Taxonomy for Indonesian Sustainable Finance Opportunities and Gaps to Support Energy Transition Financing

press release

Jakarta, May 17, 2024—The Financial Services Authority (OJK) has updated the sustainable finance market guidance from the Indonesian Green Taxonomy (THI) to the Indonesian Taxonomy for Sustainable Finance (TKBI) in February 2024. This taxonomy’s objectives include attracting more sustainable finance to various sectors, including the energy sector, and achieving the net zero emission (NZE) target by 2060 or earlier.

The Institute for Essential Services Reform (IESR) believes that while the renewal of the green taxonomy through TKBI is a step forward, there are still gaps that could make it less effective. First, the labeling system provides opportunities for fossil energy activities to receive sustainable financing. In TKBI, the classification of economic activities is no longer labeled with traffic light colors (“red”, “yellow”, “and green”), but rather “does not meet classification” and “transition” for activities that are not yet in line with the Paris Agreement but reduce emissions significantly within a specific timeframe, and “green” is in line with the Paris Agreement and considering NZE 2060 or sooner.

TKBI includes in the ‘transition’ category the activities of existing Coal-Fired Power Plants (CFPP) and the construction of new CFPPs established before Presidential Regulation (Perpres) No. 112 of 2022 or new CFPPs integrated with industry. There needs to be more consistency in categorizing CFPP with other power plants. From the aspect of emission mitigation, different plants, such as gas, hydro, geothermal, and so on, will get the “transition” category if the plant’s life cycle emissions are between 100-500 grams of carbon dioxide equivalent per kWh and the “green” category if the life cycle emissions are below 100 grams of carbon dioxide equivalent per kWh. However, for all CFPPs, the comparison is not life cycle emissions; instead, they must meet the requirements of reducing GHG emissions by at least 35 percent within ten years and stop operating by 2050. 

Deon Arinaldo, Program Manager of Energy Transformation, IESR, considers the emission reduction indicator for CFPP to be insufficient. He notes that CFPPs have operational emissions reaching 900-1200 grams of carbon dioxide equivalent per kWh, and even higher when considering life cycle emissions. Therefore, assigning a transition or ‘green’ label with an indicator of a 35 percent emission reduction after 10 years is inappropriate and contradicts the general principles of climate crisis mitigation, which aim to keep global temperature rise below 2 degrees Celsius and strive to limit it to 1.5 degrees Celsius.

“If we want to be consistent with 1.5 degrees Celsius, emissions from national coal-fired power plants should have peaked before 2030, approach zero by 2040, and no more emissions from power plants by 2045. The indicator used for green categorization should be for financial support that allows coal-fired power plants to reduce emissions before 2030 and stop operating before 2045,” said Deon. 

In addition, mining and mineral extraction activities that support energy transition industries, such as copper, nickel, and tin, are also included in the ‘transition’ category. IESR finds that a clear description has not accompanied this labeling to ensure that all mining and quarrying activities consistently support the energy transition.

Farah Vianda, Coordinator of Sustainable Finance at IESR, mentioned that this loophole allows greenwashing practices to gain sustainable financing.

“Regular updates and tightening of criteria are important. In addition, there needs to be a third party to ensure that the labeling category of an activity is in accordance with TKBI, not just an assessment carried out internally,” said Farah.

Meanwhile, Wira A Swadana, Program Manager of Green Economy, IESR, said that TKBI could be a reference for funding to support the achievement of Indonesia’s Nationally Determined Contribution (NDC) target in the future. 

“TKBI needs to ensure that there are clear rules that must be followed by the use of technologies that are proven to be efficient and effective for emission reduction so that TKBI can also be a technical reference to support the preparation of a comprehensive Second NDC,” said Wira.