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Session 7a: Part II - Scene-setting-Industrial Sector Strategy - Leonardo Adypurnama Alias Teguh Sambodo-Bappenas

  1. Transition Towards Low-Carbon Economy: Industrial Sector Strategy March 8, 2022 Bogor, West Java Leonardo A. A. Teguh Sambodo, PhD Director for Industry, Tourism, and Creative Economy
  2. Green Growth as a New Source of Growth
  3. Indonesia experience early sign of de-industrialization 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 15,0 17,0 19,0 21,0 23,0 25,0 27,0 29,0 31,0 33,0 35,0 8,0 9,0 10,0 11,0 12,0 Manufacturing GDP (% of GDP) GDP per capita, PPP (Constant Price 2017 International $), Ln Share of Manufacturing GDP and GDP per capita Indonesia Korea Selatan Singapura South Korea: High income: 1996 Share of manufacturing GDP: 24,7% Singapore: High income: 1991 Share of Manufacturing GDP: 26,6% Source: World Development Indicators (modified) South Korea Singapore Source: BPS (2023) Share of Manufacturing GDP (%) Manufacturing GDP Growth (%) 5,6 8,7 5,3 5,0 -15,0 -10,0 -5,0 0,0 5,0 10,0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 2022 Industri Pengolahan Industri Batubara dan Pengilangan Migas Industri Nonmigas PRODUK DOMESTIK BRUTO 19,98 19,86 19,86 19,81 19,82 19,28 19,14 18,79 19,21 17,84 17,97 18,32 2,12 2,04 1,96 1,86 1,92 1,95 1,83 1,84 1,86 1,84 1,79 1,94 17,86 17,83 17,90 17,95 17,90 17,33 17,32 16,95 17,36 16,01 16,18 16,39 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 2022 Industri Pengolahan Non Migas Industri Batubara dan Pengilangan Migas Industri Pengolahan Coal and oil and gas refinery GDP Manufacturing Non oil and gas manufacturing Non oil and gas manufacturing Coal and oil and gas refinery Manufacturing 3
  4. Green economy: prospective approach towards sustainable future Source: McKinsey & Company, and Bappenas 4 According to the Green Economy Report by Bappenas, pursuing a green economy will offer multiple benefits and lead Indonesia to reach the Net Zero Emissions (NZE) target by 2060 or sooner ~68% reduction in emission intensity by 2045 1.8 million Additional green jobs in 2030 (in the energy sectors EVs, land restoration, and waste management) 6.1-6.5%/yr 25-34% higher gross national income (GNI) by 2045 40,000 Lives saved in 2045 alone from reduced air pollution USD 4.75 T/yr Ecosystem restoration of services value by 2060 Average GDP growth until 2050
  5. High economic volatity Industry players need to adjust their brand and market positioning to be agile and dynamic Global economic power will shift from G7 to E7 The development of new emerging countries will open up new opportunities for industry players Global demographic changes and urbanization • The upper middle class population drives the demand for products that are sustainable and environmentally friendly • The high growth of the young population needs to be accompanied by improvements in the quality of education and the availability of jobs. Highly sophisticated technology The adoption of smart technology in the processing industry will continue to increase, thus requiring HR readiness. Indonesia's exports are still dominated by 'traditional trade', even though participation in GVC has been proven to increase the productivity of Indonesian companies (learning effect). Rapid technology life cycle • Industrial technology evolves towards industry 5.0, 6.0, etc. (higher speed, smaller size) • In the 2021 Global Innovation Index (GII), Indonesia is ranked 87th out of 132 countries. Source: various resources Environment and Sustainability Industry players must adapt to the 'New Protectionism Regime' towards greener products, technologies and processes. Participation in GVC Managing more complex risks and challenges… 5
  6. 6 Further Global Risks: Industry need to adjust with the new ‘protectionism regime’ Source: Scope of products in CBAM: Cement Iron/Steel Alumunium Electricty Fertiliser CABM will be put into place in October 2023 (transitional period until 2025), with a focus on imported goods of ‘carbon-intensive’ industries. Key takeaways: CBAM will be implemented in phases. This policy’s objective is to prevent the risk of carbon leakage by ensuring equivalent carbon pricing for domestic and imported products in certain sectors) Opportunity: (i) encourage the use of GHG emission-efficient technologies by producers from third countries, and (ii) open new market for greener products and cleaner technologies for industries Impact for developing countries: 1. CBAM will increases costs (tariff equivalent for ASEAN are 1,6% to 17,1%, differ depending on the products) and decrease export (decline in ASEAN between -6,1% to -56,6% from baseline in 2030); 2. decrease GDP (decline in ASEAN between - 0,013% to -0,201% from baseline in 2030); and (iii) reduce welfare Source:; Xiaobei (2022), TCD IMF
