Indonesia’s green powerhouse promise: Ten big bets that could pay off | Indonesia

The world stands at a pivotal point in the journey toward decarbonization—emissions need to decline from their peak as soon as possible, halve by 2030, and reduce steeply thereafter. This presents both immense challenges and significant opportunities.

Challenges include fostering global cooperation, strengthening climate policies, navigating technological transitions (including negative emissions technologies), overcoming infrastructure limitations, and securing substantial investments. In addition, a just transition is needed, one that includes reskilling workers and addressing socioeconomic disparities.

On the other hand, the transition to sustainability and clean energy presents a tremendous market opportunity, requiring unprecedented global expenditure of $8 trillion to $11 trillion annually to 2050 (Exhibit 1). Power generation, transportation, as well as land use, land-use change, and forestry (LULUCF) are three sectors at the forefront of this required transformation.

Global efforts are already underway—these include China having scaled up solar photovoltaic (PV) capacity to approximately 500 GW, Norway having successfully shifted to more than 80 percent of new-car sales being electric vehicles (EVs), and the United States having the world’s largest carbon capture and storage (CCS) facility at seven million metric tons per year (Mtpa). Developments such as these not only address urgent decarbonization needs, but also open new avenues for economic growth and innovation.

Indonesia’s role in global emissions and its strategic response

As the eighth-largest contributor to global greenhouse gas (GHG) emissions, accounting for 2 to 3 percent of the world’s total emissions, Indonesia’s role in global decarbonization is increasingly critical. With historical trends indicating a potential doubling of its emissions by 2060 (versus a 2019 baseline), Indonesia’s commitment to reversing this trend is crucial (Exhibit 2).

The country is starting to gain momentum in its decarbonization efforts, backed by a robust and growing economy. Expected to become the fourth largest economy in the world by 2045, and boldly aiming to become a high-income economy within a similar timeframe, Indonesia shows strong economic fundamentals, with a 5 percent annual growth rate, stable inflation, and stable exchange rates. The government has also implemented various regulatory and fiscal incentives to encourage green growth, focusing on electric mobility, carbon markets, and renewable energy. In September 2022, Indonesia increased its Nationally Determined Contribution (NDC) targets, now aiming for a 31.9 percent unconditional emission reduction (up from 29.0 percent) and a 43.2 percent reduction with international support (up from 41.0 percent) below a business-as-usual scenario by 2030. These targets include emissions reductions from LULUCF.

Notably, the Just Energy Transition Partnership (JETP), established during the G20 Leaders’ Summit in 2022, further signifies Indonesia’s commitment to delivering a just transition for the power sector. Under JETP, Indonesia aims to cut carbon emissions to 250 million metric tons for its on-grid power sector by 2030, while simultaneously increasing its share of renewable energy generation to 44 percent.

Finally, Indonesia’s wealth in critical minerals such as nickel—vital for electric vehicle (EV) batteries—along with its potential for carbon storage and nature-based solutions (NBS), positions it as a key supply-side player in the decarbonization market. These natural resources, combined with supportive government policies, create substantial opportunities for businesses in renewable energy, EV production, and sustainable practices.

Ten big bets for Indonesia’s decarbonization

World leaders recently convened at the inaugural Indonesia Sustainability Forum on September 7 and 8, 2023, where Indonesia’s essential role in global decarbonization was discussed. The conference provided a platform for governments, businesses, and other stakeholders to share lessons and consider partnerships that could accelerate the sustainability and energy transition.

In this article, we build on these discussions by setting out ten strategic initiatives, or “big bets,” to accelerate green growth in Indonesia, each of which could realize significant emissions reductions while maximizing economic value, job creation, and environmental protection. These big bets encompass a wide range of activities and investments, from accelerating renewable energy adoption to developing innovative technologies in CCS. Together they have the potential to position Indonesia at the forefront of the global fight against climate change.

Big bet 1: Greening the power sector—enabling growth while reducing emissions

Indonesia’s energy sector, including end use electricity and thermal energy consumption by industry, transport, and buildings, accounts for around a third of national emissions (with remaining emissions primarily coming from land-use change (such as deforestation and peatland degradation), forestry, agriculture, and waste. The power sector, mainly fueled by coal, is responsible for around 40 percent of these energy sector emissions. With the country’s power demand expected to increase by 50 percent by 2030 and quintuple by 2060, the challenge is to manage this growth without a corresponding growth in emissions.

