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«Status of Climate Finance in Indonesia Country Assessment Report Dennis Tänzler (adelphi) Martha Maulidia (GIZ) August 2013 Funded by: Climate and ...»

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 Sub--national access to funds needs improving: Fiscal decentralization in Indonesia has delegated expenditures and revenues and administrative management to local governments, notably the right to regulate local taxes and retribution. This has implications for climate finance delivery and governance. Currently policies and legal frameworks at the sub-national level are not adequate to facilitate climate finance delivery and management. More time is required to amend the regulation of the intergovernmental fiscal transfer via specific purpose grants (DAK) to reflect climate change aspects.

P a g e | 11 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 Good Financial Governance  Integrating mitigation into budgeting systems: The MoF initiated a Performance-Based Budgeting (PBB) in 2005 to improve the efficiency of funds. The first Mitigation Fiscal Framework suggested including emissions reduction in the PBB performane indicators and the MoF has started efforts to incorporate thematic tags including mitigation into the budget system.

 Constraints to monitoring climate finance: Some of the constraints observed in Indonesia that are preventing adequate MRV of finances includes: absence of formal climate finance marker system; lack of definitive guidance; and no dedicated computer system to track climate finance (Tirpak et al. 2012).

 Systematic MRV of finance needed: MoF and BAPPENAS need to put in place a systematic monitoring and evaluation system for tracking national and international climate finance flows, for adaptation as well as mitigation activity. The classification and indicators to characterize financial data are inconsistent. While loan-monitoring systems are quite well-developed, monitoring grants is challenging, although developing a system for the latter is important given that in UNFCCC negotiations most recipient countries hold that climate finance, particularly for adaptation, should primarily be grant-based.

 Integrate MRV into national and local climate planning: The link between MRV of funds and activities planned as part of the national and local emissions reduction plans need to be further elaborated. The ICCTF’s MRV capacity should be strengthened as an implementing entity for these plans. There is also a need to establish an accounting and monitoring system for private climate finance, particularly where this is counted towards meeting UNFCCC targets, to ensure activities are embedded into Indonesia’s internal audit institutions and that they meet national climate and development goals.

Private Sector Engagement  Involvement in mitigation activity: Private sector already makes up a considerable proportion of mitigation investment in Indonesia, although accurate data on such investment is not available. Private funding mostly centres on investment in renewable/clean energy and energy efficiency, commercially viable areas where investors see they can make a return on investment. Adaptation requirements and action does not attract equity investment in the same way.

 Carbon market and REDD+ engagement: Indonesia has contributed less significantly to the compliance market under UNFCCC than other countries. Out of the total capital investment of USD 215.4 billion for CDM projects (as of June 2012), Indonesia’s estimated share is USD 3.661 billion (or only 1.7%), far behind China’s (60%) and India’s (17%) (UNFCCC, 2012). In case of REDD+, there are currently more than 60 REDD+ demonstration activities spread across Indonesia, and private companies are already involved in developing and supporting these.

 ICCTF as an institutional mechanism for public-private collaboration: ICCTF can help to establish dialogue and collaboration with the private sector and financial institutions to ensure their involvement in the Green Climate Fund and related political proceses via the Private Sector Facility.

 Innovative policy approaches needed: A favourable market situation and related policies & programmes (e.g. tax incentives, low cost debt financing, R&D support) setup by the government could put in place the right triggers for more private investment in low carbon growth. Indonesia also needs to reform its domestic policy; energy pricing policy should reflect market reality and should give incentives in terms of carbon pricing.

Financial sector’s involvement sought: National banks play a key role in climate finance management and delivery and invoving these institutions could catalyze climate P a g e | 12 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 investment. Bank Indonesia is currently drafting a regulation on green banking that will require not only financial but also social and environmental sustainability standards to be integrated in investment planning.This initiative is expected to send a positive signal to banks and increase their interest and participation in the climate finance industry.

Next steps in improving climate finance readiness As we see from the analysis, there is good climate finance momentum underway in Indonesia, but further effort is still needed to improve national readiness for receiving and using climate finance.The following recommendationsseek tobuild upon the mechanisms

and results achieved already while addressing some of the remaining gaps and challenges:

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Climate finance has always been recognised as key topic in international climate change negotiations.. It was internationally agreed to increase the flow of climate finance from developed to developing countries to USD 100 billion per year from 2020 onwards (UNFCCC COP 15 and 16 agreements). Main purpose is to promote low carbon economic development in developing countries and to finance their adaptation requirements. With the international climate financing landscape becoming increasingly complex and diversified, developing countries need a new set of capacities to enable them to access and make use of available climate finance efficiently and effectively.

Indonesia too is taking measures to tackle climate change with international and domestic support. As an emerging economy, the country has committed to an ambitious target of reducing national GHG emissions. by 26% by 2020, or even up to41% with sufficient international support. To meet these targets, initial attempts to strengthening national climate finance architecture and management systems have been undertaken and are still evolving.

The current fiscal mechanisms and trust funds for managing international climate finance inflows - such as the Indonesia Climate Change Trust Fund (ICCTF), the Fund for REDD+ Indonesia (FREDDI) - are at an early stage of development and require enhanced capacities for technical planning and management to become successful.

With significant international funds entering the Indonesian climate change framework (Brown and Peskett, 2011) there is a strong demand to establish mechanisms to ensure that the funds are effectively coordinated, channelled, and monitored, and that the results of financed measures are adequately verified and reported.

