Decarbonization of the National Industry at All Costs

Industrial decarbonization is a necessity. National industrial decarbonization must be done at all costs. This is for the sake of building resilience of nation's economy in the face of an increasingly challenging world.

In recent weeks, "industrial decarbonization" seems to be a trending topic, with a number of domestic companies having promised to decarbonize the industry.

Industrial decarbonization is a necessity. The newly concluded Group of 20 Summit in Bali should be used to provide the momentum needed to accelerate industrial decarbonization as part of the G20 energy transition agenda to build national economic resilience.

It is not without reason that the sustainable energy transition has been included as one of the three G20 priority issues. In line with the G20’s theme, which is “Recover Together, Recover Stronger”, the energy transition is believed to be a recipe for the world to recover from the economic and social impact of the COVID-19 pandemic.

The pandemic has provided a valuable lesson that survival of life on Earth, including its dependance on economic activity, depends on the health of the Earth.

Post-pandemic, sustainable economy has been increasingly pursued, not only because the awareness about energy transition among industry players, who endured the worst situation during the pandemic, has strengthened, but because consumers have also been demanding environmentally friendly products. Industry is required to achieve net-zero carbon.

The pandemic has provided a valuable lesson that survival of life on Earth, including its dependance on economic activity, depends on the health of the Earth. No business without a healthy Mother Earth.

“There is a will, there is a way”

In the midst of the pressing need for countries to reduce carbon emissions to net zero, various solutions have been offered. In general, there are two options available to achieve net-zero status, which are nature-based solutions and technology-based solutions.

I want to elaborate why the technology-based solution option is the preferred pathway to be taken by the industrial sector. The industrial sector globally is the largest-carbon emitter, including in Indonesia.

The domestic manufacturing and construction sector in 2019 produced emissions at 1137.040 Gg CO2e, an increase of 29.5 percent from the previous year. This parallels the industrial fuel-consumption growth, which increased by 30 percent per year (ESDM, 2020). The industrial sector is the largest group of fossil-fuel consumers in Indonesia, accounting for nearly 80 percent of total domestic consumption (ESDM, 2021).

Also read:

> Chamber of Commerce: Industrial Decarbonization No Longer Negotiable

> Luhut, on Decarbonization: Indonesia Will Not Take Orders

These figures show the close link between industry and carbon emissions. So, it is very clear that to reduce carbon emissions, companies must reduce dependability on fossil energy in production activity, or decarbonize production facilities, instead of offsetting carbon emissions elsewhere.

Decarbonization is carried out using low-carbon emission technology in the company's production facilities, not diverting or offsetting emissions to other places.

Reducing the company's carbon emissions must be done organically, not inorganically. Without reducing carbon emissions in the production facilities, carbon-emission reductions will never occur. The country's target to reduce carbon emissions, as administered in the Nationally Determined Contribution (NDC) of climate action plan, will never be achieved without industrial decarbonization.

Low-emission business demands

Industrial decarbonization poses challenges to face. Institutions or companies that are willing to decarbonize their business processes will encounter obstacles in access to funding and human resources, and unsupportive regulations. Indeed, decarbonization is a necessity for industry, including domestic industry, due to changes in the global economic and investment landscape.

This was one of the issues Indonesia discussed with business and investment actors at the Business 20 (B20) meetings hosted by the Indonesian Chamber of Commerce and Industry (Kadin) prior to the recently concluded G20 Summit this week.

The G20 accounts for 60 percent of the world's population, 80 percent of GDP and 75 percent of global trade. The European Union and the United States, two important business and investment partners for Indonesia, are among the G20 members which impose strict environmentally friendly trade and investment conditions.

The EU this year passed the Carbon Border Adjustment Mechanism (CBAM), which imposes additional tariffs on products with high-carbon emissions. The US with the Inflation Reduction Act of 2022 (IRA) provides attractive incentives to green-technology investors. The two policy packages convey the same message, which is they demand industrial decarbonization.

Also read:

> Indonesia Actualizes Energy Commitments to Boost Global Trust

> The World Awaits Emissions Reduction Action

Multinational companies do not remain silent in the face of these policies at the country level with major business groups having initiated corporate pacts to facilitate industrial decarbonization. Two pacts that have direct links with Indonesia are Renewable Energy 100 (RE100) and the Fashion Industry Charter for Climate Action.

