Indonesia to Ditch Coal Taxonomy?

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by KnowESG
KnowESG_Indonesia to Ditch Coal Taxonomy
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The decision to label coal-fired power plants as green would be a major setback for Indonesia's climate goals and would send a signal to investors that the country is not serious about transitioning to a clean energy future.

In the past week, Indonesian financial regulators signalled their contemplation of incorporating new coal-fired power plants into the nation's green taxonomy.

This move appears to extend beyond their initial plan, which was to categorise targeted coal power plants set for early retirement under the green label. This shift not only represents a departure from their earlier stance, prominently displayed last year, but if put into practice, it could also relegate Indonesia to a less favourable position among global green and sustainable finance frameworks.

The green taxonomy introduced by Indonesia in January 2022 garnered well-deserved praise from the Institute for Energy Economics and Financial Analysis. It was applauded for its strict designation of the green label for projects exclusively linked to renewable energy sources.

The taxonomy employed a traffic light system to classify activities through a sustainability lens: green for those that "protect or enhance the environment," yellow for activities "not significantly detrimental to the environment," and red for those "harmful to the environment."

It is deeply concerning that the prospect of labelling new coal-powered generation as environmentally beneficial is now being entertained. This proposition squarely contradicts established scientific evidence.

What adds to the disquiet is the rationale behind categorising certain coal-fired power plants as green, particularly those intended "for the sake of energy transition." Such a move sends a troubling signal to global investors and governments committed to sustainability, which rely on the Indonesian government for clear policy direction and its dedication to transitioning toward clean energy.

A Rising Risk of Greenwashing

On August 29, news emerged that Indonesia's Financial Services Authority (OJK) intends to revisit the national green taxonomy to include newly constructed coal-powered generation as a green activity, as long as it serves the purpose of energy transition, such as supplying power to a smelter project.

Previously, OJK's taxonomy placed coal-fired power in the yellow or red categories.

Indonesia is now one of at least 10 countries worldwide with green or sustainable finance taxonomies, none of which recognise coal power as environmentally friendly. Even nations like China and Russia, where coal remains a significant energy source with new coal-fired power plants in development, have refrained from classifying coal and gas-powered generation as green activities.

China's initial green taxonomy in 2015 drew criticism for categorising "clean coal" as a green project eligible for green finance. However, recognising the importance of a genuinely green taxonomy, China removed fossil fuel-related projects in mid-2021. Its current green taxonomy excludes gas, liquefied natural gas, and coal-fired power activities.

Before last week's announcement, Indonesia was already contemplating labelling coal power plants earmarked for early retirement as green to align with version 2.0 of the Association of Southeast Asian Nations Taxonomy for Sustainable Finance. If the country proceeds with the latest proposal, justifying new plants' eligibility for green finance through the energy transition could make it the first to classify coal as green. This not only jeopardises national credibility but also flirts with the notion of state-sanctioned greenwashing.

A Blow to Foreign Investor Confidence

Taxonomies have been in the spotlight, often for contentious reasons.

A significant controversy unfolded last year when the European Union categorised gas power plants as sustainable. Gas was promoted as a cleaner alternative to coal and a necessary interim fuel while the EU expanded its renewable energy capacity.

International investors reacted swiftly and critically. Financial institutions managing over €50 trillion in assets criticised the European Commission for diluting the EU taxonomy to accommodate the interests of certain member states and the gas industry.

OJK needs to recognise that labelling coal-fired power plants as "green" isn't a prerequisite for obtaining financing. Withholding the green label doesn't impede their access to traditional capital funding. However, designating these plants as sustainable sends misleading signals to investors seeking assurance about the alignment of their investments, necessitating additional due diligence for each opportunity, which escalates transaction costs. This puts Indonesia at risk of losing high-quality foreign direct investment and undermines the effectiveness of its taxonomy.

Moreover, the plan by the authority places the reputations of domestic financial entities in a vulnerable position if they support investments in coal-fired power plants solely based on the green label in the taxonomy. Their commitment to decarbonisation becomes questionable, potentially diminishing their global relevance.

Muddling the Waters in the Name of Energy Transition Is a Misstep

OJK seems to believe that it's acceptable to label projects as green if they are deemed crucial to the economy. However, the authority appears to be conflating the need for transition with the necessity of providing investors with the certainty and clarity that its taxonomy is grounded in scientific principles.

International investors view the labelling of fossil fuel projects as "green" investments as unwarranted, even when these projects play a role during the transition. Indonesia can surely manage its energy transition without jeopardising the credibility of its capital market.

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Source: Institute for Energy Economics and Financial Analysis

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