborrowers.InadditiontotheincentiveframeworkalreadyintroducedbyBankIndonesia,therearearangeofotherincentivemechanismsthatauthoritiescouldconsiderforen-couragingtheuptakeorde-riskingoftheseloanproducts‒suchasguarantees,subsidies,dataprovision,andaggregation.CLIMATECLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTClimate&DevelopmentPolicyFramework95E.10.LackoflevelplayingfieldcreatedbySoEdominanceE.11.PrivatesectorparticipationingreeninfrastructureislimitedE.12.InefficientuseofstateassetscreateslostopportunitiesforacceleratinggreeninvestmentsE.13.InadequatelegalframeworkaroundCooperationProjectsdetersprivategreeninfrastructureinvestmentReformSoEstocreatenewopportunitiesforprivateinvestmentingreeninfrastructure.Thiscouldinclude:(i)reformofSoEincentivesandkeyperfor-manceindicatorsbyMSoEtoencourageSoEstomobilizeprivatecapitalandimproveefficiency;(ii)jointventureagreementsthatincluderevenue-sharingarrangementsandinternationalstandardsregardingcorporategovernance;and(iii)competitivebiddingonfinanciallyviableprojects,bothnewandassetmonetizationprojects.ReformPPPprojectselection,preparation,agreement,andconcessionpro-cedures.PPPreformcouldhelpenableSoEstopartnerwithprivateandfor-eigncompanies,unlockingprivatecapitalandexpandingaccesstothelatestrenewableenergytechnology.Developanassetmonetizationstrategytopromoteprivatesectorpartici-pationinSoEassets.ThiswouldbuildonSoEreformsunderwaythataimtohelp:(i)increaseprivatesectorinvolvementinimprovingSoEgovernanceandperformance;(ii)enhanceoperationalautonomyfromthegovernment;and(iii)leveragethevalueofSoEs'operatingassetstoattractprivateinvestorsthroughpartialmonetizationofthoseassets.ConsolidatetheregulatoryframeworkgoverningCooperationProjects.Re-viewsector-specificregulationsonprivatesectorparticipationandeliminateinconsistencieswithregulationsforCooperationProjectswherepossible.Tohelpstreamlineandavoidfrequentchanges,aconsultationprocesscouldbefollowedforanyamendmentsofregulationsaffectingCooperationProjects,withprivatesectorinput.CLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTDINVESTMENTCLIMATEANDREGULATORYREFORMSFinancialsystemreformwillhelpencourageprivatesectorparticipationinclimateinvestments;thiswouldbewellcomplementedbyinvestmentclimateandregulatoryreforms.PrivatesectorparticipationingreeninfrastructureispartiallycrowdedoutbySoEswhicharebufferedbyfiscalsupport.Neverthe-less,SoEscannotfullydeliveronclimateinvestmentsthemselvesbecauseinvestmentneedsaretoolargeandSoEbalancesheetsaretoofragiletocarrytheload.Continuedimprovementsinclimateandregulatoryreformswillhelpensureprivatesectorparticipationinthetransition.Specificmeasuresinclude:INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT96E.14.UnderdevelopedinvestmentinstrumentspreventforeignparticipationE.15.LowaveragetariffshidetariffpeaksforgreenproductsE.16.NTMsaddsignificantcoststoimportsE.17.ManynationalstandardsarenotalignedwithinternationalproductstandardsUnbundleinvestmentrisksandconnectmarketsbydevelopingforeigncur-rencyandinterestratehedginginstrumentsandintroducingproductswhereforeignanddomesticinvestorscanco-invest.Atthesametime,securitiesis-suancesintheglobalmarket,particularlybyIndonesianinfrastructureprojectsorentities,couldbeencouragedandfacilitatedtomobilizefundsfromforeigninvestors.MoFcouldfurtherleveragethecurrentmomentumonKomodobonds(includinggreenandsustainableKomodobonds)andfurtherdevelopthemarketbyextendingthebondtermsbeyondfiveyears,possiblywithcreditenhancementsfromreputableinternationalentities.Liberalizeremainingtariffsonimportsofgreengoods,includingthroughmultilateralparticipation.Whileaveragetariffsareencouraginglylow,thereareafewremainingtariffpeaksforgreengoods.Reducingimporttariffswillreducekeygoods’pricesandboostaccesstolower-costandmoreenergy-effi-cienttechnologies.Thismaybeparticularlyimportantforindustriesthatmustcomplywithclimatechangemitigationpolicies.ReviewandstreamlineNTMsongreengoods.SomeNTMscouldbesimplifiedsuchasimportapprovalsandcompliancewithSNI.SomeNTMscouldbecon-sideredforremovalentirely,suchasPSIsandportofentryrestrictions.Overtime,someNTMscouldbephasedoutasarobustnationalsinglewindowandintegratedriskmanagementsystemisdeveloped.Harmonizeexistinglocalstandardswithinternationalonesanddevelopnewstandardsthatarealignedwithinternationalstandardsandpractices.Firmstradingingreengoodsreportedalackofharmonizationwithinternationalstandardsasakeychallenge.Misalignmentimposescostsonexportersandincreasesthetimerequiredtobringgreengoodstomarket.WorkingtowardaharmonizationofproductstandardsacrossmarketscouldencourageimportsofgreengoodsandboostIndonesianexportsinnewmarketswithcomparablestandards.CLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTETRADEPOLICYAdjustmentstotradepoliciescouldbeusedtosupportIndonesia’sdecarbon-izationobjectives.Indonesiahaslowaveragetariffratesonimportsofgreengoodsandtechnologies(belowratesfornon-greengoods),however,NTMsaddcoststogreengoodsthatexceedtariffcosts.Whilemanyrepresentimportantstandardsthatshouldbemaintained,theremaybeopportunitiesforstream-liningthesebarriers.TheremayalsobescopeforintegratingenvironmentalprovisionsinIndonesia’stradeagreementsandforIndonesiatomorefullyparticipateinpolicyinitiativesongreentrade.Climate&DevelopmentPolicyFramework97FFIRMANDWORKER-LEVELMEASURESTheprivatesectorisaffectedbyclimatechangeandwillbeintegraltothelow-carbonandresilienttransitions.Challengesinclude:(i)theneedtoalignincentivesforclimate-sensitiveprivatesector-ledgrowth;and(ii)theneedtosupporttheentryofnewsustainablefirmsandensurecompetitivepressureonexistingfirms(includingreducingSoEs’footprintincompetitivesectors).Theworkforceisalsointegraltothelow-carbontransitionandlong-termgrowth.Itneedstobesynchronizedwithchangestriggeredbyfirms.Keyissuesandmeasuresinclude:E.18.LCRsareprohibitedunderWTOlawE.19.LackofparticipationingreentradeinitiativeslimitsabilitytoshapepolicyE.20.FDIinrenewablesisinsufficientE.21.IndustrialEstatesofferopportunitiesforimprovedefficienciesandresilienceReducethestringencyofLCRsuntildemandcansustainlocaleconomiesofscale.HighLCRspriortoestablishmentofmarketdemandlargeenoughtosupportdomesticmanufacturingeconomiesofscalemaypreventindustrydevelopment,increaseprices,andpreventinternationaltechnologytransfer.Allowingthemarkettofirstdevelop,suchthatdomesticproductioncansupporttheeconomiesofscalerequiredtokeeppricesaffordable,maybemoreeffective.Lookforopportunitiestoincludeenforceableenvironmentalprovisionsintradeagreementsandparticipateinplurilateralandmultilateraltradepolicyinitiativesongreengoods.Environmentalprovisionsandcommitmentsarelikelytobecomemoredetailedintermsofscopeandambition.Directparticipationinmultilateralandplurilateralenvironment-relatedtradepolicyinitiativeswouldallowIndonesianexporterstobenefitfromimprovedmarketaccessindestinationmarkets,whilealsogivingIndonesiaaseatatthetabletoshapethecontentandcourseofdiscussions.FacilitateentryofforeigninvestorsinrenewableenergythroughtheupcomingJobCreationLaw's(11/2021)PresidentialRegulationonGreenInvestments.FDIinrenewableswillbeimportantforIndonesia’slow-carbontransition.Thiscouldbeassistedbyplanningandprioritizationwithtargetedperformance-basedincentives,loweringLCRsinrenewables(seerecommendationE.19.),developingdomesticsuppliers’capacity,andgreeningtheenergymix.DevelopanEIProadmapandprogramthroughtheSmartEco-IndustrialParkinitiative,includingamodelEIPtoserveasabenchmark.EIPshavethepo-tentialtohelpreduceemissionsandimprovethecompetitivenessandresilienceofindustry.AnEIProadmapcouldhelpby:(i)assessingthecostofgreenindus-trialinfrastructureupgradesneededtolowercarbonintensityandimprovetheresilienceoffirmsinpriorityindustrialestates;and(ii)strengtheningindustrialestates’preparednessandresiliencebyconductingvulnerabilitymappingandphysicalrisks(floods)togreenindustrialinfrastructureandfirmsandjobs.CLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTINDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT98E.22.CircularEconomy(CE)solutionsrequiresupportE.23.ThereisaneedtoalignbusinesssupportwithclimateobjectivesE.24.ThereisemergingdemandforgreenskillsbutlowsupplyofgreenskillsE.25.LackofeducationonadaptationandmitigationreducesclimatechangeawarenessImplementcircularbusinessandlow-carbongrowthmeasuresasperBap-penas’LCDI.Developactionplanstopromotecircularbusinessandlow-carbongrowthmodelsspecificallyinthegovernment’sfiveprioritysectors:construc-tion,foodprocessing,electronics,textiles,andplastics.Astrengthenedpolicyframeworktosupportacirculareconomycouldincludeincentivesforcirculareconomydevelopment;circulareconomystandards(end-of-wastecriteria,greenlabelproducts,andwasteclassification),andfinancepublicgoodinvestmentsinsharedinfrastructure.Finalizetheefficiencyandeffectivenessreviewofbusinesssupportprograms.ApproximatelyUS$1.15billionisspentannuallyacross146businesssupportprograms.Thereviewcouldconsideroptionsfortargetingthissupporttoassistfirmsvulnerabletohighercarbonprices,andforthosewhoseproductivityisaf-fectedbyclimatechange.TheCCDR’sfirmsurveyhighlightedthreepriorityareasofsupport:(i)trainingandcapacitybuildingrelatedtoenvironmentallyfriendlytechnology(80percent);(ii)accesstogreenfinancingschemes(40percent);and(iii)connectionstogreentechnologyproviders(32percent).Continuemodernizingtheskillsdevelopmentsystemtorespondtochangesinlabordemand.Theskillsdevelopmentsystemrequiresfrequentlyupdatedlabormarketinformationtosupportupdatestocurriculums.Changeswouldbeservedwellbypartnershipsbetweentechnicalandvocationaltraininginstitutesanduniversitiesandtheprivatesector.TheMinistryofManpowerhasstartedthisreformandiscommittedtodeepeningitinthecomingyears.Forthepublicsector,climatechangesubjectscouldbeincludedinthecivilservice’sDIKLATPIM(NationalLeadershipTraining)I,II,III,andIVtoensurethatgovernmentleadersandmanagersunderstandstrategicclimate-transitionissues.Introduceclimatechangeeducationinschools.Whilegreenjobsarelikelytorelyheavilyontransversalskills(reading,writing,math,problemsolving,man-agement,socialanddigital)andtechnicalskills,climatechangeeducationcanhelpyoungIndonesiansunderstandrisk,uncertainty,andrapidchange.Climatechangeeducationhelpsnurturestudents’behaviortowardecologyconscious-nessandpro-environmentalactions.Italsohelpstobuildcitizens’capacitytoadapttonaturaldisasterevents,inadditiontochangingtheirbehaviorandbeliefsneededtomakeinformeddecisionsinadynamiccontext.CLIMATECLIMATECLIMATECLIMATEURGENCYURGENCYURGENCYURGENCYDEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENTMeasurestoimproveenablingconditionscouldfocusonfiscalandfinancialmeasuresintheshortterm,includingsettingoutaroadmapforcarbonpricing(Figure79).Short-termmeasureswillhelptoaligntaxincentiveswithclimategoalsandimproveeconomicefficiency(forexample,throughincrementalsub-sidyreform).Planningforcarbonpricingwillhelpinformtheprivatesector’smedium-andlong-terminvestmentdecisions.Medium-termactionsthatim-provethebusinessenvironmentareexpectedtohaveimportantdevelopmentbenefits,includingcontinuedimprovementstotheskillsdevelopmentsystem,harmonizationoftradestandardsforgreengoods,andelectricitytariffreform.Climate&DevelopmentPolicyFramework99ReducelocalcontentrequirementsLowcarboncircularpracticesGreenskillsinvestmentsVeryHighE.1HighE.3E.4E.10E.22E.20E.11E.23E.2Low-mod.E.18E.5E.24EE.12E.19E.13E.14E.15E.21E.9E.8E.17E.16E.6E.7VERYHIGHSHORT-TERMHIGHMITIGATION&ADAPTATIONIMPACTURGENCYMEDIUM-TERMLOW-MODERATELONG-TERMDEVELOPMENTSYNERGIESFIGURE79TimeframeandExpectedImpactofEnablingConditionMeasuresCarbonpricingroadmapReviewtaxmeasuresforclimateconsistencyClimatefinancialriskassessmentSoEreformsClimateeducationCo-opprojectregulationsForeigninvestmentPPPreformsAssetmonetizationEnv.provisionsintradeagreementsEcoindustrialparkroadmapLiberalizetarrifsongreengoodsGreenloanguidanceReviewbusinesssupportprogramsPLNPublicServicesObligationtotargetedcashtransfersGreenbondincentivesHarmonizetradestandardsstreamlineNTMsUnbundlingassetsCompletefuelsubsidyreformNationalclimatefinancestrategyRiskman-agementguidanceforbanksSource:WBGstaffassessment.Note:Actionsassessedasmosturgent,withthegreatestclimateimpacts,aretothetopright;thosewithgreatestdevelopmentco-benefitsarerepresentedbylarger/darkercircles.Short-termprioritiesarethoseenvisagedpriorto2025,medium-termpriorto2030,andlong-termafter2030.INDONESIACOUNTRYCLIMATEANDDEVELOPMENTREPORT100AsianDevelopmentBank.2020.