  7. 7 How affordable is the transition? 7 Through international trade, green production processes diffuse to developing countries to meet developed countries' demand for green products. But the shift process cannot be instant (supply side issue). Key Points: Developing countries that can quickly switch to environmentally friendly processes will win the green market. Consumers are more concerned about production use technology with less environmental pressure Concern for the environment as an instrument of non-tariff barriers More environmentally friendly technologies and processes DEVELOPED COUNTRIES ✔ Producers in developing countries are facing increasing demands for exports of green products; ✔ However, supply chains cannot change green production processes instantly because technological changes may be too costly and capacity building takes a long time to adjust. ✔ Low awareness and responsibility towards the environment ✔ It is difficult to introduce green markets because the government does not have enough budget or capacity to introduce green public procurement ✔ The majority of consumers do not buy products labeled as environmentally friendly DEVELOPING COUNTRIES THE GAP Source: Direktorat Perdagangan, Investasi,dan Kerja Sama Ekonomi Internasional, Bappenas
  8. Strategy for Industrial Sector
  9. 9 Synergising economic growth and environment ▪ Many studies show that economic growth and the environment (including climate change), have a positive correlation, as shown by the 2018 Nobel Laureate in Economics study: William Nordhaus: “The DICE model displays the linkages between CO2 concentrations, climate, adverse economic impacts of climate change, and examples of economic models that produce CO2. The model is used to determine the "carbon social cost", which is the future losses incurred due to increased CO2 emissions” Paul Romer: “Endogenous development theory is strongly influenced by innovation and technology. Technological change itself will be determined by economic decision-making and market pressures. This theory shows how policies and regulations can generate new economic ideas and innovations. This has led to studies on how investment in research and development can lead to new technologies that are more environmentally friendly” Therefore, there is a need for an economic concept that is not linear but also pays attention to the environment, namely a circular economy (CE) that is able to overcome economic and environmental problems
  10. 10 Green industry: the development of a sustainable manufacturing industry is also expected to encourage changes in consumer trends Environment Economy Social Sustainable Manufacturing Development • Facilitation of industrial agglomeration • Fostering the formation of industrial clusters • Encouraging and facilitating transactions between domestic companies • Machinery revitalization to improve product quality and reduce waste • Encouraging best practices in managing the manufacturing sector • Clean production • Waste handling • Increasing the skills and competence of the workforce through up-skilling and re- skilling • Facilitation of training and benchmarking Energy saving and low emission technology Renewable energy Energy, water and raw material efficiency Waste prevention and Control 1. 2. 3. 4. Source: Ministry of Industry (2021, 2022)
  11. 11 To support the implementation of green industry in Indonesia, a number of enabling conditions must be met Challenges Enabling Conditions Education and Law Enforcement Commitment of Stakeholders Infrastructure (Including Technology) and Innovative Financing Schemes The interest rate for this project is still high due to the lack of green project portfolios. Achieving Supply-Demand Balance Market acceptance of quantity and quality is crucial Improve Understanding Knowing the implications and scope (what to do first, who’s doing what) Fiscal Incentives (stimulus for the recycling industry, raw materials from waste, green technology adoption, etc). Reduce import for raw materials Reducing imports of raw materials will indirectly increase the potential for reuse domestic waste to become industrial raw materials Extended Producer Responsibility (EPR) Policy with a mandatory reporting scheme Recycling product standardization through policies that encourage the use of recycled materials. Product standardization in order to extend life-product.
  12. Promoting green production through Green Industry Standard Assessment of the Green Industry Standard (SIH) by the Ministry of Industry Implementation of Green Industry in 2019 had saved water up to IDR 20 trillion Source: Ministry of Industry Production Process (Weight: 70%) Waste/Emission Management (Weight: 20%) Company Management (Weight: 10%) Implementation of the Green Industry in 2022 had saved energy up to IDR 9.8 trillion Based on Law Number 03 of 2014 about Industry 1,187 Companies have received the green industry award from 2010 – 2022 12
  13. Other standards relevant to green industry promotion 13 The criteria for evaluating company performance ratings in environmental management are regulated in the Regulation of the Minister of Environment and Forestry Number 1 of 2021 PROPER Mechanism In total, in 2020, there will be savings of IDR 107 trillion from efforts to save water resources, energy, waste and hazardous waste and reduce the burden of water pollution and emissions.
