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Implementation of ASEAN Taxonomy Version 2 Encourages Sustainable Development

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Jakarta, May 4, 2023 – The ASEAN Taxonomy Board (ATB) published the second version of the ASEAN Taxonomy for Sustainable Finance (ATSF v2) in March 2023. This taxonomy acts as a guidance to help classify economic activities, particularly those related to green financing. The Institute for Essential Services Reform (IESR) welcomes the publication of the second edition of the green taxonomy as a strategic step to attract global investment to ASEAN in supporting sustainable development.

One of the new things and, for the first time, considered in the second version of the ASEAN Taxonomy is the gradual termination of coal-fired power plant operations as an effort to significantly reduce greenhouse gas emissions to achieve the target of the Paris Agreement. The discontinuation of coal-fired power plants (CFPP) procedures will facilitate the diversity of understanding of ASEAN member countries regarding an equitable energy transition. The ATSF v2 also includes technical screening criteria (TSC) for energy transition financing, including the termination of coal-fired power plants, into the Green and Yellow categories. TSC is a quantitative or qualitative criterion that forms the basis for assessing the classification of whether an activity is included in Green activities (Green, contributes very important to environmental goals); Amber (Yellow, does not meet the criteria for Green but shows progressive steps to achieve sustainable ASEAN development) or Red (Red, not by environmental goals).

Fabby Tumiwa, Executive Director of IESR, said that IESR welcomed the presence of ATSF v. 2 as a common ASEAN standard for green financing. He mentioned that the influx of funding for the early termination of the CFPP indicates that the region’s government is supporting the achievement of net-zero emissions in the middle of this century.

“More than half of the electricity in ASEAN comes from coal-fired power plants. Meanwhile, to achieve the target of the Paris Agreement, all CFPPs should be retired by 2040. The fact that more than 50% of CFPPs operating in the Southeast Asia region are less than ten years old has the consequence that the early termination of CFPP requires a sizable source of financing, which is combined with financing for the construction of renewable energy generators to ensure the security of energy supply in areas with fast-growing economies. In this context, ATSF v.2 can accelerate the termination of CFPP operations in ASEAN through green funding,” said Executive Director of IESR Fabby Tumiwa in a written statement from Media Luncheon: Getting to Know Green Taxonomy and Development of Energy Transition in ASEAN.

IESR considers that implementing this ASEAN taxonomy needs to be optimized in line with Indonesia’s chairmanship in ASEAN 2023. Indonesia can strengthen cooperation among ASEAN countries in overcoming energy transition challenges, including low investment in the renewable energy sector and the termination of coal-fired power plants. Indonesia has had several international funding opportunities for the development of renewable energy and the termination of coal-fired power plants through the Just Energy Transition Partnership (JETP), Energy Transition Mechanism (ETM), and Clean Investment Fund-Accelerated Coal Transition (CIF-ACT) with a total of USD 24, 05 billion. However, IESR assesses that at least USD 135 billion is needed by 2030 for energy transition costs in Indonesia, including the termination of CFPPs operations.

“Including financing for the termination of CFPP operations into the yellow and green categories will increase the opportunity to conduct funding related to the energy transition or transition finance. There needs to be clear communication from the regulator to business actors and financial institutions to allow financing for these activities. This is because several financial institutions have committed to no longer supporting coal-related funding. However, of course, this activity category is different,” explained Farah Vianda, Project Coordinator for Sustainable Financing, Green Economy, IESR.

Based on IESR analysis, over the last five years, the average investment in renewable energy has only reached USD 1.6 billion per year or 20 percent of the total investment needed to achieve the renewable energy mix target of 23% in 2025. Meanwhile, highlighting international support, based on IESR calculations, there is potential international funding of USD 13.1 billion or 35.4% of the total projected financing needs of USD 36.95 billion in 2025 to achieve the 23% renewable energy mix target.

“It is important to accelerate the energy transition to attract investment, increase industrial competitiveness, and ensure sustainable economic growth. Therefore it needs to be accelerated by building an ecosystem to develop clean emission technologies such as renewable energy. The green taxonomy is the first step. Furthermore, the government can formulate long-term policies that provide certainty for investment in renewable energy and create a regulatory framework that is at least equal between renewable energy and fossil energy,” said Deon Arinaldo, Energy Transformation Program Manager, IESR.

Deon explained that these two factors are essential to reduce investment risk in renewable energy and attract funding for renewable energy projects. On the other hand, incentives for the clean energy technology industry must be built so that Indonesia and other ASEAN countries can benefit from more optimal economic growth from the energy transition.

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