TRADING TOWARDS SUSTAINABILITY The Role of Trade Policies in Indonesia’s Green Transformation Angella Faith Montfaucon, Csilla Lakatos, Bayu Agnimaruto, and Jana Mirjam Silberring © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions and is partially supported by the Umbrella Facility for Trade trust fund, financed by the governments of the Netherlands, Norway, Sweden, Switzerland and the United Kingdom; and the Australian Government through the Australia-World Bank Indonesia Partnership (ABIP). The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Photo credits: stock.adobe.com and freepik.com Further permission required for reuse. Cover design: Arsianti The report was designed and typeset by Arsianti. TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS VII FOREWORDS VIII ACKNOWLEDGEMENTS IX EXECUTIVE SUMMARY X CHAPTER 1 INTRODUCTION 1 CHAPTER 2 INDONESIA’S TRADE IN EGs AND PLASTIC SUBSTITUTES: TRENDS 10 AND STYLIZED FACTS 2.1. Defining EGs and Plastic Substitutes 10 2.2. Green Competitiveness and Trade in Environmental Goods and Plastic Substitutes 13 2.3. Indonesia’s Trade in Environmental Goods–Firm Level 19 CHAPTER 3 TRADE AGREEMENTS AND TARIFFS ON EGs 28 3.1. Environmental Provisions in Indonesia’s Trade Agreements 28 3.2. Tariffs on EGs 31 3.3. Simulating the Impacts of Tariff Reforms and Multilateral Actions 33 CHAPTER 4 NON-TARIFF TRADE MEASURES ON EGs AND PLASTIC SUBSTITUTES 38 4.1. Incidence of Non-Tariff Measures (NTMs) on EGs and Plastic Substitutes 38 4.2. Assessing the Cost of NTMs 46 4.3. A Look at Local Content Requirements on Solar Panels and EVs 49 4.4. Which NTMs Matter the Most? 50 CHAPTER 5 CONCLUSIONS AND KEY TAKEAWAYS 53 APPENDIXES 56 BIBLIOGRAPHY 70 Click THE BUTTONS below to go to THE CHAPTER you wish to read TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 iii TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation FIGURES Figure 1.1: Trends in EPS index values of selected countries (2003-20) 3 Figure 1.2: EPS index values for the sample (2003-20) 3 Figure 1.3: CO₂ Emissions embodied in Indonesia’s exports and imports increased less than exports 5 and imports Figure 1.4: CO₂ Emissions in trade 2021: Indonesia lies above the Philippines and Malaysia 5 Figure 1.5: The source of exported CO₂ (%) in 2018 is largely domestic 5 Figure 1.6: Use of CO₂ contained in imports (%) in 2018 is largely due to consumption 5 Figure 1.7: Indonesia’s iron and steel and aluminum 8 Figure 1.8: The overall CBAM exposure of Indonesia is comparatively high 8 Figure 1.9: Impact of NDCs and CBAM on aggregate 8 Figure 1.10: Indonesia: Impact of NDCs and CBAM on Volume of Total Exports by Sector (percentage 8 change in 2030 relative to baseline) Figure 2.1: Indonesia’s green competitiveness ranking is declining 13 Figure 2.2: In regional comparison, Indonesia has low complexity but performs relatively well in terms of its 13 potential Figure 2.3: Indonesia’s RCA is high for gas flaring emission reduction 14 Figure 2.4: Indonesia's EG exports as a percentage of all exports Is low… 15 Figure 2.5: … while Indonesia’s EG imports as a percentage of all imports is around the global average 15 Figure 2.6: EGs trade in Indonesia is increasing in absolute numbers 16 Figure 2.7: Major trading partners for EGs are Singapore and China 16 Figure 2.8: Cleaner or more resource efficient technology products are growing and make up a high share of 16 exports… Figure 2.9: …While waste water management and potable water treatment dominate imports 16 Figure 2.10: Increasing imports and exports of solar panels 17 Figure 2.11: Increasing imports and exports of EVs 17 Figure 2.12: Measured by the share of global trade of plastic substitutes, Indonesia belongs to the top 20 18 countries (2021) Figure 2.13: but Indonesia’s share of global trade in plastic substitutes is stagnating 18 Figure 2.14: Share of Indonesia’s plastic substitutes trade is declining 18 Figure 2.15: The share of EGs trading firms remained stable while absolute numbers increased: number 19 (LHS) and percent (RHS) of total Figure 2.16: The share of EGs per firm remained broadly stable (percent) 19 Figure 2.17: International EG traders are large firms while domestic traders are medium size (survey results) 19 Figure 2.18: Nearly 30 percent of international EG traders are foreign owned (survey results) 20 Figure 2.19: Two-way traders are more likely to export EGs (percent) 20 Figure 2.20: …But less likely to import (percent) 20 Figure 2.21: EGs mainly consist of intermediate products (based on end-use classification and function, 21 % share within each category) Figure 2.22: Average share of imports by EG category and firm type (2014-18) 22 Figure 2.23: Average share of exports by EG category and firm type (2014-18) 22 Figure 2.24: The share of high technology intensity of EG imports for importer-exporters is increasing… 24 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 iv TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 2.25: …And so is the share of high technology intensity of EG exports for importer-exporters 24 Figure 2.26: Two-way traders’ entry rates have been broadly stable… 25 Figure 2.27: …But exporter-only firms’ entry rates decreased 25 Figure 2.28: Two-way traders exit rates are lower for EGs… 25 Figure 2.29: …As are the exit rates for importer-only/exporter-only 25 Figure 2.30: The firm survival rate is higher for importing-only firms 26 Figure 2.31: …As well as for exporting-only firms… 26 Figure 2.32: …and two-way trader firms 26 Figure 3.1: Inclusion of environmental provisions entirely offsets the rise in forest loss 30 Figure 3.2: Inclusion of forestry and biodiversity provisions partly offset increases in agricultural output 30 from trade liberalization Figure 3.3: Indonesia’s average tariff on EG imports is around 2 percent (2021) 31 Figure 3.4: Indonesia faces low average tariffs on exports of EGs (2021) 32 Figure 3.5: Indonesia’s MFN tariffs on EG imports remain high (2021) 32 Figure 3.6: Average tariffs faced by Indonesian EGs in major export markets are low (2021) 32 Figure 3.7: The Impact of unilateral liberalization of EG imports (percent change) (scenario one) 34 Figure 3.8: The impact of regional liberalization of EGs trade among APEC countries (percent change) 34 (scenario two) Figure 3.9: The impacts of the WTO EGA without indonesia on EGs trade (percent change) 35 (scenario three) Figure 3.10: The impacts of the WTO EGA with Indonesia on EGs trade (percent change) (scenario four) 35 Figure 3.11: Tariffs reduce the likelihood that firms start trading EGs 36 Figure 4.1: NTMs affect up to 95 percent of EG products in each EG category in 2021 (frequency ratio) 39 Figure 4.2: The share of affected trade (coverage ratio) of green products varies between different NTM 39 groups… Figure 4.3: …and between different specific NTMs (coverage ratio, 2021) 40 Figure 4.4: Firms that trade in EGs are mostly affected by TBT and INSP measures in 2018 41 Figure 4.5: A high share of exported EG products are affected by NTMs on their inputs 41 Figure 4.6: Most inputs in the production of EGs face NTMs in 2018 42 Figure 4.7: Products within the renewable energy group most affected by NTMs on their inputs in 2018 42 Figure 4.8: Import tariffs are the biggest import challenge… 44 Figure 4.9: … While ISO in destination countries is the biggest export challenge 44 Figure 4.10: Challenges with product standards remain 44 Figure 4.11: Duty-free or special permits or subsidies for trading EGs are common when trading EGs 44 Figure 4.12: Access to critical foreign skills remains a challenge related to international trade of environmental 45 services Figure 4.13: Weighted average import tariff on plastic substitutes are lower than plastic products in Indonesia 45 Figure 4.14: Coverage and frequency ratios of import NTM for plastic substitutes in Indonesia are higher than 46 for plastic products Figure 4.15: Licensing requirements for imports has the highest coverage and frequency ratio for plastic 46 substitutes in indonesia Figure 4.16: The Tariff Equivalent of Specific NTMs on EGs 48 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 v TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 4.17: Tariff equivalent of most problematic NTMs on EGs are relatively more costly compared to EAP 48 (AVE difference) Figure 4.18: NTMs negatively affecting import of plastic substitutes 48 Figure 4.19: NTMs can Negatively affect a firm’s decision to import or export EGs 49 Figure 4.20: Exposure to NTMs of inputs can also impact the export of EGs 49 TABLES Table 2.1: 19 EGs categories and their climate change role 11 Table 3.1: Environmental provisions in Indonesia’s trade agreements 29 Table 4.1: Share of firms affected by NTM groups in 2018 41 Table 4.2: Many NTMs affect trade in plastic substitutes (percent) 51 Table 5.1: NTM recommendations based on findings in the report 54 BOXES Box 1.1: The impact of the EU CBAM and worldwide environmental actions on Indonesia 7 Box 2.1: Examples of EGs and their climate and environmental roles 11 Box 3.1: Trade agreements with environmental provisions mitigate deforestation 30 Box 4.1: Survey results on challenges firms face in green trade 43 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 vi TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation ABBREVIATIONS AND ACRONYMS AFOLU Agriculture, Forestry, and Other Land GVC Global Value Chains Use HICs High Income Countries ALDFG Abandoned, Lost, or Discarded Fishing HS Harmonized Standard Gear IDP Informal Dialogue on Plastics Pollution APEC Asia-Pacific Economic Cooperation and Sustainable Plastics Trade ASEAN Association of Southeast Asian Nations INSP Pre-shipment Inspections and Other AVE Ad valorem Equivalent Related Measures BPS Badan Pusat Statistik (Statistics LCR Local Content Requirements Indonesia) MFN Most Favored Nation CBAM Carbon Border Adjustment Mechanism MoEF Ministry of Environment and Forestry CCDR Country Climate Development Report NDC Nationally Determined Contribution DGCE Directorate General of Customs and NTM Non-Tariff Measures Excise OECD Organisation for Economic EAP East-Asia Pacific Co-operation and Development ECETCCS Efficient Consumption of Energy OTH Other Related Measures Technologies and Carbon Capture and PC Price-Control Measures Storage PCI Product Complexity Index EFTA The European Free Trade Association PoE Port-of-Entry EG Environmental Good PSI Pre-shipment Inspection EGA Environmental Goods Agreement PTA Preferential Trade Agreements EMDE Emerging market and developing QC Quality-Control Measures country RCA Revealed Comparative Advantage EPP Environmentally Preferable Product RCEP Regional Comprehensive Economic EPS Environmental Policy Stringency Partnership EU European Union SEZ Special Economic Zones EUDR European Union Deforestation-Free SNI Standar Nasional Indonesia (Indonesian Regulation National Standard) EV Electric Vehicles SPS Sanitary or Phytosanitary Measures FDI Foreign Direct Investment TESSD Trade and Environmental Sustainability FFSR Fossil Fuel Subsidy Reform Structured Discussions FLEGT Forest Law Enforcement, Governance, TBT Technical Barriers to Trade and Trade UNCTAD United Nations Conference on Trade FTA Free Trade Agreement and Development GCI Green Complexity Index WITS World Integrated Trade Solution GHG Greenhouse Gas WTO World Trade Organization GSIM Global Simulation Analysis Model GTN Green Transition Navigator TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 vii TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation FOREWORD The necessity for eco-friendly efforts in business and industry to be given top priority has been increasingly apparent to the world community in recent years. As one of the leading exporters in Southeast Asia, Indonesia has recognized the need for environmentally friendly trade and made significant progress in this area. To combat climate change, both environmentally friendly products and trade policy play a vital role in ensuring sustainable development in Indonesia. Given its wealth of natural resources and biodiversity, Indonesia has simultaneously addressed the challenges of economic expansion and been mitigating the effects of climate change. We are aware that promoting green trade in Indonesia is essential to tackling environmental issues and promoting sustainable development. Nevertheless, Indonesia needs to balance environmental preservation and economic growth. Adopting green trade practices presents a calculated chance by encouraging trade that is socially, ecologically, and economically sustainable. This new World Bank report on Trading Towards Sustainability: The Role of Trade Policies in Indonesia’s Green Transformation could offer insights to guide the transition and to assist policy makers in creating effective policies on green trade. We can infer from the report that trade policy must balance the promotion of trade liberalization with the protection of environmental concerns. Properly crafted regulations have potential to foster a favorable climate for green trade, promote the manufacturing and exchange of eco-friendly products, as well as support worldwide sustainability objectives. Furthermore, the report finds that governments, international organizations, corporations, and other stakeholders need to work together to address NTMs in the context of green trade to foster sustainable practices and make it easier for environmentally friendly goods to be traded internationally. There are some approaches that can be further considered to deal with NTMs associated with green trade, such as: (i) the promotion of international environmental standard harmonization; (ii) the facilitation of mutual recognition arrangements (MRAs) on environmental standards, certifications, and labels; (iii) the simplification of administrative processes for the certification and verification of green products; (iv) the provision of technical assistance and capacity-building programs, particularly aimed at developing countries; (v) encouragement on cooperation between governments and private sectors to develop guidelines, standards, and best practices for green trade; (vi) the implementation of trade promotion programs on increasing awareness of green products; and (vii) the implementation of trade facilitation measures tailored for green products through among others, streamlined customs procedures, less paperwork, and expedited processing procedures. Notwithstanding the possible advantages of green trade, difficulties still exist. Indonesia frequently faces obstacles such as lack of funding, outdated technology, and inadequate institutional frameworks. To overcome these challenges, Indonesia may need financial commitments, supportive policies, international cooperation, and creative solutions that are designed to this country's particular conditions. It is impossible to underestimate the contribution of developing countries to the global movement of sustainability. The commitment to achieving a balance between economic expansion and environmental conservation should come from all to provide stronger and sustainable trade in the future. KASAN MUHRI HEAD OF TRADE POLICY AGENCY MINISTRY OF TRADE OF THE REPUBLIC OF INDONESIA TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 viii TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation ACKNOWLEDGEMENT This report was prepared by a core team consisting of Angella Faith Montfaucon (Economist, World Bank and team lead), Csilla Lakatos (Senior Economist, World Bank), Bayu Agnimaruto (Research Analyst, World Bank), and Jana Mirjam Silberring (Junior Trade Analyst, World Bank). Valuable inputs were received from (in alphabetical order) Aleksandar Stojanov (World Bank), Andhyta Firselly Utami (World Bank), Aufa Doarest (World Bank), Fatima Anjum Quraishi (World Bank), Kathleen Victoria Tedi (University of Pennsylvania), Lamiaa Bennis (World Bank), Michele Ruta (IMF), Mochamad Pasha (World Bank), Muhammad Hazmi Ash Shidqi (World Bank), Pranidhi Sawhney (World Bank), Reninta Fitrianti (ABIP), Shafaat Yar Khan (Syracuse University), and Vicky Chemutai (World Bank). Detailed feedback, suggestions, and comments were received from peer reviewers: Maryla Maliszewska (World Bank), and David James Kaczan (World Bank). Other written comments were also gratefully received from Ankai Xu (WTO), Hector Pollitt (World Bank), Henrique Silva Pacini Costa (UNCTAD), Jenny Jing Chao (World Bank) Katja Spur (UNCTAD), Kulwinder Singh Rao (World Bank), Massimiliano Cali (World Bank), Muthukumara S. Mani (World Bank). The team worked under the overall guidance of Satu Kristiina Kahkonen (World Bank Country Director for Indonesia and Timor-Leste), Lars Christian Moller (World Bank Practice Manager, Macroeconomics Trade and Investment), and Habib Rab (Program Leader, Equitable Growth and Institutions). The team is especially thankful to the Government of Indonesia’s Ministry of Trade for their review, suggestions, and collaboration in the dissemination efforts, especially the Head of the Trade Policy Agency Kasan Muhri (Ministry of Trade) and the staff. The team is also grateful to the Indonesia's Directorate General of Customs and Excise for the cooperation - particularly Rudy Rahmaddi - including also through the provision of customs data used in the firm-level analysis. Financial support for this work was generously provided by the governments of the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom through the Umbrella Facility for Trade Trust Fund; and the Australian Government through the Australia-World Bank Indonesia Partnership (ABIP). The team thanks Deviana Djalil for diligent administrative support and Chris Stewart for editing the report. Deviana Djalil provided administrative support and coordinated the organization of the report launch event. The dissemination was organized by Jerry Kurniawan, Maulyati Nuraini Slamet under the guidance of Lestari Boediono Qureshi. The report was designed and typeset by Arsianti.   TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 ix TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Executive Summary EXECUTIVE SUMMARY Climate change–and efforts to mitigate and adapt Environmental policy stringency (EPS) is increasing to it–will affect global flows of trade and Indonesia’s around the globe–a crucial challenge lies in ability to transition to a more environmentally harmonizing these with sustained economic sustainable economy on its path to become a high- growth, yet both goals can be reached. EPS has income economy is, therefore, interlinked with been increasing over time across countries of all trade policy. Regulatory initiatives on climate and the income groups in the last 20 years (Figure ES.1). The environment by Indonesia and its trading partners will World Bank Climate Change and Development Report impact trade significantly. Green policies in emerging (CCDR) indicates that a balance between environmental markets and developing countries (EMDEs) have been goals and economic growth is attainable (World Bank found to improve export duration‒especially when 2023). This can be done by enacting reforms that trading with high-income countries.1 While Indonesia simultaneously address short-term environmental has put in place policies such as on deforestation, concerns and contribute to the nation's long-term moving towards sustainable palm oil, curtailing plastic sustainable development‒fostering a transition waste, and carbon pricing instruments, more needs towards a greener, economically prosperous future. to be done to position itself in the global transition This includes making trade greener, as a larger portion to a low-carbon economy. The carbon intensity of of environmentally stringent countries record above‒ Indonesia’s trade flows has seen a significant decline average green export survival rates than those below over the years‒more than halving since 2005, but the overall mean EPS index value. Indonesia has a high share of exports that have a high intensity of CO2 emissions. About 60 percent of CO2 Although trade flows facilitate emissions, they are emissions embedded in exports stem from agriculture also a critical part of the solution, including through (including mining and quarrying), manufacturing, and trade in environmental goods (EGs) and plastic coal and petroleum products (refined and plastic). substitutes‒with important economic spillovers. First, trade can shift production towards cleaner 1 Türkcan et al. forthcoming. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 x TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation production techniques. Second, EGs and services mitigation, adaptation, and broader environmental necessary for transitioning to low-carbon production roles. UNCTAD (2023) published a list of 282 6-digit can be distributed and third, countries can access HS codes as a reference for raw materials and products critical goods and services after being affected by categorized as environmentally sustainable plastic Executive Summary extreme weather events (Brenton and Chemutai 2021). substitutes. The presence of green products in trade reduces a country’s ecological footprint (Can et al. 2021b) and Finding 1: Indonesia’s green competitiveness has increases environmental quality (Sauvage 2014). Plastic declined in recent years but Indonesia has untapped substitutes could also cut global plastic waste by about potential in exports of EGs and plastic substitutes 17 percent by 2040, and can foster growth, increase and the private sector, especially firms involved exports, reduce pollution and emissions, as well as in global value chains, will be key to realizing create higher-value employment opportunities (United Indonesia’s potential in green trade. Nations Conference on Trade and Development‒ UNCTAD 2023). As EGs serve various environmental Indonesia has untapped potential in exports of sustainability roles, more trade in these products EGs and plastic substitutes. Indonesia’s potential would also have important spillover effects in making to diversify into green, technologically sophisticated domestic production cleaner and therefore broader products, measured by its Green Complexity Potential exports, greener. (GCP), ranks relatively higher than other countries and was steadily improving until 2015 before it started This report provides a detailed analysis of the role of declining again. While Indonesia is lagging in EG trade and trade policy on EGs and plastic substitutes exports (Figure ES.2), EG imports (Figure ES.3) are at in Indonesia’s green transition. Chapter One describes par with global and regional averages and represent the need for, and urgency of, this transition, by looking an important source of access and transmission of at the carbon intensity of Indonesia’s trade, the impacts new green technologies‒underscored by the fact of environmental policies of Indonesia and key trading that Indonesia’s EG imports are more technology- partners, and the roles of EGs. Chapter Two examines intensive than exports. The extent to which Indonesia where Indonesia stands on the level of trade in EGs can competitively export green, technologically and plastic substitutes and the competitiveness of EGs sophisticated products is still low relative to other trade. Chapter Three explores trade agreements and countries, however, its potential to diversify into these tariffs and simulates potential impacts of tariff reforms‒ products is relatively high. Indonesia is a net exporter including through multilateral actions. Chapter Four of plastic substitutes. While Indonesia is in the world’s examines what non-tariff measures (NTMs) apply on top 20 traders of plastic substitutes (Figure ES.4), the these products including inputs of firms exporting levels have remained relatively static over time. EGs and assesses which NTMs may be costly. Finally, Chapter Five concludes with policy recommendations. Figure ES.1: Trends in EPS index values of selected While comprehensive, the report recognizes that other countries between 2003 and 2020 factors besides trade play a crucial role in climate change, and that an increase in trade in EGs and plastic CHN EMDE USA 5 HIC FRA DNK substitutes is likely to have distributional effects which are not studied in this report. 4 To analyze trade in EGs, this report refers to a 3 list of products defined by the Green Transition Navigator (GTN), while plastic substitutes refer to 2 the list by UNCTAD. The GTN compilation of EGs is based on classifications from the Asia-Pacific Economic 1 Cooperation (APEC), the Organization for Economic Co-operation and Development (OECD), and the 0 World Trade Organization (WTO) that use six-digit 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Harmonized System (HS) codes. The terms green trade and trade in EGs are used interchangeably. Source: OECD Stat database. Note: HIC= selected High-income Countries; EMDEs: Selected This includes 19 categories that have varying climate emerging and developing economies. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 xi TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation The private sector, especially firms involved in global especially for exports. Two-way traders‒firms that both value chains, will be key to realizing Indonesia’s export and import‒export more green products, trade potential in trade in EGs and plastic substitutes. in higher-technology EGs, and have higher survival The number of firms involved in EGs trade increased rates in export markets of EGs (Figure ES.5). As over Executive Summary between 2014 and 2018 but dropped as a share of all 90 percent of these products are intermediate and Indonesian firms trading internationally. The report capital goods products, and have relatively higher shows that the degree of involvement of Indonesian technological intensity, firms stand to benefit from firms in international trade matters in trade of EGs‒ technological spillovers and tools to facilitate greener production practices. Figure ES.2: Indonesia has a low share of EGs in its Figure ES.3: …while the EG share in imports broadly exports… aligns with the global average EG Export Share Global EG Import Share Global EG Export Share Indonesia 14% EG Import Share Indonesia 14% EG Export Share EAP EG Import Share EAP 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Bank staff calculations from BPS2 and World Integrated Trade Source: World Bank staff calculations BPS and WITS data. Solution (WITS) data. Figure ES.4: Indonesia is in the top 20 traders of Figure ES.5: Indonesian two-way traders in EGs have higher plastic substitutes… (2021) survival rates than non-EG traders (percent) 16 100 Export Import 14 Estimated Survival Probability (%) 12 10 75 Percent (%) 8 6 4 2.8 50 1.1 2 0 25 Russia Germany Sweden Canada United Kingdom Poland Netherlands Brazil Italy India USA Spain China France Republic of Korea Japan Indonesia Australia Turkey Vietnam EG Trade Firms Non-EG Trade Firms 0 -1 0 1 2 3 4 5 Survival time (number of years) Source: World Bank staff calculations from WITS data. Source: World Bank staff calculations from Directorate General of Customs and Excise (DGCE) data. 2 Statistics Indonesia (Badan Pusat Statistik: BPS) is a non-departmental government institute of Indonesia that is responsible for conducting statistical surveys. Its main customer is the government, but statistical data is also available to the public. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 xii TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Finding 2: While Indonesia committed to reducing participating countries and would benefit Indonesian tariffs on some EGs and took steps to ensure more exporters of EGs such as Energy Efficiency; Resources environmentally sustainable palm oil and timber and Pollution Management; and Water Supply (Figure exports, Indonesia does not participate in most ES.6). Third, liberalizing tariffs on EGs under the umbrella Executive Summary multilateral initiatives and environmental provisions of the WTO EGA is estimated to boost Indonesia’s in trade agreements are weakly enforceable in most EG exports by 1.1 percent (US$99 million) and green cases. imports by 1.2 percent (US$214 million) (Figure ES.7). Tariffs on imports of EGs also reduce the probability of While Indonesia committed to reducing tariffs on firm entry, as a one percentage point increase in tariffs some EGs, the country does not participate in most reduces the probability of firms starting to trade in EGs multilateral initiatives and environmental provisions by 9.3 percent. In addition, a tariff increase in imported in trade agreements are weakly enforceable. In the inputs for EG exports reduces the export value of EGs. early stages, Indonesia was one of the signatories of the APEC agreement in 2012 committing to limit tariffs Finding 4: Estimates suggest that some NTMs impose on 54 EGs to a maximum of 5 percent. Indonesia is significant costs‒equivalent to up to a 30 percent not, however, one of the 46 members of the World tariff for some EGs and plastic substitutes, and some Trade Organization (WTO) engaged in plurilateral measures negatively affect firms. In addition, local negotiations seeking to eliminate tariffs on EGs under content requirements (LCR) aimed at creating local the Environmental Goods Agreement (EGA). Indonesia manufacturing capacity could also be a deterrent to also does not participate in the three multilateral growth. initiatives aimed at tackling issues at the nexus between trade policy and climate change‒namely the Trade and NTMs are regulations such as packaging or licensing Environmental Sustainability Structured Discussions requirements, price controls, and import quotas (TESSD), the Informal Dialogue on Plastics Pollution that aim to fulfill public policy objectives but can and Sustainable Plastics Trade (IDP), and the Fossil Fuel also affect the flow of goods and services. Some of Subsidy Reform (FFSR). Among Indonesia’s 14 trade these measures are necessary‒for example, to ensure agreements analyzed at the time of writing, only six the compliance with health and safety standards, while contain environmental provisions‒of which only one others result in costly trade without achieving their (Indonesia EFTA) is strongly legally enforceable. primary policy objective. Finding 3: Average tariffs are low, but Indonesia’s Estimates suggest that some NTMs impose MFN tariffs on EG imports remain high. Tariff significant costs‒equivalent to up to a 30 percent reductions and the regional liberalization of tariffs tariff for some EGs and plastic substitutes, and on EGs trade among APEC countries and under the some measures deter firm entry. This leads to WTO EGA would create important “trade creation” lower participation rates of firms in import and effects, boost Indonesia’s EG trade and facilitate export markets of EGs. NTMs affect the inputs into firm entry into EG markets. the production of EGs and can lower the number of firms trading those goods and the export value of While average tariffs are low, Indonesia’s Most EGs. Between 2014 and 2018, on average, 92.4 percent Favored Nation (MFN) tariffs on EG imports remain of all exported EGs used imported inputs that were high (7.2 percent), and tariff reductions would have exposed to NTMs (Figure ES.8). In 2018 for example, positive effects on trade in EGs. At an average of 2 NTMs affected inputs of 7,421 products out of 7,801 percent in 2021, Indonesia’s tariffs on EGs are generally total exported products. Survey results also show that low. Indonesia’s MFN regime has several product firms trading in EGs indeed consider some NTMs to lines with tariff peaks of above 25 percent. Results of pose a challenge‒including the lack of harmonization simulations using a partial equilibrium trade model at on standards (Figure ES.9). Among NTMs, compliance the product level suggest that the unilateral, regional, with national standards (Standar Nasional Indonesia: and multilateral liberalization of tariffs on EGs trade SNI), the requirement to pass through a specific port of would have previously untapped benefits for Indonesia. customs, and pre-shipment inspections (PSI) are more First, unilateral liberalization of tariffs would boost the costly than the same measures on EGs in other ASEAN private sector’s access to cheaper and cutting-edge countries (Figure ES.10). Several NTMs also increase EGs and technologies. Second, regional liberalization the cost of imported plastic substitutes and reforming of tariffs on EGs trade among APEC countries would them would potentially allow cheaper access (Figure create important “trade creation” effects with other ES.11). