Mitigate the Impact of the Energy Transition in Coal-Producing Regions with Economic Transformation

press release

Jakarta, September 1, 2023 – The Institute for Essential Services Reform (IESR), a leading energy and environmental think tank based in Jakarta, Indonesia, released a report on the potential impact of the energy transition on coal-producing regions in Indonesia. This report, entitled Just Transition in Indonesia’s Coal Producing Regions, Case Study Paser and Muara Enim, finds that economic diversification and transformation must be immediately planned to anticipate the social and economic impacts of the decline in the coal industry along with plans to end coal-fired power plants (CFPP) operations and increased commitments to energy transition and emissions mitigation, from countries that have become coal export destinations so far.

IESR recommends that the central and regional governments realize the potential impact of the energy transition on the economy and development of coal-producing areas and start planning for economic transformation as soon as possible in these coal-producing areas.

A recent study conducted in Paser Regency, East Kalimantan Province, and Muara Enim Regency, South Sumatra Province, has recommended the utilization of coal’s revenue sharing (dana bagi hasil, DBH) CFPP and corporate social responsibility (CSR) programs to plan and support economic transformation. The study also highlighted the importance of expanding public access and participation to ensure a just transition. In 2023, Coals’ revenue sharing fund (DBH) is projected to account for 20% of the total revenue budget of the Muara Enim government. Similarly, between 2013-2020, it accounted for 27% of the total revenue of the Paser government.

“The importance of prioritizing economic activities that benefit local communities and have a greater multiplier effect towards post-coal mining economic transformation. It is equally important to factor in the potential impact of a decrease in coal production on the informal economy sector, which has not yet been included in macroeconomic analysis,” mentioned Executive Director of IESR, Fabby Tumiwa.

According to a recent study, the coal mining industry has contributed 50% to 70% of GRDP in Muara Enim and Paser over the last ten years. However, despite this significant economic contribution, coal industry workers earn little. Only around 20% of the added value is allocated to workers, while as much as 78% becomes company surplus. This means that the enormous economic value generated by the coal mining industry contributes little to the income of its workers.

“The coal mining industry has also caused significant social and environmental impacts on the surrounding communities. These impacts include degradation of air and water quality, changes in people’s livelihoods, economic inequality, and increased consumerism and rent-seeking,” stated Julius Christian, the leading author of this study and also the Research Manager of IESR.

According to him,  different parties in the region are responding to the trend of energy transition in various ways based on their interests, knowledge, and access to information. Coal companies are more aware of the energy transition risks posed to their businesses than governments and ordinary citizens.

“Both companies and local governments are starting to carry out various economic transformation initiatives. However, local people are more skeptical about the potential decline in coal because they have seen increased production recently,” said Martha Jesica, Social and Economic Analyst at IESR.

However, according to her, changes in perspective are occurring in both society and coal industry companies. The local community has called for economic diversification, and coal companies have started branching into other fields. She hopes that various stakeholders and the government can work towards raising awareness and implementing structural changes to drive economic transformation efforts.

The report “Just Transition in Indonesia’s Coal Producing Regions: Case Studies Paser and Muara Enim” by IESR suggests that to achieve sustainable development in coal-producing regions, firstly, there needs to be a comprehensive plan for economic diversification and transformation that involves stakeholders and community participation. Secondly, utilizing DBH funds and CSR programs to finance the financial transformation process, which can attract more investment into sustainable economic sectors. Thirdly expanding access to education and training to prepare a competitive workforce in the sustainable industry and increasing financial literacy for the community. Fourthly, expanding the participation of all elements of society, especially vulnerable groups, in regional planning and development.

“All matters related to the transition in coal-producing areas should be included in the respective central and provincial governments’ Medium Term Development Plan (RPJM). This will provide clear support and direction for local governments,” said Ilham Surya, Environmental Policy Analyst IESR.

