Indonesia’s new definition of climate-friendly investment risks greenwashing coal power

Authors: Agung Satyadini and Khresna Satriyo, ANU

Indonesia’s prudential regulator, the Financial Services Authority (OJK), is currently engaged in discussions regarding the potential classification of coal-fired power plants as ‘green’ under a planned update to its classification scheme for green investments, the Indonesian Green Taxonomy (THI). This green labelling of fossil fuel related projects has stirred controversy as it contradicts scientific evidence and indicates a significant shift in Indonesia’s Sustainable Finance Roadmap Phase II.

The OJK is debating whether coal-fired power plants that supply energy to eco-friendly sectors, like electric vehicles (EV), can earn a green classification. This controversial proposition underscores the need to sync environmental policies with social progress and economic growth.

At the heart of the debate over the classification is Presidential Regulation 112/2022, which aims to speed up the use of renewable energy for electricity. This regulation potentially spares coal-fired power plants from early retirement based on specific conditions, a move heavily criticised by experts who believe it conflicts with Indonesia’s carbon emissions reduction commitments.

The ongoing talks at the OJK about this classification has left both policymakers and the public worried about how it might affect sustainability goals. The decision will set an important precedent for Indonesia’s approach to applying green taxonomies.

Some argue that the green label for coal-fired power plants carries substantial advantages for stakeholders. Investors in coal could extend the lifespan of existing mining and processing facilities, while power plant operators could gain access to sustainable financing for emission-reduction technologies and secure an ongoing revenue flow. It could also encourage other investors and financial institutions to continue investing in these projects, despite ethical and reputational concerns. Governments and regulatory bodies may also benefit in terms of increased tax revenue and enhanced energy security.

Energy-intensive industries, like manufacturing and processing facilities for minerals, could also benefit from coal-fired power plants retaining their green status, as this would stabilise energy costs and bolster their competitiveness. Approximately 58 per cent (13 gigawatts) of Indonesia’s power plant capacity is intended to supply power to mineral processing facilities. This includes minerals — cobalt and nickel — that are essential to the EV industry, in which Indonesia aspires to be a key player .

For other investors, the classification has sparked concerns about ‘greenwashing’ in the Indonesian banking sector. Financial institutions might inadvertently mislead investors and the public by portraying an image of environmental responsibility while backing high-carbon activities.

When financial institutions label financing for these projects as environmentally responsible, it blurs the line between responsible and unsustainable investments, which could mislead investors striving to make ethical and eco-conscious choices. Such labelling could also deter banks from investing in renewable energy initiatives, perpetuating the limited portion of renewables in the overall energy mix and affecting the larger energy landscape and sustainability efforts.

This scheme could also put the reputation of domestic financial institutions at risk if they indiscriminately endorse coal power plant investments solely on the grounds of a green label according to the taxonomy.

The proposed green labelling of coal-fired power plants could also jeopardise Indonesia’s ongoing energy transition. At the forefront of these concerns is the environment. Labelling coal-fired power plants as ‘green’ contradicts the mission to reduce carbon emissions and transition to cleaner energy sources. This classification risks deterring investments in renewable energy technologies, diverting crucial funds from sustainable solutions and hindering progress towards a more diverse and eco-conscious energy landscape.

Globally, this could also stain Indonesia’s reputation as a responsible player in worldwide climate initiatives, jeopardising its standing in international forums. Bilateral partners may begin to doubt Indonesia’s commitment to sustainability pledges, which could undermine its progress towards the climate objectives outlined in global agreements.

In a world where global investments progressively prioritise sustainability and environmental responsibility, classifying coal-fired power plants as green sends a conflicting message that could drive down foreign capital inflows as investors opt for unambiguously sustainable opportunities elsewhere.

Some contend that if Indonesia proceeds with this plan to validate coal plants for green finance, it will pioneer coal’s inclusion in the green category. In reality, it would harm national credibility and be dangerously close to state-sanctioned greenwashing.

If the OJK adopts this controversial classification, the government must take steps to counter any adverse impacts. This includes redesigning criteria — backed by rigorous science-based assessments — to better align with national sustainability goals. Realistic emissions calculations and a holistic approach spanning upstream and downstream industries is imperative. Any deviations from science-based criteria have the potential to compromise the credibility of Indonesia’s green taxonomy.

Transparency, global sustainability alignment and incentivising renewable energy investments are non-negotiable. Active engagement with stakeholders, including environmental groups and industry experts, is vital. These measures collectively strive to establish a classification system aligned with energy transition objectives, reducing the risk of greenwashing and nurturing a genuinely sustainable energy landscape.

As global trends lean toward restricting financing for coal-related industries, the OJK must ensure a robust roadmap for financial institutions regarding coal-fired power plant financing that aligns with the goal of achieving net-zero emissions by 2060 or sooner.

Agung Satyadini and Khresna Satriyo are officials within the Ministry of Finance in Indonesia and PhD candidates at the Crawford School of Public Policy, ANU.

The opinions expressed in this article are their own and do not represent the official stance of their respective institutions.

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