OECD Economic Surveys: Indonesia 2024

Andrea Goldstein
OECD

Indonesia has ambitious goals in transitioning to a green economy, most notably aiming to reach net-zero greenhouse gas (GHG) emissions by 2060, after a peak in 2030 (Figure 4.1, Panel A). Recent years have seen an increase in net emissions (Panel B), although in per capita terms Indonesia produces roughly half as many GHG emissions as the OECD average. As for other emerging market economies, emission reduction will be challenging, insofar as the high rate of economic growth necessary to achieve convergence in living standards with OECD Members implies increases in emissions in the short term. Another challenge for Indonesia is its heavy dependence on coal for energy supply. Ensuring energy security as the reliance on coal decreases is a key aspect of the green transition. Meanwhile, Indonesia’s large and fertile land mass provides opportunity to slow down net emissions through changes in land use, in particular by eventually reversing deforestation.

In addition, Indonesia faces considerable challenges in climate-change adaptation. It is highly exposed to higher average temperatures and extreme and unpredictable weather. According to OECD estimates (2023[1]), average daily temperatures in Indonesia are likely to be 1°C higher than in the period 1985-2014 by 2050 even if the global community manages to sharply lower emissions. Recent analysis projects GDP in 2050 to be up to 0.6% lower if global emissions are contained in line with the Paris Agreement (i.e. by containing the increase in global temperatures below 2°C) but up to 4.4% lower if global average temperatures rise by more than 3°C (Swiss Re Institute, 2021[2]). Moreover, under a high emissions scenario, heat-related deaths among those aged 65 years could reach 53 per 100 000 annually by 2080, compared with a historical baseline of 1 death per 100 000 (WHO, 2015[3]).

This chapter first considers past progress and future challenges in GHG emission reduction and domestic energy sourcing. It then considers key issues in the green transition, notably policy responses in manufacturing, the transport sector and sustainable buildings. A final section on adaptation covers disaster risk management, water resource issues, and how households and businesses can cope with climate change challenges. The chapter’s focus on issues related to greenhouse gas emissions means that some green transition issues are not covered. Protecting the environment and reducing pollution includes challenges that are beyond the reduction of GHG emissions and climate-change adaptation. In particular, air pollution continues to weigh heavily on the health of Indonesians. Also, there is work to do in preserving Indonesia’s rich land and maritime wildlife; Indonesia remains the second largest producer of plastic pollution, much of it ending up in rivers and oceans.

Reducing GHG emissions has been the core element of international climate change cooperation with the aim of stabilizing atmospheric concentrations to avoid “dangerous anthropogenic interference with the climate system.” Since 1997, industrialized countries and countries in transition to a market economy have committed to achieve quantified emissions reduction targets for a basket of six GHGs. One key element of this process has been the commitment of countries to regularly report their emissions to the UNFCCC. Ensuring strong commitment on reporting is important, including for Indonesia.

In recent years, energy-related activities, peat fires and other land use (notably forestry) have been the largest contributors to GHG emissions in Indonesia, though the latter have markedly declined (Figure 4.2, Panel A). This mainly echoes efforts to reduce the pace of deforestation. Indeed, the reductions relating to land use account for the slower growth rate in total net emissions seen in 2018-2022. Nonetheless, emissions have been on a strong upward trend again since 2020. Emission reductions relating to changes in land use are expected to make a sizeable contribution to meeting Indonesia’s global commitments looking forward (see below).

Meanwhile, other GHG emissions continue to trend upwards – the decline during the pandemic was an exception (Figure 4.2, Panel A). These emissions mainly comprise energy-related activities, the largest component of which is power generation. Other energy-related components include transport and manufacturing. However, there is progress underlying increasing emissions: emissions intensity in the economy has been diminishing, i.e., emissions have been increasing by less than GDP. Between 2010 and 2022, emissions per unit of GDP fell by a little over 10% (Figure 4.3, Panel D). Part of this decline reflects the extension of modern energy services to dwellings and consequent decline in the use of biomass for residential cooking (IEA, 2022[4]). Emission intensity is now roughly the same as in ASEAN peers such as Malaysia and Thailand (Figure 4.3, Panel C). Due to differences in geography and the availability of natural resources, as well as faster policy progress, other emerging economies have achieved faster reductions in emission intensity. For instance, emission intensity reduction in the ASEAN region as a whole has been close to 20% (Figure 4.3, Panel D).

Indonesia has submitted ambitious plans to reduce GHG emissions relative to the baseline over recent years (Box 4.1). In 2021 it updated the 2016 Nationally Determined Contribution (NDC). The update commits to cut GHG emissions by 32%-43% (unconditionally and conditionally, respectively) by 2030, to also reach peak emissions in 2030 and to achieve net-zero by 2060 or earlier. Substantial investments are required. According to the national authorities, reaching the 2030 NDC target alone would require at least IDR 4.52 quadrillion (USD 310 billion, about 20% of 2023 GDP) in mitigation actions. In recognition of Indonesia’s increased policy ambitions, the International Partners Group (composed of G7 countries, the EU, Denmark, and Norway) in conjunction with leading financial institutions pledged to support the country with an initial amount of USD 20 billion (see Box 4.4 on the Just Energy Transition Partnership), half of which will come from the private sector, sovereign wealth funds, and philanthropic foundations. Timely advance on these pledges will be important for helping Indonesia achieve its 2030 goal.

As elsewhere, Indonesia’s mix of policies needed for a successful and cost-effective transition to net-zero GHG emissions must be aligned with the local context. Box 4.2 discusses available policy instruments and their potential contribution to design and implement cost-effective and socially acceptable mitigation. Emission pricing provides effective incentives to identify and deploy the lowest-cost policy mixes to cut emissions across all sectors and is well-recognised as a cornerstone for achieving the green energy transition (OECD, 2023[6]). However, impacts on the cost of production and on the prices of goods and services, need to be evaluated, and in some instances offset.

