Economy Green Index - Notes

Environmental, Economic, Social: A Step Forward

The "Economy Green Index" from the Ministry of National Development Planning (Bappenas) in 2022 aims to measure the progress of a low carbon and green economy in Indonesia.

Low Carbon Development Indonesia

This initiative is a collaboration between Kementerian PPN/Bappenas and UKaid, with support from the British people.

A Step Forward to Measure Green Economy in Indonesia

The Economy Green Index is led by Chancellor Suharso Monoarfa, Minister of National Development Planning/Head of Bappenas. Key personnel include LCDI Commissioners such as H.E. Muhammad Jusuf Kalla, Dr. Muhammad Chatib Basri, Dr. Mari Pangestu, Dyah Roro Esti, Shinta Kamdani, and Lord Nicholas Stern. Advisor Ir. J. Rizal Primana, M.Sc, Deputy Minister for Maritime and Natural Resources, Bappenas, and Dr. Ir. Medrilzam, MPE, Director for Environmental Affairs, Bappenas. The authors are Aisyah Putri Lestari, Andry Napitupulu, Anna Amalia, Anggi Pertiwi Putri, Ardi Nur Armanto, Dwiputra Ahmad Ramdani, Egi Suarga, Hapsari Damayanti, Irfan Darliazi, Medrilzam, Muhammad Ikram Nasution, Putu Indy Gardian, Rifdan Firmansyah, Suriany Ida, and Talitha Dwitiyasih. The main partner is the UK Foreign, Commonwealth and Development Office (UK-FCDO).

The Ministry of National Development Planning/National Development Planning Agency (Bappenas) acknowledges the hard work and contributions of all partners.

Table of Contents

The report includes:

• Foreword

• Executive Summary

• Introduction: How to Emerge Stronger after Pandemic?

• The Disruptive Events that Change Everything

• Economic Transformation as the Breakthrough

• What is Green Economy?

• Designing an Inclusive Framework to Measure Green Economy Progress

• Mapping and Defining the Indicators

• How to Calculate Indonesia Green Economy Index?

• How “Green” is Indonesia’s Economy?

• Overview of Indonesia’s Green Economy Index

• Progress of Environmental Pillar

• Progress of Economic Pillar

• Progress of Social Pillar

• Way Forward

• References

• Appendix

Foreword

Minister of National Development Planning, Suharso Monoarfa, states that the COVID-19 pandemic necessitates economic transformation for sustainable development. Green Economy is one of six strategies within Indonesia’s Economic Transformation framework. Indonesia is committed to sustainable development, incorporating low carbon development and climate resilience policies into the National Medium-Term Development Plan (RPJMN) 2020–2024, in compliance with UNFCCC Article 3.4. The Indonesia Green Economy Index is presented as a tool to measure the progress, using indicators representing economic, environmental, and social factors. Continuous improvement and strategic collaborations are welcomed.

Executive Summary

Indonesia aims to achieve high-income status by 2045 but faces challenges from the COVID-19 pandemic and climate change. Bappenas emphasizes that a structural change in the economy is necessary, with Green Economy as a "game changer" for inclusive economic growth, social welfare, and environmental quality. Low carbon development and climate resilience policies are key. Pursuing a Green Economy aims to achieve Net Zero Emissions (NZE) by 2060 or sooner, with potential for $6.5\%$ annual GDP growth until 2050 and significant CO2eq emissions saved. Green Economy Index developed by Bappenas comprises 15 indicators across environment, social, and economy pillars. From 2011 to 2020, the index showed a rising trend, reaching 59.17 in 2020, driven by forest cover, managed waste, industrial labor productivity, and life expectancy. Economic indicators have been the most progressive, particularly final energy intensity. Share of renewable energy and poverty rate have shown the best progress despite having the lowest scores. The Green Economy Index aims to serve as a tool for evaluation and strategic development.

Introduction: How to Emerge Stronger After Pandemic?

Indonesia achieved significant development progress from 2010–2019, but the COVID-19 pandemic created a multidimensional crisis. Climate change also poses a threat. Both hinder the 2030 sustainable development agenda and the vision to become the fifth-largest economy by 2045. Without a breakthrough in post-COVID recovery, Indonesia may miss the opportunity to escape the middle-income trap by 2045.

