A Green Industrial Policy for Indonesia

Indonesia, which is the world’s ninth biggest contributor to global greenhouse gases (GHGs), needs to implement a green industrial policy effectively. Doing so would be instrumental in attaining high-income status by 2045 as a low-carbon economy and a sustainable user of natural assets.

The motivation for embarking on a green industrial policy rests on two urgent priorities: decarbonising production across industry and ensuring the more efficient use of resources.  The case for both is clear as the Indonesian archipelago is ranked 14^th among 181 countries on the Global Climate Risk Index. Industry, comprising manufacturing and construction, has a leading role in the economy as it constitutes  41 per cent of the economy, contributes 37 per cent of GHGs, and has vital links to the country’s vast natural resources. 

Definitions of industrial policy refer to it as comprising economic activities aimed at long-term social benefits rather than only short-term financial gains. A green industrial policy adds the decarbonisation dimension. The principles of a low-carbon economy and sustainable consumer of natural assets are contained in the Law of the Republic of Indonesia No. 16 of 2016 concerning the Paris Agreement on the United Nations. But they need to be followed up with action.

Policy is best implemented with neutral or uniform incentives for green growth across entities. The incentives should then be taken advantage of by the more competitive sectors in the market setting, and not offered case by case by the government in the spirit of picking industrial winners.  The approach can use carbon tax revenues (below) to finance the incentives. Furthermore, since growth with sustainability calls for more than tinkering on the margin, green industrial policy would call for a structural transformation that values all three forms of capital, physical, human, and natural, and relies on the productivity of investment and checks on efficiency through openness to global trade.

The incentives would favour low carbon development, as envisaged in the current National Medium-Term Development Plan (2020-2024). Indonesia has the largest mitigation potential in Southeast Asia with a 36 per cent share of the region’s emissions. The country has committed to becoming carbon neutral by 2060 and is working on a Long-Term Strategy for Low Carbon and Climate Resilience to 2050. The Presidential Decree on Renewable Energy of September 2022 encourages the use of renewables and the early retirement of some coal plants. The country is committed to a renewables share of 23 per cent in electricity by 2025. 

The motivation for embarking on a green industrial policy rests on two urgent priorities: decarbonising production across industry and ensuring a more efficient use of resources.  The case for both is clear, inter alia, as the Indonesian archipelago is ranked 14th among 181 countries on the Global Climate Risk Index.

But Indonesia is way off in carbon trends: renewables constitute less than 12 per cent of energy consumption today. As the world’s largest exporter of coal, 60 per cent of Indonesia’s electricity generation comes from coal. In fact, in view of the urgency of the climate crisis, Indonesia would want to become net zero by 2050 rather than the government target of 2060. That calls for faster economic diversification from natural resources, investments in knowledge, technology, and innovation. In addition, there needs to be participation in clean energy value chains, facilitated by financial innovations including blended instruments, guarantees and feed-in tariffs.

Emissions from fossil fuels need to be cut massively, especially in the cement, iron and steel sectors that contribute some 4/5^th of industrial effluents.  Companies need to be nudged to explore alternative fuels, such as solar and wind, as well as biomass and municipal waste. Cement companies can ramp up waste heat recovery systems, which capture the heat generated during production and redirect it to generate electricity. In steel, companies can speed up energy-efficient technologies, such as electric arc furnaces, increasingly using electricity instead of fossil fuels. Realistically, however, carbon capture and storage appear to be some years away.

Pricing carbon would underpin the drive for green investments.  A carbon market and a carbon tax on coal fired power plants, pushed to 2024, are good first steps, and they need to be implemented and their scope vastly expanded. 

Managing resources sustainably would be the other big part of green industrial growth.  Regulation of the Ministry of Industry (Kemenperin) No. 50 of 2020 states that Green Industry would prioritise efficiency and effectiveness in the use of resources.  There need to be government regulations to standardise the frameworks green industries utilise. A centerpiece of this standardisation would be guidelines and monitoring of production waste generated by the industry. This would involve the reduction of waste at the source, reuse of waste, recycling of waste, and separation of a material or energy from waste.

Related to resource management is the sustainable use of natural ecosystems.  That is because forestry and land use, which are major inputs for agri-business, contribute half of Indonesia’s emission reduction target.  Relative to others in Southeast Asia, Indonesia also has a large gap to fill pertaining to emissions related to the management of natural resources. This includes forestry and land use.

The political economy of forest and land use management presents huge challenges as the status quo favours certain interests of large companies, small landholders as well as local governments. But innovation in green technology can lower the cost of operations and combat unsustainable but financially profitable practices.  Digital technologies like the internet, artificial intelligence (AI), and machine learning can be deployed to make selling sustainable products more profitable, for example building and using low-cost sensors and applying AI capabilities to improve air quality in urban and rural areas. Subjecting agribusiness exports to the tests of clean energy use can help.

Pursuing a green economy in Indonesia, comprising decarbonisation of industry and sustainable use of resources, could bring multiple benefits. A Bappenas study finds that one of the key benefits of green industry is the possibility of supporting a GDP growth of around 6 per cent a year without mortgaging the environment and ecosystems. Despite the challenges involved, such rates of environmentally sustainable growth should be attractive enough for Indonesia to push ahead with green industrial policy.

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