Report No. 50762-ID
Executive Summary
1. The objective of this Country Environmental Analysis (CEA) is to highlight the underlying challenges and opportunities for Indonesia's environment and management of its natural resources in order to guide World Bank support to Indonesian institutions for more sustainable development. Thus, it is important to clarify at the outset that the CEA is not a "State of the Environment" Report – this type of environmental stocktaking is a regular publication of the Ministry of Environment and can be found at www.menlh. go.id. Rather, the CEA sets the broader context (Chapter 1) and economic costs of environmental degradation (Chapter 2) in order to identify underlying challenges and opportunities. These are divided into two sets of priorities – those related to environmental governance and those that are more sectoral in nature. Environmental governance encompasses the decentralized framework for environmental management (Chapter 3), enabling policies for greater environment and resource sustainability (Chapter 4) and building environmental constituencies (Chapter 5). The sectoral challenges that are most important for Indonesian development are vulnerability to climate change (Chapter 6), land use and climate change (Chapter 7) and energy and climate change (Chapter 8). The report concludes with options for a more sustainable Indonesia, including recommendations for how the World Bank can more effectively invest in light of the CEA findings (Chapter 9).
2. Why bother about environmental sustainability? "The Economics of Environmental Degradation" (Chapter 2) indicates that natural capital constitutes about one quarter of Indonesia's total wealth but this capital is being rapidly depleted while not being off set by commensurate investments in human or produced capital. The economic consequences of climate change represent the highest potential cost to Indonesia's economy in the long term, amounting to annual losses of between 2.5 and 7.0 percent of GDP by the end of the century. Inadequate water and sanitation constitute the largest short-term cost to the Indonesian economy, estimated at more than $6 billion in 2005 or more than 2 percent of GDP. The health impacts of outdoor and indoor air pollution have been estimated at $4.6 billion per year or about 1.6 percent of GNI. Significant economic losses are also caused by other types of environmental degradation, especially deforestation, soil depletion, and coastal/marine degradation. In total, environmental degradation costs are likely to grow in the future and are currently on par with the average annual growth rate. This is even more relevant when one considers that environmental costs disproportionately impact the poor. In short, management of the environment matters to Indonesia's economic and social development.
Environmental Institutions, Policies and Governance Matter
3. A challenging institutional setting of decentralization (Chapter 3). Indonesian laws, policies and institutions have evolved to embrace democracy and decentralization. Similarly, there is an impressive set of laws, policies, programs, and national as well as local institutions that are responsible for environmental and natural resource management. Over the past decade, many aspects of environmental management and natural resource management have been decentralized to the local level. Greater local control has had positive aspects through reputational programs, greater political will, interagency collaboration, community empowerment, and integration of environment in spatial planning. At the same time, decentralization has resulted in obstacles to good environmental management, including: inadequate standards and enforcement; problems with incentives, empowerment and insufficient capacity; and specificissues with forestry, fisheries and environmental impact assessment. Options for improvement exist, including geography-based environmental management, improved governance, financial management and incentives, and clarification of central-local roles on environmental issues.
4. Enabling policies for sustainable development (Chapter 4). Indonesia's spending for environmental purposes has been relatively low for most of the decade, environmental revenue collection has been low and natural resources have been underpriced. Fuel and electricity subsidies enhance overconsumption, burden the budget and benefit higher income groups, while making it difficult for renewables to compete. Legal and financial incentive structures have not been effective in curbing illegal logging and slowing down deforestation as well as degradation. Policy distortions in fishing and mining have contributed to unsustainable harvesting patterns and illegal mining activities. In all sectors, policy distortions arise from conflicting sector-based regulations and national laws, especially those involving decentralization. These policy distortions could be overcome through an environmental fiscal policy reform that uses taxation and pricing instruments to raise revenues but also to provide incentives for more sustainable behavior.
5. Building constituency, awareness and critical partnerships (Chapter 5). The environment is on the radar screen of the Indonesian population, especially issues concerning water (pollution, floods, droughts), cities (cleanliness, solid waste, air quality) and forests (degradation, illegal logging, fires). The GOI has policies, investments and programs for these public priorities, but their persistence as public concerns is one indicator that they have not been adequately addressed. The GOI is also pursuing areas that are not yet public priorities, e.g. climate change, coastal and marine resources, biodiversity, clean energy, and hazardous wastes, indicating a low level of public awareness. Partnerships are needed with four key actors who can bridge environmental communications between the government and the public: the mass media, civil society organizations, the legislature, and religious organizations. Promoting public participation and increasing awareness are essential for any development partnership that seeks to build effective demand for environmental sustainability.
