Green Initiatives: Indonesian Government Support and SME Opportunities
Bulan Prabawani, Denny Nugroho Sugianto, SDGs Center Universitas Diponegoro, Jl. Prof. Soedarto, SH Tembalang, Semarang
The relationship between population and emissions is positive, meaning that as population increases, so do emissions. Additionally, research indicates that higher levels of prosperity in a country are associated with higher per capita emissions. It is worth noting that environmental damage has been linked to mental health problems in Gen Z. The negative impacts of pollution, landfills, rising temperatures, and climate change are not limited to physical health, but also have an impact on mental wellbeing. There is a paradox between welfare and health, particularly mental health, and environmental damage. This presents a global challenge that requires the involvement of multiple actors.
Stakeholder demand for a Green Industry is increasing due to high emissions per capita in Indonesia, which are among the highest in the world and the G20 countries. This demand comes from various sources, including the media, journalists, environmental activists, the general public, and consumers. Industrialization, particularly in manufacturing, has not yet reached its peak. By 2023, the industrial sector is projected to produce 238.1 million tons of CO2e in greenhouse gas (GHG) emissions, continuing the upward trend seen in Indonesia. This sector alone is responsible for 64% of total emissions, that reach 491,147 tons per year in 2023.
Switching to alternative energy and implementing recycling programs are the best ways to achieve zero emissions. Renewable energy has been proven to reduce total emissions in countries such as China, Malaysia, Alzajair, and Thailand, as well as in the world’s 50 largest economies. However, investment and development of alternative energy, particularly renewable energy, is still low in Indonesia. Therefore, implementing carbon tax and carbon trading are potential solutions that do not increase the burden on the government. Carbon tax has been implemented in 39 countries, covering 2,725.97 mtCO2e, while carbon trading has been implemented in 12 countries, covering 6,223.63 mtCO2e.
Carbon tax and trading
The implementation of the carbon tax, which was originally scheduled to begin on April 1, 2022 in accordance with Law Number 7 of 2021 concerning Tax Harmonization, has been postponed until 2025. The tariff set for the tax is IDR 30,000/tCO2e (USD 2.02), which is among the lowest in the world. This makes it less realistic to achieve the zero-emission target by 2060. For comparison, Uruguay has set a tariff of USD 155.87/tCO2e, and Liechtenstein has set USD 130.81/tCO2e, which are the highest in the world. The government’s hesitation to implement the carbon tax and the low tariff rates suggest uncertainty about its potential impact on economic stability. The carbon tax will increase production costs, leading to higher prices for goods and services and potentially contributing to inflation.
Carbon trading, as an alternative to carbon tax, has proven to be more efficient. The experimental ETS in the energy sector in Indonesia reached a price of IDR 48,000/tCO2 (USD 3.23), higher than the established carbon tax. The current carbon prices in the European Union are €56.31 (USD 61.12), UK £35.60 (USD 45.06), Australia AUD 36.75 (USD 24.02), New Zealand NZD 66.25 (USD 40.45), South Korea USD 6.86, and China USD 11.21 per ton. The market mechanisms determine the high and low carbon prices. This means that if the demand for carbon, with the stipulation of carbon offsets, is greater than the supply, it will lead to high carbon prices. The OJK (Indonesian Financial Service Authority) has issued Regulation Number 14 of 2023 concerning Carbon Trading through the Carbon Exchange. This regulation is expected to be followed by market players from various industries, also small and medium-sized enterprises (SMEs)
The role of SMEs (BUMDes)
It is important to note that SMEs are not immune to economic crises, and it is crucial to support them during these difficult times. During the Covid-19 pandemic, SMEs faced significant challenges, including a decline in income and demand experienced by 88% of SMEs, and limited supply of raw materials, affecting 48% of SMEs. Despite these challenges, Indonesian SMEs have shown resilience, with 84.8% currently back in operation. The number of small and medium-sized enterprises (SMEs) in Indonesia continues to increase, even after the Covid-19 pandemic. In 2023, the number is expected to exceed 64 million. SMEs make up 98.68% of businesses in Indonesia and employ 89% of the workforce.
BUMDes (Indonesian Village Business Entities) are small businesses managed by the Village Government with the aim of improving community welfare. They are regulated by Law number 6 of 2014 concerning Villages in article 87. According to the Ministry of Villages, Development of Disadvantaged Regions and Transmigration, there are 60,417 BUMDes by 2023, with 45,233 currently active. These BUMDes provide employment opportunities for 20,369,834 people, and 16,558 have legal entities. The BUMDes business form is designed to meet the needs of village communities and utilize their potential and superior commodities. This includes businesses such as supermarkets for daily needs, village drinking water businesses, village electricity businesses, food barns, and rental businesses for transportation equipment, party equipment, and meeting halls. Tourism Villages have great potential, including Mangrove Management as a tourist destination. BUMDes are more likely to manage mangrove forests as they involve large areas that are evenly distributed throughout Indonesia’s territorial waters. Additionally, coastal areas are generally public spaces.
