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Why India and China could show the path for Indonesia to hit net-zero goals

Published on October 20, 2023

Pandu-Sjahrir-net-zero-goals

I recently visited Shenzhen and Bangalore, back to back. It was illuminating to see how the energy transition has been unfolding in these two major cities in Asia Pacific.

Both have a higher-than-average GDP per capita compared to their national averages. The GDP per capita of Shenzhen was US$25,000 last year, while China’s national average was around US$12,700 – local economists told me that Bangalore’s was over US$25,400 while India’s national average approached US$2,400.

Both cities also have rather special dynamics regarding electric vehicles. Bangalore, the wealthiest city in India, is expected to have 2.3 million EVs by 2030, up from 75,000.

Meanwhile, as of the end of 2021, Shenzhen boasted 20,000 electric buses, 24,000 electric taxis, and over 60,000 privately owned EVs. In fact, EVs make up 25 percent of the total private vehicles, with more than 250,000 on the roads. This number is projected to soar to 750,000 by 2025.

Jakarta, on the other hand, has a GDP per capita of about US$19,000, whereas Indonesia’s national average stood at almost US$4,800. The country’s EV penetration rate is a mere 0.2%, the vast majority of which is concentrated in Greater Jakarta.

Indonesia’s figures point to a huge opportunity, as the country gears up for a sweeping national energy transition. The country aims to achieve net-zero carbon emissions by 2060, an immense but not insurmountable goal.

Investments and directives

On the trip, I learned that while investments significantly influence the speed and direction of the energy transition, government directives are just as critical. This includes not just subsidies but also support for R&D. More importantly, it also includes restrictions on non-EV businesses to push adaptation on a societal level.

Although the Indonesian government has enacted a regulation for the early retirement of coal power plants, renewable energy accounted for only 15% of power generation in 2022.

In the transportation sector, while EV adoption has been on the rise, Indonesia is still far from reaching its target of having 400,000 electric four-wheelers and 1.8 million battery-powered motorbikes by 2025.

China emerged as the top country for renewable-energy-related investments after spending US$546 billion in 2022 alone. As for India, it looks to allocate US$4.3 billion for the country’s energy transition, with more than half (US$2.4 billion) directed toward hydrogen production to reduce fossil fuel use.

Identifying linchpins

Indonesia has made steps in developing its domestic carbon markets, but significant efforts and more regulatory clarity are still required, including setting up a national carbon accounting ecosystem.

Such challenges pose a clarion call for entrepreneurs and aspiring founders to play an active role in helping Indonesia’s net-zero targets. But it’s not just about the founders – investors also need to recognize renewable energy, coal alternatives, carbon capture, and storage, carbon regulation and trading, and decarbonized transportation as industries of the future.

Currently, Indonesia has about 300 startups working on clean energy. Most of them began business in 2019, indicating a burgeoning clean energy startup ecosystem.

However, climate-related funding for tech startups in Southeast Asia only took up 7.8% of the overall US$1.1 billion funding (equity and debt) pie, according to a recent report. In the first 11 months of 2022, only 64 climate tech startups in the region were funded. Indonesia accounted for only 13.1% of total funding, while Singapore’s share was a staggering 75.4%.

This disparity is dire. To spruce things up in the clean-energy funding scene, Indonesia needs several catalysts regarding both startups and investors.

R&D incentives

Strengthening policies and regulatory frameworks could push companies to invest in rapid renewable energy or energy efficiency tech. Although the Indonesian government announced EV subsidies for consumers in March, uptake is moving slower than expected, which may eventually hurt local EV-related startups.

Clean energy startups could benefit from R&D incentives. While Indonesia’s existing tax system for R&D activities does cover the renewable energy sector, it is mainly beneficial for larger companies with significant tax liability.

In early 2023, the Indian government pledged to provide 50% to 70% financial support for renewable energy R&D by startups, private institutes, and manufacturers. In China, its government initiated a US$13 billion National Green Development Fund in 2020 for clean energy investments and research.