Introducing and gradually increasing carbon price is a key cost-effective policy instrument in mitigation policy packages, as it not only reduces emissions but also generates revenue to support the green transition. Vulnerable groups should be taken into consideration in the implementation of carbon pricing, for example through targeted support, to limit the welfare losses from the green transition. Pricing and tax instruments are under-developed in Indonesia’s policy mix, although progress has been made in recent years, notably through Law No 7/2021 on Harmonisation of Tax Regulations (Table 4.2). So far, the mitigation strategy has favoured non-market-based instruments, especially minimum performance standards, labelling requirements, bans and phase-outs, over market-based instruments (D’Arcangelo, Kruse and Pisu, 2023[7]). Market-based instruments contribute less to total climate action for Indonesia than for the OECD area, whereas the contribution of targets, governance and climate data is considerably larger. As of 2019, the environmentally related tax revenue (predominantly motor vehicle taxes) was equivalent to less than 1% of GDP, against an average of 2.3% across OECD and non-OECD economies (Lewis, 2019[8]). Since 2021, motor vehicles producing emission above 250 grams per litre of fuel are subject to a 40% Luxury Sales Tax. The authorities explain that the slow rollout of emissions-based taxation is partly due to concerns about the price passthrough of higher taxes and operational costs to consumers. In September 2023, the Indonesian Stock Exchange launched the Indonesia Carbon Exchange (IDX Carbon). In less than a year of operation, trading volumes and values have risen, although both the number of projects and transaction frequency remain limited.

The development and implementation of a domestic Emissions Trading System (ETS) for the power and industry sectors can help meet Indonesia’s enhanced NDC targets. Indonesia prices about 22% of its carbon emissions from energy use and none were priced at an Effective Carbon Rate above EUR 60 per tonne of CO₂ (OECD, 2023[6]). Drawing on the lessons from the 2021 pilot scheme, the government intends to continue developing and implementing ETS along with the planned carbon tax, for which no implementation date has been set yet. The intensity based ETS for the power generation sector was launched in February 2023, making electricity the second sector after road transport to be covered by a carbon pricing instrument. A commitment to gradually increase carbon price and broaden its base will shape expectations and drive investment in clean energy. This more stringent approach should be complemented by other policy interventions, such as feed-in-tariffs for renewable energy and financing mechanisms for energy efficiency. The application of climate budget tagging allows to improve the allocation of public resources depending on policies’ distributional impact (Boutron et al., 2023[13]).

Reforming energy subsidies and targeting them on vulnerable households is also key to encourage a transition away from carbon. Energy subsidies (electricity, fuel and liquefied petroleum gas – LPG) account for a significant share of the government’s budget (see Chapter 1). Under Indonesian law, energy subsidies are meant to target the poor and vulnerable segments of the population, but many other households also benefit. Subsidies were cut in the mid-2010s, combined with targeted support measures for the most vulnerable households (Box 4.3). As a result, lower-income deciles now receive a higher share of these subsidies than in the past. However, targeting could be improved further, as all income deciles benefit roughly from the same proportion of total energy subsidies (World Bank, 2020[14]). Energy subsidies also distort economic choices, acting as a drag to the energy transition. Shifting away from these subsidies to targeted cash assistance would reduce this problem and is potentially more cost-effective and redistributive.

Indonesia’s electricity generation and distribution is primarily provided by the state-owned enterprise Perusahaan Listrik Negara (PLN). Electricity generation accounts for around 30% of Indonesia’s GHG emissions (Figure 4.6, Panel A). Excluding reductions relating to land use, the bulk of reductions under Indonesia’s National Energy and Climate Plan are expected to come from energy use, primarily from electricity generation. Peak demand may triple between 2010 and 2030 in a business-as-usual case, primarily driven by air conditioning and with important contributions from lighting and refrigerators (McNeil, Karali and Letschert, 2019[15]). Indonesia’s reliance on fossil fuels for electricity production remains high (Panel B), while wind and solar are negligible in the generation mix as of 2024. Over the past decade or so, coal-based electricity production has accelerated markedly, gas-based has also increased, while the use of oil has declined (Panel C). Combined, hydro, bio and geothermal energy provide almost a fifth of total electricity production.

Analysis suggests the economic cost (measured as the level difference in GDP relative to baseline) of pursuing Indonesia’s clean energy transition may be relatively small. OECD long-term scenarios suggest that by 2050, cumulative mitigation costs associated with the energy transition amount to less than 9% of baseline GDP for Indonesia and 11% of GDP for the G20 emerging-market area (Guillemette and Château, 2023[16]). The economic cost, in terms of lower output growth, from fast transition would be small and concentrated in the 2020s. Furthermore, a faster transition would bring higher growth over the following decades (Figure 4.7). By contrast, a slower transition would risk missing mitigation targets and would lead to the emission of about 230 million additional tonnes of CO₂ equivalent from energy use until 2050 – even if net emissions are cut to zero by 2050.

In broader terms, the largest potential benefits of climate mitigation accrue from the removal of domestic policy distortions that contribute to emissions and create deadweight loss. For instance, gradually phasing out untargeted fossil fuel subsidies would reduce air pollution and emissions, thus improving health outcomes locally. On the other hand, pricing mechanisms would potentially have economy-wide impacts on households in terms of employment and wages, with the largest impact in energy-intensive sectors. In Indonesia, however, the social and economic cost of a carbon tax would be modest compared to the human and economic ones produced by air pollution and other factors. Limiting the social impact can be helped gradual phase-out of fuel subsidy reduction and by efforts to ensure vulnerable households receive sufficient support through other means (such as regular welfare). Overall employment in energy-intensive sectors is indeed rather low: 10% of total employment, though it is higher in coal-producing areas (World Bank, 2023[17]).

