Green Financing Model : A Financial Instrument Toward Indonesia Green Economy

Climate change has been a global concern due to its impacts to human beings. As a developing country, Indonesia is facing a challenge to finance activities related to environment, particularly climate change activities. Indonesia needs to fund its ‘green’ projects and programs, such as renewable energy development, low carbon transport and forestry projects. Agriculture, for example, has been a concern for the government because of a frequent extreme weather recently. Farms and food supply chains are at risk without a new climate-resilient investment. While finding the funding for climate change activities is often challenging, especially for government of Indonesia whose fiscal space is limited, there is an urgent need to transition to low-carbon and climate resilient development. Effective policies and additional financing is critically needed to achieve these goals. Green Bonds could play a bigger role in this case as a new source of green financing. Green Bonds is a fixed income, liquid financial instrument that is used to raise funds earmarked to mitigation, adaptation, and other environmental friendly projects. Over the past 10 years, a range of projects has been developed around the world using bonds to channel capital market to investments, importantly projects that address environmental challenges such as climate change. The Green Bonds market tripled in size between 2013 and 2014, with US$37 billion issued in 2014. Further growth is predicted that in 2015 the value of Green Bonds issued will reach US$100 billion. According to the global development of Green Bonds, Green Bonds issuance in Indonesia will be a potentially successful. However the issuance of the Green Bonds not only will affect the environment positively but also will have impacts on poverty and economic development. Therefore, appropriate policies will be needed to select potential projects that have impacts to environment and economic development. The purpose of this study is to provide a green financing model that can give policy recommendation to determine appropriate projects that create positive economic impacts and to show the impact of a change in an activity within the existing economy to other sectors. These projects will be specific to climate-mitigation and adaptation projects, and other environmentally beneficial activities. Those activities stated in The National Action Plan For Greenhouse Gas Emission Reduction (RAN-GRK) are Agriculture, Forestry and Peatland, Energy and Transportation, Industry, Waste Management. The methodology applied in this research is construct simulation using Social Accounting Matrix (SAM) multiplier that can provide the impact of increasing in one activity to other activities inside or between economy agents. There will be several scenario of environment-friendly project financing by Green Financing Scheme. The results of this research is expected to provide adequate tool to help policy makers in the field of fiscal policy to Determine the Appropriate most environment-friendly projects to be financed by the Green Financing Scheme.