The Disruptive Events That Change Everything

Indonesia experienced steady economic growth and declining poverty between 2010 and 2019. The government integrated Low Carbon Development policies into the National Medium Term Development Plan (RPJMN) 2020–2024, projecting an average GDP growth rate of $6\%$ until 2045. However, the COVID-19 pandemic caused the economy to contract by $2.07\%$ in 2020, with rising poverty and unemployment. The government invested ~IDR 500–557 trillion in the National Economic Recovery (PEN) program in 2020 and 2021. Indonesia is vulnerable to climate risks, experiencing 5,402 disasters in 2021, mostly hydrometeorological. The IPCC highlighted the increase of global temperature to $1.5^\circ C$ is faster than previously predicted. Both COVID-19 and climate change hinder Indonesia’s progress. The pandemic has also changed the way of people’s lives, with evolving health systems, digitalization, and green recovery.

Economic Transformation as the Breakthrough

Indonesia Vision 2045 aims for high-income status by 2036, surpassing a GNI per capita of USD 12,695. Economic growth of at least $6\%$ is required to escape the middle-income trap in 2045, necessitating a structural change to a more productive sector. The Ministry of National Development Planning/ Bappenas established six strategies within Indonesia’s Economic Transformation framework to lift the economic growth trajectory back to the pre-COVID situation: Bolstering the competitiveness of human resources; Improving productivity of the economic sector; Green economy; Digital transformation; Domestic economic integration; and Relocation of the New Capital city (IKN).

What is Green Economy?

The urgency of shifting toward a green and sustainable economy has been underlined by the international community. The United Nations Conference on Sustainable Development (UNCSD) in Rio de Janeiro cited the green economy as one of the important tools available for achieving sustainable development. The United Nations Environment Programme (UNEP) defines a green economy as one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities. Bappenas has adopted UNEP’s green economy definition of an economic development model to support sustainable development with a focus on investment, capital, infrastructure, employment and skills to achieve social welfare and environmental sustainability. Within Indonesia’s economic transformation strategy, green economy is aimed at creating high and inclusive economic growth while realizing social wellbeing and maintaining environmental quality. Green economy practices in Indonesia are centered on low carbon development and climate resilience policies, which have emerged as the main instruments or “backbone” of the green economy itself. The transition to a green economy entails abandoning conventional economic practices or a “brown-based economy” in which environmental sustainability and social inclusion are not prioritized. Achieving a Green Economy means implementing a paradigm with a novel concept, that there is no longer a trade-off between economic, social, and environmental development. A green economy would emphasise the utilization of renewable energy for industry and transportation systems instead of fossil fuel, shifting to low carbon industries, promoting a circular economy, environment friendly and improve economic productivity on land and marine without exploiting and creating damage to the ecosystem.

According to the Green Economy Report by Bappenas, pursuing a green economy will offer multiple benefits and lead Indonesia to reach the Net Zero Emissions (NZE) target by 2060 or sooner:

• Average GDP growth of 6.1–6.5% per year until 2050

• 87–96 billion tonnes of CO2e GHG emissions reduced over 2021–2060

• 25–34% higher gross national income (GNI) by 2045 (13,890-14,975 USD/capita)

• 1.8 million additional green jobs in 2030

• Nearly 68% reduction in emission intensity by 2045, before reaching NZE by 2060

• 40,000 lives saved by 2045 alone from reduced air pollution

• Ecosystem restoration of services valued at US$4.75 trillion/year by 2060

• 3.2 million ha of primary forest protected by 2060

• 4.1 million ha of forest coverage added by 2060

• Mangrove extent increased to 3.6 million ha by 2060

However, it will not be easy, since moving toward a green economy and exploring the path to a net- zero future would require significant policy reforms, adjustments to investment priorities, and strong coordination between public and commercial sectors as well as with international partners. Furthermore, the green economy agenda requires integrated cross-sectoral planning and a reliable measuring tool to track the progress and achievements.

Designing an Inclusive Framework to Measure Green Economy Progress

Bappenas developed Indonesia’s GEI to capture characteristics of the inclusive green economy concept. GEI has a set of multidimensional indicators covering the interlinkages between environment, society, and economy. The GEI framework has been formulated based on several existing global practices and relevant studies.

Mapping and Defining the Indicators

Indonesia’s GEI has a set of multidimensional indicators covering the interlinkages between environment, society, and economy as three main pillars of sustainability.