Startups often don’t start generating revenue in the first few years of their operations, which makes it harder for them to make use of tax deductions. But incentives, either in the form of tax credits or matching grants, could alleviate the financial burden of early-stage startups to help spur innovation in the clean energy space.

Increase coverage of tax exemption for VCs in clean energy

Currently, the tax system categorizes startups as MSMEs, and investors could enjoy a tax exemption by investing in eligible companies. However, income tax exemptions for venture capitalists are contingent on the profitability of the MSMEs they invest in.

This means that investors could be waiting years to use the tax exemption scheme, assuming the startup eventually turns a profit. There are also no tax allowances for investors that invest specifically in clean energy sectors.

China, on the other hand, has extended its tax breaks for VCs and angel investors across all sectors until the end of 2027. The policy allows investors to deduct 70% of their investment amount from their taxable income and isn’t dependable on whether the startups turn a profit or not.

India is also reevaluating its angel tax provision to allow exemptions for non-resident investors if they invest in local startups – historically, foreign investors don’t have this benefit.

Carbon trading implementation is key

Carbon trading is expected to grow alongside all the aggressive climate goals announced by governments across the world. Indonesia has kicked off its trial for a carbon tax and trading scheme. During this trial, companies from the power sector can participate in a voluntary carbon trading system ahead of the full rollout in 2025.

Under this mechanism, the government anticipates carbon prices of US$2 to US$18 per ton of carbon dioxide equivalent. However, according to the International Monetary Fund, to keep global warming below 2°C, prices must reach US$50 to US$100 per ton by 2030.

The relatively low carbon prices and voluntary participation aren’t sufficient to level the playing field of clean energy against fossil fuels that are still receiving subsidies from the government.

China’s carbon trading scheme has been running for two years, where 230 million tons of emission allowances were traded. Its carbon price is currently around US$8 per ton but is expected to rise to US$18 per ton by 2030. On the other hand, India targets to roll out carbon trading in 2025 and a framework is still in progress.

Carbon pricing can create a favorable environment for clean energy startups in Indonesia by stimulating innovation and demand for low-carbon technologies. It’s likely to also increase funding opportunities for startups as investors will be more inclined to back companies that comply with carbon pricing policies.

Sticks and carrots

Apart from incentives for EVs, the Indonesian government could roll out tax incentives and/or credits across the country for other clean energy products such as green buildings to encourage consumers and businesses to adopt sustainable practices.

Existing EV incentives could also be increased to further drive consumer demand.

Based on the examples of Bangalore and Shenzhen, incentives are crucial to help accelerate the energy transition in a growth market like Indonesia.

China, India, and Indonesia collectively represent about 40% of the global population. These countries will play a pivotal role in shaping the global EV revolution.

India, for instance, set up a Clean Energy International Incubation Centre a few years ago to help commercialize clean energy solutions by the startups it incubated.

Meanwhile, China has been successful in leveraging state-owned enterprises to finance startups in the clean energy space. Shenzhen Capital Group, a state-owned VC arm, has financed at least 20 companies in clean energy from seed to pre-IPO stages, including Phylion Battery and Jinko Solar.

China also introduced policies that could penalize automakers that don’t invest in the production of electric cars to meet the quota. The country also imposed a ban on high-polluting vehicles in large cities to reduce emissions.

On the consumer side, China has been rationing car license plates for non-EVs. India, too, is taking a leaf out of China’s playbook by introducing a law that would heavily fine automakers for failing to meet fuel-efficiency standards for the vehicles they produce.

Indonesia’s regulators and business leaders must take these ideas seriously to accelerate progress toward its net-zero goal and to protect its people from the catastrophic effects of climate change. The journey toward decarbonization will not be easy, but it’s imperative that they take more meaningful action.

This story originally appeared on Tech in Asia.

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