As part of the Just Energy Transition Partnership (JETP) scheme (Box 4.4), two coal-fired power plants (CFPPs) out of 250 (representing about 2% of the national power capacity) are slated for early closure by 2040. More may close between 2030 and 2040, due to natural retirement, though CCFPs are relatively young in Indonesia. In 2020, around 60% of the fleet was younger than 10 years, and 23% older than 20 years (IEA, 2020[18]). Estimates suggest the socio-economic benefits from closing coal power plants could be up to four times the costs (Cui et al., 2022[19]), yet faster progress can be hindered by strong interest groups locally. In the long run, retrofitting coal- and gas-fired plants to capture carbon or to run on hydrogen can further reduce emissions from natural gas, although costs can be high (IEA, 2022[4]). Indonesia’s CFPPs produce substantial emissions, while also contributing to overcapacity. The capacity margin in Indonesia, particularly in the Java‐Bali system, is around 57% in 2022. This exceeds the operator’s targeted capacity margin (30%) and is three to four times higher than international benchmarks needed to meet peak demand and maintain a 15% reserve margin. Both MEMR and IEA modelling analyses indicate no need for new CFPP after the current project pipeline, and project the phase out of unabated CFPPs (i.e., without substantial efforts to reduce the emissions produced throughout their life cycle) by the 2050s. Presidential Regulation 112/2022 organises the gradual phase-out of CCFPs, though new CCFPs can still be constructed if they were registered before the Regulation, or if they fall under specific conditions (Table 4.2).

Against this background, contractual adjustments are needed that simultaneously steer the coal- (and gas) fired energy sector towards eventual decommissioning (or adoption of emission-eliminating technologies) and ensure that plants operate more flexibly and at lower annual capacity factors. Accelerated retirements can also help to reduce overcapacity in the system, if conducted carefully to preserve investor confidence (IEA-MEMR, 2022[20]). International support, based on a detailed assessment of plant balance sheets, should be provided to help Indonesia cover possible unrecovered capital (IEA-MEMR, 2022[20]). Under the Energy Transition Mechanism (ETM) (Box 4.4), the ADB offers financial assistance to facilitate early retirement of the coal fleet and one deal has been concluded in 2023. The 660-megawatt Cirebon-1 CFPP in Western Java will likely be retired almost seven years earlier than scheduled. At the same time, connecting new coal-powered units should be restricted to the adoption of advanced cleaner technologies (Ramdlaningrum, 2024[21]).

Solar and wind have considerable potential for Indonesia, whose archipelagic feature is somewhat similar to Greece where wind alone accounts for 21% of the generation mix (OECD, 2020[22]). For Indonesia, the IEA expects a doubling of the share of renewables in power generation by 2030 to more than 35%. It also projects solar power can provide as much as 50‐60% of electricity generation capacity needed to serve the much bigger demand for electricity by 2060 (IEA, 2022[4]). The imminent operationalisation of the 10 Megawatt (MW) solar power plant in the new capital city testifies to Indonesia's commitment to renewable energy. The state-owned electricity company, Perusahaan Listrik Negara (PLN), unveiled plans to bolster renewable power capacity by 31.6 GW from 2024 to 2033 (Table 4.4). The potential for offshore renewable energy is also considerable though this requires investment in grid infrastructure to connect to centres of population. Greater deployment of small capacity offshore turbines and floating solar panels is potentially a solution for remote and sparsely populated areas.

Fewer barriers to installing renewable capacity and a better tariff setting system are needed. An IEA net-zero roadmap for Indonesia (IEA, 2022[4]) underscores the need for simplified planning procedures and engagement with local communities to facilitate new renewable capacity. Policy also needs to establish a stable, substantial and multi‐year pipeline of auctions for renewables, with competitive and transparent tariff‐setting. Current electricity tariff regulations do not favour wind and solar. Under previous regulations, the tariffs received by producers were capped at around 85% of the state-owned vertically-integrated electricity company’s (PLN) regional average generation cost (biaya pokok produksi, BPP). New regulation has replaced the BPP benchmark with annual ceiling prices that vary regionally. Independent (i.e. non-PLN) power producers bid for capacity below these ceiling prices under the PLN’s procurement process. Coal producers are required to supply power at a maximum price (USD 70 per tonne for greater than 6 000 kilocalorie per kilogramme coal), which also limits the capacity for renewable generators to compete. The maximum purchase price is 100% of the USD 70 benchmark for hydro and geothermal, biomass and ocean wave and 85% of the BPP for solar PV and wind. Current tariff levels are viewed by most industry players as too low to spur growth in renewable capacity. Institutional fragility – notably the lack of an independent regulator with strong technical competency -- hinders the growth of private capital participation (Asian Development Bank, 2021[23]). Local content requirements and high capital costs also dissuade investment. A long-proposed presidential regulation on renewables to reform the tariff system and address other barriers to deployment has yet to be fully implemented (OECD, 2021[5]). In parallel to major reform practical steps that could be considered include, where feasible, mandating the use of renewable energy in public spending and investment.

Further investments in the electricity system will be needed to ensure supply is reliable as the role of renewable sources grows. Wind and solar output are intermittent and highly uncertain and, hence, non-dispatchable (Delarue and Morris, 2015[24]). Insofar as it does not strongly align with electricity demand, increased generation from renewables will require more ‘balancing capacity’ from other sources, or complementary approaches, including storage (IEA, 2023[25]). Electricity grid expansion will also help tackling the balancing capacity issue. More connections between Indonesia’s islands grids are planned which will help exploit the large potential for renewable energy sources on many islands (OECD, 2020[22]). Better integrating Indonesia’s electricity network with neighbouring countries will also add more balancing capacity by enlarging the pool of potential energy suppliers. The recently-initiated Brunei Darussalam–Indonesia–Malaysia-Philippines Power Integration Project will complement existing efforts towards realising the ASEAN Power Grid.