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 xiii TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation In addition, without the right conditions, LCR aimed procurement and, therefore, reduce the attractiveness at creating local manufacturing capacity could also of major renewable energy sector public procurement be a deterrent to growth. Indonesia has set LCRs projects. LCRs applied in other countries for the on solar panels but the realization of the LCR of solar purposes of developing domestic productive capability Executive Summary modules currently does not reach the set minimum. of renewables have mostly led to increased costs.3 LCRs LCRs also apply to the electric vehicle (EV) industry are far more likely to succeed if the market size is large in Indonesia, compensated by generous incentives and the market’s demand is stable. Small or unstable to attract investors. For two- and three-wheeled EVs, markets may prevent firms from taking advantage of a minimum local content of 40 percent and for four- economies of scale, exacerbating the rise in production wheeled EVs a minimum 35 percent local content is costs that result from LCR policy implementation. required. LCRs act as barriers to international public Figure ES.6: The impact of regional liberalization of EGs Figure ES.7: The impact of the WTO EGA with Indonesia trade among APEC countries (percent change) on EGs trade (percent change) Water Supply Imports Water Supply Imports Wastewater Management/Water Treatment Wastewater Management/Water Treatment Exports Waste Management, Recycling, Remediation Exports Waste Management, Recycling, Remediation Resources and Pollution Management Resources and Pollution Management Renewable Energy Renewable Energy Others Others Noise and Vibration Abatement Noise and Vibration Abatement Natural Risk Management Natural Risk Management Natural Resource Protection Natural Resource Protection Management of Solid and Hazardous Waste Management of Solid and Hazardous Waste Heat and Energy Management Heat and Energy Management Gas Flairing Emission Reduction Gas Flairing Emission Reduction Environmentally Preferable Products Environmentally Preferable Products Environmental Monitoring, Analysis Equipment Environmental Monitoring, Analysis Equipment Energy Efficiency Energy Efficiency Efficient Consumption of Energy Technologies Efficient Consumption of Energy Technologies Cleaner or More Resource Efficient Products Cleaner or More Resource Efficient Products Clean Up or Remediation of Soil and Water Clean Up or Remediation of Soil and Water Air Pollution Control Air Pollution Control -2 -1 0 1 2 3 4 5 -2 -1 0 1 2 3 4 5 6 7 Source: World Bank staff calculations from DGCE data. Source: World Bank staff calculations from DGCE data. Figure ES.8: Average share of goods affected by NTMs Figure ES.9: Challenges with product standards remain 96% SNI isn't Recognized by Importing Countries SNI isn't Harmonized with Importing Countries Standard 95% Other 94% 18% 93% 92% Share (%) 91% 81% 86% 90% 82% 89% 88% 87% 19% 14% 86% 2014 2015 2016 2017 2018 EG Exporter Only EG Importer Only EG Exporter and Average share of goods affected by NTMs Importer Source: World Bank staff calculations from DGCE data. Source: World Bank staff calculations from DGCE data. 3 For example, in Brazil, India, and South Africa as discussed in Bazilian et al. (2020). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 xiv TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure ES.10: Tariff equivalent of most problematic Figure ES.11: NTMs increase the cost of imported NTMs on EGs are relatively more costly compared to plastic substitutes EAP (Ad Valorem Equivalent: AVE difference) Executive Summary 18.6 17.5 C3 (Port of entry restriction) 17.0 B6 (Product identity 25.3 requirements) E316 (Prohibition of used 26.7 goods) A52 (Irradiation) 29.1 3.3 A86 (Quarantine 33.2 requirements) Port of Entry PSI SNI 0 20 40 Percent (%) Source: World Bank staff calculations from WITS data. Source: World Bank staff calculations from WITS data. Finding 5: LCRs and nine out of nearly 90 non-tariff Recommendation Two: Streamline NTMs on EGs trade measures‒including their estimated tariff and plastic substitutes and conduct a systematic equivalents, cost relative to ASEAN countries, overall and periodic review of trade regulations. Given incidence and a survey of firms trading in EGs‒are that there are many different NTMs by different suggested for review and possible reform. government ministries and agencies, identifying which policies and measures warrant a closer look for reform The recommendations emerging from these find- is key. To that end, we triangulate the results on both ings are as follows: the cost and the incidence of NTMs to narrow down measures that could be improved or relaxed for EGs Recommendation One: Reduce remaining tariffs on and plastic substitutes. The recommendations also imports of EGs and plastic substitutes‒including account for feedback from the survey of firms such as through multilateral participation. Reducing import on standards and previous work the World Bank has tariffs on EGs will lower their price, boost access to lower- conducted on specific non-tariff trade measures that cost, more energy-efficient technologies and incentivize may be burdensome. These are presented in Table the use of environmentally friendly alternatives. This is ES.1. A responsible government agency that conducts particularly important for industries that must comply such holistic reviews on NTMs would be an important with climate change mitigation policies. Unilateral, first step in this regard. regional, and multilateral liberalization of tariffs on EGs trade would have previously untapped benefits for Indonesia and facilitate firm entry into trading of EGs. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 xv TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Table ES.1: NTM recommendations based on findings in the report NTMs for Potential Reform EGs Plastic Substitutes Authorization requirement for SPS reasons for importing certain Renewable Energy Executive Summary products (A14) Traceability requirements (A85) Renewable Energy Quarantine requirement (A86) Plastic Substitutes Certifications complying to national standards (SNI, B7)# All EGs* Management of Solid and Hazardous Waste and Recycling Systems; Authorization requirements for importing certain products (B14) Waste Management, Recycling and Remediation Waste Management, Recycling and Authorization requirements for importers (B15) Remediation Waste Management, Recycling and Traceability requirements (B85) Remediation Pre-shipment Inspections (C1)# All EGs* Requirement to pass through specified port of customs (C3) All EGs* Plastic Substitutes Source: World Bank staff calculations from BPS and World Bank NTM Database based on 2008-21 sample years. Note: Color codes: Orange affects some categories of EGs; Red affects all EG categories. *AVEs for all EGs are in relation to AVEs for ASEAN countries applying the same measures on the same products. # While PSI measures were dropped in 2021, they have historically been high and new post-border and pre-border inspection changes yet to be implemented will likely increase this share. SNI measures are included due to high cost and recurrent concerns from the private sector including those trading in EGs. Recommendation Three: Work toward a environmental provisions in trade agreements harmonization of product standards across markets, and participate in plurilateral and multilateral mutual recognition, as well as coordination on trade policy initiatives on EGs. On the one hand, climate policies that are likely to affect trade to environmental provisions and commitments will better enable the private sector. Harmonization need to become more detailed in terms of scope and of standards and mutual recognition could be a ambition. On the other hand, direct participation in supportive policy to encourage imports of EGs, exports multilateral and plurilateral environment-related trade in new export markets with comparable standards, and policy initiatives would not only allow Indonesian facilitate product upgrading for firms. There is a need exporters to benefit from improved market access in to harmonize existing local standards with international destination markets but would also give Indonesia a ones and develop new standards that are aligned with seat at the table to shape the content and course of international standards and practices. Improving the discussions. coordination of climate-related policies would also reduce policy fragmentation and compliance costs Recommendation Six: Strengthen the for firms from administrative difficulties and potential complementarity between trade and climate complexities. policies. This includes more systematically integrating trade policies and trade facilitation measures as part Recommendation Four: Review and relax local of broader climate strategies‒including in Nationally content requirements (LCRs) to accelerate renewable Determined Contributions (NDCs). energy (RE) sector growth through strengthening domestic supply chain and establishing demand for These policies will need to ensure equity and will RE and RE enabling projects. Given progress by, and have broader economy-wide effects that will need lessons from, other countries, Indonesia may consider to be analyzed further. As trade in EGs and plastic reducing minimum requirements on LCRs and allow substitutes increases, possible impacts on jobs and the the market to first develop to a point where domestic labor market for various industries, as well as impacts production could achieve the economies of scale on other macroeconomic outcomes is expected. required to keep prices affordable. There may be scope Climate-related trade policy instruments also need for countries to agree to cooperate on green industrial to ensure non-discrimination and be administratively policies (procurement, subsidies, LCRs, investment, feasible. These aspects are beyond the scope of this technology transfer, and IP). report but will be taken on in the next phase. Recommendation Five: Include enforceable TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 xvi CHAPTER 1. INTRODUCTION TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Chapter 1 CHAPTER 1. INTRODUCTION Indonesia has made progress on some aspects of trade, climate, and environmental policies, but climate action and trade-related policies are yet to be explicitly aligned. Although trade flows facilitate carbon emissions, they are also a critical part of the solution‒including through trade in environmental goods (EGs) and plastic substitutes. This is crucial both for Indonesia’s own Nationally Determined Contribution (NDC) and because global regulatory initiatives on climate and the environment by trading partners will impact trade significantly. Identifying key trade policies to boost trade in EGs and plastic substitutes would be a step forward to environmentally sustainable and climate friendly domestic production processes and international trade‒on Indonesia’s path to becoming a high- income country. Indonesia has made significant strides in climate extraction remain key for both the domestic adaptation and mitigation efforts, but a crucial economy as well as international trade. Exports of challenge lies in harmonizing these with sustained primary products and resource-based manufactures economic growth on its path to becoming a high- make up over 60 percent of total exports. Indonesia income nation. The World Bank Climate Change and is a large exporter of fossil fuels and the world’s Development Report (CCDR) indicates that a balance largest palm oil exporter‒with a 55 percent share in between these two objectives is attainable (World Bank total global exports (International Monetary Fund 2023). Both goals can be reached by enacting reforms 2021). Coal made up 11 percent of exports, followed that simultaneously address short-term environmental by palm oil (8 percent), and petroleum gas (4 percent) concerns and contribute to the nation's long-term in 2019. Over 60 percent of total coal production was sustainable development‒fostering a transition exported in 2019‒making Indonesia the world’s largest towards a greener, economically prosperous future. coal exporter (International Energy Agency 2021). The government receives royalties from oil, gas, and Although Indonesia’s economy has diversified over coal mining that are equivalent to 7.5 percent of total past decades, commodities and natural resource government revenue.4 4 Oil, gas, and coal mining royalties were 4.3 percent, 1.9 percent, and 1.3 percent of total revenue, respectively, in 2019 (IMF 2021a). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 1 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Indonesia is among the world’s ten largest GHG (World Bank 2021). In 2016, the Government of emitters but is also highly vulnerable to climate Indonesia through the Ministry of Environment and change‒requiring that climate mitigation and Forestry (MoEF) (Circular Letter Number 1230/2016) adaptation efforts go hand in hand. Indonesia’s introduced supplementary charges for plastic bags total GHG emissions have increased from about with each retail purchase. Ongoing efforts to address Chapter 1 1,000 to 1,800 MtCO2eq during the 2000-19 period, plastic waste persist, with the implementation of MoEF more than one-half of which were contributed by Regulation No. 75/2019 serving as one such initiative. the agriculture, forestry, and other land use (AFOLU) The regulation mandates that the manufacturing, food sectors. From 2000 to 2020, Indonesia lost almost and beverage, and retail sectors follow a national 8.49 million hectares of forest cover (MoEF 2022) and roadmap to achieve a 30 percent plastic waste registered one of the highest rates of species decline reduction by 2029. The prescribed implementation worldwide. Agriculture and forestry activities were the strategies encompass the adoption of biodegradable primary drivers of land cover change, notably export- items, the utilization of recyclable materials at various oriented timber extraction, pulp and paper plantations stages of production, and the promotion of reusable and oil palm‒particularly on the islands of Sumatra waste management practices. and Kalimantan. At the same time, Indonesia is highly vulnerable to weather and climate stresses. Estimates Climate change‒and efforts to mitigate it both suggest that rising temperatures and changing rainfall globally and in Indonesia–will affect global flows patterns will significantly reduce yields across almost of trade, just as climate-related events will affect all key crops‒rice, maize, other cereals, sugar, oil crops, productive capacities. World Bank analysis shows pulses, fruit, and vegetables. that demand is expected to decline for fossil fuels and energy-intensive exports while rising for relatively low While forestry and land use persist as a critical energy-intensity products such as electronics or select issue for Indonesia’s climate action, Indonesia has services sectors (Brenton et al. forthcoming). Mitigation already made noteworthy progress in reducing policies could lead to a decline in world trade, with a emissions or preserving forest land. In 2022 drop of up to 5 percent in low- and middle-income Indonesia enhanced the NDC, raising the emission countries and declines of 2 percent in advanced reduction target to 31.89 percent unconditionally economies. Improving carbon competitiveness and 43.2 percent conditionally (Republic of Indonesia of existing Global Value Chains (GVCs), will drive 2022). To achieve carbon neutrality by 2050, Indonesia the overall trade performance. Heavy agricultural formulated the Long-Term Strategy for Low Carbon exporters like Indonesia will see their yields decline and Climate Resilience (2021), launched the Low in several sectors and productive capacities affected Carbon Development Initiative and increased targets due to climate shocks. At the same time, tightened on renewable energy. Deforestation in Indonesia has environmental laws within exporting countries increase slowed over time, decreasing from an average of 1.08 their specialization in green products, improving their million hectares (ha) per year during 2000-2007, to an survival rates in international markets (Koźluk and average of 0.48 million ha per year during 2014-2021 Timiliotis 2016; Sauvage 2014). partly due to the permanent moratorium on clearing of primary forests and peatlands. Large peatland Environmental policy stringency (EPS) has been rewetting and restoration projects aim to restore 2.7 increasing across countries of all income groups million hectares of peatland by 2030 while, at the same in the years between 2003 and 2020. Although on time, the government aims to rehabilitate 5.3 million average, high-income countries (HICs) enforced more hectares of degraded forest land (World Bank 2023). stringent environmental policies than middle-income countries (Figure 1.1), the increase is observed among Indonesia also aspires to curtail marine plastic waste low-, middle-, and high-income countries, with by 70 percent before 2025.5 The annual production of Indonesia ranking 37th of the 40 countries sampled 7.8 million tons of plastic waste‒the majority of which (Figure 1.2). One example is the Carbon Border ultimately finds its way into rivers and oceans–leads Adjustment Mechanism (CBAM) of the European Union to detrimental effects on marine life and ecosystems (EU) which is expected to impact sectors like iron and 5 The National Plastic Action Partnership (NPAP) initiative brings together multiple public and private sector stakeholders in Indonesia. Source: https://wri-indonesia.org/ en/initiatives/indonesia-national-plastic-action-partnership-npap TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 2 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation steel. While worldwide NDCs have a larger impact on adapt to new sources of international demand, adjust Indonesia, if similar mechanisms to the EU CBAM are its existing productive capabilities, and cultivate new implemented by other countries, it will significantly green industries. Indonesia has an untapped potential affect aggregate real income, output, and trade as for exports of environmental goods (EGs).6 With demand shifts away from more carbon-intensive exports of EGs of US$10.4 billion (3.6 percent of total Chapter 1 sectors to green industries (Box 1.1). Other examples goods exports) in 2022, Indonesia is far below the are the European Union Deforestation-Free Regulation global and East Asia and Pacific (EAP) average at 12 (EUDR) which will likely affect exports of palm oil, one percent and 7.3 percent, respectively. of Indonesia’s main export commodities (European Commission 2023), the EU Critical Raw Materials Act, Figure 1.1: Trends in EPS index values of selected the US Inflation Reduction Act, and the EU Supply countries (2003-20) Chain Diligence, among others. CHN EMDE USA 5 HIC FRA DNK While Indonesia has put in place policies in response, such as on deforestation, more needs to 4 be done to position itself in the global transition to a low-carbon economy. Partly in response to the 3 EUDR, Indonesia established the Timber Sustainability and Legality Verification System, which was 2 implemented as a response to the EU deforestation act. The system helps to ensure sustainable practices 1 in timber production and is the first system worldwide 0 that is recognized by the EU. Developments such as 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 the trade agreement with the European Free Trade Association (EFTA) states will strengthen systems for Source: Türkcan et al. (forthcoming)-calculations from OECD Stat trade of sustainable palm oil. Indonesia could further database. Figure 1.2: EPS index values for the sample (2003-20) 5 Mean 4 3 2 1 0 DNK SWE JPN CHE LUX NDR EST HUN POL PRT ESP CHL AUT TUR CHN ISR ISL KOR CAN AUS BEL ORC MEX NZL RUS ZAF FIN ITA NLD USA CZE SVN SVK IND FRA DEU OBR IRL BRA IDN Source: Türkcan et al. (forthcoming)-calculations from OECD Stat database. 6 EGs are defined by the environmental benefits they provide rather than their carbon content. The term EGs and environmental goods (EGs) are used interchangeably. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 3 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Indonesia’s ability to diversify away from primary sources (Figure 1.5), suggesting that international products, reduce carbon emissions, adapt to climate green competitiveness will require making changes in change, and transition to a more environmentally domestic production. This signals that there is room for sustainable economy is, therefore, interlinked greening inputs through imports and domestic reform with trade and trade policy. Despite the declining for firms to change processes. On the other hand, Chapter 1 importance of trade for Indonesia’s economy after and consistent with this observation, imported CO2 is the Asian Financial Crisis (trade openness more than mainly consumed (86 percent) and only a small share is halved from 72 percent in 2000 to 33 percent in re-exported (Figure 1.6). In terms of global ranking, this 2020 before increasing to 45 percent in 2022), trade puts Indonesia’s carbon content of trade at the 19th and and trade policies could play a crucial role in climate 20th rank for exports and imports respectively.7 Among adaptation and mitigation efforts. First, trade shifts peer countries in the EAP region, however, Indonesia production towards cleaner production techniques. remains at the top‒with the highest CO2 emissions Second, EGs and services necessary for transitioning embedded in trade. to low-carbon production are distributed and third, countries can access critical goods and services after About 60 percent of CO2 emissions embedded in being affected by extreme weather events (Brenton exports stem from agriculture (including mining and and Chemutai 2021). quarrying), manufacturing, and coal and petroleum products (refined and plastic). During the 2005-18 The carbon intensity of Indonesia’s trade flows period, nearly one-half of the emissions embedded in has seen a significant decline over the years‒more exports were accounted for by other manufacturing than halving since 2005, but Indonesia has a high such as food, textiles, wood, and paper products at share of exports that have a high intensity of CO2 25 percent and agriculture, mining, and quarrying at emissions. While imports and exports in goods and 21 percent. An additional 14 percent was embedded services each more than doubled‒from under US$100 in exports of coal and petroleum while transport and billion in 2005 to over US$250 billion in 2021, CO2 storage made up 12 percent. There has been a notable emissions embedded in Indonesia’s trade flows have increase in export CO2 emissions stemming from only increased by 17 percent (Figure 1.3). This overall transport and storage and basic metals (Figure A.1 in decline in CO2 intensity can be attributed to a modest Appendix Three). decrease in the carbon intensity of exports which fell slightly over the same period (Figure 1.4). Overall, CO2 Nearly one-half of CO2 emissions embedded in emissions embedded in Indonesia’s trade flows add up imports are from transport (including storage), to 131 and 126 metric tons of CO2 for every US$1 million basic metals, and coal and petroleum products that of exports and imports, respectively. This is lower than account for the largest sectoral shares. During the the carbon intensity of exports of Thailand, but higher 2005-18 period, emissions embedded in imports of than that of the Philippines and Malaysia. Indonesia is transport and storage (17 percent), basic metals (15 among countries with a more than 20 percent share percent), and coal and petroleum products (refined and of exports that would be impacted by measures that plastic) (13 percent) accounted for nearly one-half of all target producers with emission intensities at the upper emissions, while other manufacturing (at 12 percent) end of the distribution at over 34 percent of exports is also significant. Unlike exports, CO2 emissions in (Brenton forthcoming). This is a higher percentage transport and storage imports have declined over time, than countries such as Thailand (18 percent), Vietnam while emissions in basic metals and computer and (31 percent), or Malaysia (19 percent). other electrical equipment have increased (Figure A.2 in Appendix Three). There is, therefore, room to ensure CO2 emissions embedded in Indonesia’s exports are trade policy supports greener imports, which would mainly sourced domestically rather than imported, also play a role in greening domestic production and while imported CO2 emissions are mainly consumed, exports, in addition to greener local raw materials.8 rather than re-exported. An estimated 84 percent of exported CO2 emissions originate from domestic 7 IMF Climate Change Dashboard based on 2019 prorated data. 8 See Chapter Three and Four which discusses in more detail the role of trade policy in greening trade in Indonesia. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 4 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 1.3: CO2 emissions embodied in Indonesia’s Figure 1.4: CO2 emissions in trade 2021: Indonesia exports and imports increased less than exports and lies above the Philippines and Malaysia (millions of imports metric tons) CO CO2 Emissions embodied in gross exports 2 Emissions Embodied in Gross Exports Emissions embodied CO2 Emissions CO2 Embodied in 2,400 Chapter 1 CO CO2 Emissions embodied in gross imports gross exports Gross Exports 2 Emissions Embodied in Gross Imports Millions of metric tons Total exports (RHS) 2,000 Emissions embodied CO2 Emissions CO2 Embodied in gross imports Gross Imports Total imports (RHS) 1,600 250 300 1,200 200 250 Million of Metric Tons 800 200 Billions of US$ 150 400 150 0 100 100 Thailand Malaysia Vietnam Philippines Russian Federation China Germany India Indonesia Japan France United States Italy 50 50 0 0 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: World Bank staff calculations based on International Source: World Bank staff calculations from Organisation for Monetary Fund (IMF Climate Change Indicators Dashboard).9 Economic Co-operation and Development (OECD) data 2021. Figure 1.5: The source of exported CO2 (%) in 2018 is Figure 1.6: Use of CO2 contained in imports (%) in largely domestic 2018 is largely due to consumption CO2 (%) Domestic CO2 (%) External market (re-exported, %) CO2 (%) Imported CO2 (%) Domestic market (consumed, %) Russia 84 16 Vietnam 55 45 China 72 28 Thailand 45 55 India 65 35 Malaysia 42 58 Indonesia 63 37 Philippines 17 83 United States 59 41 Indonesia 14 86 Source: World Bank staff calculations from OECD data. Source: World Bank staff calculations from OECD data. Although trade flows facilitate carbon emissions, modest increase in GDP due to falling tariffs, NTMs, they are also a critical part of the solution—including and increased energy efficiency; and (iii) a slightly lower through trade in EGs and plastic substitutes. EG trade level of global emissions (Bacchetta et al. 2022).11 On the plays a key role in achieving carbon neutrality targets. other hand, SO2 emissions seem to increase following a The presence of green products in trade reduces a tariff reduction on non-environmental goods (De Alwis country’s ecological footprint (Can et al. 2021a) by 2014). Increased trade in environmental products can reducing CO2 emissions (Zugravu-Soilita 2018).10 A also increase environmental quality (Sauvage 2014). reduction in tariffs and NTMs of energy-related EGs Finally, plastic substitutes could cut global plastic waste and environmentally preferable products (EPPs) leads by around 17 percent or about 63 million tonnes by to: (i) an increase in exports of those goods; (ii) a 2040‒the equivalent of 3.5 million fewer trucks‒and 9 https://climatedata.imf.org/ 10 But increases water pollution. The reduction of CO2 emissions results mainly from an indirect income effect that imposes dominating harmful scale-composition effects. 