The Indonesian government aims for net-zero emissions by 2060, while maintaining energy security and affordability. This goal will entail expanding power generation capacity to over 400 gigawatts (GW) by 2060, with around 75 percent of total capacity sourced from renewables by 2060. At the same time, energy efficiency measures will need to be deployed across the existing coal fleet, while also making sure that any coal plants are supercritical and fitted with carbon capture and storage (CCS) technology, and that electricity transmission and distribution losses are minimized via grid upgrades.

Fortunately, Indonesia possesses immense renewable resources, including over 550 GW in solar power, 450 GW in wind power, 100 GW in hydropower, 10 GW in geothermal power (the world’s largest source), and 20 GW in biomass. These resources mean that a net-zero power sector in Indonesia is theoretically possible, with more than 1.1 terawatts (TW) of total renewable energy potential. This presents a huge opportunity for Indonesia (Exhibit 3).

Realizing the power sector opportunity

The Indonesian government has laid out ambitious targets for renewable energy. The current goal is a 23 percent renewable share in the energy mix by 2025, potentially rising above 30 percent by 2050. In line with this, the country’s latest power sector plan (RUPTL 2021–30) earmarks over 50 percent of new capacity for renewable energy, with 65 percent slated for development by independent power producers (IPPs).

Despite the current reliance on fossil fuels for around 95 percent of the energy mix (85 to 90 percent of electricity generation), Indonesia has an established base of hydropower and geothermal energy. It also started to embark on biomass cofiring in coal-fired power plants (since 2020) and, given its equatorial location, is increasingly focusing on solar PV. Renewable energy projects are primarily being developed by Perusahaan Listrik Negara (PLN, the state-owned electric utility), Pertamina (the state- owned oil and gas company, which has primarily focused on geothermal), IPPs, and smaller-scale solar PV developers—although grid stability remains a significant constraint to large-scale intermittent renewables.

To harness local economic benefits and foster domestic industry, the government has implemented specific local content requirements for renewable energy projects. These stipulate that projects must utilize a minimum percentage of domestic materials and labor, particularly for solar PV and battery energy storage systems (BESS) projects. This policy looks to take advantage of Indonesia’s rich natural reserves (such as nickel and silica, which are essential for these technologies) and aims to position the country as a global hub in clean technology manufacturing.

Future strategies and recommendations

To effectively scale up its renewable energy sector and meet its ambitious goals, Indonesia could adopt a multifaceted strategy encompassing policy development, investment, technology transfer, and international collaboration. Building on recent momentum, including a memorandum of understanding (MOU) with Singapore for renewable electricity exports, as well as various initiatives by companies in solar PV and BESS manufacturing, priority actions could include:

Raising the ambition of renewable energy and energy efficiency policies and regulations to support the rollout and financing of both renewable energy and cleaner coal projects, including:

• For renewable energy: renewable portfolio standards; capacity payments; bundled at-scale procurement (ideally at multi-GW scale using competitive process); net metering; simplified approvals; agreements with neighboring countries to export clean power (replicating the recent MOU with Singapore); partnerships with global leaders in renewable technology to facilitate the transfer of cutting-edge technologies to Indonesia; awareness campaigns to educate the public about the benefits of renewable energy and ways to participate (such as rooftop solar installations); and capability building programs to build a skilled workforce.
• For cleaner coal: low-emissions standards; biomass cofiring; carbon pricing; mandatory CCS; tax incentives for plants that install clean technologies; and the selective phase-out of the oldest and most polluting plants.

Incentivizing the scale-up of local production of renewable energy equipment, including equipment such as solar panels, wind turbines, and batteries, which could reduce costs and increase accessibility. Joint ventures are already emerging within the solar PV industry—a positive indicator of the sector’s growth.

Improving Indonesia’s overall investment environment, which could be achieved by ensuring stable policy frameworks, tax incentives, streamlined regulatory processes, concessional finance, and risk-mitigation mechanisms. A national investment platform could be considered, where international investors use the platform to invest in specific special purpose vehicles (SPVs) or funds (see “Big bet 9: Funding the energy transition”).

In addition, the national grid will need to be improved to handle the variability and decentralization of renewable energy sources, including developing and integrating energy storage technologies, as well as minimizing transmission and distribution losses.

