Climate finance in Indonesia refers to financial resources earmarked to support climate change mitigation and adaptation actions in the country. As the fifth largest emitter of greenhouse gases in the world, a position attributed mainly to deforestation (loss of 60,000 km² of primary forests between 2000 and 2012) and dependence on fossil fuels (85% of the energy matrix in 2023), Indonesia is simultaneously a key actor in the global climate crisis and one of the countries most vulnerable to its impacts, such as rising sea levels and intensifying natural disasters.
Financing mechanisms range from international standards such as REDD+ and carbon markets to innovative instruments such as green sukuk (Islamic green bonds) and green waqf (religious conservation endowments). However, historical challenges – such as land centralization inherited from the colonial period, conflicts between customary rights (adat) and state legislation, and subsidies to polluting sectors – complicate the efficient allocation of resources. Between 2011 and 2023, the country raised US$78 billion for energy transition and forest conservation, but critics point to gaps in governance and equitable distribution of benefits.
Climatic and economic context Indonesia, an archipelago of over 17,000 islands and the fourth most populous country in the world, faces a complex scenario in terms of economic growth and the climate crisis, marked by a development model based on the intensive exploitation of natural resources. The accelerated degradation of tropical forests and the expansion of the palm oil sector have generated serious socio-environmental impacts, while the energy sector, heavily dependent on fossil fuels, currently represents the country's main source of emissions.
Despite international commitments and the potential for renewable sources, structural barriers, coal subsidies, and fragmented policies are hindering the transition to a low-carbon economy, given the growing energy demand and climate pressures. With a population expected to exceed 300 million by 2030 and rapid urbanization, the country is experiencing rising energy consumption and greenhouse gas emissions.
Forest Indonesia’s forest cover, the world’s third-largest tropical biome, faces historical pressures linked to commodity-based economic models and faces complex challenges at the intersection of forest conservation and economic development. In 1900, forests covered 84% of the country’s territory, but by 1950, historical estimates had shown that 145 million hectares of primary forest and 14 million hectares of secondary forest and mangroves remained. From the 1970s onwards, logging gained industrial scale, boosting sectors such as pulp and paper. Between 1980 and 2000, the productive capacity of these industries grew by 700%, elevating Indonesia to ninth place among the world’s largest pulp producers.
The acceleration of deforestation became critical in the following decades: between 1990 and 2000, the country lost 24 million hectares of forests (20% of the total coverage), leaving 94 million hectares (52% of the territory) in 2010.
Despite a moratorium on new deforestation concessions instituted in 2011, poor oversight and corruption have maintained high rates, with a peak of 930,000 hectares deforested in 2016. Between 2000 and 2012, the country lost approximately 60,000 km² of primary forest, surpassing Brazil in annual deforestation rate in 2012 (8,400 km² versus 4,600 km²), driven mainly by the expansion of oil palm plantations.
The main drivers of deforestation (2001–2016) include the expansion of palm oil (23% of the total), responsible for the direct conversion of 3.3 million hectares of forests, and the transformation of areas into pastures or savannahs (20%), often associated with illegal fires. Small-scale agriculture and logging infrastructure, such as roads and clearings, contributed 22% and 10%, respectively, while activities such as mining – especially nickel mining on the island of Sulawesi, driven by global demand for batteries – accounted for 5%.
Despite these impacts, the palm oil and timber sectors together generate around $45 billion in export revenues per year for Indonesia.
Indonesia is the world's largest producer of palm oil, which is the main raw material for its biodiesel. Logging and oil palm plantations have driven economic growth, but at the same time, they cause large-scale deforestation.
Currently, only 49% of the country's territory is covered by forests, compared to a historical estimate of 84%. Between 2001 and 2016, oil palm plantations were responsible for 23% of this deforestation.
The expansion of oil palm monocultures in Indonesia, often associated with the replacement of existing tropical forests or agricultural areas, has intensified environmental and social pressures during the late 20th and early 21st centuries. It is estimated that up to 80% of deforestation linked to the sector – responsible for the loss of 840,000 hectares of primary forest annually between 2000 and 2012 – occurs illegally.
The destruction of peatlands, which capture up to 20 times more carbon than unflooded tropical forests, amplifies carbon dioxide emissions: illegal land-clearing fires released between 0.81 and 2.57 billion tonnes of carbon in 1997, equivalent to 13–40% of global fossil fuel emissions that year.
Environmental degradation extends to soils and water resources: each ton of palm oil produced generates 2.5 tons of toxic effluents, contaminating aquatic ecosystems. The intensive use of agrochemicals, such as pesticides and fertilizers, combined with erosion on steep slopes (common in plantations), aggravates flooding and river silting, threatening local infrastructure.
Biodiversity loss is critical, with endemic species such as orangutans, Sumatran tigers and pygmy elephants, threatened by fires and habitat fragmentation.