The selection process involved:

1. References from existing global practices and studies.

2. Whether the technical data is relatively available and accessible.

3. Whether the targets have Specific, Measurable, Achievable, Relevant, and Time-bound (SMART) characteristics.

To understand the interlinkages between each indicator, Bappenas has developed a system dynamics model comprising all GEI indicators based on the Green Economy model. Causal Loop Diagram (CLD) of this model illustrates the correlation and feedback loop between three sustainable pillars as well as 15 selected indicators. The GEI reflects the progress accomplished by Indonesia relative to the maximum and minimum thresholds. Minimum thresholds signify the lowest levels for each indicator, while maximum thresholds indicate the highest level for each indicator.

The detailed explanation of 15 selected indicators are elaborated below:

• Environmental Pillar

  1. Forest Cover (%): Comparison between forest cover with Indonesia’s total land area (excluding water). Minimum Threshold: 30%, Maximum Threshold 54%

  2. Share of Renewable Energy (%): The share of energy from renewable sources against the total national primary energy mix. Minimum Threshold: 0%, Maximum Threshold: 42%

  3. Managed Waste (%): Level of household waste generation managed by the government compared to the total waste generated. Minimum Threshold: 0%, Maximum Threshold: 82%

  4. Percentage of GHG Emission Reduction (%): Level of cumulative emissions reduced from all sectors, started from 2010 as the base year compared to baseline of cumulative emission within the same period. Minimum Threshold: 0%, Maximum Threshold: 70%

  5. Percentage of Degraded Peatland (%): Comparison between forest cover on peatland area out of the total peatland area in Indonesia. Minimum Threshold: 0%, Maximum Threshold: 30%

• Economic Pillar

  6. Emission Intensity (TCO2eq/BnRp): Ratio of GHG emissions per unit of economic activity. Minimum Threshold: 270 TCO2eq/BnRp, Maximum Threshold: 26 TCO2eq/BnRp

  7. Final Energy Intensity (BOE/BnRp): Amount of energy consumed per level of economic activity. Minimum Threshold: 125 BOE/BnRp, Maximum Threshold: 63 BOE/BnRp

  8. Gross National Income (GNI)/Capita (USD/Capita): Sum of value added by all resident producers plus any product taxes. Minimum Threshold: 500 USD, Maximum Threshold: 12,695 USD

  9. Agricultural Productivity (ton/ha/year): Level of agriculture production output. PADDY: Minimum Threshold: 5 ton/ha/year, Maximum Threshold: 12 ton/ha/year. PALM OIL: Minimum Threshold: 2 ton CPO/ha/year, Maximum Threshold: 5 ton CPO/ha/year. AQUACULTURE: Minimum Threshold: 3 ton/ha/year, Maximum Threshold: 19 ton/ha/year

  10. Industrial Sector Labor Productivity (MnRp/person): Value that shows the ability of labor to produce production goods in industrial sector,. Minimum Threshold: 20 MnRp/person, Maximum Threshold: 200 MnRp/person

  11. Service Sector Labor Productivity (MnRp/person): Value that demonstrates the labor’s ability to generate goods in service sector,. Minimum Threshold: 20 MnRp/person, Maximum Threshold: 200 MnRp/person

• Social Pillar

  12. Mean Year of Schooling (years): Total of years of education for adult age (25 and above) divided by total adult population age (25 and above). Minimum Threshold: 2 years, Maximum Threshold: 12 years

  13. Life Expectancy (years): The average period of people may expect to live. Minimum Threshold: 55 years, Maximum Threshold: 75.5 years

  14. Poverty Rate (%): Percentage of total population with total expenditure below the national poverty line. Minimum Threshold: 0%, Maximum Threshold: 13%

  15. Unemployment Rate (%): Percentage of unemployed people in the labor force. Minimum Threshold: 3%, Maximum Threshold: 15%

Mostly, maximum thresholds indicate the desired value of progress, while minimum thresholds express the critical level. In that case, those indicators make positive contribution to the GEI when the value increase and belong to group ‘desired improving’. However, several indicators are against that premise. Having lower value and nearing the minimum threshold signal positive progress for those indicators.

How to Calculate Indonesia Green Economy Index?

