00074918.2010.503562

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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

Low carbon growth in Indonesia

Adam Schwarz

To cite this article: Adam Schwarz (2010) Low carbon growth in Indonesia, Bulletin of Indonesian Economic Studies, 46:2, 181-185, DOI: 10.1080/00074918.2010.503562

To link to this article: http://dx.doi.org/10.1080/00074918.2010.503562

Published online: 27 Jul 2010.

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Policy Dialogue: Climate Change Policy in Indonesia (1)

LOW CARBON GROWTH IN INDONESIA

Adam Schwarz* McKinsey and Company, Jakarta

Indonesia has responded to worldwide concern about climate change by commit-ting to signiicant carbon emissions reductions over the next decade. Achievement of this goal will face signiicant practical obstacles, and the opportunity cost of avoided deforestation is considerable. In our second Policy Dialogue, two climate change experts present contributions to the debate. This exchange could not be more timely, given Norway’s recent offer of substantial development assistance to Indonesia in return for reductions in deforestation and forest degradation.

In this irst contribution, Adam Schwarz canvasses abatement options and out-lines barriers to abatement and its measurement. These include capacity and data constraints, obstacles posed by decentralisation, and problems in identifying and measuring the costs of abatement measures. The author urges Indonesia to embrace the opportunity a lower carbon growth trajectory presents, and argues that this will require substantial additional funding, including from developed countries, and sustained leadership. (Ed.)

In the last several years the government of President Susilo Bambang Yudhoyono has steadily paid more attention to the issue of climate change from both a foreign policy and a domestic policy perspective. Most of the hard work of policy imple-mentation – including building public awareness – remains to be done, but recent advances provide a reasonable base to work from. A major milestone was reached on 28 May 2010 with the announcement of a REDD+ Partnership between Indo-nesia and Norway (Government of Norway 2010), in which Norway pledged $1 billion towards REDD+ readiness programs and as contributions in return for veriied emissions reductions.1

The central challenge for Indonesia is by no means a simple one: to achieve sizeable reductions in carbon emissions, and prepare for the effects of climate change, while continuing to develop the economy and create livelihoods for the country’s young and growing population. It would be unreasonable to expect Indonesia – or any developing country – to sacriice livelihoods and economic

*_{Adam Schwarz is a senior adviser to McKinsey & Company.}

1 ‘REDD’ stands for ‘reduced emissions from deforestation and forest degradation’. ‘REDD+’ includes additional elements such as sustainable forestry management, reforesta-tion and afforestareforesta-tion.

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182 Adam Schwarz

growth for the global cause of cutting carbon emissions. But Indonesia’s policy makers increasingly recognise the global beneit and domestic imperative of shifting to a less carbon-intensive development strategy. With Indonesia vulner-With Indonesia vulner-able to the predicted effects of global warming – rising sea levels in particular – it has much to gain from the global effort to mitigate climate change, and it will be better placed to encourage the rest of the world to modify its behaviour if it dem-onstrates its own preparedness to contribute to this effort.

Indonesia’s active engagement on climate change issues started in December 2007, when the country hosted a major United Nations conference on climate change in Bali. It later convened a series of follow-up meetings among lead-ers of heavily forested nations (the ‘Forestry 11’). In September 2009 President Yudhoyono committed Indonesia to reducing its CO₂emissions by 26% against a business-as-usual trajectory by 2020. This could be one of the largest reductions committed to by any developing country, depending on how Indonesia decides to set its 2020 baseline emission level. He committed to making even deeper cuts contingent on international inancial support. Translating commitment to action is now the challenge, and a signiicant one at that.

It is critically important for the global effort to address climate change that Indonesia play an active, engaged role. With estimated 2005 emissions of 2.0 Gt CO₂e (gigatonnes of CO₂ equivalent), Indonesia is the world’s third-largest emit-ter, after China and the United States (National Council on Climate Change, forth-coming). Indonesia’s emissions are likely to rise to approximately 2.6 Gt CO₂e by 2020 under a business-as-usual scenario, keeping it as the world’s third- or fourth-largest emitter (National Council on Climate Change, forthcoming).

But Indonesia is also a large potential contributor of CO₂e abatement. If it reduced its 2020 emissions by 41% – the upper limit suggested by President Yudhoyono – that would imply a reduction in emitted CO₂e of 1.1 Gt. Such a reduction would constitute about 7.5% of the total amount of CO₂e reductions that scientists believe are necessary to prevent the average global temperature from increasing by more than 2 degrees Celsius compared to pre-industrial levels. Under a 26% reduction scenario, that amount would be 4.5%.