Study Launch: Just Transition in Coal-Producing Regions in Indonesia Case Study of Muara Enim Regency and Paser Regency

Background

Coal holds significant importance for Indonesia, both as a consumer and as one of the world’s largest producers. As of 2022, Indonesia stands as the world’s third-largest coal producer, trailing only behind India and China. It also ranks among the globe’s leading coal exporters, having exported a total of 360.28 million tons, marking a 4.29% increase from the previous year. Looking ahead to 2023, the Indonesian government maintains ambitions for even higher coal production. The coal industry plays a pivotal role in the national economy. In 2022 alone, it contributed approximately 3.6% to the national GDP, accounted for 11.4% of the total export value, generated 1.8% of the national state revenue, and provided employment to 0.2% of the population.

On the other hand, coal demand is expected to decline due to the ongoing trend of transitioning towards renewable energy and the commitments outlined in the Paris Agreement, aimed at limiting temperature rise to below 1.5°C. According to IESR (2022) estimates, Indonesia’s total coal demand—both domestic and for export—is projected to decrease by approximately 10% after 2030, considering the country’s existing commitments. Furthermore, the Government of Indonesia has enacted Presidential Regulation No. 112 of 2022, which focuses on expediting the development of renewable energy sources for electricity generation. This regulation explicitly imposes a ban on the construction of coal-fired power plants, effective from 2030 onward. This national commitment is reinforced by the endorsement of the Just Energy Transition Partnership (JETP) agreement between Indonesia and the International Partners Group (IPG), as well as the Glasgow Financial Alliance for Net-Zero (GFANZ). This alliance aims to mobilize a substantial USD 20 billion in funding to facilitate an just transition to clean energy, which includes provisions for the early retirement of coal power plants.

Indonesia possesses coal reserves totaling 33.37 billion tons, distributed across several provinces including East Kalimantan, South Sumatra, South Kalimantan, Central Kalimantan, and various other areas. While these regions reap benefits from the coal industry sector, they also endure significant drawbacks.

IESR’s study, “Redefining Future Jobs,” conducted in 2022, illustrates that the advantages accruing to coal-producing regions are disproportionate to the hardships faced by their inhabitants. Furthermore, many communities in the surrounding areas bear the brunt of injustices, encompassing unequal economic impacts, land degradation, and health risks. Addressing these inequities must be a central focus for the government as it formulates plans for future energy transition.

IESR conducted a study on the coal industry’s impact within coal-producing regions in Indonesia, focusing on two major coal-producing districts: Muara Enim and Paser. The study unveiled various forms of injustice experienced by communities residing near coal mining sites, encompassing economic, social, and environmental dimensions

Among the observed injustices in coal-producing areas are income disparities between residents, workers, and capital owners, local community asset loss, and a decline in quality of life around coal mines. Addressing these issues necessitates comprehensive solutions aimed at mitigating these injustices and fostering opportunities for positive change within communities, ensuring an just energy transition.

By proactively tackling these injustices, the government can ensure that the transition process remains just for all stakeholders. With the Indonesian government’s commitment to a greener energy transition, the need arises for comprehensive development planning that promotes inclusivity and participation, particularly in each of Indonesia’s coal-producing regions.

Therefore, IESR intends to host a launch event for the study results of the Just Energy Transition in Coal Producing Areas in Indonesia. This event will bring together the national government, various experts from academia, civil society organizations, and international organizations to engage in a dialogue about the impact of the coal industry and the necessary preparations for an just energy transition in Indonesia.

Objective

The launch of the study results has several objectives:

  1. Delivering the findings of IESR’s Just Energy Transition in Coal Producing Regions’ study to the public.
  2. Gathering input on the outcomes of the study ‘Just Energy Transition in Coal Producing Areas’ to create practical recommendations for relevant parties.
  3. Collecting inputs and recommendations from various stakeholders concerning just energy transition and the mapping of potential economic sectors in coal-producing areas.

Enhancing understanding by providing practical recommendations to key policymakers to support the achievement of an just energy transition in coal-producing regions in Indonesia.