The Mangrove Tourism Village has the potential to be developed into a carbon capture and storage (CCS) based business, making it a promising green initiative. Mangrove forests are essential for coastal communities facing challenges such as coastal erosion and land subsidence. Mangroves serve several functions, including preventing sea water intrusion onto land, maintaining the stability of coastlines, preventing erosion, and reducing the impact of tsunamis. Additionally, mangrove forests are crucial ecosystems for various species of coastal animals and plants, such as fish, crabs, birds, and Moluccas. However, coastal communities affected by abrasion are generally considered vulnerable groups. Despite Indonesia’s abundant maritime resources, the welfare of those living on the shores of the sea has not been adequately supported. Coastal villages have unfortunately become pockets of poverty in Indonesia. Out of the 212 districts/cities in extreme poverty in Indonesia, 68.34% are people living in coastal areas. According to the Central Statistics Agency, in 2022, the number of impoverished individuals in Indonesia’s coastal regions will reach 17.74 million, with 3.9 million of them classified as extremely poor.
Meanwhile, the government is working to accelerate economic growth, including making coastal areas a base for growth by increasing investment. Along the north coast route, there are 70 potential industrial areas, including 12 in Banten, 2 in Jakarta, 39 in West Java, 6 in Central Java, and 11 in East Java. The growth of this area does not always correspond with the absorption of labor in the surrounding community. Unfortunately, it can disrupt people’s rights to life, such as reducing fishing areas for fishermen, which also affects the number of catches. Additionally, ecological damage and increasing temperatures are caused by pollution, emissions, and even coastal reclamation.
The combination of poverty, abrasion, Mangrove Tourism Villages, and industry has the potential to create new economic opportunities. Coastal ecosystems, such as mangrove forests, seagrass beds, and brackish swamps, store blue carbon, which can significantly reduce greenhouse gas emissions compared to land forests as CCS. Coastal industries that produce emissions and are obligated to carry out social and environmental responsibility programs have the potential for mutual relations with the surrounding communities. These communities face challenges such as abrasion, poverty, and lack of absorption by the industry. It is important to maintain a balanced approach to address these challenges.
Challenges and prospects
Indonesia’s mangrove area covers 3.36 million hectares, which is 20% of the world’s total mangroves. Additionally, 3 million hectares of seagrass beds can store up to 17% of blue carbon reserves. Indonesia’s mangrove forests are known to store five times more carbon per hectare than highland tropical forests. For instance, in Kaimana, West Papua, carbon stock reaches 700 tCO2e per hectare, equivalent to 2,500 tCO2 per hectare. Assuming that the area and characteristics of mangroves throughout Indonesia are similar to those in Kaimana, they can store 2,352,000,000 tCO2e or the equivalent of 8,631,840,000 tCO2 (8.6 mtCO2). Although this amount is insufficient to cover all the carbon produced by the industry, which reaches 40.97 gigatons, it demonstrates the significant potential of the carbon market with a limited supply.
The potential for a carbon market presents an economic opportunity for BUMDes located in coastal areas. Currently, there are 12,510 villages/sub-districts (14.9% of total villages) situated on the seashore or coastal areas. If each village/district had a BUMDes Mangrove covering an average of 20 hectares, then BUMDes alone would manage a total of 250,200 hectares of Mangroves. This area has the capacity to store 175,140,000 tCO2e, equivalent to 642,763,800 tCO2. This amount is sufficient to store carbon from land conversion activities in Indonesia, which reaches 930 million tCO2 if each village has 30 hectares of mangroves. The CO2 emissions of 642.8 mtCO2, using the assumption that the ETS price in the energy sector at the start of implementation was IDR 48,000, is equivalent to IDR 30.85 trillion or IDR 2.5 billion in income for each BUMDes per year. Assuming the ETS price calculation in China is 11.21 tCO2, the potential revenue for BUMDes could be significant. Additionally, the potential global emission price may reach up to US$90 per tCO2e or US$330 per tCO2.
However, there are several challenges for mangrove forests as CCS in relation to BUMDes. Currently, there are very few villages or subdistricts on the coast that have BUMDes, especially those that are legal entities and specifically those that have mangrove ‘commodities’. Additionally, the socio-economic challenges faced by coastal communities are relatively consistent, namely abrasion and marginalization. Coastal areas are often hubs for industrial and trade development, which can widen socio-economic gaps.
The coastal region has both negative impacts and positive opportunities as an industrial area. Companies are required to develop and distribute Corporate Social Responsibility (CSR) funds as regulated in Government Regulation No. 47 of 2012 concerning Social and Environmental Responsibility (TJSL) and Limited Liability Companies. The aim is to realize harmonious, balanced, and environmentally compatible relationships, values, norms, and culture of local communities. This regulation states that CSR is implemented by the Board of Directors, approved by the Board of Commissioners/GMS, and is part of the Annual Work Plan and Articles of Association. Therefore, CSR is a strategic policy of the company at the top management level.
However, Corporate Social Responsibility (CSR) is evolving, driven by stakeholders, particularly the government, from mere philanthropy to community development. This evolution has led to the emergence of Corporate Social Innovation (CSI) and Corporate Shared Value (CSV). In coastal areas, mangrove forests are being used as BUMDes business ventures that fulfil CSI elements. The company provides training on mangrove planting, management, and development to increase community capacity, empower communities, and provide additional income. Mangrove forests also fulfil CSV elements. In this context, BUMDes that manage mangroves become company partners as CCS service providers.