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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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accessing international climate finance by helping:

 To structure climate finance flows provided from various sources (GIZ 2012a);

 To enable the country to increase ownership in funding decisions and allocate resources in line with national priorities and strategies (ODI 2012, GIZ 2012a);

 To promote a coherent and coordinated governmental response to climate change through tailor-made capacity development in national public finance institutions (GIZ 2012a); and  To formulate projects, programmes and sector-wide approaches that attract and catalyse further public and private financing (UNDP 2012).

Institutional strengthening at the country level includes activities such as the development of capacities to enable direct access to international climate finance (accrediting National Implementing Entities), or blending and combining funds from diverse sources for more efficiency and strategic use.

Third, Good Financial Governance (GFG) of Public Finance Mechanisms (PFM) can be considered as a key requirement for transparent and accountable spending of climate

finance, particularly:

 To monitor, report and verify financial flows and expenditures (UNDP 2012, ODI 2012);

 To monitor, report and verify results of adaptation and mitigation actions (UNDP 2012, ODI 2012); and  To ensure that climate finance is spent in an efficient and transparent way (GIZ 2012b).

P a g e | 19 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 To achieve good financial governance, the establishment of effectie monitoring and evaluation systems is necessary, not least to track the impacts of climate policy and investment. Capacities are needed to develop integrated national reporting systems for monitoring financial expenditures and results (performance-based payments). Developing the capacity of regulating institutions and accountability mechanisms is also a requisite, as is supporting the development of expenditure management systems.

Finally, private sector engagement needs to be systematically addressed to leverage additional funding sources and to harness the potential of the private sector to provide climate change adaptation and mitigation solutions (UNDP 2012, GIZ 2012). A number of

components are included within this challenge, for instance:

 Exploring systematically the role of the private sector in implementing key climate policy programmes (including the identification of local investment potential);

 Creating the conditions needed to engage the private sector, in part by identifying policies and measures that can help establish incentive structures appropriate for micro, small and medium enterprises (MSMEs) and the financial sector;

 Advising the private sector on how to develop profitable projects that are relevantto national climate change policies;

 Ensuring that private climate finances flow to the areas needed (e.g. adaptation as well as mitigation, pro-poor, enhancing local capacities), and are not misallocated to activities which do not yield net climate change and development benefits (ODI, 2013); and  Implementing appropriate MRV standards for private sector engagement where this is counted towards meeting the UNFCCC climate finance goals (OECD/IEA 2011).

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Landscape of Climate Finance in Indonesia 3.

Indonesia’s Climate Policy & Institutional Setup relevant to 3.1 Climate Finance Readiness 3.1.1 Key Stakeholders in Climate Finance The Indonesian government has taken some dynamic measures to address climate change planning and financing issues. One year after the UNFCCC’s Conference of Parties 13 in Bali in 2007, Indonesia’s president issued a regulation (#46/2008) for the establishment of a National Council on Climate Change. The Council is mandated to: “formulate strategies, programs and activities on climate change control; to play coordination function in the implementation of control tasks of climate change activities; to set up policies and procedures for carbon trading; to carry out monitoring and evaluation of policy implementation on climate change; and to strengthen Indonesia’s position to encourage developed countries to take more responsibility in controlling climate change” (DNPI 2012).

The Council carries out the mandate through working groups that act as policy think-thanks, and a Secretariat that has administrative and coordination functions. A working group under the Council (WG on Financial Mechanism) is responsible for formulating climate finance strategies and coordinating Indonesia’s position on the issue in international climate negotiations.

In addition to the National Council on Climate Change, there are three government institutions in Indonesia that have a prominent role in climate finance budgeting and coordination.

These are the Ministry of Finance, National Development Planning Agency (BAPPENAS), and the Ministry of Environment:

 The Ministry of Finance is responsible for ensuring that climate change requirements are reflected in budget priorities, pricing policies, and financial market rules. It has two divisions that have tasks related to climate finance: Division of Debt Management that has a finance tracking role, and a Fiscal Policy Office that sets the fiscal policy.

 BAPPENAS has the mandate to decide national climate finance systems and procedures, and to coordinate loans and grants related to climate change. It is also the main agency responsible for mainstreaming climate change into national policies.

 The Ministry of Environment is responsible for preparing the National Communications to the UNFCCC, which also, in principal, includes information on climate financing needs.

3.1.2 Key Policy Regulations related to Climate Change Indonesia’s policy on climate change is spurred by the President’s announcement at the G20 meeting in Pittsburgh in 2009 to voluntarily reduce the country’s GHG emission by 26% by 2020 compared to a business-as-usual scenario. In addition to this target, which should be achieved without international support, the president announced an additional reduction target of 15% with international support. One key mechanism established tofacilitate this ambition is the Indonesia Climate Change Trust Fund (ICCTF), also established in 2009 to pool and coordinate funds from various sources to finance Indonesia’s climate change policies and programsfor mitigation as well as adaptation. As far as climate change mitigation measures are concerned, key steps to meet this commitment are further outlined in the National Action Plan on GHG Emission Reduction (RAN-GRK), regulated under Presidential Regulation No.61/2011. The national action plan sets the foundation for developing the Nationally Approved Mitigation Actions (NAMAs) under the UNFCCC.

P a g e | 21 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013 Indonesia’s commitment to GHG emission reduction has made it one among very few nonAnnex I Countries to enact significant GHG emission reduction regulation. In addition, the Regional Action Plan on GHG Emission Reduction (RAD-GRK), containing provincial contributions to the target, was launched in late 2012.

