Green Finance in Indonesia

Abstract

Indonesia’s population growth, urbanization, and economic growth are driving growing energy demand, and 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 decarbonizing world. The government has pursued policy reform to support GHG reductions and accelerate the adoption of renewable energy. However, unclear incentives, historical subsidies, inconsistent policies, and concentrated monopoly structures that obscure cost transparency, are hampering the achievement of its targets. 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 jeopardizing 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 chapter 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 and low emissions and renewable investments using tradable certificate-based policies (in particular CO₂ credits), harmonization 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.