Big bet 2: Delivering clean energy—strengthening and expanding the grid

The global transmission market, poised to reach $250 billion to $300 billion by 2030, is expanding rapidly, driven by factors that include rising energy demand, renewable energy integration, electrification of transport, and concerns over energy security. Within this dynamic environment, Indonesia urgently needs to enhance its power grid, including by expanding interconnection and intra-island grids, thus linking clean energy resources with major demand centers such as Java and Bali.

Optimizing the clean energy opportunity

Indonesia has already begun taking significant steps toward grid expansion and modernization. These include adding thousands of kilometers of additional transmission lines and new transformer capacity, as well as alleviating strain on existing island power systems through the development of interconnections between different islands, to improve energy distribution and reliability. This grid expansion and strengthening are necessary both to enable renewables at scale, and to support captive power intended for mineral processing in the clean technology value chain, such as for EV batteries. Projects such as the Java-Sumatra 3 GW interconnection project (planned for inclusion in Indonesia’s 2024-34 long term electricity plan (Recana Umum Penyediaan Tenaga Listrik (RUPTL)) and the establishment of a power cable plant by LS Cable & System and Artha Graha Network, highlight ongoing efforts.

Indonesia is also encouraging associated private investment in the electricity sector, with IPPs being engaged for the generation of electricity. The Indonesian government is working on improving the regulatory framework to facilitate these investments in the sector.

In addition, the government has initiated programs to extend electricity access to rural and remote areas. These efforts often involve small-scale, off-grid solutions like solar panels and microhydro plants, alongside extension of the traditional grid network.

Future strategies and recommendations

For Indonesia to accelerate strengthening and expansion of the power grid, priority actions could include:

Upgrading transmission and distribution infrastructure, including replacing aging equipment, and installing new, more efficient transmission lines. Current technologies limit the integration of intermittent power sources, potentially prolonging reliance on coal power.

Rolling out smart grid technology to enhance the integration of renewables, including solar power. Smart grid technology includes designing grids for bidirectional energy flow, essential for incorporating residential solar PV systems and preventing grid instability.

Developing the upstream transmission value chain—vital as raw material prices are rising significantly (for example, copper by 32 percent and aluminium by 40 percent). Securing such materials is important to control project costs.

Developing captive power plants, particularly necessary for energy-intensive industries such as mining and manufacturing to ensure a reliable power supply and reduce the burden on the public grid.

Collaborating with international organizations and countries to receive technical and financial assistance, including for technology transfer, capacity building, and funding for infrastructure projects.

Big bet 3: Reducing transportation emissions—accelerating electric mobility

The transportation sector in Indonesia currently accounts for approximately 10 percent of total anthropogenic emissions. Under a business-as-usual (BAU) scenario, these emissions are projected to more than double, rising from around 150 MtCO₂ in 2020 to approximately 350 MtCO₂ by 2050. This surge will be fueled by population growth, economic growth, urbanization, and increasing preference for four-wheel vehicles (4Ws) to 2050. Delivering Indonesia’s net-zero aspiration by 2060 will therefore be achieved mainly through the electrification of vehicles, the corresponding decarbonization of the power sector, and the adoption of hydrogen as a fuel alternative.

Benefiting from the electric mobility opportunity

Despite EVs currently holding less than 1 percent total penetration across 4Ws and two-wheel vehicles (2Ws) in Indonesia, the foundation for a substantial shift is being laid., McKinsey, January 2019. The Indonesian government has provided robust regulatory support, including a ban on the sale of fossil fuel motorcycles by 2040 and cars by 2050, incentives for upfront purchase prices, and non-monetary benefits like exemptions from the odd-even traffic rule for EVs.,” McKinsey, June 30, 2022; ;“Transportation minister promotes EV benefits at electric vehicle funday,” Jakarta Post, November 21, 2022.

Private corporations are already participating in this shift: Gojek aims for a complete transition of its fleet to EVs by 2030, and Grab is set to deploy 26,000 EVs in Indonesia by 2025. Further, Indonesia is set to become a leader in E2W rollout, with the market already growing at an annual rate of more than 50 percent. Electric trucks and electric light commercial vehicles (eLCVs) are also high-potential future markets.

