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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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In 2009 the DNPI launched an abatement cost curve for five sectors including forestry, peat, agriculture, power, transport, industry (cement and oil and gas) and buildings. This has its limitations though, as the least cost technology options are not always the most practical ones with a high-likelihood of being implemented. However, it has been a first available tool for the government to set priority actions.

The Government of Indonesia also submitted the second Technology Assessment (TNA) report to the UNFCCC in 2010. This contains estimates of financing requirements for recommended technological options for emissions reduction. The study was an update of the first technology needs assessment for Indonesia. Some of the assumptions of this study, e.g. capacity of geothermal power plants (27 GW) and carbon capture storage investment seem to be based on very superficial estimates that are hard to prove.

In addition to these, a Green Paper by the Ministry of Finance in 2011 identifies economic and fiscal policy strategies for the delivery of climate change mitigation in a cost-effective manner. It contains guidance on planning long term policy reforms for mitigation, covering issues of fossil fuel subsidies and carbon pricing policy.

Despite these attempts however, challenges remain in essential areas related to climate finance planning and readiness building, such as identifying climate change adaptation priorities and resourcing needs, engaging stakeholders from the private sector and subnational government in policy design and delivery, preparing financial baselines, and so on.

Proper systems for tracking and monitoring climate finances still need to be established in Indonesia. While the CPEIR tracked budget codes from 2008 and came up with insights into

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expenditure on climate change mitigation activity, a similar exercise to track adaptation expenditures is more challenging to apply.

Assessing financial needs and priorities is hampered by other capacity challenges as well, even in the case of climate change mitigation. For example, the national action plan (RAN GRK) lacks a cost-effectiveness analysis to facilitate prioritization of actions. Although the CPEIR study (2012) attempted to provide a cost-benefit assessment for select mitigation technology in energy, transport and land-based sectors, there is still a gap in terms of completing the analysis for all RAN-GRK actions. The RAN GRK is also pending a businessas-usual baseline.

These aspects illustrate some of the weak areas remaining in mitigation and adaptation planning and improving readiness for receiving climate finance. Improving capacities to estimate financial requirements and tracking expenditures for climate change planning will enhance Indonesia’s ability to attract increased funding from donors and negotiate more effectively the terms and conditions.

4.2 Ensuring Policy Delivery Ensuring an appropriate level of climate finance expertise and skills across relevant sectors and sub-national government is key to successful policy delivery, especially given the leading role of provincial and local governments in developing and implementing provincial GHG reduction proposals (RAD-GRK). Under the decentralization law in Indonesia, local governments decide independently on political, fiscal and administration aspects. This has implications for the planning and delivery of climate finance sources and strategies.

Fiscal decentralization includes delegation of expenditures and revenue to sub-national governance tiers, notably the right to regulate local taxes and retributions (limited to those included in the positive list regulated by Government Regulation). However, local actors need to build institutional capacities to improve the uptake and implementation of climate finance policies. This requires that sub-national government and concerned stakeholders possess the competence to assess and articulate funding needs in preparing and delivering locally-proposed GHG emission reduction and climate change adaptation initiatives, in addition to possessing skills in climate finance management, tracking, and reporting.

Capacities to use performance-based local grants are especially important in demonstrating climate finance readiness at local level of action.

The ICCTF provides some experience in climate finance policy implementation and coordination across some government ministries and tiers, and learning from these cases can inform further planning. Generally however challenges remain in essential areas of climate finance delivery such as engaging stakeholders from sub-national government and the private sector, and tracking the flow and impact of climate finance expenditures and strategies.

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5. Accessing Finance Evolving architecture and availability of global climate finance requires a varying range of expertise from national and sub-national recipients. International commitment for funding climate change activity in Indonesia has been relatively high, as indicated in previous chapters, but centered predominantly on REDD+ and land use related mitigation objectives.

Despite the level of funds already pledged by donors, there is still a lot more required as various climate finance assessments conclude, and the government is challenged to tap additional sources and opportunities to meet these needs.





In recent years, the issue of direct access to funding, e.g. the Adaptation Fund, has been gaining prominence in global policy dialogue and drawing attention to the availability of fiduciary capacities and accreditation credentials in developing countries. Compliance with environmental and social safeguards and competencies for serving as an implementing entity are becoming increasingly important for intended recipient countries. Accessing finance also requires country government to demonstrate capacities in efficient utilization of money, including the ability to blend and combine different resources in the national policy mix and using funds to catalyze further public and private investment.

Most international public climate finance has been provided bilaterally rather than multilaterally. It can be expected that this will remain an important issue to consider in the near future. However, efforts to develop global funds has started and is an on-going process gaining more momentum and importance in the longer run (3 to 5 years from now) and will catalyse international climate finance substantially. The Green Climate Fund (GCF) will offer the possibility of a more coherent and coordinated global funding approach in the long-term future. This is expected to be fully operational just in several years. In the meantime countries need to strengthen their national climate finance institutions to be able to access emerging funds. The lack of accredited NIEs reflects that these capacities are still low.