In the longer run and on larger islands, smart meters and dynamic pricing can help make electricity consumption more responsive to supply conditions and reduce system stress and the need for balancing capacity (IEA, 2022[4]). Smart meters use wireless technology to inform consumers about their electricity consumption in real-time. Meanwhile, time-varying pricing (dynamic pricing) provides financial incentives to shift electricity demand to periods when supply is more plentiful. In mid-2020, PLN launched a plan to install 79 million smart meters over seven years, although the roll-out appears to run behind schedule. Dynamic pricing contracts have not yet been introduced and their take-up could be boosted by simplified electricity bills (ACER/CEER, 2021[26]),

For Indonesia’s industry, which for the past few decades has under-performed both regional peers and other sectors of the economy (World Bank, 2023[17]), the green transition combined with smart manufacturing represent potential opportunities. The production of materials and goods account for a quarter of total national CO₂ emissions and reaching the Net Zero goals requires investments in low-carbon technologies, often imported, that can be costly, complex to operate and maintain and untested in developing countries. Weak awareness is also a concern: individual companies, especially small and medium-sized businesses, often underestimate the importance of fighting climate change and lack the expertise and knowledge for adopting greenhouse gas emissions accounting, setting reduction targets, and developing tailored strategies to reach them. On the other hand, the country enjoys favourable conditions to participate in key segments of global value chains, such as cell manufacturing, active materials, raw material mining and refining, and battery pack assembly. Indonesia has significantly increased high-quality nickel production in recent years, building on its strength in catering mainly for the stainless-steel sector.

In order to encourage large energy users to adopt more efficient practices, stakeholders have launched several initiatives. The main industrial energy efficiency policy is Government Regulation 70/2009, which requires all companies with an annual energy consumption exceeding 6 000 tonnes of oil equivalent (toe) to appoint an energy manager, develop an energy conservation plan, perform an energy audit and report energy consumption to government. Other initiatives include plans for sustainability reporting by business. However, existing regulations are not intended to cover less energy-intensive sectors, where the largest opportunities exist and where electric motor-driven systems are common. Minimum Energy Performance Standards (MEPS) are in place for air conditioning, but the absence of standards for electric motors means there is a huge opportunity for improvement (IEA, 2021[27]). It is estimated that if Indonesia were to introduce a requirement that electric motors had at least IE2 level efficiency, the same as in China, it could avoid nearly 2200 GWh of industrial electricity use by 2030. In nickel, the Ministry of National Development Planning (Bappenas) has initiated the decarbonization roadmap with the support of WRI Indonesia (Bappenas, 2024[28]). Food and beverages, textiles, construction, wholesale and retail trade, and electrical equipment and electronics have been identified by Bappenas for their potential in adopting circular economy principles and practices. The development of carbon pricing will eventually favour the adoption of more efficient manufacturing technologies.

Transport, which accounts for around one third of final energy consumption and around one sixth of GHG emissions, is expected to increase fast as per capita income rises and mobility aspirations increase. Transport-related CO₂ emissions per GDP unit are twice as high as the OECD average (Figure 4.8). Motor vehicle transport, the main transport means for both passengers and goods in Indonesia, will need to transition to low- or zero-emissions. Furthermore, reducing the use of petroleum and diesel fuel vehicles, particularly in urban areas, is important to address Indonesia’s air quality problems (Box 4.5). Greening the vehicle fleet can be accompanied by specific initiatives to make public transport more attractive or road transport more efficient. Technological advances can reduce future abatement costs for still hard-to-decarbonise transport modes, including for ferries which account for 12% of emissions from passenger transport in Indonesia (Box 4.6).

Greening the vehicle fleet is a gradual process, especially in emerging market economies as households and businesses have limited financial resources to invest in new vehicles. Moreover, electric vehicles (EVs) can contribute to decarbonise the economy only if electricity decarbonises first. In Indonesia, where car ownership trails behind richer ASEAN peers such as Malaysia and Thailand, buying used cars is common, with second-hand cars accounting for the majority of cars in circulation (McKinsey, 2021[31]). While price gaps between new electric and combustion engine cars may disappear within the next few years (Lutsey and Nicholas, 2019[32]), used combustion engine cars are likely to remain substantially cheaper for some time.

Indonesia lags behind other countries in adopting zero-emission vehicles. Both the share of zero-emission vehicles in the existing fleet (Figure 4.9) and in new registrations is among the lowest in the G20 (Figure 4.10). In 2022, EVs made up less than 2% of new cars on Indonesia’s roads (IEA, 2023[33]). The launch of several hybrid models drove the increase in EV sales to 5.9% by end-September 2023. Most EV cars are in the hybrid segment, dominated by Chinese and Korean brands. Government targets aim for 2 million passenger EVs and 13 million electric motorcycles (the largest market segment in the country and contributor to 26% of all transport GHG emissions) by 2030.

Various incentives have been introduced to boost both EV sales and domestic production. Tax incentives since 2022 have included reducing the VAT rate on EVs from 11% to 1% and removing the luxury tax. The Electric Car Down Payment, Sales Tax and Import Tax Waiver is due to end in 2025. The government is also offering around USD 500 towards the purchase of an EV. It aims to provide this for sales of 200 000 e-motorcycles and 35 900 electric cars, as well as the conversion of 50 000 combustion-engine motorcycles to electric propulsion. Local-content conditions are being introduced to qualify for the subsidy, which should be directed at light vehicles which are used extensively. Indonesia’s Financial Stability Authority (OJK) is expanding its Sustainable Finance Taxonomy to cover transportation sector.

