Indonesia has Asia’s laxest sustainable finance classification system, according to a report by the Institute for Energy Economics and Financial Analysis (IEEFA).
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Southeast Asia’s largest economy categorises new and existing coal plants as “green” or considers them eligible for transition finance, the report released on Wednesday finds.
Coal-fired power plants that are selected for early retirement through multilateral fossil fuel phase-out mechanisms like the Just Energy Transition Partnership (JETP) are classified as “green” or low-emitting, under a traffic light system used by Indonesia’s sustainable finance taxonomy.
Meanwhile, captive coal-fired power plants – that is, coal plants that provide localised power for industrial plants – that started operations before 2030 are categorised as “amber”, which is Indonesia’s codification for transition activities in its taxonomy. Captive coal plants are classified as eligible for sustainable finance if they power facilities that process transition metals such as nickel, cobalt and aluminum, which are used in the manufacture of electric vehicles and batteries.
The combined capacity of the country’s captive power plants, which are either planned or being built, amounts to 21 gigawatts (GW), representing more than half of Indonesia’s current total power capacity and would result in a 17 per cent increase in the country’s demand for coal.
Other coal plants approved by the electricity supply business plan of state-owned PT Perusahaan Listrik Negara (PLN) before 2022 are also considered a transition asset provided that they reduce emissions by 35 per cent within 10 years of starting operations.
The taxonomy also allows for the use of carbon offsets and assumes the widespread availability and adoption of carbon capture and storage (CCS) technology, which is “not an acceptable form of emission reduction for taxonomy purposes,” said Ramnath Iyer, sustainable finance lead at IEEFA and lead author of the study.
“The Indonesian taxonomy contradicts prevailing standards and risks losing credibility in international sustainable finance if such financing is classified as green or transition finance,” he said.
The taxonomies of the Philippines and Malaysia: too ambiguous
The Philippine and Malaysian taxonomies do not follow any quantitative criteria for classifying activities as green, amber, or red, which refers to the climate impact level of economic projects.
Instead, they rely on a principles-based approach that involves answering questions related to the nature of the activity and its impacts, which may result to “disagreements among market players due to the ambiguous guidelines,” said the report.
“The absence of any quantitative criteria risks rendering assessments based on such taxonomies insubstantial and unlikely to be considered internationally interoperable” noted the study.
However, unlike Indonesia, both countries exclude any type of coal funding from being classified as green.
Malaysia implemented its taxonomy in 2021, requiring financial institutions to report to the central bank on the climate impact of their activities. The Philippines introduced its own taxonomy this year.
A comparison of emissions limits for green classification in Southeast Asia. Source: IEEFA
The Singapore and Thailand taxonomies have the most stringent and robust quantitative criteria, allowing green classifications only for power plants that generate the rigorous European standard of lifecycle emissions of less than 100 grams of carbon dioxide per kilowatt-hour (gCO2e/kWh), noted the report. Such emissions are too low to be generated by any fossil fuel-based technology. Both countries, like Indonesia, Malaysia and the Philippines, use a traffic light system.
Singapore, a major regional finance centre, limits activities classified as “amber” that emit up to 220 gCO2e/kWh until 2030, which declines to 150 gCO2e/kWh until 2035.
For power generators, they will move away from the amber category by 2035 after which their activities must meet the criteria for the green category or risk being classified as red.
Thailand also uses an amber category, which producers can use only to classify existing fossil fuel power plants. New power generation is not allowed to be assigned amber status.
Its taxonomy only covers the energy and transportation sectors, but it specifically excludes coal from being classified as green. New natural gas-based power plants that started construction this year are classified as red and are not considered sustainable.
The taxonomy crafted by the Association of Southeast Asian Nations (Asean) has attempted to serve as a model for the regional bloc, but it has no universal definition for what constitutes transition financing, which poses the risk that it could support heavy polluters, added the study.
The report read: “While the diversity of approaches reflects each country’s unique contexts, it also presents significant challenges for interoperability and consistency. A unified framework that aligns with international standards is crucial for fostering a sustainable financial ecosystem in the region.”