Also important is the capacity of local actors including provincial and district governments, private SMEs, NGOs and communities to access and absorb funds from national climate funds and sources. This also depends on the efficacy of climate finance disbursement and benefit distribution mechanisms devised by national planners to enable stakeholder participation while balancing incentives with legitimacy and priority. Policies and legal frameworks at sub-national level need to be improved to facilitate funds accessibility and absorption.

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Exhibit 8 gives a general overview of just how diverse the landscape of climate change funding in Indonesia is.

Exhibit 9: Mapping of Climate Finance Activities Channelled via Funds in Indonesia (Source:

own elaboration)

5.1 Directly Accessing Financial Resources: Global to National With support from GIZ, the ICCTF is in the final stages of the application process to becoming Indonesia’s National Implementing Entity (NIE) to the Adaptation Fund. The decision by the Adaptation Fund Board, expected in 2013, can have major bearing on future development of the ICCTF – not only in the field of adaptation but also for upscale mitigation activities.

UNDP currently acts as an interim trustee of the ICCTF with plans to hand over trustee functions to Bank Mandiri in 2013 or 2014. Although the process of ICCTF’s accreditation to the Adaptation Fund is on-going, the ICCTF staff can benefit from further capacity building to in delivering NIE responsibilities, managing trustee services, improving fiduciary standards, and working with the private sector to establish public-private partnership modalities.

With the establishment of the Green Climate Fund (GCF) new tasks will most likely arise for the ICCTF, for instance ensuring direct access for Indonesia. Although it will take some time for the GCF to become fully operational, the preparatory capacity development should already start.

In addition to the national Trust Fund, further initiatives are needed to establish systems and capabilities for blending climate finances from various sources and streaming towards targeted activities. This again requires cooperation and coordination with multi-sectoral stakeholder groups.

P a g e | 37 Strengthening Public and Private Climate Finance in Indonesia Final Report, June 2013

5.2 Accessing National Sources of Financing Indonesia needs to ensure sufficient in-country capacity for formulating bankable climate change projects and programmes to attract funding. Because climate change goals and targets are spread across various ministries and departments, the expertise required for preparing and delivering projects needs to be widely established as well.

Developing a pipeline of bankabale projects with local and national stakeholders can work well to improve climate finance absorption, and therefore readiness prospects. In addition to technical assistance and training, this objective may be supported by more scoping and research into mitigation and adaptation investment opportunities at sub-national levels and appropriate financing instruments to facilitate these.

A challenge to funds access at downstream levels is the absence of efficient channelling mechanisms between national and local institutions. One of the fastest options that can be supported is the promotion of a financial transfer mechanism via local grants (e.g. to implement RAD-GRK). The support of such pilot activities can be a first step towards strengthening the capacities of local governments in close cooperation with the MoF.

More time is required to amend the regulation of the intergovernmental fiscal transfer via specific purpose grants (DAK) to reflect climate change aspects. It is, however, worth mentioning that among the fourteen current sectors eligible for DAK funds there are four infrastructure sectors—irrigation, roads, sanitation, and water supply that may serve as a helpful starting point for considering adaptation needs.

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6. Good Financial Governance Good Financial Governance (GFG) necessitates the availability of satisfactory monitoring and evaluation systems to assess the performance of investments and to assure the best use of funds. Sound information on climate finance received and disbursed is a key criterion for decision-makers in developing countries. As per global agreements, developing countries are expected to start submitting biennial update reports (BUR) in 2014 on the results of climate change actions and funding availed. These reports will include description of domestive MRV processes and information on support needed and received, along with updates on GHG inventory and mitigation actions and results.

The objective of such efforts is to have better financial and impact monitoring data available to inform decision making on financial spending and management and climate change planning. Transparent monitoring also helps to build trust among recipient and donor countries. This can ultimately lead to increased financial support in the future (Tirpak et al.

2012).

In the case of Indonesia, the CPEIR stressed the need for improved MRV within the current climate finance system to avoid duplicated efforts. The systematic monitoring and evaluation of international contributions to climate change targets is not yet at the level where it should be which is why capacity development of public and private institutions to implement MRV functions is necessary.

Indonesia has embarked on various initiatives to overcome some of these shortcomings and to develop a more sophisticated MRV mechanism. The MoF has initiated the introduction of Performance-Based Budgeting and a Mitigation Budget Score to estimate the benefits from mitigation actions and to track climate resources. These efforts need further boosting and should also extend to adaptation related spending.

6.1. What is the Primary Challenge in Monitoring Climate Finance?

To being with, one of the challenges to tracking funds is the fact that there is no agreement on the kind of budgets to mark as climate finance, which makes it difficult to distinguish it from other sources of finance, including general development expenditure. And it is important to mark and track climate specific funds as this enables performance-based budgeting.

Although aid and climate finance are different, they share two similar characteristics that make new and additional climate finance difficult to monitor. First, the sources of public climate finance are the same sources as aid finance. Second, financing for climate change adaptation is hard to distinguish from aid, as has been the case when tracking domestic public expenditures on adaptation activity.

Generally, a climate finance marker should indicate whether a policy programme or project budget contributes to GHG emissions reduction or not. Secondly, a performance based system should also consider the marginal budget shares for quantified emission reductions in order to generate information on cost effectiveness.



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