Indonesia’s vulnerability to climate change makes the country’s net-zero progress significant globally. However, financing and political support for climate transition have been slow, with Indonesia facing a significant financing gap, limited fiscal space, and shallow domestic financial markets. Breaking the false dichotomy between development and the environment and framing the green economy as integral to economic development is crucial for inclusive and affordable climate transition.

Indonesia, characterized by its long coastline, massive deforestation, food insecurity, and high reliance on coal and fossil fuels, is particularly vulnerable to the impact of climate change. Despite its commitments to reduce greenhouse gas emissions, concrete efforts and progress on climate transition have been slow due to limited fiscal space, a relatively higher cost of capital, shallow domestic financial market, and limited access to international finance. Indonesia’s financing needs to decarbonize its economy could be up to $200 billion annually until 2030, equivalent to around 20 percent of the Indonesian GDP. Achieving the country’s National Determined Contribution (NDC) goal, even with modest targets, would require massive financing needs that the country faces challenges on various fronts to fulfill or even close this financing gap. The country’s limited fiscal capacity, shallow domestic financial market, and suboptimal access to the international pool of funds make it crucial for Indonesia to execute necessary reforms on all fronts. The government may increase budget allocation for climate change, but this should consider the impact on debt sustainability and current account deficits. It is crucial to consider green fiscal policy from the development and climate change perspective. Policy implementation requires political support, which is often limited due to the scarcity of political capital and the short timeframe of the political cycle. In addition, the government can synergize development and environmental issues by implementing green policies and channeling the funds obtained to finance development agendas such as health sectors, social assistance, and SMEs. The feasibility of achieving inclusive and affordable climate transition will rely on its ability to break the false dichotomy between development and environment and frame the green economy as an integral part of economic development.