  14. … and expanding the implementation of circular economy Paradigm shifting From LINEAR Extraction & Production Consumption Collection Landfill Linear supply chains cost more, are prone to volatility and are harmful to our environment Circular supply chains reduce costs, provide better price stability and protect the environment. The Circular Economy is broader than waste management and recycling Collection Recycle Processing Design/ Manufacture Consumer Goods Towards CIRCULAR Sources: Bappenas, 2020 14 • The practices of Circular Economy are restorative, regenerative by designs, and effectively using materials and energy to retain their value. • Most of the circular economy initiatives focused on the environmental perspectives with limited role of trade, technological innovation, and financial market– which are essentials for accelerating the circular transformation. • There is a need to design an inclusive approach policy that facilitates active participation from all relevant stakeholders, including broader public. Note
  15. Impact of circular economy on Indonesia’s economic growth A circular economy could generate an additional economy-wide GDP impact of IDR 593-638 trillion in 2030. The economic impact from circular economy could boost overall GDP growth by 2.3 – 2.5 percent in 2030 Source: BPS; Bank Indonesia; Ministry of Environment and Forestry; ADB; WRI; ITU; expert interviews Based on system dynamics analysis, the additional GDP impact on the 5 focus sectors could be up to IDR 312 trillion by 2030 If Indonesia started implementing circular activities from 2021 onward and achieved the full economic potential of a circular economy, the circular economy could increase Indonesia’s GDP growth rate by 0.6 percent in 2030 312 21 Scenario 1: Consumer approach Scenario 2: Producer approach Scenario 3: Consumer and producer approach GDP Impact by 2030 IDR trillion Note: The economic impact in the system dynamics analysis only consider the direct impact on the five focus sectors, not the broader impacts on other sectors from implementing circular economy opportunities in those sectors -1.563 4,9 4,9 4,9 4,9 4,9 4,9 0,1 0,2 0,2 0,3 0,5 0,6 2025 2026 2027 2028 2029 2030 GDP growth rate in Indonesia (%) Business-as-usual GDP growth Contribution of circular economy to GDP growth 5,0 5,1 5,1 5,2 5,4 5,5 Strategies to boost Indonesia’s GDP: ▪ Improve productivity, particularly of investments by reducing waste and increasing the lifespan of assets ▪ Circular economy can create new business models and investment opportunities to drive growth ▪ Circular economy can improve the resilience of the economy to ecosystem services shocks 593 638 Input-Output Table Modelling Incremental Capital - Output Ratio (ICOR) Modelling GDP Impact in 2030 IDR Trillion +8% Equivalent to 2.3 – 2.5% of Indonesia’s projected GDP in 2030 15
  16. Eco Industrial Park Eco-industrial park development in Indonesia Green Industry Standard ▪ Integrating Social, Economy, and Environmental aspects ▪ Energy Efficiency Public Disclosure Program for Environmental Compliance (PROPER) ▪ Water resource management ▪ Material Flow Analysis and Waste Management Source : International Framework for EcoIndustrial Parks UNIDO, 2017 Social Challenges in Eco-Industrial Park Implementation ▪ Social conflicts with local residents ▪ Skill enhancement, environmental quality improvement, CSR, community capacity building efforts Economy ▪ Business collaboration between industrial park stakeholders Management ▪ Commitment of manager and tenant (in delivering estate regulation, environmental documents) Environment ▪ Water Resources, Energy Resources, Solid Waste Management, Hazardous Waste Management TanahKuningIndustrialParkDevelopment Plan inIndonesia EmbracetheGreenConcept The development of KI Tanah Kuning is designed to use green infrastructure ▪ Kayan River hydropower (9000 MW) ▪ Sanitation natural purification with artificial wetlands ▪ Water Conversion and Recycling System ▪ Controlled landfill If Tanah Kuning begins its operational, it must comply with the control mechanism determined by the government, including: Government Regulation Number 142 of 2015 → Obligation to have AMDAL Government Regulation Number 22 of 2021 → Implementation of Environmental Protection and Management Source: Ministry of Industry and Ministry of Environment and Forestry, 2020 16
  17. 17 Industry 4.0 and digitalization: application of data and digital technology become a solution to reduce global emissions by up to 20% Adoption of digital technology can help accelerate the transformation towards net- zero-emissions An analysis conducted by Accenture and the World Economic Forum (WEF) shows that the application of digital technology can result in up to a 20% reduction in CO2 emissions, from the 2050 target needed to achieve the net-zero emission target set by the International Energy Agency, if implemented in the energy, materials, and mobility industries, which contributed to around 34%, 21% and 19% of total emission in 2020. These industries can reduce emissions by 4-10% by rapidly adopting digital technologies. * These three sectors are also the sectors with the highest potential to reduce emissions Sumber: World Economic Forum
  18. 18 Three steps to increase digital adoption while reducing global emissions Countries can realize their net-zero carbon ambitions more quickly by adopting digitalization to decarbonize industries. ● There must be open data that is shared, autonomous, connected, and enables transparency that underpins policies and services. ● Investment is required in a modern data architecture that facilitates data availability, standards and quality, and can be shared across the value chain and with public, private and community partners. ● Consider the option of having one well-managed data-sharing platform that enables efficiencies in the development of applications and business processes that consume additional energy. Preparing for Data Disclosure ● Prioritize digital inclusion and skills development. ● Ensure that the current and future workforce has access to the new technologies and skills needed to leverage digital technologies and transform high-emission business processes. ● Increase government, business and community collaboration to increase inclusive access to digital technology and sustainable practices. Digital Technology Inclusivity Digital Partnership ● Encouraging collaboration for digital transformation across priority areas. ● Partnerships between private companies, start-ups, technology providers, investors and public institutions to increase investment, reduce technology risks and accelerate knowledge sharing.
