Executive summary
Indonesia is the world’s fourth most populated country and largest archipelagic one. Economic growth has averaged more than 5% per year since the 1997-98 Asian financial crisis, raising per capita income and reducing poverty. Natural resources have been a pillar of this growth, accounting for 20% of GDP and 50% of exports in 2017. Yet strong economic development, population growth and rising living standards have increased demand for land, energy and other resources, as well as pressures on the environment.
Being among the world’s largest greenhouse gas emitters, Indonesia plays an important role in addressing climate change. It aims to reduce its emissions by at least 29% compared to a business-as-usual scenario by 2030. Better land management is key to achieving this, as deforestation and loss of carbon-rich peatland form one of the main sources of emissions. Accelerating the use of renewable energy sources, which has declined to 10% of total energy use, is another key strategy to help Indonesia meet its climate goals, particularly since emissions from energy use are expected to continue to rise, reflecting growing demand and plans to significantly increase coal use.
Indonesia plans to make its 2020-24 national development plan its first low-carbon one. This is an opportunity to better align sector policies with environmental sustainability. The plan aims to tackle some of the most pressing environmental challenges, including loss of forest and peatland, waste generation exceeding management capacity, water resource depletion and water pollution. Addressing these will require capacity building and institutional strengthening. Better aligning the tax system with environmental objectives and the polluter-pays principle would make the transition more cost-effective. The absence of carbon pricing, for example, combined with low energy taxes and fossil-fuel subsidies, discourages energy saving and the shift to cleaner energy sources. Similarly, low retail tariffs discourage investment in waste, water and sewerage infrastructure. Direct social assistance and income support would be a more effective way to address poverty and affordability concerns. Indonesia is to be commended for its success in better targeting some energy subsidies to poor and vulnerable households, which helped cut subsidies from about 30% to 10% of central government expenditure over 2014-16.
Achieving a sustainable land sector is pivotal for green growth. In addition, the natural environment and archipelagic landscape are deeply rooted in Indonesia’s cultural identity. However, natural resource-based activities, such as mining, agriculture, forestry and fishery, put serious pressure on ecosystems. Annual deforestation remains among the world’s highest, threatening Indonesia’s unique and globally important biodiversity. Better balancing economic, social and environmental objectives in land use has become a government priority. About 7% of land has been allocated to providing local communities with legal access to land. Indonesia has stepped up efforts to clarify land rights and strengthen law enforcement. Moratoriums on use of primary forest and peatland, as well as timber and palm oil certification programmes, help protect valuable ecosystems. Expansion of protected areas and use of payments for ecosystem services offer good potential to complement these efforts.