11 Lower tariffs can result in higher economic activity, imposing higher emissions (Hu et al. 2020). Nimubona (2012) finds that pollution taxes end up being less stringent due to trade liberalization of EGs that can then increase pollution levels. These caveats, therefore, need to be accounted for when liberalizing EGs. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 5 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation can foster growth, increase exports, reduce pollution While comprehensive, the report recognizes that and emissions, and create higher-value employment other factors play a crucial role in climate change‒ opportunities (UNCTAD 2023). including Indonesia’s policies on exports of raw materials and agriculture products. Some examples Indonesia has made progress on some aspects are: (i) structural reform agendas (OECD, World Bank, Chapter 1 of trade policies, but climate action and trade- and United Nations 2012); (ii) international trade law related policies are yet to be explicitly aligned‒ and agreements (Holzer 2015; Balogh et al. 2021; including to further facilitate the transition with Brandi 2017; Aichele and Felbermayr 2015); (iii) carbon local production. In 2021, as part of the implementing tariffs (Weber et al. 2009); (iv) emission inventories regulations for the Omnibus Law on Job Creation, (Fernandez-Amador et al. 2016); and (v) renewable several regulations were enacted that reduced the energy subsidy mechanisms (ADB 2020). Indonesia’s number of trade-related regulations from 164 in 2020 policies on palm oil exports may also have an impact to 122 in 2021. These included a reduction in import- on greening trade (Bappenas 2023). The palm oil related regulations from 147 in 2020 to 116 in 2021, while sector and its impact on the environment in Indonesia export regulations decreased from 30 in 2020 to 18 in has been extensively studied (Murphy et al. 2021; 2021.12 Nevertheless, the share of products covered, Voora et al. 2023; Sylvia et al. 2020; Lam et al. 2019; and including EGs increased in 2021 (more in Chapter Four) Sylvia et al. 2022). The nickel export ban to incentivize and other measures have been implemented since. downstreaming targets the expansion of nickel smelting Trade policies have not been integrated in Indonesia’s capacities which are generally emission-intensive and, NDCs and broader climate action as yet. As EGs serve therefore, have a potentially negative impact on the various environmental sustainability roles and as over environment‒including through negative effects on 90 percent of these products are intermediate and landscape, water resources, and air quality (WTO 2022). capital goods products and have relatively higher The downstreaming policies in the mining sector are technological intensity, more trade in these products being analyzed as part of an ongoing separate growth would also have important spillover effects to domestic diagnosis for Indonesia by the World Bank. production. As such, the report’s focus on EGs and plastic As such, identifying key trade policies to boost EG substitutes trade provides an important channel trade and trade in plastic substitutes would be a through which trade and trade policy can be step forward to environmentally sustainable and more integrated with environmental and climate climate-friendly international trade. This report policy‒complementing other ongoing efforts and provides a detailed analysis of the role of trade providing granular policy options. To analyze trade and trade policy on EGs and plastic substitutes in in EGs, this report refers to a list of products defined Indonesia. Chapter One describes the need for, and by the Green Transition Navigator (GTN), while plastic urgency of, this transition, including by looking at the substitutes refer to the list by the United Nations carbon intensity of Indonesia’s international trade, Conference on Trade and Development (UNCTAD). the policies of key trading partners and demonstrates The GTN compilation of EGs is based on classifications the interlinkages between trade, trade policy, climate, from the Asia-Pacific Economic Cooperation (APEC), and the environment. Chapter Two examines where the Organization for Economic Co-operation Indonesia stands on the levels of trade in EGs and plastic and Development (OECD), and the World Trade substitutes and the competitiveness of EGs trade at the Organization (WTO) that use six-digit Harmonized country level and firm level. Chapter Three explores System (HS) codes. This includes 19 categories further trade agreements and tariffs and simulates potential described in the next chapter. UNCTAD (2023) published impacts of tariff reforms‒including through unilateral a list of 282 6-digit HS codes as a reference for raw and multilateral actions. Chapter Four examines what materials and products categorized as environmentally NTMs apply on these products‒including inputs of firms sustainable plastic substitutes. These are the two lists exporting these products‒and assesses which NTMs used in this report and their environmental benefits are may be costly and potentially need reform. Finally, further elaborated. Chapter Five draws the conclusions and provides some suggested recommendations. Based on NTM data on Indonesia. These regulations were key to the changes: Ministry of Trade Regulation No. 18/2021 on Export and Import Prohibition); Ministry 12 of Trade Regulation No. 19/2021 on Export Measures and Export Commodity Balance); and Ministry of Trade Regulation No. 20/2021 on Import Measures and Import Commodity Balance. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 6 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Box 1.1: The impact of the EU CBAM and worldwide environmental actions on Indonesia The Carbon Border Adjustment Mechanism (CBAM) of the EU is scheduled to become operational on January 1, 2026, following a transition phase that commenced in October 2023. Its primary objective is to Chapter 1 prevent “carbon leakage”13 and establish a justifiable cost for emissions linked to the production of specific high- carbon intensity commodities such as steel, aluminum, cement, fertilizer, and electricity. These goods necessitate CBAM certificates which outline their associated carbon emissions. This will impact nations like Indonesia, which are exporting these goods to the EU. The CBAM Exposure Index14 assists in determining the impact of the EU CBAM on different nations. The calculation involves an analysis of a country’s carbon emissions and its export volume to the EU. The index then computes the additional expenses exporters would incur for CBAM certificates compared to EU manufacturers‒ thereby conveying the changes in competitiveness. Indonesia’s iron and steel sector is expected to bear the brunt of this impact. Iron and steel are important export products for Indonesia‒with the EU representing a vital market. In the year 2022, exports of iron and steel totaled US$29.6 billion‒accounting for approximately 10 percent of all exports.15 Of these iron and steel exports, 8.1 percent were exported to the EU. In comparison with regional peer countries like Vietnam, Thailand, the Philippines, and Malaysia, Indonesia has the second-highest relative CBAM exposure index16 for iron and steel (Figure 1.7)‒meaning that the sector experiences a relatively larger impact on its production costs and, therefore, competitiveness. While the export value of aluminum is lower compared to iron and steel exports (amounting to US$890 million or 0.3 percent of all exports in 2022), and only 2 percent of these exports are destined for the EU, the carbon intensity of this sector surpasses that of its peer nations‒with a ratio of 0.69 kg/US$1.00 as opposed to an average of 0.04 kg/US$1.00. Consequently, the CBAM exposure index value for aluminum in Indonesia is notably higher than that of other countries in the region (Figure 1.7). These countries generally exhibit negative index values, indicating that comparatively cleaner exporters may enhance their competitiveness within the EU market. The Aggregate CBAM Exposure Index takes into account all sectors and identifies countries that are highly exposed to the CBAM‒using emission intensity and exports to the EU. With a US$100/ton carbon price, it measures added certificate costs for exporters versus the EU average producer‒adjusted by EU export share. The index considers EU market changes‒allowing cleaner exporters to stay competitive despite certificate needs. The aggregate index shows trade-weighted exposure across all CBAM products. When considering all relevant sectors, Indonesia possesses an aggregate relative CBAM exposure index of 0.0017‒higher than Malaysia, Thailand, and the Philippines but lower than Vietnam (Figure 1.8). The estimated impacts of the EU CBAM on most countries’ aggregate real income, output, and trade in 2030 are small. Estimations show that when both NDCs and the EU CBAM are implemented, Indonesia’s real income decreases by 0.5 percent relative to the baseline in 2030 (Figure 1.9). The reduction is the result of the NDCs‒while the effect of the EU CBAM is negligible. Aggregate imports and exports are also negatively impacted, with larger reductions in imports than exports. Given its high emission intensity, coal is the sector with the highest decline in total exports of 11.6 percent. Consequently, the share of coal in Indonesia’s total exports declines by 1.7 percent relative to the baseline (Figure 1.10). Some sectors see a relatively small increase of exports due to a redistribution of resources away from high emission intensity sectors. This is a result of resource allocation to sectors with relatively lower emissions. Estimates suggest that a larger portion of environmentally stringent countries record above-average green export survival 13 Carbon leakage occurs when EU-based companies start producing their carbon-intensive goods abroad to avoid stringent climate policies in their domestic country. 14 https://blogs.worldbank.org/trade/how-developing-countries-can-measure-exposure-eus-carbon-border-adjustment-mechanism 15 Source: BPS. 16 https://www.worldbank.org/en/data/interactive/2023/06/15/relative-cbam-exposure-index#3 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 7 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation rates than those below the overall mean EPS index Figure 1.7: Indonesia’s iron and steel and aluminum value. Specifically, a 1-unit rise in its EPS index value products have a high CBAM exposure decreased its EG export hazard rate by approximately 1.03 percent and green policies in exporting EMDEs 0.0060 Iron and Steel Alluminium improved their EG survival rates‒especially when Relative CBAM Exposure Index Chapter 1 0.0050 trading with HICs (Türkcan et al, forthcoming). 0.0040 Notably, despite limited macro impacts of the 0.0030 EU CBAM initially, other countries are likely to 0.0020 introduce similar mechanisms with expanded reach 0.0010 as consumer demand shifts toward cleaner products and firms implement changes in their production 0.0000 processes to remain competitive. The CBAM exposure, -0.0010 therefore, informs the need to implement policies that could further accelerate transitioning towards green production and lower carbon exports for Indonesia‒ including by using green technologies. Source: Maliszewska et al. (2023). Figure 1.8: The overall CBAM exposure of Indonesia is Figure 1.9: Impact of NDCs and CBAM on aggregate comparatively high macro indicators (percentage change in 2030 relative to baseline) 0.0045 0.0 Aggregate relative CBAM 0.0040 -0.2 0.0035 -0.1 exposure index 0.0030 -0.4 0.0025 -0.6 -0.5 0.0020 -0.8 0.0015 -1.0 0.0010 0.0005 -1.2 -1.1 - -1.4 -1.2 Real income Output Exports Imports NDC CBAM NDC + CBAM Source: Maliszewska et al. (2023). Source: Brenton et al. (forthcoming). Figure 1.10: Indonesia: Impact of NDCs and CBAM on volume of total exports by sector (percentage change in 2030 relative to baseline) 0.5 0.0 -0.5 -1.0 NDC CBAM NDC + CBAM -1.5 -2.0 Other services Gas Non-metallic minerals Other transport Coal Trade incl. warehousing Wood, paper and lumber Fab. metal goods, vehicles Water transport Other processed foods Oil Electronics and electrical Chemical products (incl. Other crops Air transport Total Metals Textile, wearing apparel and and transport equipment rubber and plastics) leather products equipment products Source: Brenton et al. (forthcoming). Note: Showing selected industries with more than 0.00 percent change in export share. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 8 CHAPTER 2. INDONESIA’S TRADE IN EGs AND PLASTIC SUBSTITUTES: TRENDS AND STYLIZED FACTS 2.1. Defining EGs and Plastic Substitutes 2.2. Green Competitiveness and Trade in Environmental Goods and Plastic Substitutes 2.3. Indonesia’s Trade in Environmental Goods – Firm level TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Chapter 2 CHAPTER 2. INDONESIA’S TRADE IN EGs AND PLASTIC SUBSTITUTES: TRENDS AND STYLIZED FACTS Indonesia’s green competitiveness has declined in recent years, but Indonesia has untapped potential in exports of EGs and plastic substitutes. The share of plastic substitutes trade has stagnated and there is potential for greater participation in the global market. The number of firms involved in the EGs trade has increased. EGs can facilitate cleaner domestic production, as over 90 percent of these products are intermediate and capital goods products and have relatively higher technological intensity. Firms that both export and import (GVC firms) account for a larger share of EGs traders and trade, are more likely to export, and overall EGs trading firms have a higher survival rate in export and import markets than non-EG traders. The private sector, especially firms involved in GVCs, will be key to realizing Indonesia’s potential in trade in EGs. 2.1. Defining EGs and Plastic Substitutes There have been several attempts to develop lists APEC member states agreed to reduce applied tariff of products with environmental benefits. The OECD rates to 5 percent or less by the end of 2015 (APEC has put together indicative lists of products ranging 2012). While these were non-binding commitments, across several environmental categories such as air there are now 19 APEC member economies that are pollution control; wastewater management; renewable fully compliant (APEC 2021). energy; and environmental monitoring, analysis, and assessment (OECD 1999), while the WTO and APEC The EGs referred to in this report are based on lists were created specifically for trade negotiation the list of green products defined by the GTN‒a purposes. The WTO lists were created through a compilation of the APEC, OECD, and WTO green process of product submission from member countries goods classifications. The GTN of green products‒or following the Doha Declaration mandate (WTO 2001). products with environmental benefits–lists and collates The APEC list includes a set of EGs on which the 21 these into a single dataset totaling 543 products TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 10 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation classified at the six-digit level of the 1992 version of data on trade in such services is still challenging. WTO the HS. The list is also inclusive of green technologies commitments on environmental services remain even in the World Bank’s (2007) International Trade and more modest compared to commitments of green/ Climate Change: Economic, Legal, and Institutional environmental goods. The discussion in this report, Perspectives report. The compilation and agreement therefore, focuses on the EGs trade. Examples of EGs Chapter 2 on an equivalent list on environmental services and can be found in Box 2.1 and Table A.1 in Appendix One. Box 2.1: Examples of EGs and their climate and environmental roles The EGs are divided into 19 categories (Table 2.1) based on their environmental benefits. Table A.1 in Appendix One provides detailed examples of each category of EGs used in this analysis. It should be noted that these products are defined as EGs based on their use in mitigating and adapting to climate change‒not on how cleanly they were produced. The EGs can be specifically attributed to mitigating climate change (such as through the energy transition, agriculture and land use transition or waste management)‒adapting to climate change or to help with broader environmental protection. Table 2.1 also lists the 19 categories and the climate change role of each. Air pollution control products, for instance, aim to control and reduce air pollution‒which supports the energy transition and, therefore, climate change mitigation. Products needed to build air handling equipment or machines to extract polluted air include parts of vacuum pumps, compressors, fans, and blowers. They also include electric vehicles or parts thereof. EPPs based on end-use or disposal characteristics support the production of biodegradable fiber alternatives from renewable resources. This requires products such as plant fibers, flooring, and gas turbines. These goods contribute to broader environmental protection. Products in the Gas Flaring Emission Reduction category are used to destroy solid and hazardous waste and, therefore, support the energy transition and climate mitigation. Catalytic incinerators are designed to destroy pollutants by heating polluted air and oxidizing organic components. This requires products such as industrial furnaces, ovens, and filtering/purifying equipment. An example of an EG category that helps adaptation to climate change is natural risk management. This category includes surveying instruments that provide environmental benefits by enabling monitoring of the ozone layer. These instruments also support the prediction of natural disasters like earthquakes, cyclones, and tsunamis‒ allowing communities to better prepare for and adapt to such events. Table 2.1: 19 EGs categories and their climate change role Agriculture Energy Waste Broader And Land Use Adapta- Product Category Transition Management Environmental Transition/NRM tion (Mitigation) (Mitigation) Protection (Mitigation) Air Pollution Control * Clean Up or Remediation of Soil and Water * * Cleaner or More Resource Efficient Technologies and Products * Efficient Consumption of Energy Technologies and Carbon Capture * and Storage Energy Efficiency * Environmental Monitoring, Analysis, and Assessment Equipment * EPPs based on End-Use or Disposal Characteristics * TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 11 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Gas Flaring Emission Reduction * Heat and Energy Management * Management of Solid and Hazardous * Chapter 2 Waste and Recycling Systems Natural Resource Protection * Natural Risk Management * Noise and Vibration Abatement * Renewable Energy * Resources and Pollution Management * Waste Management, Recycling, and Remediation * Wastewater Management and Potable Water Treatment * Water Supply * * Others * Source: World Bank staff calibrations. UNCTAD (2023) published a list of 282 6-digit HS codes as a reference for raw materials and products categorized as plastic substitutes. This compilation encompasses natural materials, minerals, plants, and materials of marine or animal origin that are characterized by their biodegradability, erodibility, minimal environmental impact, and non-harmful property towards living organisms. The list does not include materials of fossil origin. Furthermore, UNCTAD classifies plastic substitutes into three main categories, namely: (i) natural fibers; (ii) minerals (aluminum); and (iii) abandoned, lost, or discarded fishing gear (ALDFG). Although the HS code's universal implementation has constraints in various countries given the varying details in tariff lines, it still retains significant importance due to its role in shaping policy development and monitoring trade patterns. Given the list, Indonesia can refine its initiatives to address the issue of plastic pollution more effectively. This report includes some illustrations on trade in plastic substitutes, as this is a new and potentially productive area, but the core focus of this report is on the aforementioned EGs trade. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 12 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation 2.2. Green Competitiveness and Trade in Environmental Goods and Plastic Substitutes Green Competitiveness Potential and was steadily improving until 2015 before it started declining again. With respect to GCP, Indonesia ranks Chapter 2 To assess the status quo, the green complexity 36th‒higher than Malaysia and Vietnam but lower index (GCI) and the green complexity potential than Thailand (28th). Indonesia’s performance on the (GCP) index are important metrics. GCI assesses GCI and GCP is strongly interlinked with its economic the technological sophistication of a product (Product complexity. The Economic Complexity Index (ECI) Complexity Index: PCI)17 and combines this with the ranks countries as high if the country has competitive number of EG exports. This combination of quantity strengths that are similar to other countries with a high together with the complexity of the product measures ECI. On this, Indonesia also performs relatively poorly, a country’s green competitiveness. With more complex ranked 112th‒much lower than Malaysia and Thailand green products, the competitiveness of the country at number 22 and 34, respectively (Figure 2.2). increases which, in turn, benefits the terms of trade of EGs. The GCP measures how much potential a country Indonesia has a high potential of developing future has to diversify into green, complex products in the competitiveness in green products with lower future based on the proximity (how likely a country product complexity, as green products closest to has a comparative advantage in the production of two current capabilities are those with lower product different goods) and complexity of products it is not complexity and technologies. Proximity measures yet competitive in. the product's alignment with the country's productive capabilities and identifies green diversification Indonesia’s GCI is still low relative to other countries, opportunities that are closely related to their existing while the GCP is more promising. The GCI has sharply production capabilities, as this would allow them to declined since 2014 (Figure 2.1).18 Indonesia currently take advantage of skills, infrastructure, and know- ranks 60th on the GCI,19 much lower than income how that they already possess. Green products with peer countries in the region‒Thailand and Malaysia the closest proximity to Indonesia’s current production at number 39 and 42, respectively (Figure 2.2). On capabilities are Waste Management, Recycling, and the GCP, Indonesia’s potential to diversify into green, Remediation; EPPs; and Natural Resource Protection technologically sophisticated products, measured by (Figure 2.3). its GCP, ranks relatively higher than other countries Figure 2.1: Indonesia’s green competitiveness ranking Figure 2.2: In regional comparison, Indonesia has low is declining complexity but performs relatively well in terms of its potential Green complexity index Vietnam Thailand Malaysia Indonesia Green complexity potential Economic complexity index (RHS) 131 100 160 34 Economic complexity index 140 22 112 80 120 100 41 Green complexity potential 28 60 80 44 60 36 40 40 53 20 Green complexity index 39 42 20 0 60 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 20 40 60 80 100 120 140 Source: World Bank staff calculations from GTN data. Source: World Bank staff calculations from GTN data, 2016-2020. 17 The PCI ranks products according to the similarity of the countries that export them competitively. The PCI is often used as a proxy for the technological sophistication of a product. 18 For details on these metrics, see Andres and Mealy (2021). Retrieved from www.green-transition-navigator.org 19 The GCI aims to capture the extent to which countries can competitively export green, technologically sophisticated products. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 13 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 2.3: Indonesia’s RCA is high for gas flaring emission reduction 0.39 Waste Management, Chapter 2 0.34 Recycling and Remediation Environmentally Preferable Products based on End-Use or Disposal Characteristics 0.29 Natural Resource Protection Management of Solid and Cleaner or More Resource Proximity Waste Water Management Hazardous Waste and Efficient Technologies and and Potable Water Recycling Systems Products 0.24 Treatment Renewable Energy Clean Up or Remediation of Air Pollution Control Soil and Water Efficient Consumption of 0.19 Energy Technologies and Gas Flairing Emission Environmental Monitoring, Heat and Energy Carbon Capture and Management Reduction Analysis and Assessment Storage Equipment 0.14 0 1 2 3 4 5 6 Revealed comparative advantage Source: World Bank staff calculations from GTN data (2016-20). Product categories with the highest Revealed While the GTN provides useful RCA metrics to assess Comparative Advantage (RCA)20 are Gas Flaring countries' green trade potentials, the methodology Emission Reduction; and Cleaner or More Resource has some limitations. As production and trade in EGs Efficient Technologies and Products21 (Figure 2.3)‒ expand exponentially, the tool's predictive capacity may making them ideal potential export growth areas. decrease for complex GVCs. In addition, the underlying Among these, bicycle hubs and free-wheel sprocket RCA index incorporates countries' overall trade volumes, wheels, primary cells and batteries, and machinery not just sectoral competitiveness. As demonstrated for liquifying air and other gases are shown to be at by Shepherd (2021), differences in productivity only the intersection of products with high potential and account for a small amount of the observed variation high RCA. This may be because Indonesia’s productive in RCA estimates and other factors such as market know-how is more closely focused on extracting fossil size and trade costs are more determining of the RCA fuel resources. Conversely, green products with the estimations. Thus, while the GTN delivers valuable lowest proximity to Indonesia’s current production high-level insights, its quantitative outputs should be possibilities are Environmental Monitoring, Analysis interpreted carefully alongside qualitative assessments and Assessment Equipment; Heat and Energy of countries' environmental policy contexts. These are Management; and Efficient Consumption of Energy further explored below. Technologies and Carbon Capture and Storage. Trade in EGs Furthermore, Indonesia’s potential to diversify into products the country is not yet competitive in The levels of trade complement the competitiveness is promising. Countries with higher GCP scores are findings that Indonesia has significant untapped significantly more likely to have greater future increases potential in exports of EGs and technologies, in their GCI, green export ratio, and the number while imports are at par with global and regional of green products they can export competitively. averages. EGs amounted to US$10.4 billion or 3.6 Indonesia’s potential increased until 2015 but has since percent of total goods exports in 2022, far below the worsened slightly and stagnated in recent years (Figure global and EAP average of 12 percent and 7.3 percent, 2.1). Access to green technologies through trade could respectively (Figure 2.4). Conversely, with imports of play a key role in realizing this potential. EGs at about 9 percent of total goods imports (Figure 20 “RCA is based on Ricardian trade theory, which posits that patterns of trade among countries are governed by their relative differences in productivity.” https://unctad- stat.unctad.org/datacentre/reportInfo/US.RCA. Last accessed: 11.14.2023. 21 For examples of products within each category, see Table A.1 and Box 1.2. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 14 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation 2.5) or US$20.5 billion (Figure 2.6), Indonesia’s imports few source countries: China accounts for 43 percent of of EGs are relatively higher compared to EAP regional Indonesia’s imports of EGs, followed by Japan with 12 peers‒at an average of 8 percent. The number of green percent. Outside of the EAP region, the United States products imported (extensive margin) had a historically and Germany are also important trading partners. The higher import share than the share in terms of values United States accounts for 16 percent of Indonesia’s Chapter 2 (intensive margin), at an average of 10.5 percent of all exports of EGs and about 5 percent of imports of EGs, products imported during 2017-22‒compared to about while Germany accounts for 4 percent of imports. 9.8 percent of value of imports for the same period. Exports of Cleaner or More Resource Efficient Major destination markets for Indonesia’s exports Technologies and Products represent significant of EGs are Singapore, the United States, and Japan, export potential for Indonesia. This category of EGs while the main import source countries are China accounted for almost 15 percent of Indonesia’s exports and Japan (Figure 2.7). As such, main destination and of EGs between 2017-22 and has also been growing source markets are well aligned with that of aggregate (Figure 2.8). Renewable Energy Plants and Cleaner or goods exports and imports. In terms of exports, more More Resource Efficient Technologies and Products than one-half of Indonesia’s exports of EGs in 2022 made up the largest share with almost 30 percent of were destined to markets in the EAP and South Asia total EG exports in 2022. In turn, the fastest growing EG region‒to Singapore (20 percent), Japan (8 percent), export categories were products for Natural Resource Thailand (6 percent), Republic of Korea (6 percent), Protection and Heat and Energy Management‒ Philippines (5 percent), India (4 percent), Taiwan, growing by 101 percent and 86 percent during the China (4 percent), and Malaysia (4 percent). In turn, 2017-22 period, respectively. imports of EGs are much more concentrated from a Figure 2.4: Indonesia's EG exports as a percentage of Figure 2.5: … while Indonesia's EG imports as a all exports is low… percentage of all imports is around the global average EG Export Share Global EG Import Share Global EG Export Share Indonesia 14% EG Import Share Indonesia 14% EG Export Share EAP EG Import Share EAP 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Bank staff calculations from BPS22 and WITS data. Source: World Bank staff calculations from BPS and WITS data. 22 Statistics Indonesia (Badan Pusat Statistik: BPS) is a non-departmental government institute of Indonesia that is responsible for conducting statistical surveys. Its main customer is the government, but statistical data is also available to the public. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 15 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 2.6: EGs trade in Indonesia is increasing in Figure 2.7: Major trading partners for EGs are absolute numbers Singapore and China 25 EG exports Green goods exports 50% Green EG goods imports imports Chapter 2 40% 20 30% Billions of US$ 15 20% 10 10% 0% 5 VIETNAM PHILIPPINES UNITED STATES KOREA, REP. TAIWAN, CHINA KOREA, REP. UNITED STATES INDIA GERMANY INDIA CHINA CHINA JAPAN JAPAN SINGAPORE THAILAND MALAYSIA SINGAPORE THAILAND MALAYSIA - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Exports of EGs Imports of EGs Source: World Bank staff calculations from BPS and WITS data. Source: World Bank staff calculations from BPS and WITS data. Figure 2.8: Cleaner or more resource efficient Figure 2.9: …while waste water management and technology products are growing and make up a high potable water treatment dominate imports share of exports… 120 Natural 120 Cleaner or more resource Waste water resources efficient technologies and… management protection Cleaner or 100 Air pollution and potable 100 Heat and energy more resource control water Natural management efficient 80 Environmental monitoring, 2017-2022 growth rate (percent) 2017-2022 growth rate (percent) technologies resources treatment analysis and assessment Environmental protection 80 monitoring, analysis and and products 60 equipment Renewable Noise and vibration energy plant Management of solid assessment equipment abatement 40 and hazardous waste 60 and recycling … Air pollution Environmentally Renewable 20 Clean up or remediation of control energy plant preferable products soil and water 40 based on end use or… 0 Heat and energy Management of solid -20 management 20 Noise and and hazardous waste vibration and recycling -40 Environmentally preferable abatement systems products based on end use 0 -60 or disposal characteristics - 5 10 15 20 - 5 10 15 20 25 30 Share of total EG exports (percent) Share of total EG imports (percent) Source: World Bank staff calculations from BPS and WITS data. Source: World Bank staff calculations from BPS and WITS data. Note: EGs do not include all EGs categories for Figures 2.4-2.9 and in Figure 2.8 two categories were omitted due to being extreme outliers (Clean up or Remediation of Soil and Water, and Waste Water Management and Potable Water Treatment). In terms of products, solar panels and electric The values of both EVs and solar panel exports vehicles (EVs) are included in these EG categories. have increased in recent years. The top destinations Solar panels made up only about 1 percent of products for exports of solar panels in 2022 were the US (33 included in the EG category of Efficient Consumption percent), Singapore (19 percent), France (14 percent), of Energy Technologies and Carbon Capture and and Japan (17 percent-2021 data). For EVs it was the US Storage as well as 2.3 percent of Renewable Energy (50 percent) with Canada and Singapore at 9 percent products. EVs accounted for 3 percent of Air Pollution and 8 percent, respectively. While the value of trade in Control, 3.5 percent of Cleaner or More Resource solar panels has increased in recent years (Figure 2.10), Efficient Technologies and Products, and 2.4 percent of they remained the same in terms of share of exports Renewable Energy products. (0.3 percent). EV exports increased drastically in 2022, partly following the completion of a manufacturing plant in 202123 (Figure 2.11). Other top export 23 https://www.thejakartapost.com/news/2019/11/26/asean-korea-summit-hyundai-motor-clinches-15b-deal-with-indonesia-to-build-automotive-plant.html TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 16 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation products included exports of electrical machines and Figure 2.10: Increasing imports and exports of solar apparatus (Waste Water Management and Potable panels Water Treatment), electrical static converters inverters (Renewable Energy plant) and parts of engines (Air Import (LHS) Pollution Control, Noise and Vibration Abatement) 3000 Export (RHS) 800 Chapter 2 (see list in Appendix One Table A.1). 700 2500 600 On the imports side, the fastest growing imported 2000 Millions US$ Millions US$ EGs categories between 2017-22 were Cleaner or 500 More Resource Efficient Technologies and Products 1500 400 (103 percent), Air Pollution Control (93 percent), 300 and Wastewater Management and Potable Water 1000 200 Treatment products (65 percent) (Figure 2.9). In 500 addition to Wastewater Management and Potable 100 Water Treatment products (27 percent) and Renewable 0 0 Energy Plants (24 percent); Management of Solid 2017 2018 2019 2020 2021 2022 and Hazardous Waste and Recycling Systems; and Air Pollution Control also make up notable shares Source: World Bank staff calculations from BPS data. (11 and 15 percent respectively). Top imported products were water taps (Wastewater Management Figure 2.11: Increasing imports and exports of EVs and Potable Water Treatment), electrical static converters (Renewable Energy Plant), machinery, Import (LHS) 250 4.50 plant, and laboratory equipment (Renewable Energy Export (RHS) Plant, Wastewater Management and Potable Water 4.00 Treatment), motorcycle brakes (Cleaner or More 200 3.50 Millions US$ Millions US$ Resource Efficient Technologies and Products), and 3.00 plastic (Wastewater Management and Potable Water 150 2.50 Treatment). The value of imports of both solar panels and EVs has also increased in recent years, both 2.00 100 reaching an all-time high in 2022 (Figures 2.10 and 2.11). 1.50 Similar to exports, the share of imports has remained 1.00 50 relatively the same over time at about 1.0 percent for 0.50 solar panels and 0.02 percent for EVs. 0 - EG imports represent an important source of access 2017 2018 2019 2020 2021 2022 and transmission of new green technologies for Source: World Bank staff calculations from BPS data. Indonesia, underscored also by the fact that EG imports are more intensive in medium and high- tech products than exports. Exports of EGs include 64 percent of medium and high-tech products, compared to imports with 73 percent. EG exports’ intensity in medium and high-tech products has increased significantly‒from 56 percent in 2008 to 64 percent in 2020. In addition, Indonesia’s EG trade has higher technology-intensity than Indonesia’s overall trade in goods. Access to these technologies through imports will help Indonesia to not only improve productivity and allocate resources more efficiently but also to lower production costs and improve international competitiveness. Furthermore, access to new technologies might also generate new tasks and jobs in Indonesia‒new job categories that emerge when more sophisticated technology is introduced might lead to a higher demand for highly skilled labor. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 17 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Trade in Plastic Substitutes The trade of plastic substitutes in Indonesia involves many international partners. In 2022, Indonesia's In 2021, Indonesia’s total imports and exports of primary trade partners for plastic substitutes consisted plastic substitutes accounted for 2.8 percent and of China, Japan, and the United States as exporters, 1.1 percent of global trade. Indonesia’s trade in and Australia, Brazil, and India as importers (Table Chapter 2 plastic substitutes still significantly lags the world’s top A.10 in Appendix Three). These countries hold top five performers in this field‒namely China, United States, positions among trading partners in plastic substitutes and Germany (Figure 2.12). Moreover, Indonesia’s for Indonesia‒particularly for wood pulp and cotton as participation in the international markets has remained the top exported and imported products, respectively. stagnant over the past decade, specifically since 2013, with its share of global trade consistently hovering For both imports (74 percent) and exports (89 about the 3 percent mark for exports and 1.1 percent for percent), most of the trade is in natural fibers imports (Figure 2.13). Indonesia’s ambition to diminish and minerals. Natural fibers constitute 48 percent of plastic waste could be better supported by mitigation imports and 78 percent of exports, Minerals 25 percent efforts through the trade lens. Over the six years to of imports and 10 percent of exports, while ALDFG 2022, a declining trend can be seen in Indonesia’s share just 1 percent of both imports and exports. The total of global exports and imports of plastic substitutes. trade of Indonesia and trade flow pattern suggest that Exports of plastic substitutes experienced a decrease there is considerable untapped potential for greater of 1.58 percent, while imports saw a decline of 0.74 participation in the global market of plastic substitutes. percent during the 2017-22 period (Figure 2.14). Figure 2.12: Measured by the share of global trade of plastic substitutes, Indonesia belongs to the top 20 countries (2021) 16 Export Import 14 12 10 Percent (%) 8 6 4 2.8 1.1 2 0 Source: World Bank staff calculations from BPS data. Figure 2.13: But Indonesia’s share of global trade in Figure 2.14: Share of Indonesia’s plastic substitutes plastic substitutes is stagnating trade is declining 3.6 Export Import 7 Export Import 3.2 6.16 5.75 5.83 5.69 6 5.26 2.8 2.4 5 4.40 4.36 4.58 4.26 4.17 4.05 Percent (%) Percent (%) 2.0 4 3.66 1.6 3 1.2 2 0.8 0.4 1 0.0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2022 Source: World Bank staff calculations from WITS data. Source: World Bank staff calculations from WITS data. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 18 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation 2.3 Indonesia’s Trade in Environmental Goods – Firm level Firm Characteristics in Green Trade 9,275 importer-exporters in 2018, up from 8,879 pure importers, 2,885 pure exporters and 8,066 importer- The number of firms involved in EGs trade has exporters in 2014.24 Between 2014-18, an average of Chapter 2 increased in Indonesia, with a larger share of firms 43 percent of all pure exporters were traders of EGs importing EGs than exporting, thereby signaling the while 73 percent of pure importers and 83 percent role of trade in accessing green technologies (Figure of importer-exporters traded EGs. The share of firms 2.15). The number of firms trading EGs reached 12,534 trading EGs remained broadly stable between 2014-18 pure importing firms, 2,561 pure exporting firms and as has the share of EGs per firm (Figure 2.16). Figure 2.15: The share of EGs trading firms remained Figure 2.16: The share of EGs per firm remained stable while absolute numbers increased: number broadly stable (percent) (LHS) and percent (RHS) of total # of exporters # of importers 25% # of exporter-importers % EG exporters 2014 2018 21% 20% 19% % EG importers % EG exporter-importers 20% 18% 30,000 90% 15% 12% 80% 11% 25,000 9% 70% 10% 8% 20,000 60% 50% 5% 15,000 40% 0% 10,000 30% Share of Share of Share of Share of 20% 5,000 exported export value imported import value 10% products products - 0% 2014 2015 2016 2017 2018 Exports of EGs Imports of EGs Source: Figures 2.15 and 2.16: World Bank staff calculations using DGCE data and EGs list from GTN. Most EG firms trading internationally are large and Figure 2.17: International EG traders are large firms have relatively higher foreign ownership relative to while domestic traders are medium size (survey domestic EG traders and non-EG traders, signaling results) the role of Foreign Direct Investment (FDI). In a 2022 World Bank survey, 621 firms were asked about Medium Large Total Number of Firms their green manufacturing practices and whether they 80% 400 traded in EGs in the last fiscal year. Of these, about Total Number of Firms within Each Group Share of Firms Within Group 70% 350 22 percent were international traders of EGs, of which, 60% 300 about 30 percent reported to be importers only, 31 50% 250 percent were exporter-only firms and 39 percent were both importers and exporters.25 This is consistent with 40% 200 data from Indonesia’s manufacturing plants where 30% 150 firms in EGs have an average of 22 percent foreign 20% 100 ownership compared to 12 percent for non-EG firms 10% 50 in the 2008-15 period.26 Of the interviewed firms, 21 0% 0 percent of the 621 were domestic traders of EGs. Some International Domestic EG Non-EG 67 percent of international EG traders are large firms EG Trader Trader Trader and 33 percent are medium-sized firms, while there are no small firms (Figure 2.17). Nearly 30 percent are Source: World Bank 2022 CCDR Survey. foreign owned (Figure 2.18). 24 Exporter or importer is defined as a firm that imported or exported at least one EG in the time period. This is obtained from customs data sourced from the Indonesian Directorate General of Customs and Excise (DGCE). 25 Since the survey only asks about trade in the last year while the customs data considers trade in a period of five years, the lower shares are to be expected. Moreover, the customs data covers the universe of traders in Indonesia, while the survey is from a limited sample but provides us with more updated information. Values are weighted averages of the responses. 26 The data is based on the Indonesian survey of manufacturing plants (Statistik Industri: SI) administered by BPS. The coverage of the survey is extensive, and it is very close to a census. Plants are grouped into five digits industries following the definition in the Klasifikasi Baku Lapangan Usaha Indonesia‒a classification mostly compatible with ISIC coding. This coding is used to merge with the HS-10 products that identify EGs. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 19 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Overall, firms that are trading internationally are Figure 2.18: Nearly 30 percent of international EG more likely to be involved in EGs than those trading traders are foreign owned (survey results) domestically-further signaling the important role for trade in mitigating and adapting to climate Domestic Foreign Government change. Among firms that are in business activities Chapter 2 that also involve EGs, an average of 34 percent do not Non-EG Trader trade internationally while for other types of products, this share is higher, at 45 percent based on Indonesia’s manufacturing census. According to the 2022 survey, Domestic EG Trader domestic EG traders’ characteristics are similar to non- EG traders, with the majority being medium-sized and only 5 percent being foreign-owned (Figure 2.18). International EG Trader Interestingly, 8 percent of international EG traders reported to be government owned‒a higher share 0% 20% 40% 60% 80% 100% than for both non-EG traders and domestic EG traders. Source: World Bank 2022 CCDR Survey. EG exporters are also more likely to trade in environmental services (ES) compared to importers, but information on ES trade remains Figure 2.19: Two-way traders are more likely to limited. Environmental services are often challenging export EGs (percent) to distinguish. They may involve construction of a EG exporters (percent of all exporters) geothermal power plant to the installation, repair, Exporter-Importers (percent of all EG exporters) 75% or maintenance of a facility critical to mitigation and 70% adaptation to climate change. Generally, they are 65% services crucial to the delivery and proper functioning 60% of environmental equipment (Sauvage and Timiliotis 55% 2017). Among the surveyed firms, only 3.6 percent of 50% importer-only firms participated in ES trade. In contrast, 45% 14.6 percent and 17.0 percent of exporter-only firms 40% and two-way EG traders (firms that both import and 35% export) respectively reported participating in ES trade. 30% The average among all EG traders that were also 2014 2015 2016 2017 2018 involved in ES trade was only 6.3 percent (about 20 firms). Source: World Bank staff calculations using DGCE data and EGs list from GTN. Firms that both export and import (GVC firms) account for a larger share of EGs traders and trade‒ Figure 2.20: …But less likely to import (percent) especially exports. GVC firms are more likely to export than import EGs and make up a large share of the firms EG importers (percent of all importers) Exporter-Importers (percent of all EG importers) that export EGs in Indonesia (64 percent) but a smaller 75% share (about one-third) among importers (Figures 70% 2.19 and 2.20). Similarly, among the surveyed firms, 65% there is a slightly higher number of two-way traders 60% among firms in international EGs trade (41 percent of 55% all EG traders) compared to importer-only or exporter- 50% only firms (both making up 7 percent). This is further 45% confirmed from Indonesia’s manufacturing census‒ 40% within business sectors that trade EGs, 20 percent are 35% GVC firms compared to 14 percent for non-EG sectors. 30% This is consistent with broader characteristics of trading 2014 2015 2016 2017 2018 firms in Indonesia where 73 percent of exporters and Source: World Bank staff calculations using DGCE data and EGs 40 percent of importers are two-way traders and with list from GTN. the stylized fact that over two-thirds of export value in Indonesia is generated by two-way traders (Cali et al. 2022). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 20 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Firms trading in EGs are not specialized in such EGs trade is highly concentrated among firms and, trade as EGs make up a small share of the export of the biggest Indonesian firms, the top 5 percent and import baskets of firms‒although this has account for more than two-thirds of EGs trade. increased slightly between 2014 and 2018. In both Conversely, the bottom 75 percent made up only 6 value terms and the number of products traded, percent of exports and 8 percent of imports of EGs Chapter 2 imports of EGs have a larger share in the firms’ basket in 2018. The concentration of EGs traders is slightly of traded goods compared to exports, although both higher than the concentration of all trading firms. For are very low overall. On average, EGs made up about non-EGs, the top 5 percent of firms make up about 5 12 percent of the number of products exported and percentage points lower share than EG imports and 9 percent of value in 2018 (Figure 2.16). Firms trading 10 percentage points for exports generated by the EGs are, therefore, rarely specialized in such trade, and top 5 percent. Import concentration is higher than mostly trade in non-EGs. Conversely, imports of EGs for exports of EGs. Nearly 70 percent of imports and accounted for about 21 and 20 percent of the number about 65 percent of export value is generated by the and value of imports, respectively in 2018. Apart from a top 5 percent of firms, while the top 1 percent generate slight recent increase, these shares have been broadly an average of 44 percent of imports and 30 percent of stable between 2014-18. exports in EGs Indonesia’s exports and imports of EGs are quite Products Traded by Firms in EG Trade geographically concentrated among trade partners. EGs exporters have only one-half the number of EGs mainly consist of intermediate products (50 trading partner countries as exporters of non-EGs. percent) and capital goods (43 percent) and only The average number of partner countries per firm is a small share of consumption products (7 percent) three for EGs exporters, compared to six for non-EGs (Figure 2.21). By category, Waste Management, exporters. In terms of source countries, the difference is Recycling, and Remediation products have the largest smaller: non-EGs are imported from an average of four share of consumption goods (60 percent), followed by countries per firm, compared to three for importers of Natural Resource Protection and Energy Efficiency (25 EGs. These numbers have not changed much in recent percent each). These categories contain some goods years. that are purposed for end use. Nevertheless, the bulk Figure 2.21: EGs mainly consist of intermediate products (based on end-use classification and function, % share within each category) Water Supply Waste Water Management and Potable Water Treatment Waste Management, Recycling and Remediation Resources and Pollution Management Renewable Energy Others Noise and Vibration Abatement Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products based on End-Use or Disposal Characteristics Environmental Monitoring, Analysis and Assessment Equipment Energy Efficiency Efficient Consumption of Energy Technologies and Carbon Capture and Storage Cleaner or More Resource Efficient Technologies and Products Clean Up or Remediation of Soil and Water Air Pollution Control All Environmental Goods (EGs) 0% 20% 40% 60% 80% 100% Intermediate Consumption Capital Source: World Bank staff calculations from GTN list. Capital, intermediate and consumption goods are categorized using UNSTAT concordance of System of National Accounts. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 21 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation of EGs are used for production of other goods. Table production and exports. This is followed by Natural A.2 in Appendix One provides the top traded EGs and Resource Protection Products, of which 75 percent are their environmental categories. intermediate products, and Cleaner or More Resource Efficient Technologies and Products. Conversely, The main category of EGs imported or exported by export-only firms are engaged in the exports of EPPs Chapter 2 two-way traders is Efficient Consumption of Energy followed by ECETCCS goods. Two-way traders have Technologies and Carbon Capture and Storage higher shares in the exports of all types of EGs relative (ECETCCS) (Figures 2.22 and 2.23) which mainly to export-only firms. Each firm exports an average of consist of capital and intermediate products. Among one to three EGs‒with ECETCCSs having the largest ECETCCS HS-10 products, 53 percent are intermediate number of distinct exported products per firm. products and 47 percent are capital products. This indicates that these imports are used as inputs for Figure 2.22: Average share of imports by EG category and firm type (2014-18) Importer-exporter Average Share of Import Value per Firm Importer only Average Share of Import Value per Firm Water Supply Waste Water Management and Potable Water Treatment Waste Management, Recycling and Remediation Resources and Pollution Management Renewable Energy Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Gas Flaring Emission Reduction Environmentally Preferable Products based on End-Use or Disposal Characteristics Environmental Monitoring, Analysis and Assessment Equipment Energy Efficiency Efficient Consumption of Energy Technologies and Carbon Capture and Storage Cleaner or More Resource Efficient Technologies and Products Clean Up or Remediation of Soil and Water Air Pollution Control 0% 5% 10% 15% 20% 25% Source: World Bank staff calculations from DGCE data. Figure 2.23: Average share of exports by EG category and firm type (2014-18) Importer-exporter Average Share of Export Value per Firm Exporter only Average Share of Export Value per Firm Water Supply Waste Water Management and Potable Water Treatment Waste Management, Recycling and Remediation Resources and Pollution Management Renewable Energy Noise and Vibration Abatement Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Gas flaring Emission Reduction Environmentally Preferable Products based on End-Use or Disposal Characteristics Environmental Monitoring, Analysis and Assessment Equipment Energy Efficiency Efficient Consumption of Energy Technologies and Carbon Capture and Storage Cleaner or More Resource Efficient Technologies and Products Clean Up or Remediation of Soil and Water Air Pollution Control 0% 5% 10% 15% 20% 25% 30% 35% Source: World Bank staff calculations from DGCE data. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 22 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Overall, there has been an increase in the average Technology Intensity of Firm-Level Trade in EGs value of exported EGs per firm‒driven mostly by two-way traders. With the exception of Waste A country’s ability to compete in high-technology Management, Recycling, and Remediation, and Energy markets is important to its overall competitiveness Efficiency Products, there has been an increase in the in the global market. This is even more critical in a Chapter 2 average firm-level value shares of EGs. For instance, decarbonizing global economy and the role of trade the value of exports of Gas Flaring Emission Reduction in technology spillovers. Imported technology has and Cleaner or More Resource Efficient Technologies the potential to further restructure the Indonesian Products each increased by 6 percentage points economy‒not only from resource-based but also to between 2014-18. On the other hand, there have been a greener trading economy. Furthermore, imports are slight declines or stagnations‒with minimal growth in one of the channels for technological spillover from the EG exports of exporter-only firms. trade. ECETCCS products are also the most imported The EGs imported by two-way traders have a EGs by all firms by value, followed by Wastewater higher technology-intensity than average trade.28 Management and Potable Water. This is closely Importer-exporters imported, on average, 9 percent followed by Renewable Energy and EPPs‒each of high-technology goods in 2018 but 26 percent averaging 16 percent of import value for two-way of high-technology EGs (Figure 2.24).29 The share of traders (Figure 2.22).27 For importer-only firms, Natural high-technology EG imports by two-way traders is also Risk Management products made up a larger share slightly higher than the high-technology EG imports of than EPPs based on end use, followed by Cleaner or importer-only firms (19 percent). Notably, the share of More Resource Efficient Technologies products. Among high-technology EG imports has increased over time importer-only firms, Natural Resource Protection, for both two-way traders (by 6.4 percentage points Cleaner or More Resource Efficient Technologies, and between 2014 and 2018) and importer-only firms (by 5 Natural Risk Management products had an increase in percentage points). average firm-level shares between 2014-18 based on end use. Conversely, Water Supply products declined Similarly, exports of EGs by two-way traders have in the shares of both firm types and EPPs dropped in relatively high technology embodied in them.30 The the firm-level share of two-way traders. EG exports of two-way traders included, on average, 20.2 percent of high-technology goods in 2018 (Figure There is more variation in the distinct number of 2.25). This is lower than the high-technology imports imported EGs compared to exports. The number share but slightly higher than the high-technology of imported products varies between one and six exports of exporter-only firms (18 percent) and much products on average per firm. Once again, ECETCCS higher than the share in non-EG exports of these firms make up the highest number of products imported (3 percent). Reflecting the nature of the Indonesian per firm (an average of five products between 2014- economy and relative comparative advantages, the 18 for both two-way traders and importer-only firms). share of resource-based manufactures is higher in There are also heterogeneities in the concentration of the exports of EGs by two-way traders (13.2 percent), firms across different types of EGs. For instance, the compared to their imports (2.1 percent). Similarly, export concentration of firms in the Renewable Energy the share of low-technology exports is much higher and Cleaner or More Resource Efficient Technologies (12.9 percent) than their imports (10.3 percent). products is higher than the average‒with 79 percent There are a few products where exporter-only firms and 82 percent of value accounted for by the top 5 trade in higher technology goods. Heat and Energy percent of firms. Within the subset of energy efficiency Management; Wastewater Management and Potable products, the share of the top 5 percent of firms is only Water Treatment; and Clean up or Remediation of Soil 42 percent of exports and 50 percent of imports. and Water are the three products that have higher technology intensity in the exports of exporter-only firms compared to two-way firms. 27 The discussion focuses on EGs most closely linked to climate change. Statistically, the second most imported product by value was Wastewater Management and Potable Water Treatment with an average 18 percent share per firm. 28 Technology intensity is categorized using the Lall classification. 29 All averages are for the 2014-18 period. Most EGs are usually machinery and other equipment so this result is unsurprising. 30 Lall (2000) defines high-tech goods as those characterized by advanced and rapidly changing technologies in the manufacturing process, accompanied by high investments in research and development, with a primary emphasis on product design. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 23 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 2.24: The share of high technology intensity of Figure 2.25: …and so is the share of high technology EG imports for importer-exporters is increasing… intensity of EG exports for importer-exporters High technology High Technology manufactures 18.3% 20.2% Manufactures 19.7% Chapter 2 26.1% Medium technology Medium Technology manufactures Manufactures Low technology 42.4% Low Technology manufactures 48.0% Manufactures 51.3% 47.4% Primary products Primary Products Resource-based 24.2% 9.6% 12.9% Resource-based 10.3% manufactures Manufacturers 3.8% 15.8% Unclassified products 4.1% 12.1% 13.2% Unclassified Products 9.7% 1.6% 2.1% 2014 2018 2014 2018 Source: World Bank staff calculations. Source: World Bank staff calculations. How Competitive is EGs Trade for Firms in Indonesia? firms into EG exports have been relatively stable (Figure 2.26), overall entry of all firms has slightly decreased Understanding trends in the entry/exit and over time‒mostly driven by exporter-only firms (Figure the survival of firms trading EGs is essential to 2.27). Conversely, entry into the importing of EGs understanding the competitiveness of trade in is higher than exports by 8 percentage points. Firm EGs and for the design of a policy environment differences are not as pronounced for imports of EGs, that enables firms not only to export but also to where entry rates are only 4 percentage points lower stay active in trading. Firm entry into, exit from, than non-EG imports, and there is little difference and survival in foreign markets can be a signal of between the entry rates of importer-only firms and the external environment (favorable or unfavorable) two-way traders. such as government regulations or macroeconomic uncertainty. Entry into export markets involves The number of two-way trader firms entering export substantial sunk costs and a firm’s decision to enter markets for EGs was relatively stable between 2015 depends on the expected demand and future returns and 2018, while these traders have higher entry rates from exporting. Free market entry and conditions relative to exporter-only firms. The entry rate into that enable firms to operate are essential for the green exports is slightly higher for two-way traders, development of new ideas. Firms tend to persist in at about 11 percent or an average of over 776 firms exporting once they begin to export to recoup sunk a year between 2015 and 2018‒over 1.5 times that of costs but may exit if they were initially overly optimistic exporter-only firms. Exporter-only firms have also been about the market’s demand or risks faced in the declining in their entry rates and in the numbers. On foreign market (Dixit 1989). Firm exit can also be a key the other hand, exporter-only firms have slightly higher to transferring resources to more productive uses and, entry rates into non-EG trade (22 percent) compared thereby, achieving, over time, structural shifts in the to two-way traders. This suggests that being more economy. internationally exposed, these GVC firms or two-way traders can leverage existing relationships and learn In Indonesia, the share of firms entering EGs export more from their trading activities to enable them to markets is lower than the share of firms entering take advantage of market access opportunities. non-EGs export markets‒suggesting that expected returns remain relatively low. Entry rates into non-EG Exit rates from both import and export markets exports are twice as high as for EGs‒averaging about are also lower in EGs than in non-EGs‒suggesting 10 percent higher and 1,272 firms a year between 2015 more firms continue EGs trade than non-EGs trade‒ and 2018.31 Although entry rates of importer-exporter but the proportion of EG traders has not changed Entry is defined as if a firm was not trading EGs but starts trading EGs in the following year. Such a firm is defined as entering in the following year into trade in that 31 particular good. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 24 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation over the 2015-18 period. Using firm-level trade data, imports. For exports, the gap is larger at 10 percent for firms’ decisions to stop trading in EGs is examined.32 EGs and 15 percent for other products. The percentage The results show that exit rates from importing and point differences in EGs and other goods exit rates are exporting EGs are lower than non-EGs for all firm similar for importer-only or exporter-only firms. As types (Figures 2.28 and 2.29). For two-way traders, average entry and exit rates are broadly the same, this Chapter 2 the average exit rates between 2015 and 2018 were explains the broadly unchanged share of traders in EGs 12 percent for EG imports and 15 percent for other in the time period (see Figure 2.15). Figure 2.26: Two-way traders’ entry rates have been Figure 2.27: …but exporter-only firms’ entry rates broadly stable… decreased Number of exporter-importer firms that enter EG exports Number of exporter-only firms that enter EG exports Number of exporter-importer firms that enter non-EG exports Number of exporter-only firms that enter non-EG exports Share of exporter-importers that enter EG exports (RHS) Share of exporter-only firms that enter EG exports (RHS) Share of exporter-importers that enter non-EG exports (RHS) Share of exporter-only firms that enter non-EG exports (RHS) 1,400 20% 2,500 40% 1,200 35% 2,000 15% 30% 1,000 1,500 25% 800 10% 20% 600 1,000 15% 400 5% 10% 500 200 5% - 0% - 0% 2015 2016 2017 2018 2015 2016 2017 2018 Source: World Bank staff calculations. Source: World Bank staff calculations. Figure 2.28: Two-way traders exit rates are lower for Figure 2.29: …as are the exit rates for importer-only/ EGs… exporter-only Share of Importer-Exporter firms that exit EG import trade Share of importer-only firms that exit EG import trade Share of Importer-Exporter firms that exit non-EG import trade Share of importer-only firms that exit non-EG import trade Share of exporter only firms that exit EG export trade Share of Importer-Exporter firms that exit EG export trade Share of exporter-only firms that exit non-EG export trade Share of Importer-Exporter firms that exit non-EG export trade 25% 18% 16% 20% 14% 15% 12% 10% 10% 5% 8% 6% 0% 2015 2016 2017 2018 2016 2017 2018 Source: World Bank staff calculations. Source: World Bank staff calculations. Exit is defined as if a firm was trading EGs but stops trading EGs in the following year. Such a firm is defined as exited in the following year from trade in that particular 32 good. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 25 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation EGs trading firms have a higher survival rate in absorption. The EGs trade in Indonesia is concentrated export and import markets (Figures 2.30-2.32). among a few firms. The top 5 percent account for Independent of whether the firm only imports or only most of the trade‒potentially limiting competition and exports, firms that are involved with EGs trade survive leading to monopolistic practices. Entry rates for EG longer in the respective markets. Importer-exporter exports are lower than for non-EGs‒indicating lower Chapter 2 firms have the highest survival probability. Over 75 expected returns and potential challenges in finding percent of EGs importer-exporter firms survive longer profitable markets. About one-half of EGs exporting than the observed time period of five years (Figure firms survive, while about 75 percent of importers 2.32). EGs trading firms that only export have a lower remain in the market for over five years, reflecting the survival rate than firms that only import. Nevertheless, higher technological intensity of imported EGs. The over 50 percent of the firms that export EGs survive share of firms trading EGs remained stable from 2014 the observed maximum time period of five years, to 2018, suggesting potential risks of limited growth compared to non-EGs exporting firms where less than and innovation in the sector. It is recommended to 50 percent survive (Figure 2.31). The difference is even monitor and analyze the entry, exit, and survival rates more pronounced when looking at purely importing of firms, implement policies promoting the growth firms, where almost 75 percent of EG importers stay and sustainability of the sector, and encourage more in the market longer than five years while for non-EG firms to engage in EGs trade. The higher technology- importers more than one-half leave the market within intensity of EGs indicates the need to improve capacity the five years (Figure 2.30). for technological absorption to maximize spillovers and productivity gains from global trade in EGs. It is recommended to monitor and analyze the entry, exit, and survival rates of firms, implement policies promoting the growth and sustainability of the sector, and the ability for technological Figure 2.30: The firm survival rate is Figure 2.31: …as well as for Figure 2.32: …and two-way trader higher for importing-only firms exporting-only firms… firms 100 100 100 Estimated Survival Probability (%) Estimated Survival Probability (%) Estimated Survival Probability (%) 75 75 75 50 50 50 25 25 25 0 0 0 -1 1 3 5 -1 1 3 5 -1 1 3 5 Survival time (number of years) Survival time (number of years) Survival time (number of years) EG Trade Green Firms Trade Firms EG Trade Green Firms Trade Firms EG Trade Green Firms Trade Firms Non-Green Non-EG Trade Trade Firms Firms Non-Green Non-EG Trade Trade Firms Firms Non-Green Non-EG TradeTrade Firms Firms Source: World Bank staff calculations from DGCE Data. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 26 CHAPTER 3. TRADE AGREEMENTS AND TARIFFS ON EGs 3.1. Environmental Provisions in Indonesia’s Trade Agreements 3.2. Tariffs on EGs 3.3. Simulating the Impacts of Tariff Reforms and Multilateral Actions TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Chapter 3 CHAPTER 3. TRADE AGREEMENTS AND TARIFFS ON EGs Indonesia was one of the signatories of the APEC agreement in 2012 committing to limit tariffs on 54 EGs to a maximum of 5 percent. Average tariffs on EGs are, therefore, low, but MFN tariffs are relatively high. Indonesia does not participate in most ongoing multilateral initiatives on these issues. Among Indonesia’s 14 trade agreements analyzed at the time of writing, only six contain environmental provisions‒of which only one (Indonesia EFTA) is strongly legally enforceable. Simulations indicate that unilateral, regional, and multilateral tariff liberalization, including joining the WTO Environmental Goods Agreement (EGA), could bring untapped benefits by boosting trade ties, exports, and imports of EGs‒with potential positive impacts on Indonesia's economy and environmental sustainability. 3.1. Environmental Provisions in Indonesia’s Trade Agreements The inclusion of environmental provisions in emphasis, in the late 2000s when PTAs increasingly preferential trade agreements (PTAs) is not a recent included commitments to environmental protection. or an uncommon phenomenon‒close to 90 percent of trade agreements currently in force include some While Indonesia committed to reducing tariffs on form of commitments concerning the environment. some EGs in the early stages, the country does not Prior to the 1990s, however, environmental provisions participate in most multilateral initiatives in this in PTAs did not establish any binding obligations for area. In the early stages, Indonesia was one of the environmental protection. Rather, these provisions signatories of the APEC agreement in 2012 committing took the form of environmental exception clauses to to limit tariffs on 54 EGs to a maximum of 5 percent.33 trade policy commitments‒such as those to protect the Indonesia is not, however, one of the 46 members conservation of natural resources. This progressively of the World Trade Organization (WTO) engaged in changed in the 1990s and, with much stronger plurilateral negotiations seeking to eliminate tariffs 33 APEC countries are Australia; Brunei Darussalam; Canada; Chile; China; Hong Kong SAR, China; Indonesia; Japan; Republic of Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; the Philippines; the Russian Federation; Singapore; Taiwan, China; Thailand; the United States of America; and Vietnam. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 28 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation on EGs under the EGA. Indonesia also does not natural resources through developing and endorsing participate in the three multilateral initiatives aimed at special programs and projects for the transfer of tackling issues at the nexus between trade policy and knowledge and technology.”34 climate change, namely the Trade and Environmental Sustainability Structured Discussions (TESSD), the Recent developments such as the trade agreement Chapter 3 Informal Dialogue on Plastics Pollution and Sustainable with the EFTA states that strengthen its certification Plastics Trade (IDP), and the Fossil Fuel Subsidy Reform and monitoring, reporting, and verification systems (FFSR). for trade of sustainable palm oil suggest there may be progress. It is a mechanism through which the In contrast to global trends, among Indonesia’s 14 implicit carbon pricing from EFTA tariffs on Indonesian trade agreements analyzed at the time of writing, palm oil varies according to the carbon intensity of only six contain environmental provisions‒of Indonesian palm oil production‒as captured by the which only one is strongly legally enforceable. The certification system. In the agreement, EFTA countries ASEAN-Japan, ASEAN-Republic of Korea, Indonesia- will then use this information to vary their tariff rate Japan, and Indonesia-Chile trade agreements, and the on palm oil imported from Indonesia. This agreement Regional Comprehensive Economic Partnership (RCEP) presents a possible solution for carbon pricing for all include some form of environmental provisions, land uses. Although a very small market for Indonesia however, these are only weakly enforceable (Table 3.1). (for instance Switzerland has less than 0.5 percent For example, in the Indonesia-Chile trade agreement share of each of Indonesia’s imports and exports), that went into effect in August 2019, the two countries the design could scale. There is evidence that trade commit to “effectively enforce environmental laws agreements with environmental provisions do indeed and not weaken or reduce levels of environmental mitigate negative environmental externalities such protection with the sole intention to encourage as deforestation (Box 3.1). In the past, similar policies investment or to seek or to enhance a competitive such as the EU’s Forest Law Enforcement, Governance trade advantage.” In addition, the parties commit to and Trade (FLEGT) worked well, as Indonesia was the ensure that “environmental laws, regulations and first country to export “verified legal” timber to the EU policies not be used for trade protectionist purposes” through this licensing system for the certification of and that they will cooperate to “prevent or reduce the wood. contamination, and degradation of ecosystems and Table 3.1: Environmental provisions in Indonesia’s trade agreements Agreement Environmental provision is covered? Legal enforceability? ASEAN Free Trade Area – 1992 No n.a. ASEAN Free Trade Area – 2021 No n.a. ASEAN – China 2005 No n.a. ASEAN – Japan 2008 Yes Weak ASEAN – Australia – New Zealand 2010 No n.a. ASEAN – India 2010 No n.a. ASEAN – Republic of Korea 2010 Yes Weak ASEAN – Hong Kong, China 2019 No n.a. Indonesia – Japan 2008 Yes Weak Indonesia – Pakistan 2013 No n.a. Indonesia – Chile 2019 Yes Weak Indonesia – Australia 2020 No n.a. RCEP 2021 Yes Weak EFTA Yes Strong Total Share 43% Source: World Bank Deep Trade Agreements Dataset. 34 Indonesia-Chile Comprehensive Economic Association Agreement. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 29 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Box 3.1: Trade agreements with environmental provisions mitigate deforestation Deforestation is one of the most pressing environmental challenges of the modern era and very relevant for Indonesia given that the largest share of carbon emissions originates from changes in land use.35 The Chapter 3 extent of global forest loss over the past 30 years has been unprecedented: the world lost an approximately net 178 million hectares of forest area between 1990 and 2020, which also implies a huge biodiversity loss (FAO 2020). This box details the findings of Abman et al. (2021) who provide new causal evidence that environmental provisions included in PTAs are effective in limiting deforestation (see also Abman 2020). The authors exploit high-resolution, satellite-derived estimates of deforestation and identify the content of environmental provisions in PTAs using a new World Bank Deep Trade Agreements database (Mattoo et al. 2020). Results show that there are large and significant net increases in annual forest loss following the entry into force of PTAs without environmental provisions (23 percent). Results, however, also show that the inclusion of environmental provisions entirely offsets the rise in forest loss (Figure 3.1). The mitigating effect of environmental provisions on deforestation is largely driven by changes to forest loss in tropical, developing countries with high levels of biodiversity–the locations where deforestation is of greatest concern. The study also investigates the mechanisms through which forestry and biodiversity provisions in PTAs mitigate environmental damage. It is found that PTAs without these environmental provisions lead to an average 5 percent increase in the annual land area harvested, while there is no evidence of an increase in agricultural extensification following PTAs that include these provisions. Trade liberalization also leads to increases in agricultural output (as measured in tons harvested) that is partially, but not completely, offset by the inclusion of forestry and biodiversity provisions (Figure 3.2). This suggests that environmental provisions may limit agricultural land expansion, but not intensification. Net increases in agricultural exports are also lower in PTAs with environmental provisions, but not entirely offset. The effectiveness of forest-related PTA provisions at limiting deforestation arising from trade liberalization is also evaluated. It is found that there are no changes in net annual deforestation following implementation of agreements that include provisions aimed at protecting forests and/or biodiversity. On the other hand, agreements without these provisions see substantial increases in net forest loss‒that is, provisions reduce forest loss relative to PTAs that do not include them. Rough calculations indicate that the forest and biodiversity provisions prevented approximately 7,500 square kilometers of deforestation from 2003–14‒which is greater than the entire forested area of countries like Belgium or Ireland. Figure 3.1: Inclusion of environmental provisions Figure 3.2: Inclusion of forestry and biodiversity entirely offsets the rise in forest loss provisions partly offset increases in agricultural output from trade liberalization 50% 25% 20% 40% 15% % Increase 30% 10% Forest Loss 5% 20% 0% 10% -5% Ha w/o Ha w/ Ton w/o Ton w/ Ex w/o Ex w/ 0% Change in area Change in Change in total cultivated amount agricultural -10% produced exports w/o Provision w/ Provision Source: World Bank staff calculations. Source: World Bank staff calculations. 35 Its emissions stem from deforestation and peatland megafires and, to a lesser extent, the burning of fossil fuels for energy. From 2000 to 2015, Indonesia lost an average of 498,000 hectares of forest each year–making it the world’s second biggest deforester after Brazil (https://www.carbonbrief.org/the-carbon-brief-profile- indonesia). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 30 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation The findings suggest that these types of environmental provisions provide a mechanism to defray the environmental costs that can arise from international trade integration. While on the one hand the inclusion of such provisions may incur some bargaining costs in the negotiation phases of trade agreements, they appear to provide an institutional framework that allows member countries to commit to policies that encourage more sustainable patterns of trade integration and economic growth. Chapter 3 3.2. Tariffs on EGs At an average of 2 percent in 2021,36 Indonesia’s Remediation (17.3 percent), Cleaner or More Resource tariffs on EGs are generally low. These low tariffs on Efficient Technologies and Products (11.3 percent), EGs are mostly a result of EGs liberalization under the and Air Pollution Control (11.1 percent) (Figure 3.5). APEC agreement. As such, Indonesia’s tariffs on EGs There are several tariff peaks that apply to imports are consistent with global trends‒with average tariffs of products such as motor vehicles, and bicycles on EGs being about the same as average aggregate (including tricycles) with tariffs of 35-40 percent and tariffs. For example, while on the one hand imports of over 25 percent, respectively. Participation in the WTO green products for Noise and Vibration Abatement EGA would allow Indonesia to reduce these MFN tariffs benefit from close to zero average import tariffs and benefit from increased market access for exports (Figure 3.3), higher than average tariffs are applied on to other participating countries.38 EG categories such as Waste Management, Recycling, and Remediation (4.9 percent), Air Pollution Control In terms of market access, Indonesia also faces (3.4 percent), and Cleaner or More Resource Efficient relatively low average tariffs (1.2 percent) on its Technologies and Products (3.4 percent). There are exports of EGs to destination markets. Among also more than 20 product lines with applied tariffs of EG categories, Cleaner or More Resource Efficient more than 5 percent, among which the highest apply Technologies and Products (2.5 percent) and Noise to imports of motor vehicles, and plaiting materials and Vibration Abatement (2.4 percent) are among the with tariffs above 20 percent. highest (Figure 3.4). There are also high tariffs of above 10 percent applied to Indonesia’s exports of products Indonesia’s Most Favored Nation (MFN) tariffs37 on such as motor vehicles, sodium hydroxide, heaters, EG imports remain high (on average 7.2 percent), cement, and monoculars. Overall, however, tariffs on and there are several product lines with tariff peaks Indonesia’s exports to major destination markets (EU, of above 25 percent. MFN tariffs are the highest on EG China, Japan, United States) are generally low but categories such as Waste Management, Recycling, and high tariffs reduce Indonesia’s exports to Pakistan, Argentina, and Brazil (Figure 3.6).39 Figure 3.3: Indonesia’s average tariff on EG imports is around 2 percent (2021) Water Supply Waste Water Management and Potable Water Treatment Waste Management, Recycling and Remediation Resources and Pollution Management Renewable Energy Others Noise and Vibration Abatement Average Effectively Applied Natural Risk Management Tariff on EG Imports Natural Resource Protection Average Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products based on End-Use or Disposal Characteristics Environmental Monitoring, Analysis and Assessment Equipment Energy Efficiency Efficient Consumption of Energy Technologies and Carbon Capture and Storage Cleaner or More Resource Efficient Technologies and Products Clean Up or Remediation of Soil and Water Air Pollution Control 0 1 2 3 4 5 6 36 All tariffs reported in this report were calculated using trade weighted averages. 37 MFN tariffs are tariffs imposed on imports from other members of the WTO, unless the country is part of a preferential trade agreement. 38 For a list of adaptation and mitigation categorization of the EGs, see Table 2.1. 39 In December 2021, Indonesia and MERCOSUR countries (Argentina, Brazil, Uruguay, and Paraguay) launched negotiations for a Comprehensive Economic Partnership Agreement which could potentially cover the trade liberalization of EGs. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 31 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 3.4: Indonesia faces low average tariffs on exports of EGs (2021) Water Supply Waste Water Management and Potable Water Treatment Average faced tariff on EG Waste Management, Recycling and Remediation exports Chapter 3 Resources and Pollution Management Average Renewable Energy Others Noise and Vibration Abatement Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products based on End-Use or Disposal Characteristics Environmental Monitoring, Analysis and Assessment Equipment Energy Efficiency Efficient Consumption of Energy Technologies and Carbon Capture and Storage Cleaner or More Resource Efficient Technologies and Products Clean Up or Remediation of Soil and Water Air Pollution Control 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Figure 3.5: Indonesia’s MFN tariffs on EG imports remain high (2021) Water Supply Waste Water Management and Potable Water Treatment Waste Management, Recycling and Remediation Resources and Pollution Management Renewable Energy Others Noise and Vibration Abatement Natural Risk Management Average MFN Applied Tariff on Natural Resource Protection EG Imports Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Average Gas Flairing Emission Reduction Environmentally Preferable Products based on End-Use or Disposal Characteristics Environmental Monitoring, Analysis and Assessment Equipment Energy Efficiency Efficient Consumption of Energy Technologies and Carbon Capture and Storage Cleaner or More Resource Efficient Technologies and Products Clean Up or Remediation of Soil and Water Air Pollution Control 0 5 10 15 20 Figure 3.6: Average tariffs faced by Indonesian EGs in major export markets are low (2021) 1.4 Billions Singapore 1.2 EG Exports (US$) China 1.0 European Union United States 0.8 Japan 0.6 Philippines Thailand India 0.4 Taiwan Brazil Australia Malaysia 0.2 Korea, Rep. Argentina Pakistan Germany 0.0 0 2 4 6 8 10 12 14 16 2021 Average applied tariffs faced by EG exports (percent) Source for Figure 3.3-3.6: World Bank staff calculations based on the World Bank WITS database. Note: All graphs are produced using import weighted averages. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 32 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation 3.3. Simulating the Impacts of Tariff Reforms and Multilateral Actions The limited number of trade agreements that estimated to increase by 3 percent or US$521 million. include environmental provisions have focused The overall effects are muted as Indonesia already predominantly on tariffs. We first focus, therefore, applies low tariffs on imports of EGs. Imports of Cleaner Chapter 3 on the impact of Indonesia’s involvement in these or More Resource Efficient Technologies and Natural agreements by considering different tariff liberalization Risk Management are estimated to increase the most‒ scenarios. by 8 percent and 7.4 percent, respectively (Figure 3.7). On the one hand, this unilateral liberalization would To estimate the effects of potential liberalization boost Indonesia’s trade with important partners such scenarios of tariffs on EGs trade for Indonesia, as the United States (by 42 percent); Taiwan, China (49 a partial equilibrium trade model is used (for percent); and India (22 percent), while at the same time detailed methodology see Appendix Two). The slightly reduce imports from countries with already modeling framework underlying the simulations is low tariffs on EGs such as Japan, China, Singapore, and a modified version of the Global Simulation Analysis others in the EAP region. Model (GSIM) (Francois and Hall 2009). The model is calibrated on EGs trade data at the HS6 product level Full regional liberalization of tariffs on EGs trade for all bilateral country pairs, explicitly representing among APEC countries (Scenario Two) is estimated global export and import flows for 358 HS6 level green to boost Indonesia’s exports of EGs by 0.2 percent products‒with more than 401,000 observations. The or US$15 million and imports by 1.2 percent or model is specified based on the assumption of national US$214 million. While the increase in imports under product differentiation‒that is, Armington (1969) this scenario is more muted than under unilateral preferences, according to which goods produced liberalization, regional APEC liberalization of EGs by different countries are imperfect substitutes, trade would not only ensure Indonesia’s access to and thereby allowing for two-way trade between lower prices and quality imported environmental countries exporting the same goods. The elasticity of technologies but also improved market access for its substitution is held equal and constant across products exports. Indonesian exporters of EGs such as for Energy from different sources, while the elasticity of demand Efficiency; Resources and Pollution Management; and in aggregate is also constant. Import demand and Water Supply are estimated to benefit the most, with export supply equations are cleared by a market price an increase in exports by 4.3 percent, 1.7 percent, that is directly affected by tariffs. and 1.6 percent, respectively (Figure 3.8). Conversely, imports of Natural Risk Management and Cleaner or Four increasingly more ambitious scenarios are More Resource Efficient products increase the most. considered, representing Indonesia’s unilateral, Regional liberalization would benefit trade with the regional, and multilateral liberalization of tariffs on United States; Hong Kong SAR, China; Canada; and EGs trade. Scenario One assumes the full unilateral Mexico the most. liberalization of tariffs on EG imports by Indonesia; Scenario Two represents the full regional liberalization The implementation of the WTO EGA without of tariffs on EGs among APEC countries; Scenario Indonesia’s participation (Scenario Three) would Three depicts the implementation of the WTO EGA hurt not only Indonesian exporters but also without Indonesia’s participation; finally, Scenario Four importers of EGs. Due to trade diversion effects, assumes the full liberalization of tariffs on EGs under Indonesia’s exports and imports of EGs decline by the WTO EGA with Indonesia’s participation. 