Future strategies and recommendations

For Indonesia to realize the full potential of electric mobility, priority actions could include:

• Adopting more ambitious targets to phase out internal combustion engine (ICE) vehicles and to significantly scale electric vehicle charging infrastructure (EVCI) to 2030, including public charging stations and battery swap stations. This would signal a rapid EV transition to both manufacturers (OEMs) and consumers.
• Addressing critical associated infrastructure barriers, in particular, new infrastructure that would require addressing high capex requirements through low-cost financing solutions, forming partnerships with real estate entities, optimizing station placement through geospatial analysis, upgrading grid infrastructure as needed, and harmonizing technical standards.
• Establishing a comprehensive ecosystem for EVs, including third-party service and maintenance, a secondary market for EVs, and battery recycling—all of which could enhance the affordability and appeal of EVs compared to ICE vehicles. This may require adopting innovative business models to make EVs more affordable, such as separate financing for vehicles and batteries, offering “battery as a service,” and developing financing options for second-hand vehicles.
• Raising awareness among consumers about the benefits of EVs, both in terms of the country’s sustainability goals and the potential for green growth through the development of a domestic value chain.

Big bet 4: Enabling electrification—developing the battery value chain

The role of batteries, especially lithium-ion (Li-ion) batteries, which often contain high nickel content within their cathodes, is increasingly becoming pivotal to the decarbonization of transportation and power sectors globally. Indonesia, which has the world’s largest nickel reserves at about 21 million tons (approximately 20 percent of global reserves), is uniquely positioned in this evolving market. By 2030, global Li-ion battery demand is projected to soar from approximately 200 gigawatt hours (GWh) in 2020 to around 4,700 GWh, and from 0.2 to 13.0 GWh in Indonesia. (Exhibit 5). Over 50 percent of this demand is expected to be fulfilled by batteries utilizing nickel cathodes. In the burgeoning global value chain, key segments such as cell manufacturing, active materials, raw material mining and refining, and battery pack assembly are anticipated to contribute significantly to the global revenue pool, estimated to be around $400 billion in 2030. Consequently, Indonesia has already significantly increased nickel production in recent years, building on an existing production base that was formerly primarily for the stainless steel sector. This will require a significant shift into production of higher-purity “Class 1” nickel (purity of at least 99.8 percent), which is required for Li-ion batteries, rather than “Class 2” nickel, which is primarily used in production of stainless steel.

Capitalizing on the battery value chain opportunity

The government recently announced a possible additional investment of around $32 billion for its domestic battery supply chain by 2026. South Korean conglomerate Hyundai also established Indonesia’s first EV manufacturing facility in 2022. In August 2023, a consortium led by another South Korean electronics company, LG, has joined forces with the Indonesian government and Indonesia Battery Corporation (IBC) to establish a factory to manufacture EV battery cells, as well as a smelter and supplementary infrastructure, entailing investment of $9.8 billion.

Future strategies and recommendations

For Indonesia to realize its potential as a global battery manufacturing hub, priority actions could include:

• Establishing batteries as a national strategic priority, which is delivered sustainably and helps attract both global and local industry players and ensures transfer of technological know-how. This effort could include improving the ease of doing business, developing infrastructure that adheres to environmental, social, and governance (ESG) standards, and implementing targeted education programs. In particular, it will be essential to ensure that nickel can be produced sustainably, including use of renewable energy, engagement of local communities, providing local jobs, and adherence to strict environmental regulations, particularly at mine sites. A balance will be required between export of raw materials and the manufacture of batteries for domestic consumption, a central consideration of any national strategy.
• Adopting new policies to stimulate demand and manufacturing, including enhanced access to export markets through free trade agreements (FTAs) and offering manufacturing incentives to attract OEMs and battery cell producers. This approach could help stimulate both domestic demand and the manufacturing sector.
• Building an integrated value chain from mining and refining to cathode, cell, and pack manufacturing. This could help to reduce production costs, alleviate supply chain bottlenecks, and extend reach into other lucrative segments of the value chain. For example, to enable manufacturing of battery cells, Indonesia will need to either produce or import the materials required for battery anodes (such as graphite, copper, silicon) and electrolytes (for instance, lithium salts or organic solvents), as well as cathodes (primarily nickel). Recycling facilities and circular-economy practices would help with this onshoring, giving Indonesia the ability to reclaim, in the future, materials such as lithium and cobalt that are not as widely available locally.

Big bet 5: Tackling unavoidable emissions—creating a carbon market with Indonesia’s abundant nature-based solutions

High-quality carbon credits (or carbon offsets) are an increasingly important decarbonization lever as part of the net-zero “toolkit” for organizations, particularly within hard-to-abate, high-emitting sectors such as aviation, cement, steel, and oil and gas.

Nature-based solutions (NBS) for carbon sequestration, including reforestation and mangrove and peat restoration, offer effective ways to fix carbon from the atmosphere and generate carbon credits from real, on-the-ground projects. These solutions are often deployed in emerging markets due to the availability of rich, diverse natural resources, higher cost effectiveness, and social and environmental co-benefits. Indonesia has among the largest NBS potential of any country globally, translating to over 1.5 GtCO₂ in carbon credit potential (Exhibit 6). With an increasing number of corporations committing to emissions reductions, the demand for all types of carbon credits in Indonesia is projected to grow tenfold from 2022 to 2030, reflecting a global trend. Beyond climate mitigation and economic returns, carbon credits are often valued for their co-benefits, including local economic growth, local community development, soil health improvement, water-quality improvement, and biodiversity protection.

However, ensuring the long-term viability of the market for nature-based carbon credits involves creating a robust, transparent, and effective system where carbon credits can be reliably quantified, verified, and traded. Accurate accounting, as well as verification of permanence and additionality, are essential to opening this market.

Seizing the carbon market opportunities

Momentum for NBS in Indonesia is accelerating, and various initiatives are underway:

• Emerging project developers, including PT RMU and Forest Carbon, are focusing on the development of new, high-quality emissions abatement projects. Significant projects include the Katingan Peatland Restoration and Conservation Project and the Sumatra Merang Peatland Project (SMPP), with co-benefits including swampland conservation, food security, biodiversity protection, and community income opportunities.
• The Ministry of Environment and Forestry (KLHK) has introduced a National Registration System (SRN), a mandatory standard for monitoring local projects, helping ensure a level of quality control.
• The Indonesia Stock Exchange (IDX) launched a trading platform for both carbon allowances (under cap-and-trade) and voluntary carbon credits in September 2023.

Future strategies and recommendations

Ways that Indonesia could position itself as a leading NBS hub include:

• Finalizing the development of a national decarbonization road map, disaggregated by sector, including a carbon markets strategy, giving stakeholders clarity and confidence in the design and implementation of a domestic cap-and-trade scheme, a voluntary carbon market, and the operationalization of Article 6 of the Paris Agreement.
• Ensuring collaboration between public and private sectors to accelerate the improvement of carbon credit quality (in line with international standards) and the development of a carbon market ecosystem in the country, including support and incentives for credits-linked emissions reduction projects, streamlined regulatory and approvals processes, targeted sustainable financing, as well as mandated annual emissions measuring, reporting, and verification (MRV).
• Connecting Indonesia’s carbon credit market to the world to attract foreign investment and facilitate price discovery, which would enable international buyers to access Indonesia’s market by ensuring compatibility between high-integrity domestic and international standards, project implementation, and long-term monitoring.

Big bet 6: Decarbonizing transportation emissions—developing green fuels

Low-carbon transportation cannot be delivered through electrification alone. Green thermal fuels also have a significant role to play, and Indonesia is well-positioned to contribute to this shift. As the largest producer of biodiesel globally, and with significant potential for producing sustainable aviation fuel (SAF), Indonesia is positioned to be a key global biofuels player. This shift aligns with global trends and caters to growing demand, particularly from regions like the European Union and North America, driven by government mandates and airline commitments.

Accelerating the biodiesel opportunity

Indonesia has taken several steps to increase its use of green fuels:

• Bioethanol: The launch of E5 bioethanol-blended gasoline in 2023 demonstrates Indonesia’s rejuvenated bioethanol ambition. There is good potential for further bioethanol uptake, with the possibility to increase bioethanol-blended gasoline blending to 20 percent of total supply by 2030, Assuming no excise tax, this first-generation biofuel (1G) is already cost competitive versus gasoline (RON95 and RON98), whereas second-generation biofuels (2G) remain more costly than gasoline (RON98) and may need incentives for production. Key challenges for the sector include solving land availability challenges for 1G biofuels without compromising food security, and making 2G biofuels available at scale.
• Biodiesel: The biodiesel blend mandate was increased to 35 percent nationwide in August 2023.
• Sustainable aviation fuel (SAF) from palm oil mill effluent: With around 50 percent of global palm oil mill effluent (POME) production—a key feedstock for SAF—Indonesia is exploring SAF as a major component in reducing aviation emissions. However, due to the high cost of production when compared with other types of aviation fuel, financial support or incentives may be necessary to unlock the SAF market. In addition, the use of POME is subject to regulatory sensitivities around palm-oil-based fuel, despite POME being a waste product. Therefore, it will be increasingly important to monitor the supply chain using accurate accounting and traceability approaches.
• SAF from used cooking oil (UCO): UCO is another feedstock for SAF production. It is one of the cheapest and most sustainable feedstocks available globally along with POME. Despite less than 25 percent of UCO being collected in Indonesia today, the country is already a top three UCO exporter globally, with the UCO market projected to grow to around $2.5 billion in Indonesia by 2030.