1.1 Objective of Report The study serves as a preliminary gap-analysis on climate finance readiness in Indonesia.

This report provides a structured overview of climate finance in Indonesia, mapping the current systems, policies, financing trends, and needs, and outlining opportunities for improving climate finance performance in the country.

The purpose of this report is to identify priority assistance for the consideration and uptake of the Indonesian governmentas part of efforts to develop climate finance architecture in the country, in collaboration with other development partners.

1.2 Scope and Approach The report is the result of work undertaken by GIZ Indonesia and Adelphi on behalf of GIZ International Services. It is based on findings from desk research and interviews with key stakeholders in Indonesia, particularly the National Planning Ministry (BAPPENAS), the Ministry of Finance (MoF), and the National Council on Climate Change (DNPI).

Using four distinct dimensions of climate finance readiness - planning, access, financial governance (including monitoring and reporting of climate finance), and the involvement of the private sector – the study attempts to identify the current status of, and challenges to, climate finance management in Indonesia, and recommenduseful activities in developing this area. These reflections will need further scoping and elaboration with stakeholders if they are to be designed as concrete projects, and they also need to be framed within the medium to long-term perspective.

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2. Climate Finance Readiness

2.1 International Climate Finance In 2009, the Copenhagen Accord defined the overall scope of future climate finance pledges: climate policies and actions in developing countries should be supported with USD100 billion per year of new and additional public and private finance by 2020. Since then, a number of concepts have stressed the need for climate finance readiness. We suggest four pillars to improve a country’s climate finance readiness: (1) supporting capacities for multi-level planning, programming and coordination; (2) institutional strengthening to meet financial access requirements; (3) providing good financial governance, including soundMRV systems; and (4) increasing efforts to engage the private sector.

In 2009, the Copenhagen Accord established a USD 100 billion annual target, to be achieved by 2020, in new and additional climate financing in support of developing countries climate change policies and needs (this pledge was subsequently formalised in the UNFCCC architecture by the 2010 Cancun Agreement). To this end the Green Climate Fund (GCF) is currently being established in Songdo City, South Korea, to play a key role in channeling “new and additional, predictable and adequate” financial resources to developing countries (UNFCCCDecision1/CP.16).

So far it is unclear how these finances will be organised, to what extent public finance will be used to catalyse private sector investment, and whether the GCF will manage large volumes of funding directly or through already existing funding structures. Growing demand for climate funding has already led to the development of a number of funds and facilitiess, both bilateral and multilateral, and diverse financing instruments. The GCF raises some hope for more effective coordination and distribution of climate finance in an otherwise fragmented landscape.

To benefit from the rapidly evolving climate finance industry, donors as well as recipient countries need to be well prepared (readiness) and understand the comprehensive range of issues, instruments, and modalities that are materializing. Many developing countries, including Indonesia, are already developing country level approaches and strategies to enable climate finance acess and utilization in meeting national climate change goals.

2.2 Concepts of Climate Finance Readiness The availability of financial resources and capacities to absorb these vary across industrialised and developing countries, depending on the institutional architecture, policy environment, and existing financial expertise and skills within a political system. As a result donors, think tanks and research institutions have started to conceptualise approaches to evaluate and improve capacities for climate finance uptake and management.

According to the UNDP (2012), climate finance readiness can be defined as “the capacities of countries to plan, access, deliver, monitor and report on climate finance, both international and domestic, in ways that are catalytic and fully integrated with national development priorities and the achievement of the MDGs.”

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As outlined in the table above, the four pillars of climate finance can be described with key activities that are needed to establish an integrated climate financing regime. Such a regime depends on main actors (including the private sector), the coordination mechanisms they use, and the state of funding access and utilisation at different regional levels within a country like Indonesia. Even if Indonesia has achieved a relatively advanced degree of climate finance planning, significant barriers to effective delivery and coordination of plans may still exist. For instance the absence of a sound MRV system for climate finance makes it difficult to track results and to establish performance-based payment systems.

Based on its experience in developing climate finance capacities, the GIZ has developed a “Ready for Climate Finance” approach to support “developing countries and diverse stakeholders in planning for and accessing climate finance, establishing and managing national institutions and building expertise”(GIZ 2012a). This approach in a revised new form (see below GIZ 2012b) consists of four dimensions that are similar to the UNDP model

but with a stronger emphasis on addressing the involvement of the private sector:

Exhibit 2: The “Ready for Climate Finance” approach (GIZ 2012b).

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The first dimension aims to provide strategic and conceptual advice as well as institutional strengthening for multi-level planning and coordination. In addition, the delivery of programmes can be included as an important part of this dimension. Evolving concepts of

climate finance put a major emphasis on these aspects because they help:

 To ensure effective, efficient and equitable use of climate finance (UNDP 2012);

 To match priorities with potentially available resources and to plan theirintegratation over time (e UNDP 2012);

 To align climate finance with national development strategies and objectives (ODI 2012, UNDP 2012);

 To provide a full overview of financing options available, including modes of access and funding priorities (GIZ 2012a); and  To ensure that project-level activities are in line with national development planning and strategies at the macro level (UNDP 2012).

Hence, planning and coordination is crucial in assessing a country’s needs and priorities and in identifying the policy mix and sources of financing. Planning and coordination need to be combined with the ability to implement and execute programmes and to coordinate implementation.

Second, institutional strengthening at the national level can support countries in

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