Green Investment in Indonesia

Antonius Prasetya1 & Yorga Permana2

1PhD in Management, University College London (UCL)
2PhD in Economy, London School of Economy and Political Science (LSE)
 Introduction: Fossil Fuels vs Renewable Energy

Global power generation

rapidly shifts to low-
carbon sources, led by
renewables, with carbon
capture-equipped plants
ensuring carbon
neutrality. By 2050, coal
is removed, renewables
dominate capacity
additions, and the power
sector's emissions drop
from 42% to 20% of
total emissions.

Source: IEA (2019), Perspective for the clean energy transition

 Fossil Fuels vs Renewable Energy: cost perspectives

From 2010 to 2021, there has

been a dramatic shift towards
renewables as stakeholders
globally prioritize integrating
solar and wind power into
their electricity systems due to
their increasing
competitiveness, shorter
project lead times, and
environmental benefits of
reduced emissions and
pollutants.

Source: IRENA (2022), Renewable Power Generation Costs in 2021, International Renewable Energy Agency, Abu Dhabi
 Green Investment

Green investments refer to assets that are in

some way defined as green, e.g. a renewable
energy company, or a thematic green fund
managing assets, or a carbon credit.
However, green investing can also be
undertaken in the form of an investment overlay,
e.g. the integration of climate change or ESG
(Environmental Social and Governance) elements
in the general investment approach or legal SRI
(Socially Responsible Investment) compliance.

Source: Inderst, G., Kaminker, Ch., Stewart, F. (2012), “Defining and Measuring Green Investments: Implications for Institutional
Investors‟ Asset Allocations”, OECD Working Papers on Finance, Insurance and Private Pensions, No.24, OECD Publishing.
 Carbon Market

In a nutshell, carbon markets

are trading systems in which
carbon credits are sold and
bought.
Companies or individuals can
use carbon markets to
compensate for their
greenhouse gas emissions by
purchasing carbon credits from
entities that remove or reduce
greenhouse gas emissions.

Sources: https://www.rbcgam.com/en/ca/article/understanding-carbon-
markets/detail
 Carbon Market Types

The compulsory market is government-regulated, where The voluntary market is where companies can
companies have a legal limit to their emissions but can buy choose to offset their emissions by buying credits
or sell allowances with other companies – similar to the old generated by carbon-sequestering projects.
milk quotas.

Sources: https://ahdb.org.uk/news/understanding-the-two-types-of-carbon-market
 Carbon Prices

Although carbon pricing is

expanding, substantial price
increases are needed in the next
decade to drive the necessary
emissions reductions for
achieving the Paris Agreement's
target of limiting warming to well
below 2 deg.C
Research suggests that carbon
allowance prices should be
around US$40 to $80 per ton of
CO2 by 2020 and US$50 to $100
by 2030 to meet the Paris
Agreement's goal.

Sources: https://www.rbcgam.com/en/ca/article/understanding-carbon-
markets/detail
 Carbon Prices: EU ETS

Sources: Refiniviv, Carbon market year in review 2022

 Technologies: CCS and CCUS

Source: UNECE (2020). https://carbonneutrality.unece.org/

 Potential of CCUS in Indonesia

Regulations to facilitate investment in CCUS, in

particular CO2 storage, have yet to be developed in the
region, although Indonesia has made significant
progress. In some countries, existing oil and gas
regulations could serve as a starting point.

Source: IEA, “Carbon Capture, Utilization and Storage: The Opportunity in Southeast Asia
https://www.iea.org/reports/carbon-captureutilisation-and-storage-the-opportunity-in-southeast-asia
 How carbon credit increases the economy of CCS project?

● Carbon credits generated by CCS

projects could attain higher
prices because geological
storage of CO2 is perceived more
secure than nature-based
solutions
● Prices of CCS-generated credits
could also increase if market
participants would be willing to
pay a premium for innovative and
novel solution
● Prices will differ by CCS type
(reductions vs. removals)
● Stacking of carbon credit revenue
and other public funding sources
needed before wide-scale
deployment

Source: IEA (2013). Global Action to Advance Carbon Capture and Storage
*Presentation material by Perspective Climate Group at METI-JOGMEC-IETA joint workshop
Is it new?

Sources: https://fintechnews.my/33608/various/bursa-malaysia-launches-worlds-first-shariah-compliant-carbon-exchange/
Is it new?