Higher taxes on combustion-engine vehicles, possibly as part of a feebate to subsidise EV purchase and buyback of older vehicles, should be considered. Rechannelling a tax on the purchase of high-emission vehicles emitters to EV purchase incentives (a feebate) has met with some success in several countries, for instance France, Thailand, and Singapore (Wappelhorst, 2022[34]). However, the households that buy electric vehicles, and benefit from the subsidies, are largely higher income. Subsidising zero-emission rental services could provide better access for low-income households. Subsidising loans rather than providing grants for purchasing zero emission vehicles, as done in Scotland, addresses financial constraints by overcoming high upfront costs of electric vehicles and mobilises more private funding (ICCT, 2020[35]).

Further development of the EV charging network is underway but has a long way to go. Perusahaan Listrik Negara (PLN), the state-owned power company, has been appointed to establish the EV charging infrastructure and aims to invest USD 1 billion by 2030. Leveraging more private capital and ensuring public support concentrates on areas where charging points are neither commercially nor financially viable, could further bolster network density. Regulatory measures could include making the installation of publicly accessible charging points obligatory for petrol stations or other focal points (IEA, 2021[36]). Germany, for example, plans to negotiate voluntary commitments by petrol-station companies to equip 75% of petrol stations with charging points by 2026, and to mandate this if the goal is missed (Bundesregierung, 2020[37]). The Indian model of scooter battery swapping stations could also prove useful in Indonesia’s largest cities.

Tighter restrictions for using fossil-fuel cars in large cities would encourage more buyers to choose a zero-emission vehicle. Some such measures are underway. In the new capital city, Nusantara, the plan is for government vehicles to utilize environmentally smart technology. The DKI Jakarta government aims to have completed bus electrification by 2030. This plan will contribute to a 60% estimated reduction in vehicle emissions and a 28% reduction in noise pollution. Similar urban electrification targets for public transit could be adopted elsewhere and extended to taxis, ride-hailing cars, and motorcycles. Enforcing and expanding restrictions based on vehicle emissions, for example through road pricing, congestion charges, priority lanes, emission-free zones or parking regulations, would add to the benefits of zero-emission cars. Amsterdam, Oslo, Paris, Rome, London, and Milan are planning to phase out fossil-fuel cars and provide discounts or easier parking for electric vehicles (ICCT, 2020[35]).

Scope for more intercity rail transport is considerable, particularly in Java, which is home to around half of Indonesia’s population. The mainly single-track rail network accounts for about 7% of the non-metropolitan passenger market and only around 0.6% of goods transported (Asian Development Bank, 2016[38]). A key issue is the relatively limited scope the rail network. In addition, poor maintenance, dilapidated rolling stock, slow trains, frequent delays, and insecurity contribute to users’ dissatisfaction and further accentuates structural problems. It is estimated that shifting passenger and freight from road to rail would cut 83% of GHG emissions generated by transport between cities. Reductions in road transport would also help address air pollution, traffic congestion and road accidents, which are very high by global standards (Figure 4.11, Panels A and B).

Welcome improvement in the rail network is underway. An investment of around USD 90 billion planned in the National Railway Vision 2030 (RIPNAS, 2023[39]). Much of the investment is in network renovation, notably installing double tracks on major trunk rail lines, reviving dormant tracks (there are some 2 500 km of unused track, mainly on Java), and promoting inter-modality. The state railway company, PT Kereta Api Indonesia (PT KAI), is investing in freight locomotives that operate with biodiesel blends up to B35 (i.e., a mixture of 35 % biodiesel and 65 % diesel fuel). The new Makassar–Parepare railway has received strong passengers’ support, although freight users are still rather cautious due to single-track configuration, vulnerability to natural hazards, and uncompetitive pricing (Partnership for Australia-Indonesia Research, 2022[40]). The Jakarta-Bandung project, operational since late 2023, is the first high-speed railway in Southeast Asia. PT KAI should be granted greater managerial autonomy, while the relationship between it and government should evolve and create the foundations for expanded private participation. Given the poor results of the current, restrictive regulatory environment (Figure 4.12, Panel B), the use of competitive tenders to allocate public service contracts could sustain investment and improve service quality (Vitale and Terrero, 2022[41]).

Making travelling by public transport more attractive, particularly in urban areas, would help cut car use. In Indonesia, many people prefer travelling by car because public transport is slow, does not cover the entire journey, or requires switching between different transport modes. Nearly 50% of female passengers experienced sexual harassment on public transportation, further dissuading use (Asian Development Bank, 2023[42]). In major metropolitan areas, the public transport modal share can be as low as 3% (Asian Development Bank, 2016[38]). This strong car (or motorcycle) preference reflects a policy bias towards individual mobility that contributes to Indonesia’s bad performance in terms of road safety, injuries, and fatalities (WHO, 2023[43]). There is scope to further invest in urban transportation, though limited resources require sound cost-benefit analysis.

There is scope to make different public transport modes work together more seamlessly with digital technologies, for example by promoting Mobility-as-a-Service or offering integrated ticketing and shared transport modes such as on-demand taxi-buses to cover the last kilometre (ITF, 2017[44]). Better incorporating transit in urban development planning would make using public transport cheaper by bringing terminals closer to where people live, work, and shop (ITF, 2021[45]). Non-motorised transport (i.e., walking and biking) could be encouraged through changes in land-use regulations, investment in walkability and dedicated road lanes, and public awareness campaigns. A concerted policy push is needed, so that public transport reaches critical mass.

Buildings and related domestic activity are responsible for 19.5% of Indonesia’s energy consumption, mostly in the form of cooking and water heating (IEA, 2021[46]). Thanks to the progress in broadening access to electricity (switch to electrical lighting is practically complete), emissions from lighting with kerosene and other combustible fuels have been largely eliminated over the last decade. According to the most recent annual socio‐economic survey, only 0.8% of households reported using a non‐electrical source as their main source of lighting (BPS, 2022[47]).

