Exploring Potential Risks of Coal Exit towards Economics and Finance in Indonesia
In 2015, the Paris Agreement, the most ambitious climate change agreement in history, urged 195 parties to commit to curb the rise of global temperatures well below 2 degree from pre-industrial levels, ideally below 1.5 degree Celsius. Climate change has created serious impacts and will become greater unless action is taken to address the issue. G20, which represents 85% of the global economy and contributes to at least 80% GHG emission responsibility, is urged to meet the Paris Agreement target. According to a 2020 United Nations Emission Gap Report, G20 members are off track to meet their NDC commitments based on pre-covid 19 projection. On that note, G20 must take ambitious actions regarding climate ambition. As for Indonesia, the country’s GHG emissions are still rising despite Covid-19 has been dropped 7% of emission reduction compared to 2019 and will bounce back in 2021.
Global energy sector is accountable for 80% anthropogenic emissions and coal is the most prominent polluter among fossil fuels. In G20 countries coal is still involved in around 30% in primary energy supply and used as the power generation fuel in developing countries, especially Indonesia. Analyzing the global trend of energy transition in the last decade, positive signs are apparent to optimize renewables as primary energy resources and thus coal has considered entering the sunset phase. The target of net-zero emissions by 2050 will be achieved if no new unabated coal plants are approved and no new mines are built by 2021 according to the International Energy Agency (IEA). Therefore, many countries are now beginning to shift from fossil-based fuels to renewables as their primary energy source. This shifting drives private sectors and investors the opportunity to anticipate a decreasing global market demand on coal following a significant increase.
As the largest coal exporter and 80% of coal production is imported by other countries, Indonesia highly relies on International demand. However, utmost Indonesian coal importer countries such as South Korea, Japan, and China are starting to limit coal dependency. On Indonesia’s fossil fuel infrastructure, Indonesia’s thermal power plant is still largely financed by these three countries. An initial step to halt overseas coal financing was taken up at Biden’s Leaders Summit on Climate last April where South Korea announced they would stop funding new overseas coal projects as a commitment to slashing carbon emission. Japan, as the second largest institutional coal share investment among G7 nations, has finally joined to end funding for unabated coal power plants overseas. This implies to upscale the number of carbon capture, utilisation and storage technologies to accelerate energy transition. Unfortunately, this global pressure has not yet urged China, as the top coal financier, to end funding for coal projects globally. In fact, China has promised to green its Belt and Road Initiative overseas construction plan. Leaving China as the last financier could push China to exit from coal investment sooner. The commitment on halting international coal financing will assist developing countries to be on the right track in achieving net zero emission and limiting the global temperature increase at 1.5 degree celsius.
The latest summit of the world’s seven largest advanced economies, G7, has promised to end a new direct government support for unabated coal power plants by 2021. This refers to reducing CO2 to meet the climate goal, which additional investments are needed to attain. It applies the responsibility to the operator and owner either to fit CCS technology to reduce the emission or to retire the existing power plant. As a result, It could increase climate-related risks such as physical and financial transition risks.
These signs of Indonesia’s decrease in demand on coal could potentially affect risk factors in climate related transition risk known as stranded assets. Lately, Indonesia state-owned electricity utility (PLN) has stated the aim to retire CFPP as early as 2030 in an effort to reach decarbonisation in the power sector. However, this brings other issues to the surface, including the potential of stranded assets.
Stranded assets must be anticipated as the result of rapid renewable energy deployment. The implication of stranded assets will be faced by private sector, investors, policy makers, regulators, and financial institutions. Beside that, major risk induces stranded assets in different sectors, and the larger likely economic, social, and political consequences. Building awareness with climate-related risk not only mitigates the upcoming impacts but also promotes financial sector transition to a net-zero economy. This can be done through the implementation of investment diversification specifically
Faisal Basri | Senior Economist INDEF
Febrio Kacaribu | Head of Fiscal Policy Agency (BKF)*
Hadi Prasojo | Researcher of Economic and Finance IESR
Sammy Hamzah | Chairperson of Energy and Mineral Resources APINDO*