Integrating the social dimensions in energy transition financing to achieve a just transition

Changing our energy sources requires a massive transformation of systems. It is not only developing new technologies or building more infrastructures, but it also concerns the people, both as the decision-maker and the most affected by the transition. The discourses on energy transition are heavily dominated by the technical aspect that other elements, such as the social, economical, and environmental aspects are easily overlooked. When talking about the amount of finance needed to build renewable energy infrastructures, for example, the social costs often escape the calculation. If just energy transition is what we truly aim for, it is time to start considering its social dimensions.

Brian Motherway from the International Energy Agency remarked during the G20 Forum on International Policy Levers for Sustainable Investment that while investment is important—due to the high initial capital costs for renewable energy projects, we cannot deny that people-centered sustainable energy transitions are just as important. As the shift toward renewables is happening, societies are also transforming. Whether this transformation is disruptive or empowering largely depends on the choice of policy measures to mitigate the risks entailed in the transition process. The costs to safeguard these risks must also be accounted for in renewable energy project financing, as a way to ensure that everyone can enjoy the benefits from low-carbon development, rather than being the expenses of such projects.

However, some challenges persist in quantifying the social risks and their required costs. As the idea of a just energy transition has only gained traction recently, so does the idea of accounting for the costs of non-project financing. The first challenge is defining what are the social costs of the energy transition. As each energy transition project is traversed at different scales and complexities, these projects would have a different understanding of what includes as the social costs. The most common interpretation of these social costs is usually related to employment and safety nets, while others put more emphasis on energy justice which concerns the fair distribution of cost and benefits to the communities impacted by the change in the energy systems. Without neglecting the diversity of local or regional contexts in energy system planning, establishing a regulatory framework to provide uniform definition of social costs can help private enterprises or financial institutions in designing the budget allocation for non-project financing. 

Secondly, there is a scarcity of data that can depict the amount of socio-economic risks posed by energy transition projects. For example, the Indonesian National Planning Agency (Bappenas) estimated that there will be around 1.8 to 2.2 million jobs in the renewable energy sector by 2060 if the government can provide adequate intervention in this sector. On the other hand, an IESR report on Ensuring Just Energy Transition in Indonesia mentioned that the Indonesian coal industry has provided around 1 million employment, both directly and indirectly. At a glance, this data informed us that there will be more jobs created than the jobs displaced. However, it only represents the macroeconomic outlook of the job transitions, while in reality, the process takes place at the regional or local level. Data that is able to illustrate the impact of shifting modes of employment at the regional or local scale, particularly in coal-dependent areas, can better inform financial institutions in assessing the cost of job transitions for issues such as safety nets, job reskilling, or providing alternative modes of employment. Taking the energy transition as an inevitability, the government must be ready to respond to the risks of unemployment, especially in the carbon-intensive sectors.

Other than the employment sector, the lack of information for the local communities on the planning of energy system transformation also poses a challenge to deploy the necessary amount of money in offsetting the impact. Especially in fossil fuel-dependent regions, this lack of information or knowledge about energy transition policy could render the communities vulnerable when their primary source of economic activity, such as coal mines, are being retired early due to the declining demands in the future. Again, data is crucial to visualize how the economic turnover in fossil fuel-dependent regions are disrupted by the transformation. With comprehensive data, redirecting the main source of regional income away from the fossil fuel industry to the alternatives can be done more comfortably and equitably. 

The G20 governments have the homework to answer these challenges. Undoubtedly, financing is a crucial part of the energy transition, but less attention has been given to the financing of social costs accrued from the systemic change. Financing instruments must be mobilized to accommodate the needs of affected areas and people to provide safeguards and strengthen their economic capacity, not only for the technologies and infrastructures. Well-informed and data-driven policy actions–especially at the regional level–are important to mitigate the adverse impacts related to the energy transition. At the end of the day, just transition is a concept that assimilates both climate and economic objectives. It is time to start unraveling the ‘just’ element of just transition by promoting more inclusive financing mechanisms. 

IESR: Indonesia Needs Economic Transformation in Coal-Produced Regions

press release

Jakarta, 11 July 2022The demand for coal as a long-term energy source is predicted to decrease significantly. This trend is affected by stronger climate commitment from coal-imported countries to shift into renewable energy. Institute for Essential Services Reform (IESR) in its study even said that if the government’s commitment to reducing emissions was following the Paris Agreement to achieve net-zero emission by 2050, then in 2045, coal would no longer be utilized in Indonesia’s energy system. It demands the government’s commitment to preparing the economic transformation and employment for regions whose income is dominated by the coal sector.

Fabby Tumiwa, Executive Director of IESR said that the enhancement of emissions target in Nationally Determined Contribution (NDC) from countries that utilize coal, such as China, Japan, South Korea, United States, Europe Union, South Africa, and other countries, will affect the reduction to fossil energy projects’ funding. Referring to the Paris Agreement, if whole countries adopt a more aggressive coal phase-out, then in 2030, coal production will drop by 20%, 30% in 2040, and 90% in 2050.