Also, a majority of households are now using liquefied petroleum gas (LPG) instead of biomass (usually wood) for cooking. Biomass generates several times the emissions per unit of heat compared with LPG. Switching away from biomass in cooking brings other benefits (including less exposure to wood smoke and less time spent gathering fuel), especially for women and children, who traditionally perform most household work. Indonesia’s kerosene-to-LPG programme that ran from 2007 to 2012 promoted significant shift to LPG (see Box 4.6). As of 2021, almost 85% of Indonesian households used LPG as their primary cooking fuel (BPS, 2022[47]). Nonetheless, as of 2022 around 41 million Indonesians were still without access to clean cooking (IEA, 2023). Indonesia is a major supporter and contributor to the on-going global discussions on clean cooking. It is engaged in high-level international policy dialogues (such as through the Health and Energy Platform of Action and the G20-endorsed Initiative on Clean Cooking and Energy Access) and research and innovation programmes (through the Modern Energy Cooking Services and the Clean Cooking Alliance).

Ensuring buildings are better insulated against the heat will increase in importance as climates change further. Renovating existing residential buildings and raising the energy efficiency of new housing would additionally help to reduce households' energy bills and the high incidence of energy poverty. Law No. 36/2005 introduced obligatory energy conservation measures for buildings larger than 500 m². The measures included mandatory energy audit and preparation of energy conservation plans and reports. Subsequent revisions of the law have extended the obligation to complex buildings (these include offices, industrial facilities, and buildings consuming more than 6 000 tons of oil equivalent per year).

There is scope to expand energy-efficiency actions on existing buildings. Most policy, such as the National Green Building Guidelines, applies to new buildings and could be extended to existing commercial buildings/retrofits that currently only require audits and implementing green requirements when feasible. The public sector, which owns 22% of the building stock, should catalyse efforts in investing in energy efficiency. This may prompt greater compliance with regulation among landlords in the private sector. Cities and regions can also plan a way forward by creating a common vision for a broad array of public and private stakeholders, devising effective regulatory frameworks for decarbonising buildings, and introducing a monitoring and evaluation scheme for policy outcomes (OECD, 2022[48]).

Obstacles to investing in energy-saving renovation need to be overcome. Supporting loans with on-bill repayment can address the challenge of access to finance. Poorer households may be assisted through grants. Agreeing on renovations may be easier when upfront costs are fully financed through future energy savings (Nita, 2023[49]). Also, there may be scope to further support renovations in multi-owner buildings by changes to the relevant legal arrangements, for example to promote majority-based decision-making and individual metering (Edwards, 2020[50]). Energy service companies can provide financing to commercial owners with larger renovation projects, where savings are high enough to repay the costs of setting up these services (Nita, 2023[49]). General incentive for energy-saving renovation may lie in tax measures, for instance by a reduced rate of the land and buildings tax (Pajak Bumi dan Bangunan, PBB) for buildings passing certain energy efficiency criteria. In addition, information campaigns can help overcome lack of awareness or scepticism on the opportunities and benefits of retrofits.

Indonesia’s agricultural sector produces GHG emissions, but it also has substantial capacity as a carbon sink. Emissions include, for instance, methane emissions from rice cultivation. Meanwhile, Indonesia’s capacity as a carbon sink is compromised by deforestation and peatland degradation from fires. As shown above (Figure 4.2), recent years have seen a decline in the contribution to emissions from peat fires and from deforestation. The rate of deforestation is the lowest in 20 years. This is a welcome sign of policy success. As an example of policy efforts, according to Bappenas, the surface reserved for social forestry has expanded ten-fold from 500 000 hectares in 2014 to 5 million hectares by 2023.

To achieve the FOLU (Forestry and Other Land Use) Net Sink 2030 objectives, policy aims to further reduce deforestation, increase reforestation and promote sustainable peatland management. Restoration of 2 million hectares of peatlands and rehabilitation of another 12 million hectares of degraded land is planned. At the heart of this effort is the Sustainable Landscapes Project, a collaborative initiative involving Bappenas, the Ministry of Environment and Forestry, the National Institute of Public Administration (NIPA), and the Indonesian Environment Fund (IEF). However, as with land-use policies elsewhere, executing the planned changes and ensuring that implementation is sustained is challenging. Tackling illegal deforestation requires further clarification of land rights and vigorous law enforcement (OECD, 2019[51]).

Indonesia is one of the most important countries globally for ocean-based climate change mitigation. It is the largest archipelagic country in the world, with an offshore area three times the size of its land area. Given Indonesia’s extensive coastline and coastal population, rising sea levels and coastline erosion will make some coastal areas, including Jakarta, unsuitable for living or business activities and damage existing infrastructure. More than a fifth of the coastline is vulnerable to a 1 metre rise in sea level – estimates range from a rise of 0.2 metres to 2 metres by 2100.

Indonesia’s policy as regards oceans and related activities could be developed further. Its NDC includes ocean-related measures: blue carbon, offshore renewable energy, and shipping. However, there is scope for greater coverage. For instance, reporting on mangrove deterioration is included in NDC reporting, while degradation of seagrass meadows is not (Climateworks Centre, 2023[52]).

