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Economic Governance & Public Financial Management for Climate Change Policies in

Indonesia

Efa Yonnedi (Andalas University)

Kurnya Roesad (Australian National University)

Frank Jotzo (Australian National University)

Policy research paper for

The 5th CRISU-CUPT Conference

Chiang Mai, 8-9 July 2010

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I. Introduction Research questions

How can Indonesia’s central government structure its economic governance framework to better tap into international carbon finance?

How do regions benefit from carbon finance flows? Methodology

Interviews Review of policy documents, market data etc. Jakarta and Sumatra components

Funding Australia-Indonesia Governance Research Partnership (AIGRP) Additional funding from Environmental Economics Research Hub,

ANU

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International climate policy and carbon finance and why it matters to Indonesia

A sophisticated international climate policy and carbon finance architecture is evolving

Post-Kyoto mechanisms: scaling up, broadening out – the economic crisis may not deter for long

Indonesia: large potential for reducing emissions exists, but other domestic policy objectives take precedence

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ODA

Private Investment Bilateral Multilateral

Voluntary & CSR

Capital Markets

National Mechanisms

Global Mechanisms

The Carbon Finance Framework

UNFCCC

CDM Global Environmental Facility

Adaptation Fund

Private Sector GOI

Mitigation & Adaptation

Local Government and Investment Community

CDM REDD (and other)

Budget

Global Financial Flows

Regional Mechanisms

International Financial Institutions (IFIs)

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The Clean Development Mechanism Global project pipeline

expected offset credits 2,700 MtCO2-equivalent by 2012 prices: > 10 euro/t, total revenue > $ 40 billion to 2012

Largest project categories: industrial and energy Industrial gases, hydro, energy efficiency, landfill gas, fuel switching,

biomass CDM excludes deforestation, very limited in forestry

Indonesia’s CDM share Pipeline: 40 Mt = 1.4% of total Comparison: Indonesia 2.8% of developing country emissions excl

deforestation and agriculture Reduction potential much greater than realised under the CDM An issue of CDM coverage and procedures, and investment climate

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Post-2012 necessities

Substantial emissions reductions in developing countries must be achieved to limit climate change Emerging global goal 50% reduction by 2050 Developing countries around half of global emissions right now, and

growing fast (combustion emissions growth >5% pa) Developing countries must be comprehensively involved

Will require support from high-income countries

Global CO2 emissions, business-as-usual

50%

Source: Garnaut, Jotzo & Howes China Update 2008

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Post-2012 proposals Bali Roadmap

‘measurable, reportable and verifiable nationally appropriate mitigation actions’

sectoral agreements, deforestation (‘REDD’) financing, technology transfer

Policy proposals (Stern, Garnaut, many others) Comprehensive commitments/targets for developing countries ASAP,

supported by international trading Effective sectoral agreements fast Create incentives to slow deforestation fast Improve the CDM Provide substantial funding for technology development and diffusion

Indonesia CO2 emissions: history and a business-as-usual future

0

500

1000

1500

2000

2500

1990 1995 2000 2005 2010 2015 2020 2025 2030

Fossil fuel combustion

Land-use changeand forestry

Mt CO2/year

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Large potential for mitigation in Indonesia, if policy frameworks are broadened

Electricity supply Power consumptions grows at around 7%pa, limited by supply capacity Expansion largely in coal-fired plants: 10,000 MW crash program Currently: ca 29,000 MW capacity, emissions 96 MtCO2, ca half of electricity

output from coal, emissions 61 MtCO2

South Sumatera expansion plan for new coal plants: 23,000 MW by 2015, 36,000 MW by 2025 implies roughly 100 MtCO2 by 2015, 160 MtCO2 by 2025

Compare CDM pipeline: ~8Mt/year to 2012

Industry: many options for energy savings eg cement plants – Semen Padang

Deforestation remains the big emissions source in the medium term

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Mainstreaming climate change into the national economic governance framework

Indonesia’s climate change policy framework still evolving: complex coordination issues and competition for leadership

Integration beginning, but no clear low carbon development strategy or consistent climate finance approach – yet

Potential institutional overlaps: policy dialogue, climate finance and donor coordination to be resolved

The Climate Change Policy Framework

Ministries

Finance

Key Policy Documents National Climate Change Board Reports to President

Budget process

Bappenas

Environment

Forestry

Mines & Energy

National Development Planning: Indonesia’s Responses to Climate Change

Gov. Work Plan (RKP) 2010

Foreign Financing / Grant/ Loan

Coord. Economy

Coord. Welfare Annual Budget

(APBN)

Long-term Development Plan (RPJP) 2004-2025

Medium-term Development Plan (RPJM) 2009-2014

National Action Plan Addressing Climate Change

National Strategy on Forestry and REDD

National Energy Strategy

Donor Agencies

Implementation

Provincial and local governments

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Practical barriers to carbon finance

To date mainly projects under the CDM, but the record falls short of overall emissions reduction potential

Sumatra case studies: investment climate, capacity and information especially of local governments, regulatory uncertainties (land tenure!)

National policies on energy an electricity not conducive for carbon finance: fuel subsidies, electricity tariffs.

Strategically, low carbon economy path in Indonesia:

Adopting ‘green’ taxation and fiscal policies aiming to reduce fiscal and energy price distortions.

Incorporating carbon finance into public and private investment decisions.

Engaging internationally to shape post-2012 climate investment architecture

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Institutionally, Indonesia: A clearer division of labor between policy-

formulating and budget/finance coordinating agencies.

Clarify the role of the new National Climate Change Council (DNPI), especially with regard to its role as a policy-formulating agency.

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CDM-specific reforms: Develop a national CDM plan (linked to an overall low carbon growth strategy) and

identify key sectors and programs (e.g. renewable power like geothermal, hydro or nationwide landfill gas flaring)

Consider establishing a public carbon investment or program agency to facilitate program implementation, speed up CDM application, monitoring and verification procedures, clarify trading and ownership of CERs.

Raise awareness in financial/banking sectors to increase lending to CDM projects Keep improving the general investment climate, as CDM investments are like any

other investment flows which respond to sound incentives and transparent governance regimes

Improve the communication flow between central government and regional government on carbon finance investment opportunities

Increase CDM training programs for regional and local policymakers

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Main Story and Key Messages

International level Scaling up and broadening international carbon finance Comprehensively engage developing countries in mitigation effort

National level Integration of climate change policy into economic policymaking Policy coordination roles still evolving Carbon finance regime is limited to CDM projects

Regional level Significant barriers to CDM and carbon finance more broadly

Policy Outlook Need broader policy and financing framework Need clear economic incentives at all levels Need sound domestic investment climate

Terimakasih

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Appendix

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44. . Validation (4 months)Validation (4 months)

9. Certification and 9. Certification and IssuanceIssuance

8. Verification 8. Verification

6. Project Registration6. Project Registration

Bureaucracy: CDM project cycle

Project sponsor Accredited CDM auditor

CDM Executive Board ENVCF/Region

1. Project Identification Note plus financials (1 month),

5. Negotiate and sign Emission Reductions Purchase Agreement (ERPA)

7. Construction and start up

10. End of contract period (may be post-2012)

2. Project Design Document (2 months)

3. Bank Project due diligence (environmental and social safeguards)

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Energy

Forests / Land

Indonesia’s GHG Emissions Sources

Forests / Land Use Projected Growth Stable Or

DecliningData Source: IFCA (2007)

Strong Fossil Fuels Growth Data Source: IEA 2004

  Coal Oil Gas Emissions Growth '94-'04

Industry 31.9 35.4 50.7 118 48%

Electricity 54.9 25.2 9.9 90 170%

Transport 78.0 - 78 74%

Resident 41.0 9.0 50 71%

Total 86.8 179.6 69.6 336 80%

  Prod’n Prot’d Pulp Palm Total

Above Ground Deforest 107   19   55   50   231 

Planned "Conversion"  100   100 

Peatland Deforest     88   43  131 

Peat Drainage (not REDD)         469 

Peat Fires (not REDD)         1,260 

Total 207  19  143  93  2,191 All figures in MtCO2e. Forest data are

compiled from various years

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Barriers: Distorted Energy Prices

Subsidies 24% (120.7 trn IDR)

Social Assistance 5% (24.2 trn IDR)

Transfer to Regions 30% (151 trn IDR)

Others 6% (31 trn IDR)

Interest Payments 11 %

(58 trn IDR) Capital Expenditures 7% (37 trn IDR)

Material Expenditures 6%

(33 trn IDR)

Personnel Expenditures 11% (

56 trn IDR)

Fuel Subsidies 15% (75 trn IDR)

Non-Fuel Subsidies 2% (12 trn IDR)

Fuel Subsidies Electricity Sector 4% (21 trn IDR)

Non-Fuel Subsidies Electricity Sector 3% (13 trn IDR)

Source: Compiled from World Bank (2007)

Central government expenditure components (percent of GDP in 2005)

Entry barriers to investment in power sector:

Fixed fuel subsidies and electricity tariffs do not provide clear price signals

Causing overconsumption

Provides less incentives to innovate and invest in renewable energy

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Increased Environmental Expenditures

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2001 2002 2003 2004 2005 2006 2007

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

National nominal environmental expenditures

Environmental expenditures as % of total expenditures

bn IDR RKP 2009: around 1.7 trn IDR allocated to climate change actions with Public Works (23%) and Ministry of Forestry (21%) claiming the biggest shares.