Future strategies and recommendations

To successfully expand the use of green fuels, priority actions for Indonesia include:

• Making policy changes enabling competitive green fuel pricing versus fossil fuels and addressing high production costs and regulatory challenges around SAF, possibly through carbon taxation or other means of financial support (or both).
• Scaling up bioethanol and biodiesel production and adoption, including through enhanced palm oil plantation efficiency, without compromising food security. The scale-up of bioethanol could focus on delivering sufficient feedstock and the development of production and blending facilities, while the scale-up of biodiesel could focus on the rollout of palm oil solutions including better seeding and agrotechnology to improve yields for biodiesel production.
• Exploring the potential of clean hydrogen as a future energy carrier and regional export commodity, especially to energy-importing nations like Japan and South Korea. This would require advancements in production technology and specific regulations for e-fuels.

Big bet 7: Mitigating greenhouse gas emissions—converting mature oil and gas fields into carbon stores

The global importance of CCS as a tool to mitigate greenhouse gas emissions is growing. CCS involves capturing CO₂ emissions from industrial sources and storing them underground. CCS could contribute to a reduction of 2 to 6 Gt per annum of CO₂ globally by 2050, representing 6 to 14 percent of current total emissions. In Asia, there are eight commercial CCS facilities in operation and eight more either under construction or at an advanced development phase. This is in addition to at least 15 pilot CCS facilities (as of November 2023). As one of Southeast Asia’s largest oil and gas producers, Indonesia’s potential to repurpose mature oil fields or saline aquifers for CO₂ storage or enhanced oil recovery (EOR) is significant.

Increasing the carbon capture and storage opportunity

Indonesia has been actively pursuing CCS, with ongoing evaluations of potential carbon capture, utilization, and storage (CCUS) sites and legislative advancements. As of November 2023, ten CCUS clusters are being evaluated and five CCUS projects are already in the early and advanced development phase. Additionally, a presidential regulation on CCS and CCUS is expected to be finalized by the end of 2023. Efforts are also underway to map the CO₂ storage capacity, and the Ministry of Energy and Mineral Resources is finalizing regulations specific to CCS for oil and gas areas. These developments demonstrate Indonesia’s commitment to integrating CCS as a part of its climate change mitigation strategy.

Future strategies and recommendations

To inform effective CCUS implementation, Indonesia can draw lessons from international large-scale projects:

• Exploring the development of cluster-based CCS in industrial hubs, achieving economies of scale to accelerate CCS adoption, inspired by successful models like Net Zero Teesside and Zero Carbon Humber. This may include gathering insights from at-scale international projects such as Gorgon LNG and Northern Lights, including managing technical complexities (for example, reservoir pressure) and understanding potential business models involving CO₂ taxation and service margins.
• Developing international collaborations with countries such as Japan, and frameworks such as those provided by the American Carbon Registry, to assist in establishing clear, credible guidelines for safe and effective CO₂ storage.
• Including blue hydrogen in CCS plans to create a new revenue stream, helping to offset costs and ensuring competitive pricing.

Big bet 8: Concentrations of sustainability innovation—developing green industrial estates

Indonesia is aiming for 23 percent renewable energy in its mix by 2025 and net-zero emissions by 2060. Central to this transformation is the development of green industrial estates, or hubs. These hubs are envisioned to be future centers of green innovation, crucial in reducing Indonesia’s substantial industrial CO₂ emissions, which account for 23.0 percent and 15.6 percent of the country’s direct and indirect energy-related emissions, respectively.

Developing green industrial hubs

The government has already initiated efforts to foster green industrial hubs, emphasizing low-carbon utility and circular-economy principles. These hubs are intended to serve as collaborative platforms for local and international companies, offering:

• Economies of scale by facilitating cross-sector collaboration, with hubs enabling industries to share resources, reduce costs, and accelerate local industrial decarbonization. This includes developing shared infrastructure like clean power systems, smart grids, and CO₂ and hydrogen pipelines.
• Innovation and test beds, with hubs serving as living laboratories demonstrating the convergence of policy and technology for environmental impact.
• Local development, with green infrastructure designed to not only support the industrial parks but also to provide clean energy to surrounding districts.

