If given the chance, Indonesia’s COVID-19 stimulus can build a green, resilient economy
The global health pandemic is leading the world towards recession, and Indonesia is no exception. To restore prosperity and growth, the government needs to ensure that recently passed stimulus packages take into consideration long-term sustainable development goals.
The world is heading towards recession as a result of the COVID-19 crisis, and Indonesia is no exception. The country’s stock exchange has lost about 35% of its value this year, and 3 million people have lost their jobs, with that number possibly rising to 9 million by mid-year if Indonesia’s GDP growth slows further, or heads into negative territory, as some economists predict.
The Indonesian government has responded by unveiling a number of stimulus packages to support the country’s tourism, aviation, real estate and energy sectors, as well as for general business economic recovery, including relaxing import levies and tax incentives for small and medium-sized enterprises (SMEs). While these measures are needed, they are designed to last no further than September 2020.
Indonesia has a unique opportunity to learn from past mistakes and build a recovery that improves the country’s chances for economic stability and growth. To restore long-term prosperity, however, incentives must promote a green, resilient and inclusive economy. This can be achieved by making adjustments to the stimulus packages in the following three ways:
1. Taxpayer-funded fiscal policies should accelerate the growth of green industries.
An economy that relies on fossil fuel is vulnerable to market shocks and worsens the climate crisis. About 50% of Indonesia’s electricity is powered by coal, and almost all the country’s transportation is fueled by oil. Though there are attempts to diversify the energy mix, renewable energy still accounts for less than 10%.
A new mining law – which guarantees an extension of current coal concessions for up to 20 years – reinforces the dominance of coal, where it is not needed. Although the stimulus packages mention renewable energy, it provides financial support to the oil and gas and mining industries, but makes no mention of other green industries.
Renewables are struggling to gain a major footing in Indonesia because of entrenched fossil fuel interest: coal is subsidized, tariffs are mostly driven by the price of coal and subsidized diesel is dominating energy supply in remote islands. Without more aggressive government gap funding, private sector financiers in Indonesia still consider renewables to be a risky investment. The stimulus packages are a perfect opportunity to address these imbalances, reducing fossil fuel subsidies while increasing incentives for renewable energy, battery manufacturers and other energy storage solutions, as well as recycling, energy efficiency and other industries that have demonstrated strong job growth and at the same time contributed to a low-emission, low-resource economy.
There is sufficient precedent to take cues from. The European Union has announced it will integrate its coronavirus response into its Green Deal agenda, which brings every single law, regulation and business in line with a 50% emissions cut by 2030. During the 2008 global recession, the United States made fiscal bailouts to General Motors and Chrysler conditional upon energy efficiency measures and cleaner fleets, which fostered a new era of competitiveness for those companies.
2. Natural resources for essential needs must be diversified and decentralized.
Global trade is here to stay, but when it comes to essential needs the pandemic teaches us that the more options we have closer to home, the better. Indonesia, like many other countries, scrambled to import essential medical supplies before shifting what we could to domestic production. Increasing capacity for local production of essential services will enable us to be resilient in the face of future shocks to the economy or disruptions to supply chains.
Energy generation and transmission provides a key opportunity. Electricity is an essential need, yet we have had little success in diversifying and decentralizing our energy sources. Stimulus investments could accelerate these efforts. For example, off-grid systems powered by renewable energy are needed to electrify rural and isolated areas where transmission lines have not reached, while also building resilience in areas that are already electrified. Having building, businesses and individual households partly connected to the grid, but partly powered by off-grid energy, will reduce the risk of shocks to the system. Stimulus incentives could accelerate these energy grid investments.
Food and water are also essential needs, yet entire localities are becoming increasingly reliant on imports. For example, the Berau district of East Kalimantan prioritized palm oil development after a coal price shock in 2015 decimated the district’s traditional mining economy. Other essential food crops, such as rice and maize that were traditionally grown in Berau, all declined in land area as palm oil dominated 90% of agricultural land. Berau is now at risk of falling into the same single-commodity trap with palm oil as it was when coal dominated the local economy.
In other parts of Indonesia, there are 88 districts – with a population of 7 million people – that are already food insecure. Stimulus incentives for farming and agriculture should be applied towards improving sustainable agriculture practices, needed to ensure the resilience of our food supply in light of climate change, as well as promoting crop diversification, especially in areas where we see single-crop domination.
3. Indonesia must use current momentum to decouple growth from resource use.
Prior to the COVID-19 pandemic, renewables were outpacing fossil fuels for power generation growth at the global level. But with demand and prices for oil dropping, supplies are piling up. While some analysts predict that this spells a blow to renewables as cheap oil floods the supply chain, others predict that investors will flee oil as the cost and risk of oil exploration far outweighs that of renewable project development.
Knowing that renewable energy growth is on the rise and that the cost and supply of fossil fuels will become increasingly unpredictable, now is the time to aggressively invest in a massive shift to renewable energy. This will reduce our dependence on the few companies that extract limited natural resources from the earth, while investing in a more diverse energy supply chain that is demonstrating economic growth.
Indonesia can instead harvest the replenishable resources we have in abundance – sun, wind and water – as well as its manufacturing and infrastructure that take advantage of those resources, like stimulus incentives that help Indonesia switch more rapidly to electric vehicles. We can build diverse energy systems that do not rely on limited sources, while decentralizing distribution from the main transmission grids to help build resilience. We will power our transportation systems from that energy, and see much less pollution in our cities. Our health would improve, as would the health of the planet.
This is the world, and the Indonesian economy, we should aim to build after the pandemic.
A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice.