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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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Status of Climate Finance in


Country Assessment Report

August 2013

Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013

Status of Climate Finance in Indonesia

Country Assessment Report

Dennis Tänzler (adelphi)

Martha Maulidia (GIZ)

August 2013

Funded by: Climate and Development Knowledge Network (CDKN)

Prepared by: adelphi Deutsche Gesellschaft f r Internationale

Caspar-Theyss-Strasse 14a Zusammenarbeit (GIZ) GmbH 14193 Berlin T +49 (30) 8900068-0 c/o BAPPENAS Wisma Bakrie II F +49 (30) 8900068-10 6th Floor Jl. HR Rasuna Said Kav. B-2 office@adelphi.de Jakarta 12920 www.adelphi.de T +62 (21) 8517186 F +62 (21) 8517186 Page |2 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 Table of Contents Executive Summary

The challenge of climate finance readiness

What is the situation in Indonesia?

How “ready” is Indonesia?

What are next steps to improve climate finance readiness?

1. Introduction

1.2 Scope and Approach

2. Climate Finance Readiness

2.1 International Climate Finance

2.2 Concepts of Climate Finance Readiness

3. Landscape of Climate Finance in Indonesia

3.1 Indonesia’s Climate Policy & Institutional Setup relevant to Climate Finance Readiness

3.2 Indonesia’s Climate Finance Landscape

4. Planning Capacity

4.1 Assessing Needs and Priorities& Identifying the Policy Mix

4.2 Ensuring Policy Delivery

5. Accessing Finance

5.1 Directly Accessing Financial Resources: Global to National

5.2 Accessing National Sources of Financing

6. Good Financial Governance

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

6.2 Capacities to Monitor Climate Finance at the National Level

6.3 Developing MRV system for Climate Finance

7. Private Sector Engagement

7.1. Current Issues in Private Sector Engagement

7.2 How to increase Private Sector Engagement?

7.3 Good Practices: Public-Private Dialogues as Instrument

8. Recommendations: Next steps to improve climate finance readiness?.... 44 9. Bibliography

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Exhibit 1: Four Pillars of Climate Finance

Exhibit 2: The “Ready for Climate Finance” approach.

Exhibit 3: Synthesis Table of Mitigation Financing Needs in Indonesia

Exhibit 4: ICCTF structure and operations

Exhibit 5: ICCTF funded pilot projects in 2010

Exhibit 6: Climate finance delivery mechanisms

Exhibit 7: Domestic Expenditure on Mitigation Actions by Ministries

Exhibit 8: Outstanding Loans and Foreing Currency of Commercial and Rural Banks by Economic Sector

Exhibit 9: Mapping of Climate Finance Activities Channelled via Funds in Indonesia........... 48 Annex ANNEX 1: Most Important Sources for Adaptation

ANNEX 2: Summary of REDD+ flows

ANNEX 3: Selected Private Financing Sources

ANNEX 4: List of Meetings

ANNEX 5: Tables

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Executive Summary The challenge of climate finance readiness Why climate finance readiness? 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.

Why Indonesia? Many countries, including Indonesia have started to develop national approaches to climate finance management. Indonesia has taken an ambitious stand with respect to climate change, recognizing its contribution to climate change mitigation and adaptation. It has officially declared a national target to reduce GHG emissions by 26% by 2020 compared to a business-as-usual scenario, without international support - and up to 41% with international support. Indonesia’s commitment to GHG emission reduction has made it one among very few non-Annex I Countries to enact significant and comprehensive GHG emission reduction regulation. In order to fulfil these objectives, the efficient use of national and international climate finance needs to be developed.

Why this report? This report provides an assessment of the state of climate finance in Indonesia–explainingthe current funding architecture, financial flows and sources, key actors involved, andassessing the potential for accessing additional funding and structuring climate finance internally. The objective is to understand the climate finance readiness of Indonesia and identify gaps and opportunitiesto build upon in the near future. The report seeks to inform future planning and investment undertaken in this area by the government of Indonesia and development partners.

What is the situation in Indonesia?

National and international climate finance Limited climate finance disbursement to date: Estimates on the total value of • international climate finance pledged to Indonesia vary but lie somewhere in the area of USD 3.1 - 4.4 billion, predicted to rise to over USD 5.3 billion in the near future. Most of this finance is pledged in the form of loans (73%). According to data from Climate Funds Update, which covers all multilateral funds and some major bilateral initiatives, only 3% (USD 82 million) of these commitments have been disbursed to date and mostly fundingREDD+ / land use related mitigation actions, which is appropriate given that around 80% of Indonesia’s current GHG emissions come from those sectors. Future commitments place more focus on other mitigation actions, and since GHG scenarios point to rapidly rising emissions in energy related sectors, this area warrants greater focusDomestic climate expenditure is increasing: According to UNDP’s Climate Public Expenditure and Institutional Review (CPEIR) study, Indonesia’s total budgetary expenditure in 2011 on climate change mitigation actions amounted to around IDR 5.5 trillion (around USD 579 million), an average increase of 5% since 2008.