Indonesia’s decarbonization efforts will bring substantial economic change to some sectors and regions, with both positive and negative implications for workers. This may require some policy intervention to ensure a smooth adjustment (OECD, 2024[53]). Not all workers will have the skills to transition to new jobs. In specific localities, heavy job loss due to climate change policies (for instance, the closure of coal mines) may require offsetting interventions to avoid long-term unemployment and socio-economic costs. In other localities, demand for copper and nickel may boost employment. This intervention can, under certain circumstances, facilitate the transition of workers to “green” jobs, with the exception of those in highly automatable occupations, who may require more extensive re-skilling (Fankhaeser, Sehlleier and Stern, 2008[54]). A simulation exercise conducted for Indonesia illustrates that a global energy transition would result in employment losses concentrated in the fossil fuel value chain (i.e., related to coal), while employment gains would occur across multiple sectors such as electricity and gas, construction, and mining of metals (OECD, 2024[55]). Using the JETP current investment scenario, an additional renewable generation capacity of 52.2 GW will be built as well as approximately USD 19.7 billion worth of transmission infrastructure, translating into roughly 383 000 jobs between 2023-30 (JETP Indonesia, 2023[56]).

Climate change may negatively affect a wide range of sectors, beyond energy and natural resources (Figure 4.13). For instance, the shift to zero-emission vehicles will impact the motor repair sector. The sizable shares of Indonesia’s workers in such industries will require support to reskill and shift to new work opportunities. Indonesia’s large number of self-employed or workers in very small enterprises are likely to need particular support. Extreme and less predictable weather may modify tourism patterns, bringing further structural change.

To mitigate the adverse social consequences of the energy transition, policy makers should provide early support before layoffs, implement social protection measures, and invest in local development for negatively affected areas, with effects depending on policy choices, industry mix and workers’ skills. This underlines the importance of further building the capacity and effectiveness of active labour market policies (ALMPs), in particular to develop green skills, which currently are still lacking, and provide social support functions such as career planning, job placement, upskilling and reskilling, and financial assistance. Indonesia already has systems in place that provide these types of activation service. For instance, the Pre-Employment Card Programme (Kartu Prakerja) is a competency development programme that combines temporary social assistance with skills development to help laid-off workers and job seekers (OECD, 2024[55]). Therefore, part of the policy solution will lie in ensuring current ALMPs have capacity for the green transition. The on-going preparation of the Human Resource Development Roadmap for Green Jobs provides a unique opportunity to ensure policy coherence in government intervention.

Adaptation efforts help reduce current and future vulnerability and exposure to the social, economic, and environmental impacts of climate change, including slow- and sudden onset weather extremes. To help countries build resilience, the OECD Recommendation on the Governance of Critical Risks (2014[57]) calls on governments to identify and assess risks taking interlinkages into account, invest more in risk prevention, develop flexible capacities for preparedness, response and recovery, and establish transparent and accountable risk management systems.

Indonesia is vulnerable to a range of natural hazards, including but not limited to weather related hazards. It lies on the Pacific “Ring of Fire”, one of the planet’s most exposed zones to phenomena related to tectonic plate movements; volcanic eruptions, earthquakes, and tsunamis. Two of the most catastrophic natural disasters in human history – the Tambora eruption in 1815 and the Indian Ocean tsunami in 2004 – took place in Indonesia. The country is home to 76 active volcanoes. However, over 90% of recorded disasters are hydrometeorological in nature, including floods, landslides, strong winds, droughts, and hurricanes (Figure 4.14) and the ensuing economic losses are considerable (Figure 4.15).

Forest fires bring particular challenges. For several days in 2015, forest fires in Indonesia emitted more carbon dioxide than the entire United States economy and are estimated to have caused more than USD 16 billion in economic losses, with more than 100 000 premature deaths (Edwards, 2020[50]). El Niño events explain most of the year-on-year variation in fire, but variance at village levels can be explained by remoteness, development, and use of fire for land clearing before planting crops in traditional agriculture. Urbanisation and population growth have increased exposure to extreme heat days. Indonesia ranks among the countries with the highest observed annual changes in rainfall causing the north to become wetter and the south drier. Since the 1990s, relative sea-level rise has on average risen by approximately 4.97 millimetres per year, putting the 175 million people living on the coast (70% of the total population) at risk (OECD, forthcoming[58]).

Climate resilience has been identified as an important objective by the national government and is one of the pillars of Indonesia’s new long-term development plan (RPJPN) 2025-45, notably by building infrastructure to reduce disaster risks. The National Disaster Management Authority (BNPB) (established in 2008) coordinates the relevant line ministries and agencies at all stages of disaster management: pre-disaster preparedness, emergency response, post-disaster recovery, and risk transfer mechanisms. The BNPB’s budget has been expanding since the late 2010s. Indonesia's proactive approach to disaster risk management reflects a commitment to safeguarding its people and assets against the unpredictable nature of disasters (Table 4.5). This holistic and data-driven approach ensures that the country is better prepared to face future challenges, thereby minimizing the economic and social impacts of disasters. However, there is scope to improve some aspects of the disaster management system. In particular, (Juwitasari, 2022[59]) points to need to increase the density of Indonesia’s early warning system (EWS) network such that there is at least a station every 50 to 100 kilometres. There is also need for more timely, standardised, and comparable data on risks, occurrences, impacts, and financing related to disasters and disaster management (OECD, forthcoming[58]).

Public infrastructure and housing need to become better adapted to climate-related extreme weather events (OECD, 2018[60]). As Indonesia’s population becomes more affluent, combined with rising temperatures, the use of air conditioning and other home appliances will increase (CMCC, 2022[61]). Earlier evaluation of the potential effects of climate change in public infrastructure project design and selection can reduce the longer-term costs of increased emissions. Additional measures could incorporate adaptation concerns into infrastructure planning and procurement procedures (OECD, 2018[60]).

