Indonesia moves to unlock foreign climate investment

Why Indonesia is changing the rules now

Indonesia is preparing a fresh push to attract private capital into projects that cut emissions and strengthen climate resilience. A forthcoming white paper is set to outline a package of steps to draw more foreign investors and banks, backed by a new Sustainable Finance Committee that will align rules that have long been fragmented across agencies. The goal is simple but ambitious, to turn a large market with strong potential into a market that is easier to understand, easier to finance, and easier to execute.

The need is urgent. In its latest Nationally Determined Contribution (NDC) filed with the United Nations, Indonesia expects emissions to peak around 2030 under key economic growth scenarios. Meeting those targets will require sizeable capital. The NDC estimates at least US$472.6 billion is needed to deliver the country’s climate goals. Indonesia has limited fiscal space for such a scale up. The government reports 702.9 trillion rupiah went to climate related programs between 2018 and 2023, a fraction of what will be required through the next decade.

Efforts to mobilize external support have had mixed progress. The Just Energy Transition Partnership, a US$20 billion pledge from a group of partner countries to support a cleaner power sector, has so far resulted in around US$3 billion of approved financing and four projects. Momentum took a hit when the United States withdrew from the partnership in March. At home, President Prabowo Subianto has set an ambitious target to transition the coal dependent economy to renewable energy by 2035. That will demand clearer policy signals, faster permitting, and more reliable de risking tools to gain the confidence of global finance.

What the Sustainable Finance Committee will do

The government has finalized the governance structure and implementation plan for a Sustainable Finance Committee that will sit under the Ministry of Finance. The body will likely include about 20 members drawn from senior ranks of the Finance Ministry, the Financial Services Authority (OJK), and Bank Indonesia. It will have a secretariat and working groups, and its membership is expected to be in place by the first quarter of 2026. The legal foundation for the committee was signed into law in 2023.

Immediate priorities

Authorities intend for the committee to give investors a clear window into how to navigate sector rules, access incentives, and find a pipeline of credible projects. It is also meant to map and expand de risking instruments so that private lenders can price Indonesian climate projects with more confidence. That includes credit guarantees, blended finance platforms with multilateral banks, and practical tools to manage currency risk. A focus area is standardization, for example, model power purchase agreements for renewables, clear guidance on viability gap support, and transparent timelines for permitting and land acquisition.

How it fits with existing reforms

The new body is designed to pull together gains from recent reforms. The 2020 Omnibus Law on Job Creation reduced barriers to entry, and in 2021 Indonesia liberalized most sectors and launched a risk based online single submission system for licensing. The Indonesian Investment Authority, the sovereign wealth fund, was created to co invest in infrastructure. Special economic zones continue to offer incentives. The committee is expected to reduce duplication, improve coordination across national and local levels, and align standards and disclosures that matter to institutional investors. Policy analysts have long pointed to obstacles such as fragmented rules, lengthy approvals, and limited standardization of ESG reporting. A single body that improves clarity and coordination can address many of these problems.

How far Indonesia is from its climate targets

Indonesia’s latest NDC puts a large number on the table, at least US$472.6 billion in investment needs. Earlier estimates put needs at roughly US$247 billion from 2018 to 2030. Either way, the budget can only cover a portion. Government spending on climate has averaged around the equivalent of several billion dollars per year, which leaves a sizable role for private finance and international partners.

Where will the money go The power sector requires cleaner generation, stronger grids, and early retirement or repurposing of coal plants. Heavy industry must shift toward lower carbon production. Forestry and land use programs, including peatland and mangrove restoration, are essential both for emissions cuts and for adaptation. Urban transport, water security, and health systems need investment to withstand rising heat, heavier rain, drought risk, and disease patterns that are changing with the climate.

The Just Energy Transition Partnership is still a key test. While US$20 billion was pledged, only a small fraction is moving, and the exit of a major donor has complicated delivery. Even so, the partnership is shaping early projects in grid upgrades and clean power and is pushing forward tough issues like early retirement of coal plants. Those transactions require concessional loans, guarantees, and sometimes carbon revenue to close the economic gap compared with continued operation.

Can carbon markets unlock private capital

Indonesia has restarted international carbon credit trading after a four year pause. A new presidential decree allows trade in carbon units that comply with national rules or United Nations standards, and it calls for a transparent, real time registry to prevent double counting. Indonesia has signed mutual recognition arrangements with international crediting programs, which gives project developers a clearer pathway to sell to foreign buyers. The policy is meant to draw capital into rainforest preservation, peatland protection, and energy and industrial projects that cut emissions.

Why the exchange has struggled

Despite strong potential, Indonesia’s carbon market has not yet reached scale. Trading on the domestic exchange has been modest. A complex hybrid approach that combines a cap and trade framework with a fallback carbon tax has created uncertainty. Emission thresholds for coal power that are set too high can result in weak demand for allowances or credits. The carbon tax is still not implemented. Overlapping mandates among ministries have slowed decisions and confused market participants. A recent update to the national carbon regulation aims to improve integration, strengthen transparency, and align with international practice. The impact will depend on swift implementation and clear rules.

What this means for project developers

A functioning carbon market, combined with international access, can turn future emissions cuts into a revenue stream. That revenue can be pledged to lenders and used to improve project bankability, whether for forest conservation, mangrove restoration, renewable energy, or energy efficiency. Indonesia used its national pavilion at COP30 to showcase dozens of projects and reported multi million ton interest from prospective buyers. Integrity is the linchpin. International investors will look for robust monitoring and verification, fair benefit sharing with communities, and safeguards that protect biodiversity and local rights.