As far as the priorities of the national action plan are concerned, one needs to consider Indonesia’s overall emission profile as reported in the Second National Communication to the UNFCCC (SNC, 2009): the emissions from land use change and forestry (LUCF) and the peat sector in 2005 accounted for around 63% (1.125 Gg CO2e) of the country’s overall GHG emissions (1.791 Gg CO2e). Consequently, over 87% of the total emission reduction target (0.767 Gg CO2e) will be derived from actions in land-based sectors.

As one of the world’s forest-rich countries, Indonesia perceives REDD+ as an opportunity to meet dual objectives of improving forest governance and reducing GHG emissions from deforestation and forest degradation. The huge potential to achieve both objectives attracts significant international support for Indonesia. One of the notable initiatives in REDD+ is the Norway-Indonesia Partnership that pledges US$ 1 billion in grants and performance-based payment grants to Indonesia.

The national strategy on REDD+ mandated the need to establish a REDD+ agency. The REDD+ Task Force, founded in 2010, is the interim body responsible for preparing the agency’s establishment. This body is structured under the Presidential Delivery Unit for Development Monitoring and Oversight (UKP4). In May 2011, the President issued a presidential regulation number 10/2011 on moratorium of new licenses for land-based activities, including logging and establishing plantations in primary forest and peat land areas. Although considered insufficient to address serious deforestation problems, the moratorium has been praised as a good step in improving forest governance and in embarking on a low emission development pathway (WRI 2011; Murdiyarso 2011). The question of addressing the problems of deforestation and forest destruction is subject to numerous reports and studies and also an aspect of climate finance governance that is mainly dealt with separately. As far as our discussion on climate finance readiness is concerned we therefore mainly focus on other challenges related to climate change mitigation and adaptation.

Indonesia is currently preparing the National Adaptation Plan of Action, also known as RAN-API (to be finalised in 2013) to identify priority adaptation actions and to initiate their implementation. The RAN-API will provide an inventory of adaptation measures that are in the pipeline of ministries and agencies such as the Ministry of Marine and Fisheries, Ministry of Health, Ministry of Agriculture or the Ministry of Public Works. Although the plan is expected to give an indication of the adaptation expenditure needed in the country, so far there is no comprehensive adaptation costing methodology based on investment and financing needs.

Indonesia’s Climate Finance Landscape 3.2 3.2.1 Assessment of Climate Financing Needs The UNFCCC, EU, and the World Bank estimate the total mitigation costs for developing countries to be between USD 150 billion per year (low estimate) and USD 180 billion per year (high estimate). Assuming a 5% - 10% share for Indonesia, the country’s mitigation action could cost between USD 7.5 billion and USD 9 billion per year. Indonesia has already provided some estimates on country climate financing needs, including those presented in the Second National Communication to the UNFCCC, estimates in the Ministry of Finance’s Green Paper, and those submitted as part of the mid-term development plan (RPJMN). The

results of these assessments go in a similar direction:

P a g e | 22 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013  To integrate climate change into inter-sectoral programs, emission reduction actions have been incorporated into the mid-term development plan (RPJMN). The mid-term development plan for 2010-2014 estimates the financial requirement for meeting emissions reduction goals to be as high as IDR 37.8 trillion (or around USD 3.7 billion).

 The Second National Communication (SNC 2009) estimated the amount required to achieve 26% emission reduction target to be IDR 83 trillion (USD 8.3 billion) and to achieve 41% emission reduction the requirement is IDR 168 trillion (USD 16.8 billion).

 According to the Fiscal Policy Office (FPO) of the Ministry of Finance, the financing needs for mitigation are in fact much higher than those outlined in the SNC. This can be illustrated by the MoF’s mitigation budget in 2010 that was set at IDR 10.2 trillion (USD 1.074 billion), almost 13 times of the average annual cost of USD 0.83 billion as estimated by SNC (CPEIR, UNDP 2012).

 A cost curve study jointly developed by DNPI and McKinsey (2009, quoted by the National Environment, Economic and Development Study of Climate Change) states that the abatement costs for six sectors (Power, Forestry and Peat, Agriculture, Cement and Building) sum up to EUR 12.84 billion or roughly around USD 19.26 billion until 2030. This estimate was based on an average abatement cost of EUR 6 per tCO2e.

 For the forest sector, the REDD+ Task Force has developed a study on REDD+ financing needs in Indonesia through its Funding Instrument Working Group.

According to the findings, REDD+ measures will require a total USD 10 billion until

2020. The funds are expected to come from public as well as private sources that will be coordinated under the Trust Fund for REDD+ in Indonesia (FREDDI) (Sari 2012).

These assessments give a first impression of the overall scope of financing needed to achieve the climate change mitigation commitments made by the government – although uncertainties still remain. In addition, they help to understand the shortages in available climate funding. To this end, the first Mitigation Fiscal Framework Study, as part of the CPEIR, offers some helpful insights. The study estimates the mitigation costs for RAN-GRK actions to be IDR 670 trillion (USD 70.5 billion) until 2020. It was estimated using RAN-GRK target of 0.767 GtCO2e multiplied by the weighted average cost of IDR 91,000 (USD 9.5)/ tCO2e. However, existing financial resources are only IDR 15.9 trillion (USD 1.67 billion), provided by the central government budget, off-budget government financing, and local government budget in 2012. As a result, the current financing can only provide 23% of the total mitigation financing that is required (UNDP 2012).

Exhibit 3: Synthesis Table of Mitigation Financing Needs in Indonesia (Various sources)

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