“This production reduction should be anticipated due to the impact on employment and will also affect the national and coal-produced regions’ income. This threat is quite serious considering coal-produced regions do not have many choices for their economic alternative while carrying out post-coal mining economic transformation will take a long time. Now is the time to make a transformation and prepare the foundation to conduct post-coal mining and post-coal power plant economic transformation. The failure to succeed in economic transformation will not only cause a higher unemployment rate but also the decline in economic competitiveness,” said Fabby.

He added that coal-produced regions need to be supported with a particular national policy. IESR even recommended this issue should be prioritized and included in forming RPJMN 2024-2029.

Julius Christian, the author of the IESR study titled Redefining Future Jobs: The implication of the coal phase-out to the employment sector and economic transformation in Indonesia’s coal regions urged the central and coal-produced regions in Indonesia to anticipate the possibility of income reduction and employment opportunities for the workers from the coal sector.

“Collaboration between the central and regional government will be an important note in preparing the long-term economic strategy to realize a more diverse economic structure and no longer depend on coal,” Julius explained.

In 2020, there were approximately 250.000 workers who directly worked in the mining sector. These workers, in general, are aged under 50 years old. Therefore they still could be prepared with various types of training to shift to other employment sectors. Besides, the government also needs to prepare the allowance and social safety net to anticipate the rapid decline in coal demand.

“Coal workers are one of the most impacted groups from this coal decline. However, currently, the workers have not realized the risk they will be facing and have not been included in all energy transition discourse,” added Julius.

Ronald Suryadi, a researcher at IESR who is also writing the report Redefining Future Job, also said that economic transformation needs to be addressed for Indonesia’s provinces that its Gross Regional Domestic Product (GRDP) is mainly gained from the coal sector, such as North Kalimantan that produces 48% national coal supply, South Kalimantan (32%), South Sumatra (9%), North Kalimantan (3%), and Central Kalimantan (3%).

“A gradual economic transformation is not only needed to mitigate the resulting impact, but also to achieve an economic structure that can keep up with the current development in the future,” said Ronald.

IESR pushes for an inclusive planning and strategy formulation process by involving the affected groups, especially the workers and the community around mining areas. The purpose is that economic transformation will be carried out sustainably and correspond to people’s needs. For instance, economic transformation in the coal area can be carried out by modernizing the agricultural sector. Besides, the government also needs to strengthen the existing main industries with a high multiplier effect, such as the food and chemical industries. In addition, the preparation to establish an economy that is centralized on services can be implemented by building infrastructure, restoring the environment, and intensifying human resources.

The IESR study ‘Redefining Future Jobs’ can be downloaded at ***

Green Jobs: Promising yet Untapped Opportunity

Jakarta, November 6, 2021 – Green jobs have become an issue that is starting to be discussed a lot. Young people try to understand green jobs to figure out what fields are included in green jobs, what are the prospects for future opportunities, as well as what should be prepared to work in this sector. Project Clean, Affordable, and Secure Energy (CASE) for Southeast Asia in collaboration with Indonesia Mengglobal hosted a webinar entitled “Green Jobs in Indonesia: Opportunities, Challenges, and Future Outlook” with the aim of providing an overview of green jobs from practitioners in various fields. 

Previously, a mini survey to gain the perception of young people about green jobs was conducted. The survey, which attracted around 200 respondents, revealed one interesting finding, namely that more than 90% of respondents stated that they would prefer companies that have concern on environmental issues.

Desi Ayu Pirmasari, a researcher at the University of Leeds, England, stated that green jobs have a wide sector. “Green jobs have a very broad spectrum, not limited to specific sectors such as energy. For example, when civil servants make greener city plans, procurement staff who consider the carbon footprint in the procurement of goods. Lawyers can also become green jobs if they help others to breathe fresh air and fight for climate change.”

Desi’s opinion is agreed by Julius Christian, a researcher on clean fuels at IESR, with the trend of using renewable energy that is getting wider. According to him, currently there are so many sectors that need workers who understand sustainability, SDGs, and the environment concepts in general.

“In the energy sector only, in the next 5-10 years renewable energy will be more competitive with fossil energy, so the energy transition is inevitable. From the IESR study on Deep Decarbonization itself, there will be around 3.2 million new jobs. Of course, this is a big opportunity and must be prepared from now, “explained Julius.

Preparation of human resources and financial resources is very important, because the development of technology moves so fast requires qualified human resources and adequate financial support.

“So if in the future we want to take advantage of this (green jobs) opportunity, for example making a solar panel manufacturing plant in Indonesia, we must act quickly. We have to consider the full lifecycle of everything, from the carbon footprint of the manufacturing process to use, and the results are not instant. We can only see (the results) in the next 10 years for instance,” said Noor Titan Putri, post-doctoral researcher, Helmholtz-Zentrum Berlin, Germany.

Jonathan Davy, founder and CEO of Ecoxyztem Venture Builder, said that many entrepreneurs are starting to invest in the green jobs sector. The challenge of developing an environmentally friendly business in Indonesia lies in the adoption of environmentally friendly technologies.

“Technology adoption must meet three categories, i.e desirability (whether the market wants to use it), viability (whether technology is needed), and feasibility (whether the business is possible to run). Currently, we are still heavily regulated so that some business processes are still locked,” explained Jonathan.

Jonathan also highlighted the development of human resources, which he said needed to shift the mindset from how many jobs could absorb workers to how many people could create jobs.