0.3 percent (US$29 million) and 0.8 percent (US$129 million), respectively. Except for exports of EGs for Unilateral liberalization of tariffs on EGs by Indonesia Water Supply; Noise and Vibration Abatement; Air (Scenario One) would boost the competitiveness of Pollution Control; and Natural Risk Management, all Indonesian firms that already use these as inputs of Indonesia’s exports and imports are estimated to into their production by boosting a firm’s access be hurt (Figure 3.9). Interestingly, results also show to cheaper environmental technologies. This could, that, while Indonesia’s trade with non-participating in turn, incentivize the private sector’s transition to countries increases (for example, Thailand, Vietnam, the use of green technologies. Imports of EGs are and India), these increases are outweighed by the TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 33 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation contraction in trade with major trading partners such benefit exporters of EGs such as Energy Efficiency; as the United States, Japan, and China. Cleaner or More Resource Efficient Products; and Natural Resource Protection. By joining the WTO EGA (Scenario Four), exports would significantly expand the benefits of There are additional benefits from freeing up Chapter 3 participation in a regional APEC liberalization and trade in EGs and distributional implications that boost Indonesia’s EG exports by 1.1 percent (US$99 are not captured in this analysis. These additional million) and imports by 1.2 percent (US$214 million). effects include promoting competition and innovation On the one hand, eliminating remaining tariffs on EGs within Indonesia. This analysis provides the impact would boost imports of products categories such as of tariff liberalization using largely static and partial Natural Risk Management; Cleaner or More Resource equilibrium assumptions. Additional benefits would Efficient Products; and Environmentally Preferable accrue from freeing up trade not only through tariffs Products by 6.2 percent, 4.6 percent, and 2 percent, but also, crucially, NTMs on environmental products respectively (Figure 3.10). Conversely, improved market and technologies as demonstrated earlier. access to participating countries’ markets would Figure 3.7: The impact of unilateral liberalization of EG imports (percent change) (scenario one) Water Supply Wastewater Management/Water Treatment Waste Management, Recycling, Remediation Resources and Pollution Management Renewable Energy Imports Others Noise and Vibration Abatement Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products Environmental Monitoring, Analysis Equipment Energy Efficiency Efficient Consumption of Energy Technologies Cleaner or More Resource Efficient Products Clean Up or Remediation of Soil and Water Air Pollution Control 0 1 2 3 4 5 6 7 8 Figure 3.8: The impact of regional liberalization of EGs trade among APEC countries (percent change) (scenario two) Water Supply Wastewater Management/Water Treatment Waste Management, Recycling, Remediation Resources and Pollution Management Renewable Energy Others Noise and Vibration Abatement Imports Exports Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products Environmental Monitoring, Analysis Equipment Energy Efficiency Efficient Consumption of Energy Technologies Cleaner or More Resource Efficient Products Clean Up or Remediation of Soil and Water Air Pollution Control -2 -1 0 1 2 3 4 5 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 34 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 3.9: The impacts of the WTO EGA without Indonesia on EGs trade (percent change) (scenario three) Water Supply Wastewater Management/Water Treatment Waste Management, Recycling, Remediation Resources and Pollution Management Chapter 3 Renewable Energy Others Noise and Vibration Abatement Natural Risk Management Imports Exports Natural Resource Protection Management of Solid and Hazardous Waste Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products Environmental Monitoring, Analysis Equipment Energy Efficiency Efficient Consumption of Energy Technologies Cleaner or More Resource Efficient Products Clean Up or Remediation of Soil and Water Air Pollution Control -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 Figure 3.10: The impacts of the WTO EGA with Indonesia on EGs trade (percent change) (scenario four) Water Supply Wastewater Management/Water Treatment Waste Management, Recycling, Remediation Resources and Pollution Management Renewable Energy Imports Exports Others Noise and Vibration Abatement Natural Risk Management Natural Resource Protection Management of Solid and Hazardous Waste Heat and Energy Management Gas Flairing Emission Reduction Environmentally Preferable Products Environmental Monitoring, Analysis Equipment Energy Efficiency Efficient Consumption of Energy Technologies Cleaner or More Resource Efficient Products Clean Up or Remediation of Soil and Water Air Pollution Control -2 -1 0 1 2 3 4 5 6 7 Source: Figures 3.7-3.10: World Bank staff calculations using WITS and GTN data. Results of simulations suggest that unilateral, participating countries and would benefit Indonesian regional, and multilateral liberalization of tariffs on exporters of EGs such as Energy Efficiency; Resource EGs trade would have previously untapped benefits and Pollution Management; and Water Supply. Third, for Indonesia. First, unilateral liberalization of tariffs results also show that the trade-related opportunity would boost the private sector’s access to cheaper and costs of not participating in the WTO EGA could be cutting-edge EGs and technologies, increase imports significant for Indonesia‒not only in terms of lost export of EGs (especially of Cleaner or More Resource Efficient and import opportunities but also for being able to technologies and Natural Risk Management), and shape the content and course of negotiations in these strengthen trade ties with important trading partners different multilateral forums. Conversely, liberalizing such as the United States; Taiwan, China; Hong Kong tariffs on EGs under the umbrella of the WTO EGA SAR, China; and India. Second, regional liberalization is estimated to boost Indonesia’s EG exports by 1.1 of tariffs on EGs trade among APEC countries would percent (US$99 million) and imports by 1.2 percent create important “trade creation” effects with other (US$214 million). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 35 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Finally, we also find that tariffs on imports of EGs Figure 3.11: Tariffs reduce the likelihood that firms start reduce the probability of firm entry, and tariffs on trading EGs inputs used by EG exporters reduce their EG export growth. Raising tariffs by one percentage point reduces Management of the probability of firms starting to trade in EGs by 9.3 Solid and Chapter 3 percent. The effect is even larger for certain categories Hazardous Waste of EGs such as Management of Solid and Hazardous and Recycling Renewable Energy Waste and Recycling System Products and Renewable EGs System Products Products Energy Products where the probability declines by 24.2 percent and 51.5 percent, respectively (Figure 3.11). In addition, a one percentage point tariff increase in -9.3% Marginal Effects imported inputs for EG exports, reduces the export value of EGs by US$6 million per year (Montfaucon et -24.2% al. World Bank mimeo). These results provide the import and export simulated effects of these policies, but economy- -51.5% wide effects will need to be analyzed further. These include possible impacts on jobs and the labor market for various industries relatively more involved Source: World Bank staff calculations from DGCE data and World Bank NTM database. in trading these products, as well as impacts on other Note: This figure shows the probabilities of starting to trade EGs, macroeconomic outcomes such as GDP, which are calculated by using the marginal effects following xtprobit regression. beyond the scope of this aspect of the analysis but in We only report the negative significant coefficients. All full regression the next phase of this work. tables as well as the methodology can be found in Appendix Two (Tables A.3-A.5 (Column 6)). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 36 CHAPTER 4. NON-TARIFF TRADE MEASURES ON EGs AND PLASTIC SUBSTITUTES 4.1. Incidence of Non-Tariff Measures (NTMs) on EGs and Plastic Substitutes 4.2. Assessing the Cost of NTMs 4.3. A Look at Local Content Requirements on Solar Panels and EVs 4.4. Which NTMs Matter the Most? TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Chapter 4 CHAPTER 4. NON-TARIFF TRADE MEASURES ON EGs AND PLASTIC SUBSTITUTES While most Non-Tariff Measures (NTMs) are in place to address legitimate public policy concerns, estimates suggest that some NTMs impose significant costs‒equivalent to up to a 30 percent tariff for some EGs and plastic substitutes. NTMs also affect firms’ decision to enter the EG trade and are cited by firms already involved in EG trade as a challenge. Accounting for one or more of the following criteria: their estimated tariff equivalents, their cost relative to ASEAN countries, their overall incidence and survey of firms trading in EGs, nine out of nearly ninety non-tariff trade measures are suggested for review and possible reform. International evidence suggests high minimum local content requirements (LCR) can act as a deterrent to the growth of the industry and need to be reviewed as they can only succeed in certain conditions. 4.1. Incidence of Non-Tariff Measures (NTMs) on EGs and Plastic Substitutes NTMs on EGs Research Institute for ASEAN and East Asia (ERIA) in 2015 and 2018 for Indonesia.40 The World Bank data NTMs are regulations such as packaging or backdates and updates this data and creates a panel licensing requirements, price controls, and import of nearly 90 measures and more than 650 regulations, quotas that can affect the flow of goods and spanning from 2008-2021 and covering all import services across borders. Some of these measures and export measures across all traded products. The are necessary‒for example, to ensure the compliance dataset can, therefore, be used to highlight the specific with health and safety standards, while others result in NTMs applied on different EGs and plastic substitutes. costly barriers to trade without achieving their primary policy objective. Analysis of NTM data is, therefore, Despite low tariffs, a high incidence of NTMs very important for understanding and improving trade on imports of EGs and technologies prevails in policy. The data used to analyze the impact of these Indonesia. These NTMs affect a high share of trade and NTMs is a panel dataset collected by the World Bank many products. Among the most affected by NTMs are based on data collected by UNCTAD and Economic Water Supply Products; Energy Efficiency Products; and 40 https://datacatalog.worldbank.org/int/search/dataset/0063543/indonesia_nontariff_measures TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 38 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Environmentally Preferable Products based on End- increase in TBT measures may be associated with use or Disposal Characteristics (Figure 4.1). In most an increasing preference for quality products as a cases, various NTMs are applied to the same products country’s income rises (Munadi 2019). More generally, at the same time, compounding compliance cost. For however, the increase in NTMs applied on EGs is example, 95 percent of all Water Supply Products are consistent with Indonesia’s increasing incidence of Chapter 4 affected by at least one NTM while 82 percent of all NTMs applied to all imports (Cali and Montfaucon Energy Efficiency Products are impacted by at least one 2021). The measure which affects the highest share NTM. of EG imports is authorization requirements for importers (a TBT measure), affecting 43 percent of Further analysis reveals that technical barriers to imports in 2021, followed by traceability requirements trade (TBT) affect the highest share of products and authorization requirements for importing certain (50 percent in 2021)41 (Figure 4.2).42 All categories of products (37 percent each) (Figure 4.3). NTMs applied to imports of EGs have increased in terms of their coverage since 2008. The more pronounced Figure 4.1: NTMs affect up to 95 percent of EG products in each EG category in 2021 (frequency ratio) Resources and Pollution Management Gas Flairing Emission Reduction Environmental Monitoring, Analysis and Assessment Equipment Noise and Vibration Abatement Efficient Consumption of Energy Technologies and Carbon Capture and Storage Natural Risk Management Clean Up or Remediation of Soil and Water Heat and Energy Management Management of Solid and Hazardous Waste and Recycling Systems Air Pollution Control Waste Management, Recycling and Remediation Renewable Energy Waste Water Management and Potable Water Treatment Cleaner or More Resource Efficient Technologies and Products Environmentally Preferable Products based on End-Use or Disposal Characteristics Energy Efficiency Water Supply 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: World Bank staff calculations from World Bank NTM Database. Note: Figure 4.1 only shows categories where at least one good was affected by at least one NTM. Figure 4.2: The share of affected trade (coverage ratio) of green products varies between different NTM groups… 60% EXP INSP OTH QC TBT SPS 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: World Bank staff calculations from World Bank NTM Database. 41 These are measures referring to technical regulations, and procedures for assessment of conformity with technical regulations and standards. 42 These are measures that are applied to protect human/animal life from risks arising from additives, contaminants, toxins, or disease-causing organisms in their food; to protect human life from plant- or animal-carried diseases; to protect animal or plant life from pests, diseases, or disease-causing organisms; to prevent or limit other damage to a country from the entry, establishment or spread of pests; and to protect biodiversity. These include measures taken to protect the health of fish and wild fauna, as well as of forests and wild flora. Note that measures for environmental protection (other than as defined above), to protect consumer interests, or for the welfare of animals are not covered by SPS. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 39 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 4.3: ……and between different specific NTMs (coverage ratio, 2021) Product quality, safety or performance requirements (B7) 10% Product identity requirement (B6) 10% Chapter 4 Requirement to pass through specified port of customs (C3) 10% Certification requirement (B83) 11% Testing requirement (B82) 14% Conformity-assessment measures n.e.s. (B169) 14% Pre-shipment inspection (C1) 15% Inspection requirement (B84) 17% Labelling requirements (B31) 18% Export quotas (B32) 19% Authorization requirements for importing certain products (B14) 37% Traceability requirements (B85) 37% Authorization requirements for importers (B15) 43% Source: World Bank staff calculations from World Bank NTM Database. A substantial number of internationally trading regulatory measures in the context of green trade. firms in Indonesia encounter various NTMs, and In the next section, we formally assess to what extent a significant proportion of these firms engage in these NTMs may be creating barriers to trade in EGs trade of EGs. Among the diverse NTM categories, TBTs for Indonesian firms. have an effect on the largest number of firms. A total of 23,029 or 80 percent of firms engaged in imports (both NTMs not only affect green products but also the exclusive importers and exporting importers) in the inputs that are used in the production of these EGs‒ year 2018 were subjected to TBT measures (Table 4.1). which has significant implications for Indonesia’s Among these firms, approximately 80.6 percent are potential for green exports. Between 2014 and involved in trading EGs. Measures like pre-shipment 2018, an average of 92.4 percent of all exported EGs inspections and other related measures (INSP), such as used inputs that were exposed to NTMs. In 2018 for the obligation to pass through specific customs ports, example, NTMs affected inputs of 7,421 products43 out are also highly prevalent among importing firms. In of a total of 7,801 exported products (95.1 percent) most instances, a significant majority of firms affected (Figure 4.5). This affected about 96.5 percent of all EGs by these NTMs are also engaged in trading EGs. The exporting firms in the sample (6,152 firms out of 6,376 lowest percentage for firms trading in EGs is 74.9 EGs exporting firms over the sample period). Almost percent out of a total of 7,112 importing firms that face all categories of EG exports face a significantly high SPS measures on their imports. On the other hand, the share of NTMs on their inputs. The most affected EG incidence of export NTMs is notably lower in terms categories include Energy Efficiency; Environmentally of the proportion of firms affected, with 62.5 percent Preferable Products based on End-Use or Disposal of these impacted exporting firms being involved in Characteristics; Natural Resource Protection; Natural trading EGs. Risk Management; Noise and Vibration Abatement; Waste Management, Recycling, and Remediation; Nearly 90 percent of EGs trading firms encounter and Water Supply‒all of which face NTMs on their NTMs (Figure 4.4). Importer-exporters, in particular, inputs. Even the least affected category‒Cleaner or bear a greater burden of these NTMs‒experiencing More Resource Efficient Technologies and Products‒ a more pronounced impact. Among the various faces NTMs on as many as 88 percent of the products NTM categories, TBT and INSP stand out as the most (Figure 4.6). These NTMs may hinder firms’ ability to significant impact, with 85 percent and 75 percent of produce and export more EGs in Indonesia. firms affected respectively. NTMs linked to exports affect approximately 35 percent of all firms engaged Looking at specific EGs within an EG category‒for in the trading of EGs. This interplay between trading example, Renewable Energy‒reveals which products practices and the influence of NTMs underscores the are most impacted by NTMs on its inputs. Some 99 complex relationship between trade dynamics and percent of inputs into the production of regulating 43 Products are classified at HS6 digits. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 40 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation or controlling instruments and apparatus are subject production of renewable energy products. On average, to NTMs (Figure 4.7). This exposure comes from 93 percent of imported inputs into the production of approximately 25 different NTMs that place a burden on these cells and batteries are subject to NTMs. Overall, the production of renewable energy products. Another this involves 11 different NTMs. example is cells and batteries which are needed in the Chapter 4 Table 4.1: Share of firms affected by NTM groups in 2018 Importing Firms Importing-Exporter Firms Number Share Non-EG EG Number Share Non-EG EG of Firms affected Trading Trading of Firms affected Trading Trading Other measures (OTH) 1,716 6.0% 14.7% 85.3% 769 6.9% 11.4% 88.6% Quality-control 6,529 22.7% 8.7% 91.3% 2,798 25.1% 6.8% 93.2% measures (QC) Pre-shipment inspections and other 19,204 66.7% 18.9% 81.1% 8,151 73.0% 14.4% 85.6% related measures (INSP) Technical barriers to 23,029 80.0% 19.4% 80.6% 9,351 83.7% 14.6% 85.4% trade (TBT) Sanitary and phytosanitary measures 7,112 24.7% 25.1% 74.9% 3,818 34.2% 18.6% 81.4% (SPS) Exporting Firms Importing-Exporter Firms Number Share Non-EG EG Number Share Non-EG EG of Firms affected Trading Trading of Firms affected Trading Trading Export-related measures 6,775 38.5% 37.5% 62.5% 3,683 33.0% 15.3% 84.7% Note: A firm is defined as trading EG if at any point in our dataset (2010-2018) a firm traded at least one EG. Figure 4.4: Firms that trade in EGs are mostly affected by TBT Figure 4.5: A high share of exported EG Products and INSP measures in 2018 are affected by NTMs on their inputs Importer Importing exporter Exporter average share of goods affected by NTMs 100% average share of inputs affected by NTMs (RHS) 96% 12% Share of EG trading firms affected 80% 10% 94% 60% 8% Exposure (%) 92% Share (%) 6% 40% 90% 4% 20% 88% 2% 0% 86% 0% NTM OTH PC QC INSP TBT SPS EXP 2014 2015 2016 2017 2018 Source: World Bank staff calculations. Source: World Bank staff calculations from DGCE data. Note: The graph shows the share of EGs trading firms that are affected by each measure. EXP = Export-related measures; OTH = Others; PC = price-control measures; QC = Quality-control measures; INSP = Pre-shipment inspections and other related measures; TBT = Technical barriers to trade; SPS = Sanitary and Phytosanitary Measures. A firm is defined as trading in EGs if at any point in our dataset (2010-2018) it traded at least one EG. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 41 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 4.6: Most inputs in the production of EGs face NTMs in 2018 Others Cleaner or More Resource Efficient Technologies and Products Renewable Energy Chapter 4 Efficient Consumption of Energy Technologies and Carbon Capture and Storage Resources and Pollution Management Gas Flairing Emission Reduction Clean Up or Remediation of Soil and Water Waste Water Management and Potable Water Treatment Management of Solid and Hazardous Waste and Recycling Systems Heat and Energy Management Air Pollution Control Environmental Monitoring, Analysis and Assessment Equipment Water Supply Waste Management, Recycling and Remediation Noise and Vibration Abatement Natural Risk Management Natural Resource Protection Environmentally Preferable Products based on End-Use or Disposal Characteristics Energy Efficiency 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: World Bank staff calculations from DGCE data. Figure 4.7: Products within the renewable energy group most affected by NTMs on their inputs in 2018 Regulating or controlling instruments and apparatus Cells and batteries Waste and scrap of primary cells, primary batteries and electric accumulators Liquid dielectric transformers Engines & Motors Heat exchange units Instantaneous gas water heaters Glass mirrors other than rear-view mirrors Floating structures Static converters 0% 20% 40% 60% 80% 100% Exposure Source: World Bank staff calculations from DGCE data. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 42 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Box 4.1: Survey results on challenges firms face in green trade We examine some of the underlying challenges firms face in trading EGs which may provide insights into competitiveness constraints and firm entry and exit rates. Using a survey of firms conducted as part of the Chapter 4 Indonesia CCDR (World Bank 2023), we examine challenges reported by firms trading in EGs in Indonesia. A total of 145 of the surveyed firms trade in EGs internationally while 128 trade domestically‒for a total of 273 of the 621 firms that were interviewed. A total of 101 firms responded to questions on import challenges and 104 on export challenges related to trading in EGs. Some 72 percent of firms reported facing challenges to importing EGs, while 70 percent reported facing export challenges‒with each firm facing multiple trade-related challenges. The challenges identified included trade regulations including tariffs and NTMs. Among these, NTMs such as customs procedures and compliance with Indonesian national standards were cited, as well as destination markets’ LCR rules among others. LCRs are prevalent for products such as solar panels and electric motors and vehicles. Despite tariffs on EGs being relatively low, import tariffs were reported by the majority to be an obstacle or the main obstacle to importing EGs. Among import challenges listed, 23 percent identified import tariffs, the most significant of any single obstacle (Figure 4.8). There may be several reasons why firms reported this. First, tariffs are straightforward and easier to estimate in terms of costs. Second, firms trading in EGs are importing not only EGs and this response may refer to other products outside of the EGs list.44 Notably, products outside the EGs list may be used as inputs in the production of EGs and tariffs on those may still be high. Finally, further analysis shows that tariffs on a limited number of EGs remain high.45 Among NTM-related obstacles, customs procedures (18 percent),46 and SNI compliance (13 percent), were highlighted as key hindrances to importing EGs. Import customs procedures include both documentary and border compliance requirements‒contributing to the increase in the number of hours and days at the border. SNI compliance was further singled out as an important obstacle. SNI compliance is mandatory in Indonesia for thousands of intermediate and capital goods (which most EGs are, including domestically produced ones). As certification requires a visit to the factory premises by an Indonesian certifying agency, the cost is considerably higher for imported goods. The monetary cost is compounded by the uncertain duration of the process and World Bank research has found this procedure to negatively impact firms in Indonesia.47 Other challenges to importing included the lack of information for importing (10 percent), port-of-entry (PoE) restrictions (7 percent), government procurement (5 percent), and LCRs (5 percent). The survey revealed that firms face multiple trade-related challenges in importing EGs and, while this is a limited sample, the results are in line with previous findings about some of the most problematic NTMs that traders face in Indonesia. The survey reveals that these same measures also affect the greening of Indonesia’s production and exports. The main challenge identified in exporting EGs were standards in export markets (25 percent) and the lack of harmonization between Indonesia’s standards and international ones, followed by export approvals (15 percent) (Figure 4.9). Other export challenges identified were the lack of information on market access (13 percent), the high costs of imported inputs (11 percent), and customs procedures both in Indonesia and destination markets (11 percent). High production cost due to the high cost of imported inputs is unsurprising given the prevalence of NTMs affecting intermediate goods imports. Customs procedures in both Indonesia and destination markets can also be challenging, and these are usually compounded due to the documentary requirements of export approvals domestically, and standard certifications. This relates to the lack of information on foreign markets and further resonates with the finding that more internationally exposed firms (two-way traders) dominate EGs trade, especially exports (see Figure 2.19). 44 The survey did not have information on which specific products firms were referring to when they reported the challenges. Rather the question was: ”What are the main challenges this company faces when importing EGs” with a list of options. 45 See Part C on the tariff schedule on the full list of EGs. 46 The survey did not elaborate which specific customs procedures. 47 SNI certification is also a recurrent cost as the certification must be renewed every year against a fee and the certification process must be carried out again every three or four years depending on the product (see Cali and Montfaucon 2021). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 43 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Firms exporting EGs face challenges in meeting product standards in destination markets. This is consistent with Indonesia’s low harmonization with international standards as 80 percent of firms surveyed reported that the harmonization of Indonesian standards in foreign markets is a key obstacle (Figure 4.10). For exporter- importers of EGs, 100 percent of surveyed firms reported that a lack of recognition of SNIs by importing countries or harmonization with that of trading partners were key obstacles. This also relates to reported challenges with Chapter 4 obtaining export approvals from Indonesian authorities which can be cumbersome when some of the documents and restrictions apply. Despite these challenges, 41 percent of importers and 32 percent of exporters reported benefiting from duty-free or special permits or subsidies when trading EGs (Figure 4.11). This suggests that there may be efforts to stimulate such trade or these traders are taking advantage of policies that affect these goods‒even if the policies may not necessarily be of environmental benefit.48 Unfortunately, more in-depth information on these was unavailable at the time of writing this report. As for environmental services trade, the main identified challenges have to do with businesses being unable to access critical foreign skills (Figure 4.12). The main challenges faced by firms have to do with getting working visas and permits for foreign workers (13 percent), restrictions on the number of foreign workers (11 percent), and requirements for workers to be local or native (9 percent). These contribute to shortages of needed skills for firms.49 Figure 4.8: Import tariffs are the biggest import Figure 4.9: … while ISO in destination countries is the challenge… biggest export challenge Surveyor Customs Packaging, Export Goods Packaging, Marking, And Local Content Report, 3% Security in Marking, and Registration, Labeling, 3% Requirement, Destination Labeling, 5% 3% Government5% Country, 8% ISO in Procurement, Destination Import Tariff, 5% Country, 25% 23% Port Restriction, 7% Other, 9% Information for Importing, Customs 11% Procedure, Production 18% Cost of Export Imported Approval, 15% Inputs, 10% Other, 13% Customs Market Access SNI, 13% Procedure, Information, 11% 13% Figure 4.10: Challenges with product standards Figure 4.11: Duty-free or special permits or subsidies remain for trading EG are common when trading EGs SNI isn't Recognized by Importing Countries Don't Know No Yes SNI isn't Harmonized with Importing Countries Standard Other 32% 41% 18% 86% 81% 45% 59% 82% 14% 19% 14% 9% EG Exporter Only EG Importer Only EG Exporter and Importer Exporter Importer 48 The survey does not provide more details of the type of benefits and subsidies that are most prevalent, and this is an area of follow-up research. 