The Kalimantan Industrial Park Indonesia (KIPI) in Bulungan, North Kalimantan, is a flagship green industrial hub project. Planned as the world’s largest green industrial park, KIPI will focus on sectors like EV battery manufacturing and clean energy production, with tens of billions of dollars of investment from international partnerships. Two other planned industrial parks are Arun Lhokseumawe and Sei Mangkei.

Future strategies and recommendations

To successfully establish and scale green industrial estates, priority actions for Indonesia could include:

• Selecting strategic locations with proximity to urban and transportation hubs; access to renewable utilities; availability of land with lower ecological value, low flood or natural disaster risk; appropriate zoning; and access to necessary raw materials. Appropriate trade-offs will be required—for example, Kalimantan is rich in renewable energy potential, whereas Java has existing infrastructure and is close to major markets.
• Initiating pioneering projects and partnerships to create a foundation for a sustainable industrial ecosystem. For instance, public-private partnerships can help distribute risks between public and private sectors, while partnerships with international technology providers can help bring in cutting-edge solutions for renewable energy, waste management, water conservation, and more.
• Encouraging sustainable investments, with fiscal incentives like tax holidays and import duty exemptions, which can be vital in attracting both domestic and international investors.

Big bet 9: Funding the energy transition—mobilizing green capital

Indonesia has set an ambitious target to reduce its GHG emissions by 43.2 percent by 2030 (approximately 31.9 percent unconditional and 11.3 percent conditional on international support). The country has excellent potential for sustainable growth, but achieving these green growth targets and GHG reductions requires substantial investment, estimated at around $150 billion to $200 billion per annum to 2030. Consequently, engaging a diverse range of financial players, and offering a range of green financial instruments, are crucial for Indonesia’s green transition.

Sustainable financing can take three main forms—traditional loans from banks, bonds to domestic and international markets, and “blended finance” from public and private sources. The loans and bonds can be either sustainability-linked, where the interest rate or coupon rates change when sustainability goals are met, or project-based where the projects must be eligible green projects.

In Asia, green bonds and sustainability-linked loans form the majority of sustainable financing issued. Green, social, and sustainability bonds, typically issued by governments, public-sector entities, or supranational organizations, are the largest part of the market (more than 50 percent), with sustainability-linked loans taking up much of the rest of the market in 2022.

Blended finance brings a more unique value proposition, as it is provided by a group of lenders between public and private sectors (development finance institutions [DFIs], multilateral development banks [MDBs], and investors). It can include many asset classes such as grants, equity, debt, concessions, tax exemptions, immunities to investors, insurance, and guarantees (Exhibit 7).

For example, the Just Energy Transition Partnership (JETP) is a sustainability program that serves to fund Indonesia’s green efforts (specifically on coal retirement). It is funded by governments of G20 nations, the World Bank, and the Glasgow Financial Alliance for Net Zero. JETP uses a blended-finance mechanism consisting of a mix of concessional loans, market-based loans, grants, guarantees, and other instruments.

Invest in the green capital opportunity

In Indonesia, significant strides have been made in sustainable financing, particularly following the introduction of a sustainable financial roadmap by the financial regulator, OJK. Key developments include:

• The launch of the Indonesia Sustainable Finance Initiative (ISFI) in 2018 by eight banks in Indonesia, promoting environment-friendly project funding. By 2021, half of Indonesia’s banking sector had committed to increasing financing for sustainable projects.
• The Global Blended Finance (GBF) Alliance, initiated during the Indonesian G20 Presidency in 2022, aiming to bridge funding gaps for Sustainable Development Goals programs.
• Broad industry adoption of diverse financial instruments, including traditional loans, sustainability-linked loans and bonds, and innovative blended finance combining public and private resources, similar to the JETP.
• OJK launch of Phase II of the Sustainable Finance Roadmap 2021–2025, aiming to further accelerate the sustainable transition of the finance sector.
• The publication of Indonesia’s Green Taxonomy 1.0 in 2022, standardizing sustainable finance terminology to enable identification of projects eligible for sustainable finance and requiring financial institutions to align climate disclosures with this taxonomy.