Measurement of Indonesia Green Economy Index is conducted within the period of 2011–2020, in yearly basis. The scoring calculation is performed by comparing each indicator with its maximum and minimum threshold using the Equation:

$(1) y<em>i = \frac{y</em>{indicator} - y<em>{min}}{y</em>{max} - y_{min}}$

The GEI measures progress in achieving the transition towards an inclusive Green Economy by aggregating progress across pillars:

$(2) Pillar_{environmental} = \frac{Forest Cover + Share of Renewable Energy + Managed Waste + Percentage of GHG Emission Reduction + Percentage of Degraded Peatland}{5}$

$(3) Pillar_{economic} = \frac{Emission Intensity + Final Energy Intensity + Gross National Income (GNI)/Capita+ Agricultural Productivity a. Paddy Productivity + Agricultural Productivity b. Palm Oil Productivity + Agricultural Productivity c. Aquaculture Productivity+ Industrial Sector Labor Productivity+ Service Sector Labor Productivity }{8}$

$(4) Pillar_{social} = \frac{Mean Year of Schooling + Life Expectancy + Poverty Rate + Unemployment Rate}{4}$

Aggregation:

$(5) GEI = \frac{(5<em>Pillar{environmental}) + (8Pillar</em>{economic}) + (4*Pillar_{social})}{17}$

How “Green” is Indonesia’s Economy?

Indonesia’s GEI shows a rising trend over the ten-year period, with a composite score of 59.17 in 2020. Economic indicators are the most progressive, especially for final energy intensity. Four indicators are categorized as having a very good score: forest cover, managed waste, industrial labor productivity, and life expectancy.

Overview of Indonesia’s Green Economy Index

Overall, Indonesia’s GEI shows a rising trend over the ten-year period, with a composite score of 59.17 in 2020, indicating the right track for the nation’s green economic growth. Based on each indicator’s progress from 2011 to 2020, economic indicators are the most progressive. Four indicators are categorized as having a very good score: forest cover, managed waste, industrial labor productivity, and life expectancy. Each year, the environmental pillar has the lowest composite index.

Progress of Environmental Pillar

The environmental pillar score for Indonesia began poorly, particularly in the first five years, due to the low share of renewable energy and the degradation of peat lands. To solve this, the government decided to accelerate the development of new and renewable energy with the issuance of the Presidential Regulation No. 22/2017 on National Energy General Plan (RUEN). The Government established the Peatland Restoration Agency (BRG) in the wake of widespread peatland fires in 2015. The best performance indicator is forest cover, albeit showing a slightly decreasing trend until 2018 that eventually bounced back from 2018 onwards. The indicator of managed waste fell short behind the forest cover indicator as the second best performing environmental indicator in 2020. The last indicator in environmental pillars is cumulative emission reduction from baseline. Changes in emissions in the land sector have been the main driver of emission reduction progress.

Progress of Economic Pillar

Economic indicator scores mostly fall within the category of good, a score between 50 and 75, except for some lows that occurred in the early years and some drops that occurred in 2015 and 2019. The plunges in 2015 and 2019 were due to forest fires affecting emission intensity indicators. Moreover, decreased productivity in aquaculture commodities was due to reduced production of seaweed cultivation. The agricultural productivity indicators are a composite of three sub-indicators that measure the productivity of food cultivation in Indonesia: rice field productivity, palm oil productivity, and aquaculture productivity. Paddy productivity increased and declined somewhat from 8.12 tons/ha/year to 7.33 tons/ha/year between 2011 and 2020. Palm oil productivity increased harmoniously from 2.46 tons of CPO/ ha/year to 3.37 tons of CPO/ha/year. Since 2011, aquaculture production has increased from 7.2 tons/ha/year to 13.88 tons/ha/year in 2020. The final energy intensity, as mentioned previously, has the most progressive performance during 2011–2020. GNI per capita is often recognized as a good indicator of a country’s general quality of living. The last two economic indicators are labor productivity in industry and services.

Progress of Social Pillar

Overall, the development of social indices in GEI had shown an increasing tendency over the last ten years, except for 2020, when the COVID-19 pandemic caused significant setbacks in poverty and unemployment rates. As evidenced by their steady upward trends in 2020, the pandemic seemed to have no immediate impact on the other two measures, mean years of schooling and life expectancy.

Way Forward

Green Economy Index marks new milestones for Indonesia in transitioning towards low carbon and green economy by providing an accurate and reliable methodology in measuring the progress and achievements. The index built based on various indicators that have leverage to sustainable development in Indonesia, based on the Indonesian Green Economy model, indicated by strong economic growth, supporting environmental protection and social inclusion. Addition or reduction of indicators that could capture a more inclusive green economy index is possible for future development. The Green Economy Index provides a more comprehensive and objective analysis on how green Indonesia is, since the index is developed based on the interlinkages of economy, environment and social pillars.