RE100 is a global corporate renewable-energy initiative bringing together 387 multinational companies, including those operating in Indonesia. The RE100 members are required to increase their use of renewable energy gradually, from 60 percent by 2030 to 90 percent by 2040 and 100 percent by 2050. This commitment is binding to these companies across the world.

The Fashion Industry Charter for Climate Action is the agreed decarbonization pathway for the fashion industry signed by almost all principal companies holding big world brands, such as LVMH, H&M Group, Levi Strauss & Co, Gap Inc, Nike, Inditex Group and many more, which have supply chains in Indonesia. Like RE100, this textile- and clothing-sector pact is also binding on the suppliers.

The 2022 G20, which peaked with the world summit, gives Indonesia a strategic role as the rotating president with an opportunity to show the world that the country is on the right path of industrial decarbonization.

Conducive climate

How Indonesia positions itself as the right investment-destination country must be supported with facts on the ground. However, can Indonesia accommodate the demands of global investors, especially in terms of the availability of non-fossil, or new and renewable energy (NRE) electricity as the main condition for green investment?

Despite the huge natural resources, the development of NRE-based electricity in Indonesia is still lagging far behind. Based on the ASEAN Power Updates (2021), the generated NRE-based electricity in Indonesia only amounts to 14.8 percent, much lower than the neighboring countries (as well as competitors): Thailand (30.3 percent), Vietnam (55.8 percent) and Cambodia (54.8 percent).

The "convenience" offered in the use of fossil energy makes NRE remain a second option in national electricity and energy. Policymakers are eloquent in throwing jargon about climate change around only to fall short in implementation.

Also read:

> Waiting for Indonesia’s Leadership Role in Energy Transition

> Emission Reduction Targets Are Increasingly Challenging

The structure of the national electricity market remains an obstacle in the development of NRE-based electricity. Companies do not have enough space to decarbonize because of the difficulty in accessing EBT-based electricity. The Corporate Power Purchasing Agreement (PPA) option, in which industrial companies or consumers buy NRE electricity directly from private power companies, or the direct investment option, in which companies build their own power plants, is not feasible in the current national electricity-market structure.

Even though the government, via state-owned electricity company PT PLN, has begun to turn to NRE-based electricity, with floating solar PV that can be purchased by the private sector with the provided renewable energy certificates (REC), the national industrial sector still has to expand more space in procuring NRE-based electricity.

While having to address the problem in NRE electricity supply, the government must also look for policy breakthroughs that will encourage industrial decarbonization among domestic entrepreneurs.

Providing incentives for national entrepreneurs who use low-carbon technology in national procurement projects can be among the concrete steps to affirm Indonesia's commitment to supporting the energy transition.

It is not simply ceremonial

In his speech coinciding with Indonesia's G20 presidency in December 2021, President Joko “Jokowi” Widodo pledged to make the best of this opportunity for change by looking to produce major breakthroughs from the G20 forum, so that the Indonesian presidency was not simply ceremonial.

The G20 must be used as a stage to woo investment needed to support decarbonization of the domestic industry. To promote industrial decarbonization is a huge task for anyone. There is no country, institution or company that does not face challenges in industrial decarbonization.

At this stage, Indonesia must demonstrate its credentials as a trusted partner of the G20 in the sustainable energy-transition agenda. Inclusive collaboration of all parties, from investors, companies (from small businesses to big corporations), financial institutions and global-development agencies is needed to carry out the energy transition via decarbonization of the national industry. To win that trust, Indonesia must give evidence, not just promises. What is implemented on the ground must be in accordance with what was promised to the world. We should walk the talk.

National industrial decarbonization must be done at all costs. This is for the sake of building resilience of the nation's economy in the face of an increasingly challenging world.

Today's global-investment decisions are more than just going for the ease of doing business. Availability of environmentally friendly electricity and climate change-mitigation readiness in investment destination countries will be taken as the main considerations. Failing to meet these conditions, a country will be struggling to attract new investment, even to maintain ongoing investment.

Commitment and willingness to sacrifice and leave the comfort zone are obligatory for all parties, both national and foreign private companies, as well as state-owned enterprises (SOEs). National industrial decarbonization must be done at all costs. This is for the sake of building resilience of the nation's economy in the face of an increasingly challenging world.

Arsjad Rasjid PM, Chairman of Indonesian Chamber of Commerce and Industry (Kadin)

This article was translated by Musthofid.