Where the money could come from

Public development banks and climate funds remain essential. The Green Climate Fund has supported readiness programs to strengthen coordination, build capacity among accredited entities, and prepare a pipeline of higher quality proposals. Grants and concessional loans from the Asian Development Bank and the World Bank can crowd in private capital when paired with guarantees and first loss tranches. Indonesia’s National Designated Authority and the Indonesian Environment Fund play a central role in aligning these flows with domestic priorities.

Sovereign and institutional investors are another pillar. The Indonesian Investment Authority was created to co invest with international partners in infrastructure, including clean energy. Gulf and Asian funds have signaled interest in green assets. Australia is stepping up regional financing, including a A$2 billion facility for clean energy and infrastructure in Southeast Asia, and its export credit agency has grown exposure to the region. Through the Australian Climate Finance Partnership, a US$15 million concessional loan is helping expand the Muara Laboh geothermal plant in West Sumatra. Surveys of Australian firms point to growing interest in Indonesia as a priority market for expansion. Such partnerships bring not only capital but also technical expertise in mining services, battery supply chains, and project management.

Capital markets matter as well. Indonesia has become a regular issuer of sovereign green bonds and green sukuk, which align with investor demand for Sharia compliant and climate aligned assets. OJK’s sustainable finance taxonomy, guidance on green bonds, and deeper disclosure rules are helping banks and corporates issue their own instruments. Blended finance platforms, guarantees from the Indonesia Infrastructure Guarantee Fund, and currency hedging facilities can help reduce risk for foreign lenders who face local currency exposure and policy uncertainty.

What foreign investors still see as risks

Policy clarity sits at the top of investor checklists. Announced targets, such as a shift to full renewables by 2035, require a transparent roadmap for how coal plants will be retired, how new capacity will be procured, and how grids will be reinforced. The carbon tax remains undefined. Changing signals on international partnerships can spook cautious capital. Analysts warn that mixed messaging can slow deal flow, even in markets with strong fundamentals.

Project level risks are equally important. Indonesia’s power sector is anchored by the state utility PLN as the offtaker, so bankable power purchase agreements and credible payment security arrangements are vital. Land acquisition, local permitting, and environmental impact assessments can take longer than investors expect. Contract enforcement can be uneven. Bureaucratic delays and corruption risk add cost. Many investors look for partial risk guarantees, political risk insurance, or co lending from multilateral institutions before they commit.

Standards and integrity are another concern. Large foreign investors follow strict ESG rules and need data they can trust. That includes greenhouse gas accounting that aligns with international norms, safeguards that protect communities, and transparent benefit sharing in forestry projects. The Sustainable Finance Committee can reduce friction by aligning national standards with global frameworks and by publishing a clear set of templates and disclosure expectations for projects that want to attract foreign capital.

Signals from partners and markets

Regional partners are leaning in. Australian agencies have expanded finance for Southeast Asia and are encouraging large pension funds to consider clean energy and infrastructure in Indonesia. Two way trade and investment have grown, supported by the Indonesia Australia Comprehensive Economic Partnership Agreement. Companies see commercial opportunities in renewable power, grid equipment, education and skills, technology services, and agrifood supply chains that will be needed for a decarbonizing economy.

China remains a major player in Indonesia’s energy transition and industrial policy. Cooperation ranges from electric vehicle manufacturing to critical minerals processing and solar deployment. Policymakers are also working to diversify by engaging Japan, Europe, the Gulf, and the United States, aiming to balance cost, technology access, and policy autonomy. At the same time, global finance is moving away from coal. More banks and funds are adopting coal exclusion policies. Moves by countries to join alliances that rule out coal signal that capital will increasingly look for clean projects. Indonesia can capture more of that capital with clear rules, credible timelines, and projects that deliver jobs and local value.

What to watch next

All eyes are on the white paper and on how quickly the Sustainable Finance Committee takes shape. Early milestones include a practical guide that maps permits and incentives for green projects, a catalog of de risking tools, a priority project list, and a process to align national standards with leading international frameworks. Implementation of updated carbon market rules and clarity on a carbon tax would greatly improve price signals. Better data and reporting, including alignment with international sustainability disclosure standards, would reduce uncertainty for institutional investors.

On the project side, watch for early coal retirement transactions that combine concessional finance and carbon revenue, new geothermal and utility scale solar projects, and stronger transmission investments that connect islands and unlock renewable resources. A steady flow of bankable projects, supported by guarantees and transparent contracts, will be the clearest proof that Indonesia’s climate finance reforms are working.

Key Points

• Indonesia will publish a white paper and stand up a Sustainable Finance Committee to align climate investment rules across agencies.
• The committee will include senior officials from the Finance Ministry, OJK, and Bank Indonesia, with a secretariat and working groups.
• Indonesia’s NDC estimates at least US$472.6 billion of investment is needed to meet climate goals, far above current public spending.
• The Just Energy Transition Partnership has approved about US$3 billion and four projects, and the United States has withdrawn as a donor.
• Carbon trading has resumed for international buyers under a new decree, with mutual recognition agreements and a plan for a real time registry.
• Investors still cite policy uncertainty, land and permitting delays, currency risk, and uneven contract enforcement as key hurdles.
• Funding sources include multilateral banks, the Green Climate Fund, the Indonesian Investment Authority, green bonds and sukuk, and regional partners like Australia.
• Execution speed, stronger de risking tools, and clear standards for ESG and disclosures will determine how much foreign capital Indonesia can attract.