Future strategies and recommendations

Indonesia has seen progress across key financing instruments and schemes, however, there is still significant room for improvement. For example, the annual average investment in renewables over the past five years has been $1.62 billion, which represents only 20.2 percent of the annual spend required for Indonesia to reach its 2025 goal. The funding deficit impedes the energy transition and underscores the obstacles such as unattractive renewable energy tariffs, competition with subsidized fossil fuels, high capex requirements, and a lack of clarity and traceability of financial flows and allocation of public financing for renewable energy projects.

These obstacles may also erode investor confidence in renewable energy investment in Indonesia, but there is a strong need for nonpublic financing sources to fill the funding gap, given the limited allocation of public funding to renewable energy projects. To further catalyze sustainable financing into Indonesia’s growth and decarbonization agenda, priority actions include:

• Creating a supportive policy and regulatory environment, including a comprehensive sustainable finance roadmap and taxonomy (Green Taxonomy 2.0 is under development). This includes creating clear and concise regulations on sustainable finance, incentives for financial institutions to adopt sustainable practices, and implementation of domestic policy reforms and other actions to improve the country risk or investment environment. This could also include expanding the tax base (such as green growth agendas and tax collection improvements) and aligning to climate objectives (for example, eliminating fossil fuel subsidies).
• Developing innovative new financing mechanisms, while also strengthening capacity and expertise in sustainable finance. This includes exploring new ways to raise capital for green projects, such as expanding the use of finance instruments with higher leverage ratios (for example, insurance, guarantees, blended finance structures, currency hedging). It could also provide training and resources to financial institutions, investors, and other stakeholders on sustainable finance.
• Promoting public-private partnerships to bring in more international capital, potentially through a national-level investment platform. The government and the private sector could work together to develop and implement sustainable financing solutions, potentially including a national-level investment platform that enables at-scale project procurement and financing. This could include increasing capital deployment from existing initiatives and institutions (such as the Bridgetown Agenda or MDB reform) and raising new international concessional climate finance (as part of COP, G20, and United Nations process, such as proposed COP28-linked blended finance funds, loss and damage fund, and new global climate taxes or levies).

Big bet 10: Enabling a green economy—cross-cutting policies and initiatives

To achieve its ambition of becoming a green economy, Indonesia needs policy, technology, and people (as well as finance, discussed earlier). Comprehensive policies are required across all sectors, with one crucial cross-cutting policy enabler being a price on carbon (for example, via an Emissions Trading Scheme). On technology, while many low-carbon technologies are manufactured outside the country, Indonesia could leverage global trends to attract new foreign investment and expertise in manufacturing. On people, Indonesia has a demographic advantage, featuring a young, educated, and growing population, which enhances its attractiveness as an investment destination. Opportunities to further entice foreign companies and skilled professionals include financial incentives, robust infrastructure, and favorable visa and tax policies—potentially positioning Indonesia as an appealing alternative to traditional expatriate hubs like Dubai or Singapore. It will be equally essential to continue to foster domestic talent.

Growing a green economy to achieve a sustainable future

Indonesia has taken initial steps to lay a foundation for a green economy. Key initiatives include:

• Policy: Indonesia’s commitment to achieving net-zero emissions by 2060 has been furthered by the establishment of its first carbon exchange market in September 2023. This initial phase focuses on the voluntary carbon market, with plans to extend to the compliance market.
• Technology: With a wealth of natural resources like nickel, copper, and cobalt, Indonesia is already attracting global renewables and battery manufacturers such as Hyundai and LG.
• People: A good example of a local capacity-building initiative is the launch of the Sustainability Academy and Sustainability Center by Pertamina in September 2023.

Future strategies and recommendations

To enhance its green economic landscape, priority actions for Indonesia include:

• Developing comprehensive green economy policies and regulations that promote sustainable practices across all sectors, as well as incorporating sustainability into national and regional development plans. For example, corporate and public engagement could encourage corporates to adopt net-zero goals and initiatives, and public engagement look to influence lower-carbon consumer behavior. Carbon pricing may be particularly impactful in driving down emissions and should be a focus.
• Facilitating manufacturing and adoption of sustainable technologies in industries and households through incentives, grants, and awareness campaigns.
• Enticing foreign companies and professionals, while continuing to foster domestic talent, including through financial incentives, robust infrastructure, favorable visa and tax policies, university and employee programs, and countrywide dedicated sustainability programs to meet these objectives.

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The challenges to decarbonization are immense for Indonesia, but the opportunities are equally significant. By utilizing its abundant resources for nature-based solutions and building on various strategic initiatives across industries and the public and private sectors, the country could position itself as a forerunner in the global journey to net zero.