Sources: https://www.icdx.co.id/our-market/carbon
Carbon Market in Indonesia

Sources: https://www.icdx.co.id/our-market/carbon
Carbon Market in Indonesia

Sources: https://www.icdx.co.id/our-market/carbon
Carbon Market in Indonesia

Sources: https://lens.monash.edu/@environment/2023/05/23/1385783/what-to-know-about-indonesias-decision-to-open-its-international-carbon-markets
Carbon Market Potential in Indonesia

Indonesia is already home to conservation and

restoration projects that are generating and selling
carbon credits to commercial buyers at scale, such as
the Katingan Mentaya Project in Kalimantan. However,
aside from these outliers, Indonesia is only at the early
stages in the carbon credit business.

In theory, Indonesia’s recently passed omnibus law will

make it easier to get an ecosystem restoration licence or
convert current plantation and logging concessions to
restoration use. The law unifies Indonesia’s separate
land use licences into a single business licence, which
will theoretically allow Indonesia’s agribusinesses to
explore carbon credit generation.

Sources: Singapore Institute of International Affairs, HAZE Outlook 2021

Carbon Market Potential in Indonesia

Sources: Singapore Institute of International Affairs, HAZE Outlook 2021

Sharia in Carbon Market Indonesia

Sharia Commodity, widely known as

Commodity Murabahah, were first practiced by
a local Islamic bank in Saudi Arabia and
subsequently followed by several Islamic
financial institutions.

In Indonesia, Sharia Commodity referring to the

DSN MUI No: 82/DSN-MUI/VIII/2011
concerning on Commodity Trading based on
Sharia Principles in Commodity Exchanges by
fulfilling the provisions stipulated in the fatwa.

Sources: https://www.icdx.co.id/our-market/sharia
Sharia in Carbon Market Indonesia

ICDX as a Futures Exchange has obtained

permission from the Commodity Futures
Trading Supervisory Agency (CoFTRA) -
Ministry of Trade to organize a sharia
commodity murabahah market.

Sources: https://www.icdx.co.id/our-market/sharia
Appendix: Climate Change and Its Implication to Business
Two sides of
• Then
• Smith: theory about supply and

Adam Smith and

demand / invisible hand
• Glasgow: industrial revolution

Glasgow • Now
• Smith: value defined by human, can be
redefined by human too
• Glasgow: host of COP-26

Source: Carney, 2023

 Amplifies
climate
Credible &
policies,
predictable
accelerates
climate
transition,
policies
drives
growth

Finances
Values
Provides
innovation
and
investment
driving certainty for
investment

value

Net Zero Strategies for

Financial Net Zero
System Transition

Source: Carney, 2023

We need money to invest
• Industrial Revolution vs Sustainable Revolution
• Central bank: lender of last resort → demand climate disclosure (investors of
first resort)
• International monetary system: gold standard → carbon market

• Private involvement
• Financial commitment to net zero (26x, 5T $ Jan 2020 → 150T $ Nov 2022)

• Your money matters

• High bank street still financing oil and gas industries, a lot. Take your money
from there, place in the financial institution which invest in green investment.

Source: Carney, 2023

We are in the past

• Oil and gas bring

economic prosperity
• Carbon dioxide
counted as impurities
in the gas industry
• Fossil fuels dominated
the power generation
and transport industry Source: World Finance
The effect of carbon accumulation in the atmosphere: GHG Effect

Source: freepik.com
This climate migration is expected to surge in coming decades with forecasts from
international thinktank the IEP predicting that 1.2 billion people could be displaced globally
by 2050 due to climate change and natural disasters. (Source: Zurich.com)

Source: University of Reading

Rationale: doughnut philosophy
 We need
CCS and CCUS!
“We just need to put Source: Linkedin.com

carbon back in the

right place.”
Low carbon
ecosystem
opportunity
• Save the competitiveness of
Indonesia’s industry, not by
provide cheap fuel price but by
provide low carbon industry
ecosystem (increase product
value)
• Follow market demand
requirement
Carrot and stick
incentives

• Low carbon product have

higher value in the market
(carrot analogy)
• Endorse cap and trade
system with progressive
scheme, considering the
limited fiscal condition (stick
analogy)
Indonesia Case Study
• Considering fiscal capability limitation, cap and trade
options viable enough to be implemented which further
create a carbon tax system and carbon market
• Government have the role of governing body to integrate
end to end sector (cap and trade by Kemenkeu; carbon
emission allowance by KLHK; industrial capture by
Kemenperin; carbon storage by KESDM) to determine
optimum design scheme and distribute carbon credit to
each contributor