Climate Change is a New National Priority
6. Adaptation is a priority because of Indonesia's vulnerability to climate change (Chapter 6). Specific areas of Indonesia are highly vulnerable to multiple climate change hazards (drought, floods, landslides, sealevel rise). While temperature may only increase modestly, more intense rainfall and sea-level rise will negatively affect food security, water resources, coastal areas, farming and coastal livelihoods, forests, marine biodiversity, and health. People and ecosystems are especially vulnerable to climate risks on Java, Bali, parts of Sumatra, and a large area of Papua. Climate change will have the most impact on the poorest Indonesians who are more likely to be: living in marginal areas that are susceptible to drought, flooding and/or landslides; dependent on limate-sensitive agriculture or fisheries for their livelihoods; and have fewer assets to cope with the impacts of a changing climate. The annual benefit of avoided damage from climate change is likely to exceed the annual cost by 2050 and, by 2100, the benefit could reach 1.6 percent of GDP, compared to the cost at 0.12 percent of GDP. Many adaptation options exist to help reduce Indonesia's vulnerability to climate change which will need to be phased and prioritized according to the magnitude of costs, benefits and risks.
7. Land use and climate change constitute a recognized sectoral challenge (Chapter 7). High rates of deforestation, illegal logging, forest fires, and peatland degradation constitute the single largest source of Indonesia's greenhouse gas emissions and have made it one of the world's principal emitters. 10 provinces account for 78 percent of dry forest loss and 96 percent of swamp forest loss as well as related emissions, with just Riau, Central Kalimantan and South Sumatra accounting for over half of all losses and emissions. Although there is uncertainty about the magnitude of such emissions, there is consensus that forestry and land use are key priorities for mitigation. The policy and institutional issues, driving forces, impacts, and development costs of forest and land degradation have been well-known for many years in Indonesia. "No regrets" options exist that should be pursued regardless of climate benefits, i.e. improved forest law enforcement, management and governance; realigned incentives for timber harvesting and processing firms to improve sustainability; restructuring and revitalization of forest sector industries, forest and land fire control, greater equity and transparency in forest/land use decisions, and independent monitoring of legal compliance. Forest climate finance such as REDD can provide an important incentive for implantation of these "no regrets" options.
8. Energy and climate change is an emerging challenge (Chapter 8). In the future, fossil fuel emissions will be a greater concern than forest and land use emissions. With current energy subsidies, it will be more difficult to promote efficiency, cleaner technology or innovation for environmental and climate benefits. Indonesia uses fuel and electricity inefficiently and in excess. On the other hand, the country has the world's largest potential for developing geothermal power, sustainable biofuels and other renewables (hydropower, wind, solar, and biomass). While fossil fuel GHG emissions per capita and emissions intensity are low, they are increasing rapidly. Industry is currently the largest source of carbon emissions, the transport sector is the largest user of liquid fuels and petroleum is currently the main contributor to CO2 emissions. Even assuming a decrease in energy intensity, emissions from energy consumption will triple by 2030 from 2005 levels. Mitigating these emissions will require more realistic energy pricing, a more enabling environment to develop renewable energy resources, and greater efficiency in the industrial, power, manufacturing and transport sectors.
9. Options for investing in a more sustainable Indonesia (Chapter 9). A more sustainable Indonesia is one where:
- The costs of environmental degradation and climate change are lowered so that less wealth is diverted from growth
- Good environmental management contributes to poverty alleviation by reducing impacts on the poor and better sharing of benefits
- Renewable resources are used sustainably while nonrenewable ones are wisely developed for investment in human and physical capital
- Citizens are aware of and participating in environmental issues directly or through their representatives and other organizations.
Options for moving toward this vision exist in both the areas of environmental governance and climate change. These are summarized in the table below and key actors are identified to move the agenda forward. The World Bank has a long history of partnership with Indonesia on environmental and natural resource management issues. The ongoing engagement has centered on forestry management and biodiversity conservation as well as coastal and marine resources. Given the findings of the CEA, there are opportunities for increased partnerships in the areas of environmental governance and climate change that are presented in the report's annex.