Limited information on adaptation financing: Research tracking Indonesia’s expenditure • on climate change adaptation activity is not yet available. This is partly due to the fact that a national action plan on climate change adaptation has not yet been published to

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provide benchmarks and definitions for classifying adaptation action and tracking within public budgets and expenditure.

Legal framework Mitigation framework is evolving: Indonesia’s commitment to reduce GHG emissions is • codified in the National Action Plan on GHG Emission Reduction, regulated under Presidential Regulation No.61/2011. The Local Action Plan on GHG Emission Reduction, launched in late 2012, lays out provincial contributions to these targets, including provincial baselines and emission reduction targets. The national and local action plans will serve as starting points for the development of Nationally Appropriate Mitigation Actions (NAMAs) under the UNFCCC.

Growing momentum for forest protection: In May 2011, the President issued a • presidential regulation number 10/2011 imposing a moratorium on new licenses for landbased activities, including logging and establishing plantations in primary forest and peat land areas. Although additional measures are needed to address serious deforestation problems, the moratorium has been praised as a good first step in improving forest governance and embarking on a low emission development pathway.

Green banking still to start: Indonesia’s central bank is currently drafting a regulation on • green banking and financing, expected to be issued by the newly established Financial Services Authority, which will require lenders to assess potential borrowers not only on financial, but also social and environmental sustainability standards, and can help encourage investments in green sectors.

Institutional framework A shared responsibility for climate finance readiness: The National Development • Planning Agency (BAPPENAS) is responsible for formulating procedures and planning for climate finance, coordinating climate change loans and grants, and is the agency responsible for mainstreaming climate change into national policies. The Ministry of Finance (MoF) is responsible for ensuring that climate change is reflected in budget priorities. The Ministry of Environment is responsible for preparing the National Communication to the UNFCCC, which also includes information on climate finance needs. The National Council on Climate Change coordinates climate change control policies, which includes adaptation, mitigation, technology transfer and financing. It is also responsible for the formulation of Indonesia’s position in international negotiations.

National climate fund established: The Indonesia Climate Change Trust Fund (ICCTF) • was established in 2009 as the financing mechanism for Indonesia’s climate change policies and programs. As a national fund, it is designed to pool funding from various sources, including international donors and domestic private sector, and promote financial coherence. The UNDP is acting as the interim trustee, whilst the transition to Bank Mandiri, a state-owned bank, as national trustee is scheduled for end of 2013.

Access to international adaptation funding is being pursued: The ICCTF is registering to • be a National Implementing Entity (NIE) to the UNFCCC’s Adaptation Fund, in order to make use of direct access modalities. The ICCTF includes expenditure funds as well as revolving investment funds, and currently prioritizes three financing windows: land-based mitigation; energy; and adaptation and resilience. Despiteattracting core funding from international donors in the first few years of operation, further fund raising success has been limited. The ICCTF has a capitilization of USD 11.3 million to date.

Page |9 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 2013 How “ready” is Indonesia?

Planning Capacity Planning for mitigation is advanced: The government of Indonesia has set up a national • GHG emission reduction plan (RAN-GRK) and in late 2012 successfully launched provincial GHG emission action plans (RAD-GRK) in nearly all provinces. The RAN-GRK identifies mitigation actions for different sectors and includes an initial assessmemt of financing needs. The national plan lacks a cost-effectiveness assessment for all identified actions however, and the business-as-usual baseline is still under development.

Planning for adaptation still in process: Climate change policy in Indonesia centers • largely on emissions reduction targets - goals and strategies for climate change adaptation are not yet determined. With the presentation of a National Adaptation Plan of Action (RAN-API), Indonesia will achieve a significant milesetone but will need to go some way to catch up with mitigation progress.

Varying estimates of mitigation financing needs: There are several documents that give • an overview of Indonesia’s climate change mitigation financing needs for e.g. the MidTerm National Development Plan (RPJMN), the Second National Communication to the UNFCCC, and the MoF’s Green Paper. Estimates for annual mitigation needs vary according to different studies, ranging from USD 925 million (MTDP 2010) to USD 19.26 billion (NEEDS/DNPI 2009), and even higher according to other assessments.

Need for increased donor coordination: The establishment of the Indonesia Climate • Change Trust Fund (ICCTF) is an important development in promoting coherence in climate finance planning, but there is no overarching donor coordination mechanism. The level of funding channelled through the ICCTF is currently low, increased dialogue and coordination with donors could help to boost commitments from agencies supporting the Fund.

Limited capacity at local level: There is a need to strengthen the capacity of stakeholders • delivering climate change plans and financing at sub-national and sectoral level. In order to improve delivery of climate finance from national to local level, enhanced stakeholder engagement is necessary through dialogue and mutual learning processes; this can facilitate the development of programmes that are pro-poor, gender sensitive, and suited to local context.

Accessing Finance Direct access being arranged: With support from GIZ, the ICCTF is in the final stages of • the process to becoming Indonesia’s National Implementing Entity (NIE) to the Adaptation Fund. This can potentially ease direct access to the Green Climate Fund (GCF) in future.

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 | 10 Strengthening Public and Private Climate Finance in Indonesia Final Report, August 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).

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