Australia: Issue 6: Asia Pacific climate change policy series: Indonesia

The Copenhagen Accord called on Annex I countries to make their climate change pledges, and on Annex II countries to identify their nationally appropriate mitigation actions by 31 January 2010.

In this edition of the Asia Pacific climate change policy series we examine the regulatory framework and climate change investment opportunities in Indonesia.

Key points on Indonesia:

  • Copenhagen Accord commitments include a voluntary 26 per cent reduction in emissions by 2020 and has flagged the potential for an additional 15-16 per cent reduction in emissions with the support of other parties, being a remarkable possible total reduction of 40-41 per cent by 2020
  • while one of the world's largest emitters of greenhouse gases, it is also a global leader in the emerging area of REDD+
  • investment opportunities present in forestry, large-scale hydro projects, geothermal projects, and waste to energy projects, as well as coal bed methane and biofuel production.

As a archipelago with over 17,000 islands, some 80,000 km of coastline and a population of around 250 million people, Indonesia has unique challenges in relation to the impacts or and contributions to climate change.

Indonesia is amongst the world's largest emitters of greenhouse gases. Around 85 percent of these emissions result from land use issues: agricultural practices, land use methods and land use changes in forest and peat-land areas.

Given the impact of emissions from land use, Indonesia is also a global leader in the emerging climate change mitigation area of Reducing Emissions from Deforestation and [Forest] Degradation (REDD+) being the first nation to introduce a legislated REDD scheme and hosting several UN pilot projects.

In terms of the Clean Development Mechanism, Indonesia has some 48 projects registered by the CDM Executive Board including large scale geothermal, waste/biogas, blended cement, and methane capture and combustion from animal manure treatment projects and small scale projects including small scale biomass cogeneration and solar cooker projects.

Indonesia has arguably the world's greatest geothermal potential, followed or led by Iceland, and possesses significant coal bed methane resources as well as hydro potential in respect of renewable energy.

Having cemented a number of bilateral agreements with other nations in relation to climate change mitigation capacity building and projects, Indonesia is also home to a number of commercial projects in the voluntary emissions reduction market sphere including some 12 commercial "REDD projects".

Copenhagen Accord commitments

Indonesia's Copenhagen Accord commitments include a voluntary 26 per cent reduction in emissions by 2020 with no baseline year identified. Indonesia has flagged the potential for an additional 15-16 per cent reduction in emissions with the support of other parties, being a remarkable possible total reduction of 40-41 per cent by 2020.

Emissions reduction possibilities identified by the National Commission on Climate Change which will assist with Indonesia's Copenhagen Accord commitments include the following five biggest opportunities to reduce emissions:

  • preventing deforestation
  • preventing fires on peatland
  • preventing the oxidation of peatland through water management and rehabilitation
  • implementing and enforcing sustainable forest management
  • reforesting marginal and degrade forests.

Additional measures to reduce emissions have been identified by the Commission as including:

  • increased use of renewable power (bioenergy, geothermal and hydro power in particular)
  • transportation (such as improved internal combustion engines)
  • increased energy efficiency (for example downstream energy efficiency in the petroleum and gas sector)
  • use of clean energy technology (for example improved energy efficiency in buildings).

Regulatory framework

The National Action Plan Addressing Climate Change prepared in 2007 (the NAP), is a general guide to be used by multiple Indonesian institutions to provide for a co-ordinated and integrated approach to addressing climate change. The NAP is referred to as a "dynamic policy instrument". It is supported by Ministry policies, for example the Ministry of Public Works recently released National Action Plan on Mitigation and Adaptation to Climate Change specific to Public Works which includes policies, strategies and programs to lower impacts of climate change in the public works sector. The NAP lists the regulatory efforts to be implemented for tackling climate change in categories including short–term and long-term implementation.

The matters requiring immediate attention relate principally to collaboration between key actors, institution and capacity building and the collection of relevant information. These matters have been addressed over the past years and included significant developments in the necessary bureaucratic institutions and methods to account for and evaluate carbon emissions, particularly in the forestry and land use sector.

Indonesia has worked on a number of bilateral arrangements in relation to capacity building and emissions reductions. For example, the Indonesian and Australian governments have worked closely in technology and information sharing, building Indonesia's institutions and capacity through initiatives such as the Indonesia – Australia Forests and Climate Partnership and a number of other nations, including Japan, have contributed to similar projects.

Most recently the Netherlands and Indonesia have signed a letter of intent under which the Netherlands intends to commit US$1 billion to Indonesia in phased grants in connection with the reduction of emissions from deforestation, forest degradation and peatland conversion. Initial funding will be for capacity building including provincial mapping.