49 Until recently, Indonesia operated a highly restrictive work permit system that involved a limited set of occupations eligible for work permits and a cumbersome approval process. This included the approval of the Expatriate Manpower Employment Plan and the issuance of the Expatriate Manpower Employment License by the Ministry of Manpower. Any work permit needed for a position outside the eligible ones required the approval of the line ministries related to the specific sector and occupation. The restrictiveness of the work permit system effectively prevented businesses from accessing foreign talent‒unlike the case in most other countries in the region. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 44 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 4.12: Access to critical foreign skills remains a challenge related to international trade of environmental services Other 2% Chapter 4 Requirement for Foreign Skilled Worker to Meet Local Qualification 6% Service Provider Has to be Local/Native 6% Restriction on Storage and/or Data Transmision 7% Requirement to Partner Up with Domestic Entity 7% Limited Stay Permit for Foreign Skilled Worker 8% Foreign Equity Limit 9% Restriction on Number of Foreign Skilled Worker 11% Cost to Get a Business/Work Visa 13% Source: Figures 4.8-4.12: Authors calculations based on the World Bank 2022 CCDR Firm Survey. NTMs on Plastic Substitutes score, with each imported product needing to comply with an average of six SPS measures, compared to Considering efforts to reduce plastic waste in three for TBT measures. Indonesia, trade policies such as import tariffs and NTMs could play a pivotal role in shaping the Figure 4.13: Weighted average import tariff on nation's path in the global marketplace. Throughout plastic substitutes are lower than plastic products the period from 2019-22, Indonesia has in some cases in Indonesia maintained lower tariff rates for plastic substitutes Plastic Substitutes ALDFG compared to conventional plastic products (Figure Minerals Natural fibers 4.13). Average tariffs for abandoned, lost, or discarded Plastics PE 12.0 fishing gear (ALDFGs) are, however, consistently higher than those of plastic and have been less competitive in 10.0 recent years when compared to conventional plastic.50 8.0 Percent (%) Globally, approximately 40 percent of imported plastic substitutes need to adhere to at least one 6.0 NTM while, for Indonesia, this has been above 60 4.0 percent since 2015. At the same time, the global average coverage ratio currently sits at about 80 2.0 percent, and Indonesia has maintained this identical figure since 2015 (Figure 4.14). Meanwhile, nearly one- 0.0 third of exported plastic substitutes have to comply 2017 2018 2019 2020 2021 2022 with NTMs globally compared to nearly one-half of Source: World Bank staff calculations from BPS data. all exports. UNCTAD (2023) also identifies clusters and Note: ALDFG, minerals (aluminum), and natural fibers are types of NTMs‒with natural fibers, dedicated crops, sub-categories of plastic substitutes. Polyethylene (PE), polypropylene (PP), polyoxyethylene methyl phosphonate and agricultural by-products being the most regulated (POM), and polycarbonates (PC). imports. TBT and quantity control measures were the most common for imports (65 and 50 percent of world Despite plastic substitutes having a lower tariff imports respectively), while SPS measures were found rate in comparison to conventional plastic, the to primarily affect food and agriculture products. SPS disparities in both coverage and frequency ratios measures are characterized by their high prevalence of NTMs are notably substantial. The coverage ratio 50 Conventional plastic products are defined by HS headings: 3901 – polyethylene (PE); 3902 – polypropylene (PP); 3907 - polyoxyethylene methylphosphonate (POM) and polycarbonates (PC). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 45 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation exhibits a significant difference of nearly 50 percentage of 2021, five NTMs exceeded 30 percent of import points since 2016, while the frequency ratio illustrates value, with licensing requirements for imports (B15) an even more pronounced difference, exceeding 60 being the highest at 41.3 percent (Figure 4.15). Of the percentage points. These considerable gaps underline 282 plastic substitutes, nearly one-half are subject to the significant disparities between the two types of import approvals and more than one-half are subject Chapter 4 plastic in terms of their NTM implementation aspects. to import licensing measures. Among NTMs applied on imports in Indonesia, as Figure 4.14: Coverage and frequency ratios of import Figure 4.15: Licensing requirements for imports has NTM for plastic substitutes in Indonesia are higher the highest coverage and frequency ratio for plastic than for plastic products substitutes in indonesia Coverage - Plastics Substitutes A86 (Quarantine Frequency - Plastics Substitutes requirements) Frequency Ratio 100 Coverage - Plastics A83 (Certification Coverage Ratio Frequency - Plastics requirements) 80 B85 (Traceability 60 requirements) B14 (Import 40 approval) 20 B15 (Import licensing) 0 0 10 20 30 40 50 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Percent (%) Source: World Bank staff calculations from BPS and World Bank Source: World Bank staff calculations from BPS and World Bank NTM Database. NTM Database. 4.2. Assessing the Cost of NTMs Not all NTMs are problematic and require reform, distortions would be misleading. To draw meaningful rather the key is identifying measures which impose insights, an in-depth review on whether the measures an unnecessary burden, and negatively impact are justified on the products they affect is also needed. green trade. The focus is on measures that fulfill Additionally, while AVEs entail which NTMs are costly, the three conditions underlying the breach of a key they do not provide the non-trade effects of the trade principle of WTO rules: (i) they discriminate against regulations such as health and safety standards. imports; (ii) they are not necessary to achieve a non- trade objective; and (iii) they are likely to impose The report assesses the trade implications of NTMs significant costs on imports. in comparison to tariffs, and the effect of NTMs on EG trading firms to determine which NTMs may A systematic analysis of the effects of NTMs involves need closer attention and potential reform. These evaluating their tariff Ad Valorem Equivalent (AVE). AVEs can then be applied in conjunction with trade AVEs of NTMs involve estimating the uniform tariff that elasticities to determine the overall impact. The specific will result in the same trade impacts on the import of a equations for calculating these AVEs can be found product due to the presence of the NTMs. The AVE of in Appendix Two. The effect of NTMs on firms EGs an NTM is often interpreted as measuring the distortion trade is also estimated‒including the effect of NTMs imposed by the NTM to the domestic economy. As on exporting firms inputs into the production of EGs. some NTMs are, however, imposed to address market The methodology details are in Appendix Two. These failures, the presence of externalities or public goods, estimates will help narrow down specific trade policy means that simply interpreting AVEs as measuring that may need closer attention. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 46 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Estimates show that, in addition to their high Firms' participation in import and export markets incidence, NTMs on EGs have tariff equivalents for EGs is negatively affected by both import and that are high. For example, SPS authorization export NTMs. While certain NTMs have a positive requirements increase the costs of renewable energy effect on firms' decisions to engage in trade in EGs, Chapter 4 products by almost 10 percent while TBT authorization price controls (PCs) and SPS measures discourage requirements increase the costs of Management of importing firms from importing EGs. Similarly, export- Solid and Hazardous Waste and Recycling Systems related NTMs discourage the exports of EGs for by 31 percent (Figure 4.16) and affect 26 percent of all exporting firms, however, the magnitude of these products. The impact of certain NTMs is also worse in effects varies between different categories of EGs. For Indonesia compared to other countries in the region‒ instance, PCs significantly reduce the likelihood of suggesting lower implementation efficiency and higher importing Renewable Energy products. In the case of compliance costs. Even when the same measures are Renewable Energy products, the additional imposition applied to the same goods in different countries, the of marking requirements and tolerance limits for cost of the measures will differ, depending on how residues of, or contamination by, certain substances the measures are implemented‒which translates to further contributes to the negative impact on firm the compliance cost to traders. This compliance cost entry (Figure 4.19). is captured through the tariff AVE of NTMs. Further analysis reveals that when the same NTM is applied in When inputs for the production of EGs are exposed other countries, the cost of these measures in Indonesia to NTMs the likelihood of firms exporting EGs is is significantly higher for EGs. For example, the cost of reduced. Results show that firms producing goods PSIs of EGs are 18.6 percent higher in Indonesia and with those products being subject to NTMs are 2.8 PoE restrictions up to 17.5 percent (Figure 4.17). percent less likely to start exporting EGs (Figure 4.20, methodology see Appendix Two). This highlights the Several NTMs also increase the cost of imported fact that NTMs can be a significant obstacle for firms plastic substitutes and reforming them would exporting EGs. In particular, PSIs and other measures potentially allow cheaper access. For instance, have a negative impact, with the former reducing the the requirement to pass through a specified port of probability of starting to export EGs by 4.0 percent and customs (C3) has an estimated tariff equivalent of 17 the latter by as high as 32.8 percent. NTMs on inputs percent (Figure 4.18) and affected 25 percent of all into production of EGs can also negatively affect the imported products in 2021. These measures exceeded export value of a firm. For example, a one percentage both average and median of plastic substitutes' tariffs point increase in exposure to product quality, safety, or at 5.2 percent and 5 percent, respectively.51 As such, performance requirements (B7) reduces export value the evidence underscores the significant capability by US$2.2 million per year.52 of NTM reform to enable access to environmentally friendly plastic substitutes in Indonesia. 51 Based on Indonesian Customs Tariff Book 2022. 52 Montfaucon, A.F., C. Lakatos, B. Agnimaruto, and J.M. Silberring. World Bank mimeo. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 47 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 4.16: The tariff equivalent of specific NTMs on EGs Management of Solid and Hazardous Waste and Recycling Systems Renewable Energy Chapter 4 Waste Management, Recycling and Remediation Import Traceability license Require- ments (B15) (B85) Indonesia national Tolerance limits (B21) Marking requirements standard (B7) (B32) Import approval (B14) Import Traceability Certification approval Require- Restricted use of requirements ments Import approval (B14) Packaging requirements (A14) (A85) substances (B22) (B83) (B33) Source: World Bank staff calculations from World Bank NTM Database. Note: AVE estimations are based on a sample from 2008-19. Figure 4.17: Tariff equivalent of most problematic Figure 4.18: Estimated AVE of NTMs negatively NTMs on EGs are relatively more costly compared to affecting import of plastic substitutes EAP (AVE difference) 18.6 17.5 C3 (Port of entry restriction) 17.0 B6 (Product identity 25.3 requirements) A52 (Irradiation) 29.1 A86 (Quarantine 3.3 33.2 requirements) 0 10 20 30 40 Percent (%) Port of Entry PSI SNI Source: World Bank staff calculations from UNCTAD TRAINS NTM Database and WITS. Note: (i) Figure 4.17 plots the AVE for EGs for Indonesia relative to other EA countries. (ii) The SNI result is not statistically significant. (iii) Countries included: Brunei Darussalam, Cambodia, China, Indonesia, Republic of Korea, Lao PDR, Malaysia, Myanmar, Philippines, Thailand, and Vietnam. (iv) See Appendix Two for methodology. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 48 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Figure 4.19: NTMs can negatively affect a firm’s Figure 4.20: Exposure to NTMs of inputs can also decision to import or export EGs impact the export of EGs Exports Imports - NTM Groups NTM OTH INSP 0% Chapter 4 EXP OTH PC SPS -5% -2.8% -1.43% -4.0% -1.8% -3.3% Marginal Effects -4.7% -10% Marginal Effects -7.2% -15% -10.9% -20% -21.6% -25% All EGs -30% Management of solid and hazardous waste and recycling systems Renewable energy -35% -32.8% Source: World Bank staff calculations from DGCE data and World Source: World Bank staff calculations from DGCE data and World Bank NTM database. Bank NTM database. Note: This figure shows the probabilities of starting to trade Note: This figure shows the probabilities of starting to trade EGs, calculated by using the marginal effects following xtprobit EGs, calculated by using the marginal effects following xtprobit regression. We only report the negative significant coefficients. All regression. We only report the negative significant coefficients. full regression tables as well as the methodology can be found in A full regression table as well as the methodology can be found Appendix Two (Tables A.3 (Column 2 and 6) and A.4-A.5 (Column in Appendix Two (Table A.6). OTH = Others; PC = Price-control 6)). EXP = Export-related measures; OTH = Others; PC = Price- measures; INSP = Pre-Shipment Inspections. The exposure is control measures; SPS = Sanitary and Phytosanitary Measures. defined as the weighted share of inputs that are exposed to NTMs The NTM variables are equal to one if an NTM of that category per product at a particular time. Controls include tariffs and sector applies to EG. We control for tariffs. The specific NTMs were fixed effects. Each firm is allocated to one of 21 HS section based chosen based on those which once had positive AVEs at least in on the highest export/import value of that firm. one year between 2019 and 2021. The results are robust when including year fixed effects. 4.3. A Look at Local Content Requirements on Solar Panels and EVs LCRs or “localization rules” are imposed by of solar modules currently only reaches 47.5 percent. governments with the objective of helping the This may be contributing to the underdevelopment development of local industries. LCRs require firms of the local industry as domestically produced solar to use a certain percentage of domestically produced panels are more expensive and considered less goods or services and are among the fastest growing efficient and technologically advanced than imported NTM measures applied worldwide.53 To comply with ones and local production of solar panels is highly LCRs, firms are often required or incentivized to reliant on imported parts and components. The price substitute imported inputs for what may be more of imported solar modules from China ranges from expensive and lower quality domestically produced US$0.25-0.37/Wp56 while the average price of local ones‒leading to increases in costs, loss of efficiency solar modules is US$0.47/Wp (IESR 2019), implying and competitiveness (IESR 2021). LCRs are prohibited that the competitiveness and efficiency of local under WTO rules as they violate several WTO solar modules may also be lower. In a further effort provisions‒including the national treatment principle. to encourage the local manufacturing industry, the government has banned the export of quartz sand and Indonesia has set LCRs on solar panels but the silica sand (key components in solar PV modules). realization of the LCR of solar modules currently does not reach the set minimum. LCR regulations54 set the LCRs also apply to the EV industry in Indonesia, level of domestic components for solar modules at 60 compensated by generous incentives to attract percent by 2025,55 however, the realization of the LCR investors. For two- and three-wheeled EVs, a minimum 53 https://www.oecd.org/trade/topics/local-content-requirements/ 54 MoEMR Regulation No. 49/2018 on the Utilization of Roof Top Solar PV by PT. Perusahaan Listrik Negara (PLN) and Ministry of Industry Regulation No. 23/2023. 55 Ministry of Industry Regulation No. 23/2023 on Use of Domestic Products for Electricity Infrastructure Development: Requirement that the LCR for solar modules must increase from 40 percent to 60 percent by the beginning of 2025. 56 The capacity of solar installation is measured in watt peak (Wp) which is the maximum electrical capacity a solar cell can yield under ideal circumstances. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 49 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation local content of 40 percent and for four-wheeled EVs LCRs applied in other countries for the purposes a minimum 35 percent local content is required. LCRs of developing domestic productive capability of will be further raised to a minimum of 60 percent for renewables have mostly led to increased costs.59 LCRs two- or three-wheeled EVs produced between 2024 are far more likely to succeed if the market size is large and 2025, and 80 percent for those manufactured after and the market’s demand is stable. Small or unstable Chapter 4 2026. For four-wheeled or more EVs, the LCR will be markets may prevent firms from taking advantage of raised to 40 percent if manufactured during 2022-23, economies of scale, exacerbating the rise in production 60 percent during 2024-29, and 80 percent from 2030 costs that result from LCR policy implementation onwards. In addition to LCRs, the government also (Kuntze and Moerenhout 2013). introduced incentives to attract investors and stimulate growth of the local industry.57 For example, imports of 4.4. Which NTMs Matter the Most? parts and components are allowed if local suppliers do Given that there are many different NTMs, not have the capacity to produce these components. identifying which policies and measures warrant In addition, EV manufacturers who develop production a closer look for reform consideration is key. To facilities in Indonesia can import completely built-up that end, we triangulate the results on both the cost EVs and are exempted from luxury goods tax.58 These and the incidence of NTMs to narrow down measures initiatives are expected to jump start sales of EVs in that could be improved or relaxed for EGs and plastic Indonesia. substitutes. This is done by taking measures whose cost is 10 percent of a tariff equivalent or more and that While some have reached the EV thresholds, others affect at least 10 percent of imported products. Based on choose not to comply as they are not mandatory. the discussions in Chapter Four, Table 4.2 provides the Some brands have achieved the government’s LCR suggested measures and the key products they affect. target of 40 percent in 2022 (IESR 2023), however, The recommendations also account for feedback from some EV industries could choose not to comply the survey of firms such as on standards and previous with the LCR assessment as it is not necessary for work the World Bank has conducted on specific non- sales to customers. This also means that they miss tariff trade measures that may be burdensome. out on incentives and other opportunities such as government procurement. Opportunities to enforce the LCR emerge with the recent government plans to conduct public procurement for government official vehicles and provide customer incentives through Presidential Instruction No. 7/2022. To benefit from these government programs, manufacturers need to comply with the LCR. Overall, renewable energy industrial development in Indonesia is still at a budding stages and domestic manufacturers are not currently able to fulfil levels of projected demand or meet quality standards. International evidence suggests high minimum LCRs often act as a deterrent to the growth of the industry and can only succeed in certain conditions. When LCR rates are observed to be very high, they increase their trade-distorting impact and the inefficient allocation of resources (Kuntze and Moerenhout 2013). Indeed, 57 Presidential Regulation No. 55/2019. 58 Government Regulation No. 74/2021 and Ministry of Finance Regulation No. 141/PMK.010/2021. 59 For example, in Brazil, India, and South Africa as discussed in Bazilian et al. (2020). TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 50 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Table 4.2: Tariffs and NTMs for boosting green and environmentally sustainable trade EGs Management Waste of Solid and Plastic Substitutes Renewable Management, Hazardous Waste All EGs* Chapter 4 Energy Recycling and and Recycling Remediation Systems AVE FR AVE FR AVE FR AVE FR AVE FR Authorization requirement for SPS reasons for importing 10 9 certain products (A14) Traceability requirements (A85) 10 11 Quarantine requirement (A86) 33 31 Certifications complying to 3 7# national standards (SNI, B7) Authorization requirements for importing certain products 31 26 8 13 (B14) Authorization requirements for 8 13 importers (B15) Traceability requirements (B85) 8 13 Pre-shipment Inspections (C1) 19 5# Requirement to pass through 18 8 17 25 specified port of customs (C3) LCRs n.a.* n.a.* Source: World Bank staff calculations from BPS and World Bank NTM Database based on 2008-21 sample years. Note: AVE estimations are based on a sample from 2008-19. *AVEs for all EGs are in relation to AVEs for ASEAN countries applying the same measures on the same products. LCRs are not extensively analyzed but are key to EVs and solar development and need to be reviewed constantly. # While PSI measures dropped in 2021, they have historically been high (4 percent and new post border and pre border inspection changes yet to be implemented will likely increase this share). SNI measures are included due to high cost and recurrent concerns from the private sector including those trading in EGs. FR is the share of the number of products within that category of goods affected by that trade measure. All figures are from 2021. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 51 CHAPTER 5. CONCLUSIONS AND KEY TAKEAWAYS TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Chapter 5 CHAPTER 5. CONCLUSIONS AND KEY TAKEAWAYS The findings of the analysis suggest that NTMs The key recommendations emerging from the pose significant costs on EGs and plastic substitutes findings are as follows: while both NTM and tariff reforms could boost EG trade in Indonesia and grow importer and exporter Recommendation One: Reduce remaining tariffs on firms. As NTMs are prevalent on EGs and plastic imports of EGs and plastic substitutes‒including substitutes, addressing NTMs would stimulate existing through multilateral participation. Reducing import exporters to export more and incentivize entry into tariffs on EGs will lower their price, boost access to lower- the EGs trade. In addition to these behind the border cost, more energy-efficient technologies and incentivize steps, trade agreements, addressing challenges such the use of environmentally friendly alternatives. This is as tariffs for products that still have high tariffs as well particularly important for industries that must comply as unilateral, regional, and multilateral liberalization of with climate change mitigation policies. Unilateral, tariffs on EGs trade would have previously untapped regional, and multilateral liberalization of tariffs on EGs benefits for Indonesia. Keeping the costs of EGs and trade would have previously untapped benefits for environmental services low‒including access to critical Indonesia and facilitate firm entry into trading of EGs. skills and technologies could also make cleaner practices more accessible and widespread‒including Recommendation Two: Streamline NTMs on EGs for domestic firms. An enabling environment for firms and plastic substitutes and conduct a systematic to import and export EGs and environmental services and periodic review of trade regulations. Given could benefit both domestic importers and exporters that there are many different NTMs, identifying which and non-traders. policies and measures warrant a closer look for reform TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 53 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation consideration is key. To that end, we triangulate the for importing certain products (A14); Traceability results on both the cost and the incidence of NTMs requirements (A85); Quarantine requirement (A86); to narrow down measures that could be improved Certifications complying to national standards (SNI, or relaxed for EGs and plastic substitutes. The B7); Authorization requirements for importing certain recommendations also account for feedback from products (B14); Authorization requirements for Chapter 5 the survey of firms such as on standards and previous importers (B15); Traceability requirements (B85); Pre- work the World Bank has conducted on specific shipment Inspections (C1); and Requirement to pass non-tariff trade measures that may be burdensome. through specified port of customs (C3) as listed in These are Authorization requirement for SPS reasons Table 5.1. Table 5.1: NTM Recommendations based on findings in the report NTMs for Potential Reform EGs Plastic Substitutes Authorization requirement for SPS reasons for importing certain Renewable Energy products (A14) Traceability requirements (A85) Renewable Energy Quarantine requirement (A86) Plastic Substitutes Certifications complying to national standards (SNI, B7)# All EGs* Management of Solid and Hazardous Waste and Recycling Systems; Authorization requirements for importing certain products (B14) Waste Management, Recycling and Remediation Waste Management, Recycling and Authorization requirements for importers (B15) Remediation Waste Management, Recycling and Traceability requirements (B85) Remediation Pre-shipment Inspections (C1)# All EGs* Requirement to pass through specified port of customs (C3) All EGs* Plastic Substitutes Note: Color codes: Orange- affects some categories of EGs; Red affects all EG categories. *AVEs for all EGs are in relation to AVEs for ASEAN countries applying the same measures on the same products. # While PSI measures dropped in 2021, they have historically been high and new post border and pre border inspection changes yet to be implemented will likely increase this share. SNI measures are included due to high cost and recurrent concerns from the private sector including those trading in EGs. Recommendation Three: Work toward a Recommendation Four: Review and relax local harmonization of product standards across markets, content requirements (LCRs) to accelerate renewable mutual recognition, as well as coordination on energy (RE) sector growth through strengthening climate policies that are likely to affect trade to domestic supply chain and establishing demand better enable the private sector. Harmonization for RE and RE enabling projects. Given progress and of standards and mutual recognition could be a lessons from other countries, Indonesia may consider supportive policy to encourage imports of EGs, exports reducing minimum requirements on LCRs and allow in new export markets with comparable standards and the market to first develop to a point where domestic facilitate product upgrading for firms. There is a need production could achieve the economies of scale to harmonize existing local standards with international required to keep prices affordable. There may be scope ones and develop new standards that are aligned with for countries to agree to cooperate on green industrial international standards and practices. Improving the policies (procurement, subsidies, LCRs, investment, coordination of climate-related policies would also technology transfer, and intellectual property). reduce policy fragmentation and compliance costs for firms from administrative difficulties and potential complexities. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 54 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Recommendation Five: Include enforceable complementarity between trade and climate environmental provisions in trade agreements. policies. This includes more systematically integrating On the one hand, environmental provisions and trade policies and trade facilitation measures as part of commitments will need to become more detailed broader climate strategies‒including in NDCs. in terms of scope and ambition. On the other hand, Chapter 5 direct participation in multilateral and plurilateral These policies will need to ensure equity and will environment-related trade policy initiatives would have broader economy-wide effects that will need not only allow Indonesian exporters to benefit from to be analyzed further. As trade in EGs and plastic improved market access in destination markets but substitutes increases, possible impacts on jobs and the would also give Indonesia a seat at the table to shape labor market for various industries, as well as impacts the content and course of discussions. on other macroeconomic outcomes is expected. Climate-related trade policy instruments also need Recommendation Six: Strengthen the to ensure non-discrimination and be administratively feasible. These aspects are beyond the scope of this report but will be taken on in the next phase. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 55 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation APPENDIXES Appendix 1 Appendices Table A.1: Top environmental goods, examples and climate change/environmental role EG Description, Examples, and Cli- Top 10 Products in 2020 Exports Rank mate Change Role Air Pollution Control (Mitigation) Compressors used for automotive air conditioners. 1 For example: Parts of vacuum pumps, Cylinder block; crank case for vehicle of Chapter 87, other than of heading 2 compressors, fans, blowers, hoods. 