The report titled Aligning the State Budget with Climate Priorities of Indonesia was led by Mr. Arun Arya, a Senior Public Sector Management Specialist and Task Team Leader of the World Bank’s Public Finance Management Program in Indonesia. This study served as one of the Background Papers for the World Bank’s 2023 Country Climate and Development Report. The report critically analyzes Indonesia’s efforts to align its state budget with its climate priorities, particularly in the context of achieving its Nationally Determined Contributions (NDCs) aimed at reducing greenhouse gas (GHG) emissions and fostering climate resilience.
Key Findings:
Impact of COVID-19:
The COVID-19 pandemic exposed Indonesia’s vulnerabilities in its transition towards a green economy. While the government introduced fiscal stimulus measures to support economic recovery, many of these came at the expense of environmental sustainability. A relatively small proportion of the stimulus was directed toward supporting green initiatives.
Green Budget Expenditures:
Although the Indonesian government has prioritized climate programs under the Government Work Plan (RKP), the study finds that only a limited number of NDC-related actions are covered by the current budget. Most funding is skewed towards adaptation measures, with significantly less allocated to mitigation efforts. The financing gap remains substantial, with current state budget allocations covering only a fraction of the total funding required to meet NDC targets.
Misalignment of Budget and NDCs:
The study highlights a lack of alignment between budget allocations and the NDC’s mitigation and adaptation actions. Only 50% of the mitigation actions and 70% of adaptation actions outlined in the NDC receive budget allocations in the RKP. Crucial climate initiatives, such as clean coal technology and biofuel implementation, are excluded from the budget, hindering Indonesia’s ability to meet its climate targets.
Political Economy Barriers:
A significant challenge in aligning the state budget with climate priorities lies in balancing fiscal constraints with development needs. Political and economic barriers limit the reallocation of funds towards greener programs. Additionally, Indonesia’s existing fiscal deficit restricts the government’s capacity to allocate sufficient resources for climate initiatives.
Green Revenue Instruments:
The introduction of a carbon tax represents progress in Indonesia’s efforts to raise climate-related revenue; however, the current tax rate remains too low to significantly curb emissions. The report recommends further reforms, including the introduction of excise taxes on fossil fuels and plastic waste, as a means to increase revenue and support climate goals.
Public and Private Finance:
The report underscores the insufficiency of the state budget to fully meet the financing needs for climate action. It emphasizes the importance of mobilizing private sector investment and securing international support to bridge the financing gap, particularly for mitigation activities in the energy and transport sectors.
Recommendations:
- Redistribute Climate Budget:
The report calls for the redistribution of the climate budget to fund a broader range of climate programs, particularly those directly aligned with NDC targets. Currently, there is an overemphasis on resilience programs, while mitigation efforts remain underfunded. - Include NDC-Aligned Programs:
Future budget planning should ensure that all NDC-aligned programs are included, enhancing coherence between climate objectives and financial allocations. - Expand Green Revenue Sources:
Additional green revenue instruments should be introduced, such as excise taxes on fossil fuels and plastics, and the carbon tax should be made more effective. - Phase Out Energy Subsidies:
The gradual elimination of energy subsidies is recommended, with the funds redirected toward climate action and green investments. - Mobilize Private Finance:
The report emphasizes the need to encourage private sector participation through fiscal incentives, carbon pricing mechanisms, and public-private partnerships to bridge the climate financing gap.
Conclusion:
Indonesia’s current budget allocations and fiscal policies are insufficient to meet the climate goals outlined in the NDC. A more ambitious, well-aligned financial strategy is required, incorporating budgetary reforms, the introduction of new revenue instruments, and greater involvement from the private sector. These changes are essential to ensure Indonesia achieves its climate and development goals.
The Team:
This report was prepared by a World Bank team led by Arun Arya (Senior Public Sector Specialist, EEAG1/Task Team Leader [TTL]) that consisted of Dr. Muhamad Chatib Basri (NDC Economic Adviser for Government Indonesia/Consultant DECDP), Melisa Sudirman (Senior Carbon Finance Specialist/Consultant ELCG2), Andhyta Firselly Utami (Environmental Economist, SEAE1), Ralph van Doorn (Senior Economist, EEAM2), Cut Dian Agustina (Economist, EEAG1), Hari Purnomo (Senior Public Sector Specialist, EEAG1), Muhammad Khudadad Chattha (Young Professional, EEAG1), Bambang Suharnoko (Senior Economist, EEAPV), Retno Handini (Consultant ELCG2/PFM and Monitoring and Evaluation Expert), and Corry Huntangadi (Program Assistant, EACIF).