“DisasterResilienceImprovementProgram:ReportandRecommenda-tionofthePresident.”(link).BankforInternationalSettlements.2021.“Principlesfortheeffectivemanagementandsupervisionofclimate-relatedfinancialrisks(draftforconsultation).”Basel:BaselCommitteeonBankingSupervision,BankofInternationalSettlements(link).Bappenas.2021.“AGreenEconomyforaNetZeroFuture.TheLowCarbonDevelopmentInitiative.”Ja-karta:MinistryofNationalDevelopmentPlanning(Bappenas).BadanPusatStatistik(BPS)(StatisticsIndonesia).2018.“AgricultureIntercensalSurvey.”———.2020.“StatistikKelapaSawitIndonesia2020(IndonesianOilPalmStatistics2020).”Jakarta:StatisticsIndonesia(link).CarbonDisclosureProject(CDP).2020.“RaisingAmbitionsTowardsSustainablePalmOilinIndonesia.”London:CarbonDisclosureProject(link).Chang,P.H.,R.Daga,G.V.Mehta,andM.Cali.2019.“CreatingMarketsinIndonesia:UnlockingtheDy-namismoftheIndonesianPrivateSector.”CountryPrivateSectorDiagnostic.Washington,DC:WorldBankGroup.ClimateBondsInitiative.2019.“UnlockinggreenbondsinIndonesia:aguideforissuers,regulatorsandinvestors.”London:ClimateBondsInitiative.ClimateWatch.“DataExplorer.”Washington,DC:WorldResourcesInstitute(link).CoalitionforUrbanTransitions.2021.“SeizingIndonesia'sUrbanOpportunity.”Washington,DC:CoalitionforUrbanTransitions.Dalheimer,B.,C.Kubitza,andB.Brümmer.2021.“Technicalefficiencyandfarmlandexpansion:EvidencefromoilpalmsmallholdersinIndonesia.”AmericanJournalofAgriculturalEconomics104(4):1364-1387(link).Emam,A.R.,B.K.Mishra,P.Kumar,Y.Masago,andK.Fukushi.2016.“ImpactAssessmentofClimateandLand-UseChangesonFloodingBehaviorintheUpperCiliwungRiver,Jakarta,Indonesia.”Water8(12):559(link).FoodandAgricultureOrganization(FAO).2019.“CountryGenderAssessmentofAgricultureandtheRuralSectorinIndonesia.”Jakarta:FAO.Frankenberg,E.,T.Gillespie,S.Preston,B.Sikoki,andD.Thomas.2011.“Mortality,TheFamilyandtheIndianOceanTsunami.”TheEconomicJournal121(554):F162–F182(link).GlobalEco-IndustrialParksProgramme(GEIPP).2022.“GlobalEco-IndustrialParksProgram-Indonesia.”UnitedNationsIndustrialDevelopmentOrganizationandMinistryofIndustry(link).REFERENCESReferences101Goldberg,L.,D.Lagomasino,N.Thomas,andT.Fatoyinbo.2020.“Globaldeclinesinhuman-drivenman-groveloss.”GlobalChangeBiology26(10):5844-5855(link).Greenstone,M.,andQ.Fan.2019.“AirQualityLifeIndex:Indonesia’sWorseningAirQualityanditsImpactonLifeExpectancy.”AQLI(link).Hubacek,K.,X.Chen,K.Feng,T.Wiedmann,andY.Shan.2021.“Evidenceofdecouplingconsump-tion-basedCO2emissionsfromeconomicgrowth.”AdvancesinAppliedEnergy4:100074(link).InstituteforEssentialServicesReform.2021.“BringingIndonesiatoTheGigawattClub:UnleashingIndonesia’sSolarPotential.”InternationalEnergyAgency(IEA).2020.“ElectricityMarketReport:2020Regionalfocus:SoutheastAsia.”Paris:InternationalEnergyAgency(link).InternationalFinanceCorporation(IFC).2018.“IndonesiaInfrastructureSectorAssessmentProgram.”InternationalFoodPolicyResearchInstitute(IFPRI),MinistryofNationalDevelopmentPlanning,RepublicofIndonesia(Bappenas),andAsianDevelopmentBank(ADB).2019.“PoliciestoSupportInvestmentRequirementsofIndonesia’sFoodandAgricultureDevelopmentDuring2020-2045.”Manila:AsianDevelopmentBank.InternationalLabourOrganization(ILO).2021.“RegionalStudyonGreenJobsPolicyReadinessinASEAN.”TheAssociationofSoutheastAsianNationsandtheInternationalLabourOrganization(link).———.2022.“Gendergapinlabourforceparticipationrates.”InternationalLab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