Almost 80% of Indonesia’s current emissions come from deforestation and the drying, decomposing and burning of its massive peat deposits. The energy sector is a relatively minor contributor of greenhouse gases, but its role is likely to grow sharply over time, as Indonesia builds new generating capacity to meet latent and future demand, particularly if, as is currently planned, it shifts to an even greater reliance on coal.

Seven provinces account for more than three-quarters of forest-related emissions, and it is in these provinces that abatement efforts need to be concentrated in the near term. Peatlands, of which Indonesia has some 22 million hectares, are a par-ticularly worrisome source of emissions. Peat is partially decayed plant matter at an early stage of the compression and fossilisation that will eventually convert it into coal. Normally found in marshy areas or bogs, it has a very high carbon content. To open peatlands for cultivation, developers typically dig canals to drain the area so they can operate heavy machinery to fell trees and cultivate the land. Once drained, peat soils in hot, tropical countries dry out, and as they are exposed to oxygen they start to decompose, sending large volumes of CO₂ into the atmosphere. Dried peat is also highly susceptible to ire, and peat ires are very dificult to extinguish.

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A scientiic understanding of the emissions implications of peatland conver-sion is still evolving. Nevertheless, many of the abatement opportunities offered are not technically complex or especially expensive. Fire suppression and rehabil-itation and re-wetting of peatlands can be achieved without wrenching changes or expense. Sustainable forestry management and lower-impact logging are also relatively inexpensive, albeit requiring a signiicant increase in institutional and enforcement capacity on the part of the government. But other important abate-ment initiatives, such as requiring new palm or pulpwood plantations to use already degraded land, or to stop conversion and cultivation of peat forests alto-gether, would be more expensive from an opportunity cost perspective, and so threaten to reduce economic growth.

Palm and pulp plantation growers in Indonesia ind it more lucrative to cut forests for their plantations, because they can sell the cut timber to inance their working capital needs. In addition, these companies say that it is usually faster and cheaper to obtain licences to forested land than to degraded land, which is some-times occupied or subject to contested claims and therefore legally less secure.

Given the expense and implications of some of the emissions abatement meas-ures, it is important for Indonesia to ensure that its climate change policy not be limited to speciic abatement efforts such as ire prevention or avoided deforesta-tion projects, but instead be integrated into broader economic growth strategies. A look at the numbers illuminates the need for a development-based approach. According to an ongoing analysis by the country’s National Council on Climate Change and the provincial government of East Kalimantan, the province’s for-estry, mining and land-use sectors currently account for 86% of provincial CO₂e emissions, but also for 30% of provincial GDP and 39% of the province’s jobs; that is, in Indonesia’s second largest province by area, the same sectors that pro-duce most of its CO₂ emissions are also critical to its regional economy. The same holds true for other high-emitting provinces such as Central Kalimantan, Riau and Jambi.

Putting an immediate stop to high-emission activities – even if that were tech-nically possible – is untenable from a political and economic perspective. Only by shifting to a lower carbon growth pathway can the high-emitting provinces aspire to sustainably reducing pressure on their forests and peatland while meeting eco-nomic and development objectives.

Low carbon growth strategies2_{now in development in a number of provinces} typically include four elements:

• analysis of the provincial carbon footprint, together with an estimate of the cost and impact of high-priority abatement initiatives across the main emitting sectors;

• estimates of the economic costs of adapting to climate change-related events, for example, by building sea walls to manage increased coastal looding; • evaluation of the province’s potential to develop and sustain alternative

economic activities, or to adapt existing ones, so as to replace the jobs and tax revenues currently accruing from activities causing deforestation; and

2 For further information, see Baer et al. (2010) and Albani et al. (2010), white papers pub-lished by McKinsey & Company’s Climate Change Special Initiative, Jakarta.

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184 Adam Schwarz

• description of the new institutions, infrastructure and policies that would be needed to implement a low carbon growth strategy.

For virtually all the abatement options Indonesia is considering, many barriers to implementation exist. Lack of capacity in some relevant government agencies is one problem, which means that even if the right policies are in place, enforcement is often lacking. Given that much of Indonesia’s emissions and potential abate-ment involve smallholder farmers and cultivators, building institutions capable of engaging with such communities at scale is critical. Measuring emissions (and potential abatement) from forest and vegetative carbon is more dificult than measuring emissions from fossil fuel usage, and estimates can vary widely. This is particularly true for peat-related emissions. Equally challenging for policy mak-ers is a lack of real-time geographical and cadastral databases that could provide them with a clear, defensible idea of which tract of land is being used for which purpose, an early indication of ire hot-spots and an effective means to track ille-gal logging. The absence of such data makes it dificult to set baselines, and com-plicates the process of raising awareness of the issues.