Climate change projections point to an increasing severity of weather-related disasters. Precipitation trends in Indonesia are complex, though overall it seems likely that rainfall will rise, also in intensity, but that droughts as well may become more frequent (CMCC, 2022[61]). Droughts greatly impact agriculture but also the wider community. Some areas of Indonesia are already susceptible to water shortages. For instance, in major tourism destinations large demand pressures can strain water provision. Indicators suggest overall water scarcity is moderate in Indonesia in international comparison (Figure 4.16, Panel A). However, OECD assessment points to increased frequency of water scarcity in much of Java along with Bali, Nusa Tenggara, and Sulawesi. Projections to 2045 indicate further intensification due to climate change, land degradation and unsustainable water usage (OECD, 2023[1]).

Increased frequency and duration of droughts amplifies the need to ensure efficient water use. In general, water in Indonesia is used less efficiently than in other countries. For example, water abstraction is high and is mostly for irrigation in agriculture (Figure 4.16, Panel B). Nearly half of irrigation systems are considered ‘in bad condition’, and a non-negligible part is categorised as ‘ruinous’ (World Bank, 2022[62]).

There is also a problem with groundwater level decline, linked to insufficient monitoring and illegal abstraction, e.g., for industry or high-rise buildings (OECD, 2019[51]). According to the Asian Development Bank (2024[63]), approximately 77% of households in Indonesia have access to basic sanitation facilities such as septic tanks, but only 7% have access to safely managed sanitation that ensures the proper disposal of household waste to wastewater treatment plants. Better reflecting water scarcity in water prices would encourage businesses and households to use water more efficiently and reinforce cost recovery (OECD, 2019[51]). There is also potential to develop nature-based solutions that involve the planned and deliberate use of ecosystem services to improve water quantity and quality and increase protection and resilience to climate change (OECD, 2023[1]).

Several water management reforms have been introduced recently, including revisions of the legal and regulatory framework relating to the implementation of the 2019 Water Law and the 2020 Omnibus Law. Adoption of four draft government regulations on drinking water, water sources, water resource management, and irrigation is ongoing. Establishing an independent economic regulator that supervises and reviews tariff reforms would be major breakthroughs in securing a stable revenue stream for water providers and setting tariffs at cost-recovery levels (OECD, 2023[1]). Recent discussions on a nationwide, uniform water tariff warrant caution. Depending on the way it is set (i.e. whether it is a uniform tariff level, tariff formula, tariff structure, uniform at bulk water supply or at retail), the uniform water tariff may jeopardise the cost recovery of water services.

Given the repeated and intensifying nature of climate related extreme events it is important to promote climate adaptation across all of government and society. This requires conducting downscaled and regularly updated climate risk assessments, which help understand the exposure and vulnerability of social, economic and environmental assets and hence assists the prioritisation of adaptation interventions. Effective adaptation also requires clear roles and responsibilities and all levels of government and non-governmental actors. An over-reliance on the government to conduct emergency response and to fund the recovery and rehabilitation of assets disincentivises adaptation investments.

For the financial burden to manage the costs of disasters not to rest on the government’s shoulders it is important to identify effective risk transfer instruments. Where the government provides compensation for damages it is important to design compensation mechanisms that build back better and that avoid paying for repeated damages to the same assets in the same locations. Private insurance does not necessarily dovetail with government compensation or provide coverage in other types of events. This uncertain coverage limits support for economic recovery from disasters (OECD, 2023[64]). In Indonesia, insurance coverage for damages from extreme weather events is low compared to the OECD average, but higher than in other middle-income countries (Figure 4.17). The government can take the lead in these circumstances, as shown by the State Asset Insurance programme which was launched in 2019 to cover over 1 300 Kemenkeu-owned buildings and was expanded to 10 ministries/agencies in 2020. By 2023, it has insured over 5 000 public assets with a total sum insured of USD 2.5 billion. The programme is part of the Disaster Risk Financing and Insurance (DRFI) Strategy, whereby the government is taking a more proactive approach.

There is scope to expand climate-related private catastrophe risk insurance in Indonesia. Law No. 4/2023 concerning the Development and Strengthening of the Financial Sector (UU P2SK) paves the way for expanding the coverage of existing compulsory insurance to include fires and natural disasters (Wasono, 2023[65]). However, more frequent extreme weather events will raise costs for insurance and could challenge insurability. In general, expanding measures for mandatory insurance to existing buildings and more areas could reduce insurance costs through risk pooling and limit fiscal exposure for compensating losses (European Commission, 2018[66]) (OECD, 2021[67]), although distributional effects may be negative. An example of government intervention to help ensure insurance coverage is the Danish Storm Council, an independent body that helps with technical expertise to assess damages and provide compensation for climate-related damage to individuals and firms protected by fire insurance (OECD, 2021[67]). Indonesia’s insurance markets, at any rate, are still at an early development with less than 3% of the population covered by building insurance. Increasing market penetration is key. Governmental support of private risk financing should be considered, for example through re-insurance (G20/OECD, 2012[68]). Insurance companies, for their part, should promote risk awareness and financial literacy, offer affordable products, and fully exploit digitalisation (OJK, 2023[69]), building on compulsory insurance as mandated by Financial Service Omnibus Law (FSOL) and the Rice Farming Insurance Product (Asuransi Usaha Tani Padi).

More broadly, there may be significant returns to ramping up public awareness of climate-change risks and the exposure of certain areas. Cognitive biases can limit awareness of such risks and delay response. Policies can help to overcome these biases by providing information and encourage limiting exposure (Economides et al., 2018[70]). Informing firms and households of adaptation options can steer them towards adopting protective behaviour, such as limiting outdoor activities during heatwaves or preparing for floods. Developing a communication strategy to assure the information reaches people in the most affected communities would allow to better leverage existing knowledge to improve the impact of these plans. The integration of climate change adaptation into development planning is another area where progress has been recorded, although obstacles remain such as a lack of effective coordination, unavailability of detailed information and vulnerability assessments at national and sub-national levels, and challenges in tracking adaptation-related investment (Green Climate Fund, 2021[71]).

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