The New Pathway of Indonesian Development

KOMPAS/ELSA EMIRIA LEBA

Mari Elka Pangestu.

There is a polemical discussion on climate change revolving around an assumed trade-off between economic growth and the reduction of greenhouse gas (GHG) emissions. Meanwhile, there is an urgent need to act on climate change now.

The 2018 Intergovernmental Panel on Climate Change (IPCC) report should be a warning for all of us. If climate change is not addressed properly, its effects will be disastrous for the world and Indonesia, such as the increase in natural disasters, the sinking of Indonesian islands, the damaging natural capital, air pollution and the lack of clean water. Climate change will hurt poor people the most.

The National Development Planning Ministry/National Development Planning Agency (Bappenas) just released a report entitled "Low Carbon Development – Paradigm Shift Towards a Green Economy in Indonesia" to integrate the GHG emission reduction targets in the 2020-2024 National Medium-Term Development Plan (RPJMN).

With an integrated system-based approach, a low-carbon pathway can be achieved by policy interventions through an interrelated system between energy, transportation, industry, agriculture and fisheries and other sectors.

The system-based approach integrates the impact of economic activities with the capacity and carrying capacity of land and water resources, and the impact of GHG emissions. Thus, it should change the process in planning and implementing policies that are based on sectoral ego or "silo".

According to the report, low-carbon development will result in a higher rate of economic growth than the current approach (business as usual). The economy is predicted to grow at an average of 6 percent a year in the 2019-2045 period. GHG emissions are projected to decline by almost 43 percent by 2030 or above Indonesia\'s climate change commitment. The low-carbon development pathway contains the assumption of a change in government policies, such as the policy of switching from petroleum-based and coal-based energy sources to low-carbon energy sources.

Infrastructure is projected to support sustainable development, for instance through the construction of environmentally friendly public transportation systems, and an increase in agricultural production is expected to be achieved not through the expansion of farming areas but through an increase in productivity.

Of course, the most important thing in achieving high growth in a low-carbon economy is the commitment and coordination of the government, including local governments, in the short, medium and long term.

The certainty of clear direction and strategy will encourage investment and innovation. In addition to higher GDP growth resulting from the low-carbon development pathway, other benefits that can be achieved include wider employment opportunities, improved public health and higher living standards. In fact, by 2045, extreme poverty is expected to decline to 4.2 percent of the population, from the current rate of 9.8 percent.

Synergy

To attract investment and other sources of funds for the low-carbon economy, Indonesia must pay attention to three main factors.

First, the low-carbon development must support a synergistic approach that can achieve economic, social and environmental goals simultaneously. For example, policies to protect and rehabilitate forests and land, such as a moratorium on the use of peatland and reduced deforestation, will also have an impact on the water supply for drinking and irrigation produced by forest and river ecosystems.

Renewable energy also reduces GHG emissions and encourages the achievement of health targets, such as a reduction of respiratory infections triggered by pollution from coal power plants. According to the report, investment in new coal power projects is not economical if the impact of pollution is accounted for.

Investment in renewable energy is better for the economy and society, now and in the future. Moreover, the cost of renewable energy will fall rapidly and will continue to fall as economies of scale are achieved.

Scale of investment and financing

Second, in the report, the average total investment for low-carbon development in Indonesia is around US$21.9 billion for the 2020-2024 RPJMN. That is equivalent to 1.7 percent of the GDP. Meanwhile, investment in low-carbon development for the 2024-2045 period is estimated to be around 2.3 percent of GDP. Compared to the current level of investment, low-carbon development has a lower investment-to-GDP ratio.

The low-carbon development scenario is projected to create 15.3 million green jobs with better wages by 2045. This is good news for all of us, especially given the demographic bonus and the need for job creation. Policies and interventions must also rely on local labor and reduce the number of people that are negatively affected during the transition to a low-carbon economy.

Mobilization of funds

Third, given the amount of investment needed, low-carbon development requires partnerships between the public and private sectors in mobilizing funds and harmonizing investment with low-carbon benchmarks. The government does not have enough resources from the state budget to finance the transition to a low-carbon development path, both from its own and from bilateral and multilateral development partners.

Additional funding is needed from domestic and foreign investors and blended finance, especially for investment in sustainable development that will support the transition.

It should be attractive for the private sector and it can be created by mainstreaming low-carbon policies, in addition to building a governance framework and clear policies. The government has begun this effort by including green projects in the state budget, as well as with the issuance of green sukuk and the launch of the SDG Indonesia One funding scheme by PT Sarana Multi Infrastruktur (SMI).

The Financial Services Authority (OJK) has also issued guidelines on sustainable finance. The biggest challenge in encouraging private investment comes from the perception of investment risk.

Development banks and financial institutions can act as catalysts in upfront financing mobilization or provide the guarantees needed. This is a tool to reduce the risk of investing in low-carbon projects.

The availability of project preparation facilities is one way to support the development of bankable projects commensurate with a low-carbon strategy. For example, the clean energy finance partnership between the US and India (USICEF) makes clean energy projects more attractive for investment.

Unlike the general assumption so far, an integrated system-based approach proves that a trade-off will not occur when we intend to achieve development goals and low-carbon targets at once. Now it is our duty to realize the golden vision and opportunity, so that Indonesia does not lose thousands of islands and our grandchildren can still breathe fresh air and live comfortably.

Mari Elka Pangestu, Professor at the School of Economics and Business, University of Indonesia