Injecting climate change considerations into the existing economic development planning processes poses a further challenge, especially given the continuing con-fusion over the respective roles and responsibilities of the central, provincial and local governments within the national decentralisation process. Spatial planning is particularly important in this regard. With land-use change at the root of much of Indonesia’s emissions, a critical early step is to improve the spatial planning process so that it can effectively identify and plan for the economic use of already degraded forest land. The recently announced two-year suspension of new con-cessions in natural forest and peatland is intended to give the government some breathing space to reorganise the permit-granting and planning regime.

There are also multiple, and dificult, issues of equity and revenue sharing to deal with. Given Indonesia’s unclear and often-contested land titling system, there are competing claims to large tracts of forested land. This complicates the matter of deciding who should beneit from any revenue streams accruing to car-bon sequestration or avoided deforestation.

Still another dificult issue involves the identiication and estimation of oppor-tunity costs. If, say, a 50,000-hectare plot of forest has already been licensed for conversion to a palm oil plantation, what would be the economic implications of revoking the licence? Given that palm oil is a highly lucrative crop, preserving the forest carries a signiicant opportunity cost. Preliminary work done by Indo-nesia’s National Council on Climate Change suggests that the full opportunity cost of a forgone palm oil plantation is in the order of $30 per tonne of abated carbon, much higher than the average cost of around $2 per tonne for Indonesia’s other abatement opportunities.3

There are several possible ways of reducing this opportunity cost. One is to develop and apply a monetary value to the biodiversity, carbon sequestration, watershed management and other beneits that forests provide. Raising the cost

3 These estimates do not include transaction costs, which for some abatement initiatives could be signiicant; for more information, see National Council on Climate Change (forth-coming).

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of accessing forests will mean that private costs more closely relect the full social value of the forests. Another approach is to compensate palm oil cultivators with other tracts of land in already degraded areas. Even so, there will be signiicant costs associated with implementing abatement initiatives such as REDD projects, and the source of the funds to cover them is not yet obvious.

Carbon markets can be one important source of inancing, although in the near term these markets are unlikely to be big or liquid enough to fund the scale of abatement that countries like Indonesia are potentially able to supply. More immediately, it will fall to the public sector – both domestic and foreign – to pro-vide the inancial support that Indonesia’s provinces and districts will need to develop policies, systems and capabilities for starting the shift to a lower carbon development pathway.

Notwithstanding the multiple implementation dificulties that lie ahead, Indo-nesia, as a large developing country, has a clear opportunity to play a global leadership role in combining economic, social and environmental objectives. Nor-way’s recent commitment of $1 billion to a REDD+ partnership with Indonesia is an important recognition of the vital role Indonesia can play in addressing the global climate change challenge. Although details have not yet been announced, the partnership appears to be an extremely useful example of developed–devel-oping country collaboration, especially in funding capacity-building efforts and beginning to build a system based on payment for performance in reducing emis-sions. It reinforces and bolsters the government’s efforts to reach its 26% reduc-tion target. But it does not begin to cover the full cost of delivering on Indonesia’s considerable abatement potential; nor can it be a substitute for the sustained polit-ical leadership needed to drive Indonesia towards a greener growth path.

REFERENCES

Albani,Marco, Denis, Nicolas, Frank, Marcus, Riese, Jens and Schwarz, Adam (2010) ‘Developing a National REDD+ Strategy’, White Paper published by the Climate Change Special Initiative, McKinsey & Company, Jakarta, January.

Baer, Mathias, Barnes, Francisco, Enkvist, Per-Anders and Riese, Jens (2010) ‘Developing a Low-Carbon Growth Plan’, White Paper published by the Climate Change Special Initiative, McKinsey & Company, Jakarta, January.

Government of Norway (2010) ‘Norway and Indonesia in partnership to reduce emissions from deforestation’, Press release, 31 May, available at <http://www.norway.org.au/ News_and_events/Policy/Norway-and-Indonesia-in-partnership/>.

National Council on Climate Change (forthcoming) National Greenhouse Gas Abatement Cost Curve, Jakarta.