There are a number of Indonesian laws relevant to climate change issues in relation to energy, environment, forestry and land use. In addition there are specific regulations in respect of the establishment and powers of Indonesia's National Committee on the Clean Development Mechanism (the Indonesian DNA) (which the Committee has issued the National Guidelines for Indonesia as a host country for CDM projects) and for implementing Indonesia's REDD scheme. At the time of writing there is also a draft regulation for the establishment of a REDD Commission.

Law No. 30 of 2007 concerning energy lists sustainability and environment protection amongst its aims and gives all levels of Governments (central and regional) responsibility for energy conservation. The National Energy Policy - Presidential Regulation No. 5 of 2006 includes targets for an energy mix by 2020 which includes at least 15 per cent of national energy consumption to be by generated from renewable energy, including each of biofuel, geothermal and other renewable energy sources.

Under Law No 25 of 2007 concerning investment and the most recent "Negative List", Presidential Decree openings have been made for increased direct foreign investor participation in Indonesian companies in certain aspects of the electricity and forestry sectors (restrictions still apply). Law No 30 of 2009 concerning Electricity and subsequent implementing regulations have to some extent increased the opportunity for private investment in this sector, which together with the changes to the negative list may encourage foreign investment in renewable power projects.

Other legislation currently in force promoting renewable energy includes a green energy development decree - Decree of the Minister of Energy and Mines Resources No.02 of 2004 and legislation to promote biofuels as an alternative energy source - Presidential Instruction No.1/2006 on supply and Uuilisation of biofuels as alternative energy.

In respect of Indonesia's legislative REDD scheme, this is currently in place under regulations issued by the Minister of Forestry Regulation No.P30 of 2009 on the Implementation Procedures of REDD (P.30) and Regulation No.P36 of 2009 regarding licensing procedures for the utilisation of business of carbon absorption and/or reservation in production and protected forests. These regulations are somewhat inconsistent, have internal consistency and drafting issues and are subject to further implementing regulations.

At the time of writing the above REDD regulations are currently under review and the Ministry of Finance has mooted a challenge to one regulation which seeks to apportion any benefits/funds obtained from the sale of "credits" from REDD projects between relevant stakeholders. Caution should therefore be exercised in this area, noting however that the regulations do have force of law (at the time of writing).

At an international level, Indonesia is a strong advocate for the inclusion of REDD+ in a post 2012 international regulatory framework and is a strong participant in negotiations in relation to markets and mechanisms.

Investment opportunities

Indonesia offers a range of investment opportunities in the "climate change" area including in respect of REDD and renewable energy and CDM projects, although regard should be had to restrictions on direct foreign investment and advice taken on any applicable limitations, structuring and the legal aspects of doing business in Indonesia.

Particular opportunities can found in avoided deforestation and reforestation (REDD) projects although currently confined to the voluntary carbon market. In Indonesia such projects often include community involvement and employment components which are also attractive to many investors in terms of corporate social responsibility benefits. Forestry and related complementary sectors, such as energy from biomass, may "add-value" in respect of investment opportunities.

The potential for foreign investment in renewable energy is also evident with opportunities in relation to large-scale hydro projects, geothermal projects, and waste to energy projects in particular. Other opportunities exist in respect of coal bed methane and biofuel production.

Related to the above investment opportunities there are likely to be service industry opportunities in respect of capacity building and through various bilateral measures. Many service industries are generally open to direct foreign investment, although there are restrictions and prohibitions in some areas. For more information on renewable energy in Indonesia, please refer to our Asia Pacific renewable energy manual.


Norton Rose Group, including Norton Rose Australia through its Indonesian Associate firm, Brigitta I Rahayoe & Partners, has advised on a range of climate change issues in Indonesia and broader issues in respect of projects and investment including foreign investment and restrictions on participation, legal structuring, licensing and approval, local incorporation, local security for financing and projects contracts and documents. Our recent experience in Indonesia includes:

  • advised carbon brokers in relation to Emissions Reduction Purchase Agreements with Indonesian entities for the purchase of CERs generated from CDM in the waste sector
  • advised investors on appropriate financial security and registration of Indonesian securities in respect of financing of CDM projects in Indonesia
  • advised a clean energy and carbon investment company on the development of landfill gas, biomass and methane capture CDM projects
  • acted for Climate Change Capital Carbon Fund on its equity investment and joint venture in GreenWorksAsia, a business involved in the origination and implementation of greenhouse gas projects in Indonesia
  • advised KeeptheHabitat in relation to REDD projects for the voluntary market
  • advised a global bank in relation to Indonesia's current REDD scheme and licensing and approval requirements and potential investment in REDD projects in Indonesia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Issue 7: Asia Pacific climate change policy series: Malaysia for the next article.
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