Economists urge green policies, incentives toward sustainable economy

Adrian Wail Akhlas

The government needs to issue fiscal measures such as cutting fossil fuel subsidies and providing renewable energy incentives to slow climate change and to ensure sustainable post-pandemic development of the economy, experts say.

Developing the Indonesian economy should no longer neglect environmental issues, according to the University of Indonesia’s economist and former finance minister, Chatib Basri, underlining that foreign investors were becoming increasingly focused on environmental and social driven goals.

“Government intervention is crucial in supporting the transition to renewable energy and in ensuring sustainable development,” he told a discussion on Monday held by economics research and news company Katadata. “The government must cut fossil fuel subsidies and start investing more in health care and environmentally friendly products like electric cars.”

Foreign direct investment (FDI) might recover to pre-pandemic levels only in 2022, but investors could avoid projects that were detrimental to the environment, he continued. “Therefore, government intervention is needed to attract green investment,” Chatib stressed. Indonesia entered its first recession since the 1998 Asian financial crisis in the third quarter when the economy shrank 3.49 percent, slower than the second-quarter contraction of 5.32 percent. Household consumption and investment, which together account for more than 80 percent of gross domestic product (GDP), shrank respectively 4.04 percent and 6.48 percent in the third quarter. The Investment Coordinating Board (BKPM) reported FDI realization of Rp 106.1 trillion (US$7.21 billion) in the third quarter, a modest 1 percent year-on-year increase.

According to a report by the International Energy Agency (IEA), Indonesia’s uncertain regulatory environment had held back renewable energy investment. The IEA urged Jakarta to regulate green energy pricing to enable more private renewable energy companies to enter the Indonesian market.

“The existing fiscal space needs to be used wisely, while an improved policy, regulatory and investment framework can help mobilize a more diverse pool of sources of funding, especially from new investors and private-sector industry players,” the IEA suggested in its July 17 report.

Indonesia is committed to generating 23 percent of its energy from renewable sources by 2025. Existing regulations stipulate that Indonesia attain a 17.5 percent renewable energy mix by 2019, yet the country attained a renewables mix of just 12.36 percent last year.

Speaking at the same discussion, macroeconomic policy director Hidayat Amir of the Finance Ministry’s Fiscal Policy Agency said that the Job Creation Law would help attract foreign investment to the sector by cutting bureaucratic red tape. He added that the government’s tax incentives were a “sweetener” intended to attract investors.

“The government is also preparing several measures to reduce [negative] externalities related to the environment,” he said, and that the government planned to incentivize electric cars and disincentivize high-emission vehicles. The Finance Ministry in 2018 began issuing green sukuk – Islamic bonds to finance green projects – and has raised $3.25 billion from two bond issuances. The ministry is currently offering retail green sukuk in a bid to raise Rp 2 trillion.

Meanwhile, the Financial Services Authority (OJK) has published the medium-term Roadmap for Sustainable Finance in Indonesia 2015-2019, which incorporates climate change mitigation efforts in its definition of sustainable financing. Think Policy Society cofounder Andhyta F. Utami said that the government should use its fiscal capacity to prevent environmental degradation. She also urged the government to push forward with its sustainability measures, including a plastic excise and a carbon tax. “The government also needs to subsidize the uncompetitive solar industry to accelerate renewable energy development,” Andhyta told The Jakarta Post, pointing out that solar incentives could create up to 500,000 green jobs.

Continuing, she said that the government would need to rethink subsidies like the domestic market obligation for coal, which could be environmentally harmful.  “Government incentives to spur investment in renewables and to reward sectors that generate positive impacts on the environment are critical to preventing environmental degradation,” she said, especially as environmental degradation could exacerbate poverty in the long run.

The government has this year allocated a Rp 92.2 trillion energy subsidy that includes fossil fuels, cooking gas and electricity.

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