  19. 19 Fastest Growing Green Skills Globally, by Category Source: Linkedin (2021) • Various technical skills are required to support a green transition. • The most important skill changes occur at the medium to high skill level. • In the early stages, the company usually reskills and upskills its staff as needed. Over time, the government participated through educational institutions. • Rapid developments have occurred in the renewable energy sector and waste management. • Regulations for building insulation and recycling are key to the development of skills in construction and manufacturing. Source: ILO (2019) The transition towards a green industry also needs uplift through skills competence standardization
  20. Green investments can support the development of green industries and jobs Green Investment is an investment activity that is focused on companies that are committed to: 59% 41% FDI DDI Total Investasi USD 21,18 Miliar 2014 2015 2016 2017 2018 ↑ 54.5% ↓ -24.8% ↑ 5.6% ↑ 13.1% 3,251 5,177 3,892 4,109 4,648 9.81% Kontribusi terhadap total realisasi investasi pada tahun 2014-2018 Miliar USD 2014 2015 2016 2017 2018 Total Investment USD 21.18 Billion contribution to total investment realization in 2014-2018 Billion USD Regulations related to Green Investment include: 1. preserving the natural environment, 2. producing alternative renewable energy sources, 3. implementing clean air and clean water projects, as well as 4. investment activities that are environmentally friendly. 20 1. Law Number 25 of 2007 concerning investment ▪ For the government: provide facilities to investors who invest while preserving the environment ▪ For investors: implementing corporate social responsibility, and gradually allocating budget for site restoration (for investors in non-renewable natural resources business). 2. Presidential Decree Number 16 of 2012 Concerning the General Investment Plan (RUPM) mandates Green Environment-Based Investment
  21. Sustainable finance: potential, but not yet benefited the manufacturing sector in green transition 21 Debt based Other bonds Sharia Financing Trust Funds Capital Markets Impact Investments Philanthropy Development Partners Blended Finance Debt for Nature Swaps Insurance Ecological Fiscal Transfers E.g. Zakat Bonds, Green Sukuk E.g. Impact/ Outcome-based Bonds E.g. Government, NGO E.g. Private sectors debt and equity E.g. Both equity and debt E.g. CSR, Direct Grants E.g. ADB, UNDP E.g. Coral Reef Insurance, Parametric Insurance E.g. Terrestrial examples E.g. Combination of potential instruments E.g. SDG Bonds, Green Bonds, SOE, Banking Sectors, Fin- tech, NGO/Donor-supported
  22. 22 Blended finance in development financing strategy Coordination: • Ministry of National Development Planning • Ministry of Finance • Financial department at ministry • Development partner, NGO, philanthropy organization Governance: • Inter-ministerial coordination • Coordination related to SDGs goals that have been established Existing monitoring frameworks: • National Mid-term Development Plan (RPJMN) • SDG dashboard & e-monev • SDGs VNR and annual report • Annual plans target and indicators • Green, blue, and PPP financing guidelines Source: OECD Current study: • Total official support for SD (TOSSD) • SDG costing • Development Finance Assessment (DFA) snapshot • Public financing and financial planning • Article IV consultation Existing elements of financing strategy: • National Mid-term Development Plan (RPJMN) financing strategy • SDG Roadmap financing strategy Existing financing policies: • MTEF • State budget • Income strategy • Monetary policy easing & inflation targeting • Sustainable Finance Roadmap (phase II) • PPP policy • Business regulation • Sustainable investment promotion • Equity fundraising
  23. • Harmonization of regulations to support the application of green industries. • Encouraging the implementation of green investment and green economy thereby encouraging the provision of fiscal incentives. • Collaborating with the central and regional Ministries/Agencies to promote sustainable development. Government Society • Applying up to green industry certification. • Conducting R&D to improve the efficiency of production processes, raw materials, and energy. • Prepare for the development of an integrated and collaborative Green Industrial Estate. Practitioners and Academics • Increasing environmentally friendly technological innovations: electric vehicles, renewable energy (solar panels). • Production process innovation for energy and resource efficiency. • Technology and digital integration through the development of data science, machine learning, simulation, engineering systems and robotics. • Increase awareness of the importance of using environmentally friendly products and products produced from environmentally friendly processes. • Participate in protecting the surrounding environment by supporting industry and green industrial areas. Industry Indonesia's green industry transition requires multi-stakeholders collaboration and support 23
  24. Thank You