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Climate financing: Who will benefit?
Extreme weather is becoming more frequent in various parts of the world
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span>Extreme weather is becoming more frequent in various parts of the world. The United States, for instance, has been experiencing extreme cold, with the air temperature in Minnesota recently plummeting to minus 49 degrees Celsius, a temperature typically associated with the North Pole.
In Chile, meanwhile, the driest area in the Andes mountain region is flooded. Some regions of Indonesia have also been experiencing extreme weather. North Sulawesi saw incessant heavy rain for a few days and West Java was hit by floods and landslides. Experts indicate that the more frequent extreme weather events are a result of climate change.
As an archipelagic country lying on the so-called Ring of Fire, Indonesia is particularly vulnerable to the negative impacts of climate change, and the impacts need to be tackled effectively and systematically.
The Indonesian government has vowed to reduce its greenhouse gas emissions and to mitigate climate change impacts by establishing the National Action Plan and Regional Action Plan for reducing Greenhouse Gas Emissions, respectively known as RAN GRK and RAD GRK, in 2011 as well as ratifying the Paris Agreement in 2016. This commitment is further reflected in the Indonesian nationally determined contribution (NDC), under which Indonesia is expected to reduce its GHG emissions by 29 percent by 2030 against a business-as-usual baseline scenario, or by 41 percent with international assistance and financial support.
Climate change may not only spell disaster for the environment but also cause economic losses. According to a study conducted by Prof. Richard S. J. Tol from the University of Sussex, climate change will begin to negatively affect the economy when the global temperature increases by 1.1 degrees. This study is in line with the purpose of the Paris Agreement to limit the increase of the global temperature, so that the negative impacts can be minimized and mankind can adapt to the changing climate.
It is well understood that action to tackle climate change is costly.
In 2017, the United Nations Framework Convention on Climate Change (UNFCCC) estimated the costs for adaptation and mitigation measures in the period of 2015 to 2020 at around US$81 billion, or $16.2 billion
annually.
Funding for climate change action should come from domestic and international sources, namely from the government budget, public-private partnerships, the private sector, state-owned enterprises, the community, the capital market and bilateral and/or multilateral institutions.
There is also international financing prioritizing green development, including philanthropic funds that target green projects.
To monitor and track climate-related expenditure in the state budget, the Indonesian government has developed a climate budget tag enabling it to more easily keep track of national spending on climate action.
The green bond market has also grown rapidly. In 2007, the Climate Bonds Initiative recorded $806 million of green bonds issued worldwide, and just seven years later, that number had increased to around $36.6 billion. This shows that the global green bond market has the potential to grow further, in line with the increasing awareness on the importance of environmental issues.
In March 2018, Indonesia issued its first green sukuk worth $1.25 billion and became the first country to issue green sukuk in the world. This green sukuk is expected to finance environmental conservation-based projects in Indonesia. Investors are widespread: 32 percent of the investors came from Islamic countries, 25 percent from Asia, 15 percent from the European Union, 18 percent from the US and 10 percent from Indonesia.
Given the fact that Indonesia is an emerging economy, the issuance of green sukuk is expected not only to have a positive impact on the environment but also to boost economic growth and job creation as well as to reduce poverty and inequality, which remain major problems in Indonesia.
A deep look at the RAN GRK shows there are five targeted sectors with the highest greenhouse gas emissions, namely forestry and peatland, agriculture, energy and transportation, industry and waste.
The Financial Services Authority (OJK) has issued a policy on the types of business activities that are eligible for financing from green bonds. These business activities are called business activities with environmental perspectives (KUBL) and include activities related to renewable energy, energy efficiency, pollution prevention and control, biological natural resource management and sustainable land use, land and water biodiversity conservation, environmentally friendly transportation, sustainable water and waste management, climate change adaptation, eco-efficient products, green buildings that meet national and international standards and other business activities that are environmental beneficial.
Several policies on government expenditure and climate change can become the basis for green bond disbursement. Each policy has priority sectors that get more attention than other sectors. The resulting impact is also different depending on the multiplier effect of spending on the related sector. Although the OJK regulation seem to restrict activities that can be financed by green bonds, the government as a policymaker in the utilization of green bonds can create scenarios that can be harmonized with short-, medium- and long-term development goals, so that the impact of green sukuk can be maximized.
The policies chosen should not only benefit corporations with an alternative source of financing for green projects but also have a positive impact on the income of workers and households. This way, the government’s green sukuk or bonds not only support green growth but also alleviate poverty and inequality, which remain an obstacle to development.
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Rita Helbra Tenrini is a senior researcher at the Fiscal Policy Agency of the Finance Ministry. Wesly Febriyanta Sinulingga works the Center for Climate Financing and Multilateral Policy at the agency.
