Green finance in Indonesia: barriers and solutions

Unclear incentives, historical subsidies, inconsistent policies and market monopolies are hampering Indonesia’s achievement of its emissions reduction targets.

Indonesia’s population growth, urbanisation and economic growth are driving growing energy demand and, with that, greenhouse gas emissions (GHG).

Although abundant in renewable energy resources, the country’s economy and energy security is largely reliant on fossil fuels, with coal and gas generators risking asset stranding in a rapidly decarbonising world. The government has pursued policy reform to support GHG reductions and accelerate the adoption of renewable energy, but various financing barriers are slowing down progress.

Under the current business-as-usual trajectory, increasing emissions and other associated climate impacts present a range of socioeconomic risks. Although studies indicate that it is technically feasible for Indonesia to undertake an affordable green transformation without jeopardising economic growth and poverty reduction, there exists a large gap in financing. Increased investment from both private and public sectors is needed, as public funds alone are insufficient.

This journal article identifies the market, policy and governance barriers — including financial credit regulations, uncompetitive pricing, restrictive project scale and limited access to information— to unlocking green financing for a low-carbon energy transition. We propose reform pathways via the development of mechanisms for market transparency that include:

• the need for a wholesale electricity market
• low emissions and renewable investments using tradable certificate-based policies (in particular CO2 credits)
• harmonisation of policies across ministries and agencies, and
• a reduction of electricity and fossil fuel subsidies and cross-subsidies.

Together, these measures are needed to create a transparent and lower risk investment landscape.

This is the abstract from the article of the same name published in the ‘Handbook of Green Finance’. This study built on the work of an AIC study titled Indonesian Energy Technology Assessment (IETA). Read or download the full article below.