At the socioeconomic level, although the palm oil sector employs 16 million people and represents around 4.5% of gross domestic product (GDP), indigenous communities, such as the Dayak in the Kalimantan region, face forced displacement and land conflicts: more than 630 territorial disputes linked to plantations were recorded by 2010.
Public health is compromised by air pollution – in 2015, transboundary haze (Southeast Asian Haze) contributed to 103,300 premature deaths in the region. In addition, a 2016 complaint by Amnesty International claimed that workers at the company Wilmar International had suffered serious health damage as a result of applying herbicides such as paraquat, banned in Europe but still used on oil palm plantations, without adequate protective equipment. Women and children are particularly vulnerable to these risks: minors work informally to help parents with production targets, while women, often hired without social benefits, handle toxic chemicals.
Energy and emissions
The energy sector is central to the Indonesian climate debate. Despite having abundant renewable resources such as geothermal energy, hydropower, and biofuels its energy mix still relies on 85% fossil fuels, especially coal and natural gas.
The energy sector is estimated to account for 50% to 70% of national emissions by 2030, surpassing deforestation. The growth in demand for electricity, driven by industrialization and urbanization, tends to consolidate coal-based infrastructures, generating risks of "stranded assets" in a global decarbonization scenario. The International Renewable Energy Agency (IRENA) warns that, without urgent policies, energy demand will increase by 80% by 2030, locking the country into polluting and economically obsolete technologies.
Following the Paris Agreement, the Indonesian government set ambitious targets for its nationally determined contribution, including reducing greenhouse gas emissions by 29% by 2030 (or 41% with international support) and increasing the share of renewable energy to 31% of its primary energy mix by 2050. However, challenges such as historical fossil fuel subsidies, inconsistent policies, monopolistic structures in the energy sector, and lack of transparency in costs make it difficult to achieve these goals. Studies indicate that an economically viable green transition is possible, but requires significant investment: projections indicate the need for up to US$78 billion in investment by 2030 to modernize the electricity grids of Java and Sumatra, regions that concentrate 70% of national generation.
Because Indonesia is made up of 17,508 islands, the country does not yet have a fully interconnected electrical grid. Many islands rely on isolated systems to generate power, which are distributed across several zones. The country intends to modernize its entire grid structure, expanding capacity and including the expansion of renewable sources, in addition to connecting the islands to each other. To implement these changes, the government claims that more than 20 billion US dollars are needed.
By 2023, the country's total carbon dioxide (CO2) emissions reached an estimated 1.2 billion metric tons. The main source of these emissions is the power sector, with coal-fired power plants accounting for over 60% of electricity generation. Other major contributors include deforestation, land-use changes caused by the expansion of palm oil cultivation, and industrial activities.
To reduce these emissions and meet its climate goals, the Indonesian government has promised not to approve new coal-fired power plants. Companies that invest in Carbon Capture, renewable energy, or forest conservation projects can sell carbon credits on Indonesia's regulated market.
The transport sector in Indonesia generates an estimated 150 million metric tons of CO2 per year, which is equivalent to almost a quarter of the country's total emissions. Road transport (cars, buses, trucks, and motorbikes) accounts for 90% of these emissions in the sector. Although public transport exists and is expanding, 72% of Indonesians still rely on private transport. In Jakarta, TransJakarta BRT is one of the largest bus rapid transit systems, serving over 1 million passengers daily. In 2023, the Jakarta–Bandung high-speed rail, the first of its kind in Southeast Asia, was inaugurated, aiming to reduce travel times and associated emissions.
Indonesia has set ambitious targets to reach 75% clean energy by 2040. The geothermal and hydropower sectors are seen as key to achieving this goal. The government and state-owned electricity company Perusahaan Listrik Negara (PLN) have issued new regulations and created funds to support this growth. PLN has also recognized the importance of private sector participation and has outlined plans for collaboration. It is estimated that $154 billion will be needed to meet climate targets. Currently, installed clean energy capacity represents only 12% of the total. In 2023, clean energy investment in Indonesia reached an estimated $497.99 million, an increase of 78% compared to 2022 ($279.93 million).
Indonesia has a large untapped renewable energy potential, estimated to reach around 3,500 GW. The greatest promise lies in geothermal and hydropower. For hydropower, the potential is approximately 94.3 GW. In geothermal, it is estimated to be around 28.5 GW. Solar energy is also very promising, with a national average Global Horizontal Irradiance Index of 4.8 kWh/m², reaching over 5.6 kWh/m² in some southern regions of the country.
The energy transition faces structural obstacles, such as the lack of a wholesale electricity market, uncompetitive tariffs for renewables and cross-subsidies to fossil fuels. The monopoly of the state-owned PLN as the sole energy buyer discourages independent producers, while restrictive financial regulations limit credit lines for large-scale projects. In addition, the lack of transparent data on costs and returns increases risk aversion among investors.