Green taxonomy revision causes ‘uncertainty’ for energy transition: Critics

Experts say a planned revision of the government’s green taxonomy causes uncertainty for Indonesia’s energy transition as it excludes the “red” category and switches from the traffic light categorization system to a dichotomy of “green” and “transition”. Agung Budiono, executive director of nonprofit organization Indonesia Cerah, explained that the draft for the planned Indonesia Sustainable Taxonomy (TBI) introduced a “non-eligible” label for business activities deemed risky. “But no explanation [about that label] is included in the draft,” he said on Thursday at an event hosted by ResponsiBank Indonesia, contrasting the draft of Indonesia’s revised green taxonomy with Singapore’s Green Taxonomy, which provides detailed criteria to define high-risk business activities under its ineligible label. “We suggest that the Financial Services Authority [OJK] clarify which [activities] are considered non-eligible. If the only categories are “green” and “transition”, that [creates the impression] that the OJK is playing it safe,” Agung added.

A representative of the OJK declined to comment on the matter. The revision is to be carried out in stages, with the OJK beginning in 2023 to develop technical criteria for the energy sector. The agency has begun work on revising the Indonesian Green Taxonomy (THI) Version 1.0 to adapt to changes made to the ASEAN Taxonomy for Sustainable Finance (ATSF) in June, which focuses on encouraging capital flows and investment for the energy transition in Southeast Asia. The draft was released on Nov. 13 and was open for public consultation until Friday of last week.

Linda Rosalina, executive director of climate advocacy group Transformasi Untuk Keadilan Indonesia (TuK), said the missing “red” category made it difficult to flag business activities that had harmful ramifications for the environment. “The revised green taxonomy document should improve [things], not increase uncertainty over Indonesia’s energy transition efforts,” she said on Thursday, adding that the taxonomy should be made mandatory for financial sector players to effectively reduce emissions and encourage more financing for sustainable and renewable energy projects. Linda went on to say that the OJK should regulate financing restrictions based on the labels under the taxonomy, which the agency could start doing by providing incentives and disincentives to enforce the taxonomy. Projects categorized under the “yellow” and “red” labels have received more funding than those under the green label in the first half of 2022, according to a report published by the OJK.  In the report, the OJK identified Rp 1,065 trillion in financing until June 2022. The lion’s share, some Rp 392.87 trillion, went to projects under the “yellow” label. Projects under the “red” and “green” labels got Rp 378.16 trillion and Rp 294.2 trillion in financing, respectively. Of the three categories, the nonperforming loan (NPL) ratio was lowest for the “green” label at 0.81 percent, while it reached 2.56 percent for “red” level projects and 4.37 percent for “yellow” level ones, according to Linda. A lower NPL ratio value indicates lower bank risk. The OJK is the government agency tasked with producing the THI in collaboration with several ministries, including the Environment and Forestry Ministry and the Energy and Mineral Resources Ministry. In the process, it is also receiving input from Bank Indonesia and the Finance Ministry’s Fiscal Policy Agency (BKF). Mining projects in the TBI Muhammad Aulia, a green finance researcher with Action for Ecology and People’s Emancipation (AEER), said he found it problematic that some mining activities were included under the TBI’s “green” and “transition” labels because of their role in building clean energy technologies. “But we have to be clear about when these activities will be considered as having a critical role in the energy transition. The timeframe must be clearly defined,” he said, also on Thursday. Critical minerals such as copper, lithium, nickel, cobalt and rare earth elements, are important components in today’s rapidly growing clean energy technologies, from wind turbines to electric vehicles (EVs). Nevertheless, tackling the environmental and social impacts of mineral development will be crucial, according to the International Energy Agency (IEA), including the emissions linked with mining and processing, risks from inadequate waste and water management and impacts from inadequate worker safety, human rights abuses and corruption. Indonesia, which has the largest nickel reserves in the world, is struggling to improve environmental standards for nickel mining amid concerns over the metal’s production, which is increasingly used in EV batteries. Nickel mining and smelting have become a major part of Indonesia’s economy, with billions of dollars of global investment flowing into the country after the government banned exports of unprocessed ore in 2020.