87.01 & 87.11. Used for: (i) air handling equipment; Part of vehicle of Chapter 87, other than carburretor, piston, cylinder, other (ii) transport or extraction of polluted 3 than of heading 87.01 & 87.11. air, corrosive gases, or dust; and (iii) transport or extraction of polluted air Cylinder liner with internal diameter <= 50mm or <= 155 mm for marine 4 and corrosive gases or dust. propulsion engine of a power > 22.38 kW. Parts of marine propulsion engine of a power > 22.38 kW, other than piston 5 & cylinder. Compressor exclusively for refrigerating equip, air, gas in oil drill operation, 6 automotive AC & sealed unit for AC machine. Other automatic service-vending machines, not electrically operated. 7 Machinery, plant & equipment other than for making hot drink/cooking/ 8 heating food, electrically operated. Other automatic service-vending machines, electrically operated. 9 Laminar airflow cabinets fitted with filters in horizontal side > 120 cm. 10 Clean Up or Remediation of Soil Remote control apparatus, other than radio remote control apparatus. 1 and Water (Mitigation, Adaptation) Other equipment/machine for removal of dust particles & curing material by 2 For example: Water filtering or UV light for manufacturing of printed circuit boards. purifying machinery or apparatus. Other floating structures. 3 Environmental benefit: Used to filter and purify water for a variety Smart cards. 4 of environmental, industrial, and scientific applications, including water Filtering/purifying machine & apparatus, other than for medical/surgical/ 5 treatment plants and wastewater laboratory, sugar manufacture & oil drilling operation. treatment facilities. Purifying machinery and apparatus of a capacity <= 500 l/hfor domestic 6 use. Other Environmental categories: Efficient Consumption of Energy Light-emitting diode (LED) lamps. 7 Technologies and Carbon Capture and Storage (ECETCCS): Wastewater Centrifuge machinery other than used for sugar manufacture. 8 Management and Potable Water Treatment. Filtering or purifying machinery and apparatus for water of a capacity > 500 9 l/h, electrically operated. Oil filter other than for medical/surgical/laboratory use, sugar manufacture 10 & oil drilling operations. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 56 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Cleaner or More Resource Efficient Other motorcycles (including mopeds). 1 Technologies and Products (Mitigation) Primary cells and primary lithium batteries. 2 For example: Railway/tramway rails, Chain wheels and cranks; other parts for bicycles designed to be used by 3 iron, or steel. children. Appendices Other bicycles not motorized. 4 Environmental benefit: Cleaner or more resource efficient technologies Other primary cells and primary batteries not zinc-carbon, having an 5 and products. external volume > 300 cm3. Electrical machines, domestic other than vacuum cleaner, floor polisher, Environmental categories: Cleaner or 6 grinder, mixer, juice extractor, kitchen waste disposers. more resource-efficient technologies and products. Other primary cells and primary batteries zinc-carbon, having an external 7 volume <= 300 cm3. Railway/tramway passenger coach & other special purpose railway or 8 tramway coaches not self-propelled. Brakes and parts thereof of motorcycles (incl mopeds). 9 Self-propelled railway or tramway coaches, van, and truck powered from 10 internal source of electricity. Efficient Consumption of Energy Static converters other than Uninterruptible Power Supply (UPS), battery 1 Technologies and Carbon Capture chargers, inverters, and rectifiers. and Storage (ECETCCS) (Mitigation) Part of other gas turbines. 2 For example: Parts of gas turbine Cylinder block; crank case for vehicle of Chapter 87, other than of heading engines except turbojet/prop. 3 87.01 & 87.11. Environmental benefit: Gas turbines for electrical power generation from Part of vehicle of Chapter 87, other than carburretor, piston & cylinder, 4 recovered landfill gas, coal mine vent excluding heading 87.01 & 87.11. gas, or biogas (clean energy system). Cylinder liner with <= 50 mm internal diameter <= 155 mm for marine Other environmental categories: 5 propulsion engine of a power > 22.38 kW. Renewable energy. Other parts undefined of gasoline engine for other vehicles of Chapter 87, 6 other than 87.01 or 87.11. Liquid dielectric transformers, power capacity >30.000 kVA. 7 UPS, not automatic data processing machines & units thereof, 8 telecommunications apparatus. Parts of marine propulsion engine of a power > 22.38 kW, other than piston 9 & cylinder. Other parts undefined of gasoline engine for vehicles of heading 87.11. 10 Energy Efficiency (Mitigation) Pilot lamp with fitting for electro-thermic domestic applications of heading 1 85.16. For example: Electric lamps, lighting fittings. Other lighting fittings. 2 Environmental benefit: Compared Other fluorescent lamps and lighting fittings other than for operating rooms. 3 with the conventional fluorescent or incandescent lamps, they are Lamps of electric table, desk, bedside/ floor-standing lamps. 4 long life, low power consumption, energy saving and no toxic substance Fluorescent lamps and lighting fittings. 5 (mercury free). Other environmental categories: Heat Other exterior lighting. 6 and energy management. Searchlights. 7 Other electric lamps, of a kind used for lighting public open space/ 8 thoroughfares. Other electric lamps of spotlights. 9 AC machinery of cooling capacity >21.10kW & air flow rate >67.96m3/min, 10 incorporating refrigerating & reversible heat pump, in marine. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 57 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Environmental Monitoring, analysis Other instruments & apparatus other than exposure meters, electrically 1 and assessment equipment operated. (Broader Environmental Protection) Other automatic regulating/controlling instruments & applications, not 2 electrically operated. For example: Monocular, telescopes. Environmental benefit: Applications Other instruments, appliances and machines, other cable tester. 3 Appendices in environmental monitoring, analysis and assessment equipment. Water meters. 4 Thermometers & pyrometers, electrically operated, other temperature 5 gauges for motor vehicles. Other optical instruments and appliances for other purposes. 6 Microtomes, not electrically operated. 7 Thermostats, electrically operated. 8 Parts & accessories (not specified/incl elsewhere in this chapter) for 9 machines, applications of Chapter 90 for electrically operated equipment. Thermometers & pyrometers, elect operated, temperature gauges for motor 10 vehicles. Environmentally Preferable Assembled flooring panels other than of bamboo or with at least the top layer 1 Products based on End-Use or (wear layer) of bamboo, multilayer. Disposal Characteristics (Broader Other assembled flooring panels. 2 Environmental Protection) Coconut fibers (coir) and abaca fibers, other coconut fibers. 3 For example: Vegetable fiber, processed not spun, tow & waste. Gas turbines of a power > 5,000 kW. 4 Environmental benefit: More biodegradable than synthetic fiber Coconut fibers (coir) and abaca fibers, coconut fibers, raw. 5 alternatives and made from a renewable resource Twine, cordage, ropes, cables, other than of jute/other textile bast fibers of 6 head 53.03. Vegetable textile fibers other than 5305.00.10-23. 7 Sacks and bags, of a kind used for the packing of goods, new, of other textile 8 bast fibers of heading 53.03, excluding jute. Sisal & other textile fibers of the genus agave, tow & waste of these fibers. 9 Gas turbines of a power <= 5,000 kW. 10 Gas Flaring Emission Reduction Other automatic regulating/controlling instruments & applications, not 1 (Mitigation) electrically operated. Machinery, plant & equipment, other than for making hot drink/cooking/ 2 heating food, electrically operated. For example: Industrial furnace, oven, incinerator non-electric. Thermostats, electrically operated. 3 Environmental benefit: Used to destroy solid and hazardous wastes. Parts & accessories (not specified/incl elsewhere in this chapter) for 4 Catalytic incinerators are designed machines, appliances of Chapter 90 for electrically operated equipment. for the destruction of pollutants by Filtering/purifying machinery & apparatus for gases. 5 heating polluted air and oxidation of organic components. Instrument & apparatus other than automatic regulating voltage units 6 Other environmental categories: (stabilizers), electrically operated. Several. Part of evaporator/condenser for AC machine for motor vehicle with a 7 cooling capacity <= 21.10 kW. Parts & accessories for electrically operated instruments & apparatus, 8 measure/check the flow level, pressure. Part of filtering/purifying machinery & apparatus for liquid/gas of 8421.21.19- 9 90,8421.29.10,8421.29.30-40,8421.29.90,8421.39.20. Other instruments/apparatus for measuring/checking the flow, level, 10 pressure, electrically operated. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 58 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Heat and Energy Management Pilot lamp with fitting for electro-thermic domestic application of heading 1 (Mitigation) 85.16. Water meters. 2 For example: Thermostats. Thermostats, electrically operated. 3 Environmental benefit: Used to control Appendices the efficiency of air conditioning, Kilowatt hour meters (kwh). 4 refrigeration, or heating systems. Other environmental categories: Phenolic resins, other than molding compounds, other than phenol 5 ECETCCS; Environmental monitoring, formaldehyde. analysis and assessment equipment; gas flaring Slag wool, rock wool & similar mineral wools in bulk/sheets/rolls. 6 Part of evaporator/condenser for AC machine for motor vehicle with a 7 cooling capacity <= 21.10 kW. Flagstones, reinforced or not. 8 Other lighting fittings. 9 Acrylonitrile butadiene styrene (ABS) sheets of a kind used in the 10 manufacture of refrigerators. Management of Solid and Other electronic integrated circuits. 1 Hazardous Waste and Recycling Systems (Mitigation) Biaxially oriented polypropylene (BOPP) film. 2 Processor & controller of electronics integrated circuits. 3 For example: Film not cellular/ Plates & sheets of polymers of ethylene, unreinforced, laminated, supported reinforced polymers of ethylene. 4 or similarly combined with other materials, unrigid. Environmental benefit: Membrane systems have multiple uses including: Plates & sheets, of polymers of propylene, unreinforced, laminated, 5 (i) to line landfills to prevent leachate supported or similarly combined with other materials. (water run-off) from contaminating Film, foil and strip, of polymers of ethylene, unreinforced, laminated, groundwater resources; (ii) to cover 6 supported or similarly combined with other materials. landfills and prevent methane from escaping into atmosphere; and (iii) for Other aluminum casks, drums, cans, boxes & containers for any material. 7 the reinforcement and protection of soil, including under oil refineries and Brooms consisting of twig/other vegetable materials bound together. 8 gas stations. Other automatic service-vending machines, not electrically operated. 9 Film, foil & strip, of polymers of propylene, unreinforced, laminated, 10 supported or similarly combined with other materials. Natural Resource Protection Made up fishing nets of manmade textile materials. 1 (Mitigation) Fishhooks, whether/not snelled. 2 For example: Binder or baler twine, of sisal or agave. Twine, cordage or rope, knotted netting, of other than man-made textiles, 3 Environmental benefit: More other than of net bags. biodegradable than synthetic fiber Twine, cordage or rope, knotted netting, of other than man-made textiles, alternatives and made from a 4 net bags. renewable resource. Other environmental categories: Twine, binder or baler twine, of sisal or other textile fibers of the genus Environmentally preferable products. 5 agave Natural Risk Management Other instruments & appliances other than radio sonde and radio wind 1 (Adaptation) apparatus. For example: Surveying instruments Parts & accessories of surveying instruments & appliances. 2 Environmental benefit: Used for measuring the ozone layer and to monitor, measure and assist planning for natural risks such as earthquakes, Photogrammetrically surveying instruments and appliances. 3 cyclones, and tsunamis. Other environmental categories: ECETCCS; Environmental monitoring. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 59 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Noise and Vibration Abatement Cylinder block; crank case for vehicle of Chapter 87, other than of heading 1 (Broader Environmental Protection) 87.01 & 87.11. Part of vehicle of Chapter 87, other than carburretor, piston & cylinder, For example: Locks, sheets, strip and 2 excluding heading 87.01 & 87.11. tiles of agglomerated cork. Environmental benefit: Assists in the Cylinder liner with <= 50mm internal diameter <= 155 mm for marine Appendices 3 reduction of noise levels in buildings. propulsion engine of a power > 22.38 kW. Other parts undefined of gasoline engine for other vehicle of Chapter 87, 4 other than 8701 or 87.11. Parts of marine propulsion engine of a power > 22.38 kW, other than piston 5 & cylinder. Other parts undefined of gasoline engine for vehicles of heading 87.11. 6 Carburretors and parts of gasoline engines, for vehicles of Chapter 87, other 7 than 87.01 or 87.11. Piston rings and gudgeon pins for other vehicles of Chapter 87, other than 8 87.01 or 87.11. Compressor excluding for refrigerating equipment, air, gas in oil drill 9 operation, automotive AC & sealed unit for AC machine. Laminar airflow cabinets fitted with filters in horizontal side > 120 cm. 10 Others (Broader Environmental Machinery, plant & equipment, other than for making hot drink/cooking/ 1 Protection) heating food, electrically operated. Machines for working by removal of material, by laser/other light/photon 2 beam in the production of semiconductor wafers. For example: Distilling or rectifying plant. Distilling or rectifying plant, electrically operated. 3 Environmental benefit: Desalination plants remove salt from water and Machines for bending, folding, and straightening semiconductor leads. 4 are important in conditions of water scarcity. Biogas refinement equipment Other laser cutters for cutting contacting tracks in semiconductor 5 "upgrades" biogas resulting from production by laser beam. organic matter to give it the same Epitaxial deposition machines, spinners for coating photographic emulsions 6 properties as natural gas. Allows the on semiconductor wafers. recovery and reuse of solvents, (for example, solvents used in the printing, Spin dryers for semiconductor wafer processing. 7 painting, or dry-cleaning industries). Grinding, polishing, and lapping machines for processing of semiconductor Other environmental categories: 8 wafers. Several. Resistance heated furnaces and ovens for the manufacture of 9 semiconductor devices on semiconductor wafers. Machinery for processing material by heating, for the manufacture of PCB/ 10 PWB/PCA, electrically operated. Renewable Energy (Mitigation) Primary cells and primary lithium batteries. 1 Switchboard & control panels: use for other purposes. 2 For example: Heat exchange units, non-domestic, non-electric. Other guardrails of iron or steel. 3 Environmental benefit: Provide cooling effect to heat exchangers Static converters other than UPS, battery chargers, inverters rectifiers. 4 in solar collector or solar system Part of other gas turbines. 5 controllers to avoid overheating. Some are specifically designed for use Other towers of iron or steel. 6 with renewable energy sources such as geothermal energy. Other primary cells and primary batteries not zinc-carbon, having an 7 Other environmental categories: external volume > 300 cm3. ECETCCS; gas flaring emission reduction; Heat and energy Other board for electrical control for voltage <1,000 volts. 8 management. Other primary cells and primary batteries zinc-carbon, having an external 9 volume <= 300 cm3. Switchboard & control panels: use in distributed control systems. 10 TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 60 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Resources and Pollution Swing check-valves, of cast iron, with an inlet of <=4cms, internal diameter 1 Management (Mitigation) =60 cm. For example: Valves, safety or relief. Other fuel cut-off valves for vehicles of copper/alloy. 2 Environmental benefit: Used for Other manually operated gate valves of cast iron. 3 handling and transport of wastewater Appendices or slurries during treatment. Other taps, cocks, valves & similar appliances for pipes, boiler shells, tanks, Environmental categories: ECETCCS; 4 vats, or the like. Wastewater management and potable water treatment. Other parts of housing for sluice or gate valves. 5 Parts of table, floor, wall, window, ceiling/roof fans &explosion-proof air fans. 6 Other swing check-valves, of cast iron, with an inlet of <=4cms, internal 7 diameter =60 cms. Mixing taps and valves. 8 Housings for sluice or gate valves with inlet or outlet of 50 mm, an internal 9 diameter <=400 mm. Part of free piston generator, oil drilling gas/automotive AC/sealed unit AC 10 compressor, electrically operated. Waste Management, Recycling Mats, matting, and screens of vegetable materials of rattan. 1 and Remediation (Broader Environmental Protection) Mats, matting, and screens of vegetable materials other than bamboo and 2 rattan. For example: Mats, matting, and Parts for steam/other vapor-generating boilers, other than boiler bodies, screens, vegetable plaiting material. 3 shells or casings. Environmental benefit: Used for soil erosion as a soil cover, biodegradable Mats, matting, and screens of vegetable materials of bamboo. 4 from waste. Boiler bodies, shells or casings, parts for steam or other vapor-generating 5 boilers. Wastewater Management Anhydrous ammonia. 1 and Potable Water Treatment (Mitigation, Broader Environmental Compressors used for automotive air conditioners. 2 Protection) Babies’ garments and clothing accessories, knitted or crocheted, of cotton. 3 For example: Porcelain bathroom, Remote control apparatus, other than radio remote control apparatus. 4 kitchen, & other sanitary fixtures. Other women’s or girls’ protective work garments (excluding those used for Environmental benefit: Waterless 5 protection from fire/chemical substances/radiation). urinals and composting toilets minimize water use. Composting Parts of other electrical machines and apparatus, having individual functions. 6 toilets also provide self-contained sewage treatment on site, with no Surgical masks. 7 need for sewers and treatment plants. Other made-up articles excluding umbrella covers/surgical masks/safety These items also do not pollute 8 harnesses/fans & handscreens/laces, shoes, boots, and corsets. ground or surface water or soil (unlike septic tanks or pit latrines) and Baby napkins and pads for incontinence, of paper, paper pulp, cellulose 9 produce safe, useful compost. wadding, or webs of cellulose fibers. Other articles of plastic & other materials of headings 39.01 to 39.14. other 10 than 3926.10.00-3926.90.92. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 61 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Water Supply Naphthenic acids, their water insoluble salts and their esters. 1 Other nucleic acids their salts, whether/not chemically defined, other 2 For example: Mineral and aerated heterocyclic components other than HS29341000-29349950. waters not sweetened or flavored. Biodiesel, not containing petroleum oil, coconut methyl ester (CME), with Environmental benefit: Potable water 3 Appendices ester alkyl content 96.5% or more but <98%. supply and distribution. Other acetone oil, chemical preparations containing monosodium glutamate 4 (MSG), Other chemical preparation used in manufacturing of foodstuffs. Mineral waters. 5 Biodiesel, not containing petroleum oil, coconut methyl ester (CME), with 6 ester alkyl content exceeding 98%. In addition to biodiesel, containing petroleum oil. 7 Peptones & their derivatives, other protein substances, not specified or 8 included, hide powder, chromed or not. Carbides, whether or not chemically defined, other than of calcium & silicon. 9 Oxadiazon, with a purity of 94% or more. 10 Source: World Bank staff calculation based on GTN list of EGs and BPS trade data. Table A.2: Top EGs traded in 2020 (ranked by value) No. 10-digit HS Description EG Category Exports 10-digit Description EG Category Imports code (Climate Change/ (2020) code (Climate Change (2020) Environmental (millions Role) (millions of Role) of US$) US$) 1 87141090 Other motorcycles Cleaner or more 438.9 38220090 Diagnostic/ Wastewater 496.5 (including mopeds) resource efficient laboratory management technologies reagents on a and potable and products backing prepared water treatment (mitigation) diagnostic/ (Broader laboratory Environmental reagents Protection) 2 28141000 Anhydrous Wastewater 386.9 84068100 Steam turbines Renewable energy 472.6 ammonia management and and other vapor (mitigation) potable water turbines. output treatment (Broader > 40 MW, other Environmental than for marine Protection) propulsion 3 85065000 Primary cells and Cleaner or more 191.1 85423100 Processor & Management 332.2 primary batteries resource efficient controller of of solid and (lithium) technologies electronics hazardous and products integrated circuits waste and (mitigation) recycling systems (mitigation) 4 85423900 Other electronic Management of 151.1 85423900 Other electronic Wastewater 322.8 integrated circuits solid and hazardous integrated circuits management waste and recycling and potable systems (mitigation) water treatment (Broader Environmental Protection) 5 85371099 Switchboard & Renewable energy 145.4 85143090 Other furnaces and Air pollution 310.5 control panels: use (mitigation) ovens control for other purposes (mitigation) 6 73089099 Other guardrails of Renewable energy 135.5 84818099 Other fuel cut-off Wastewater 288.0 iron or steel (mitigation) valves for vehicles management of copper/alloy and potable water treatment (Broader Environmental Protection) TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 62 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation 7 85044090 Static converters Renewable energy 132.3 84798939 Other automatic Air pollution 273.2 other than UPS, (mitigation) service-vending control battery chargers, machines, (mitigation) inverters, rectifiers electrically operated 8 87149994 Chain wheels Cleaner or more 126.4 84118200 Gas turbines of a Environmentally 260.3 Appendices and cranks; other resource efficient power > 5,000 kW preferable parts for bicycles technologies products based designed to be and products on end use used by children (mitigation) or disposal characteristics (Broader Environmental Protection) 9 39202010 Biaxially oriented Management of 123.3 84178000 Furnace & Air pollution 258.1 polypropylene solid and hazardous oven including control (BOPP) film waste and recycling incinerators for (mitigation) systems (mitigation) laboratory, non- electric 10 87120030 Other bicycles not Cleaner or more 112.1 85023939 Other generating Renewable energy 243.3 motorized resource efficient sets other-powered (mitigation) technologies of 10,000 kVA < and products output< 12,500 (mitigation) kVA 11 84148042 Compressors used Air pollution control 110.2 87141090 Other of Cleaner or more 230.6 for automotive air (mitigation) motorcycles resource- efficient conditioners (including mopeds) technologies and products (mitigation) 12 61112000 Babies garments Wastewater 107.6 73089099 Other guardrails of Renewable energy 222.6 and clothing management and iron or steel (mitigation) accessories, knitted potable water or crocheted, of treatment (Broader cotton Environmental Protection) 13 85437020 Remote control Clean up or 105.9 84798210 Mixing, kneading, Management 218.3 apparatus, other remediation of crushing, grinding, of solid and radio remote soil and water screening, sifting, hazardous controlled (mitigation, homogenizing, waste and apparatus adaptation) emulsifying/ recycling systems stirring machines, (mitigation) electrically operated 14 62105090 Other women’s or Wastewater 98.3 84069000 Part steam and Renewable energy 216.6 girls’ protective management and other vapor (mitigation) work garments potable water turbines (excluding those treatment (Broader used for protection Environmental from fire/chemical Protection) substances/ radiation) 15 84119900 Part of other gas Renewable energy 89.9 29051100 Methanol (methyl Renewable energy 213.3 turbines (mitigation) alcohol) (mitigation) TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 63 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Appendix 2 Methodologies Methodology for the estimation of AVE for NTMs on EGs Appendices The AVEs of NTMs are estimated by comparing the trade effect of NTMs to the one from tariffs. Specifically, it is theorized that the total effect of NTMs is a product of trade elasticity and the AVEs. The following regression specification is then estimated using Indonesia’s import data as follows: Eq.1 is the first step to get the coefficients of NTM and tariff. They are βj and β1, respectively • lnV_it is the log import value of commodity i (HS 10) at year t. • tariff_it is the ad valorem tariff of commodity i at year t. • NTM_ijt is a dummy that takes value of 1 if NTM of interest j affects commodity i at year t. • NTM_ikt is a dummy that takes value of 1 for all other NTMs k that affect commodity i at year t. • α_i is the product dummy • that serves as a control for other product characteristics • α_t is the year dummy that serve as a control for shocks to a given year • ε_it is the error term. AVEj=βj ⁄β1  * 100 (2) Eq.2 is the second step that will give us the estimate of unique AVE for each NTM j. The AVE is defined as the ratio between estimated coefficient of NTM j and estimated coefficient of ad valorem tariff, both of which we already derived from Eq.1. Essentially, this allows turning NTMs into “tariff units” since NTMs are regulatory text which are represented by a dummy variable. The AVE from Eq.2 is only feasible and calculated if the estimated coefficient of βj and β1 are statistically significant. For product groups, the estimation is done at HS-10 product level if the product is within that product category or group (sub samples). Due to the differences in the NTM data used compared to previous studies, AVEs may be different from other existing estimates in the literature. Methodology for the entry rate analysis To analyze whether NTMs prohibit firms from entering the EGs trading market we adopt a probit model whereby the firm has a binary choice between entering the EGs market (entry equals 1) or not (entry equals 0). The regression equation of the time series probit model can be expressed as follows: Φ-1(Pit (gtnci = 1)) = γit × NTMit + βit × Xit+ ϵ (3) where: • Φ-1 (.) is the inverse cumulative distribution function of the standard normal distribution. • Pit (gtnc = 1) is the probability of the dependent variable gtnc being equal to 1, meaning that the firm i trades in EGs at time t • NTM is a dummy variable equal to 1 if the good is subject to any NTMs • βit is a vector of coefficients of the control variables including tariffs and sector fixed effects. Each firm is allocated to one sector based on the highest export/import value of that firm. Sectors are defined based on the 21 different HS sections. • ε is the error term. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 64 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation By calculating the marginal effects, we can interpret the coefficients at the sample means. For the time series probit model, the marginal effects are as follows: Appendices Where Pit is the probability that the ith firm will choose to enter EGs trading at time t. NTMit captures whether firm i at time t was affected by that NTM, while γi is the coefficient. The data used is a panel data set at the monthly firm level. For this exercise, the data was aggregated to an annual level. A firm is identified as being impacted by NTM(s) if at least one NTM affects at least one of the goods that are being imported/exported by that firm (regardless of whether it is an EG or not). A firm is defined as trading in EGs in a particular year if at least one EG is imported/exported in that year by the firm. The data includes time invariant firm characteristics, which are used as control variables. Time fixed effects are included. The equivalent methodology was applied when analyzing the entry rate to EGs market based on how exposed the production inputs are to NTMs. Hereby, we limit the sample to EGs and to exporting firms only. Again, the dependent variable was the dummy as explained above. The independent variable is a variable between 0 and 1 whereby 0 means that none of the inputs are subjected to NTMs while 1 means that all inputs are subject to NTMs. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 65 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Regression Results Table A.3: The marginal effects of NTMs on exporting and importing firms and their decision to trade in EGs (1) (2) (5) (6) (7) (8) (11) (12) Appendices NTM Importer Importer Importer Importer Exporter Exporter NTM NTM Exporter Exporter NTM NTM Groups Groups Groups Groups 0.0829*** -0.0143*** 0.0821*** -0.0153*** EXP (0.00482) (0.00408) (0.00484) (0.00410) 0.0726*** 0.0780*** 0.0746*** -0.0926*** 0.0779*** 0.0825*** 0.0901*** -0.0838*** Tariff (0.0197) (0.0189) (0.0285) (0.0292) (0.0199) (0.0192) (0.0287) (0.0295) 0.0687*** 0.0176** 0.0729*** 0.0237*** OTH (0.00753) (0.00750) (0.00752) (0.00749) -0.118*** -0.216*** -0.104*** -0.190*** PC (0.0368) (0.0331) (0.0369) (0.0338) 0.289*** 0.292*** 0.289*** 0.290*** QC (0.00409) (0.00413) (0.00411) (0.00415) 0.105*** 0.103*** 0.101*** 0.0993*** INSP (0.00374) (0.00370) (0.00374) (0.00370) 0.131*** 0.146*** 0.128*** 0.142*** TBT (0.00410) (0.00405) (0.00409) (0.00404) 0.0519*** -0.109*** 0.0447*** -0.116*** SPS (0.00564) (0.00474) (0.00572) (0.00475) Sector FE Yes No Yes No Yes No Yes No Year FE No No No No Yes Yes Yes Yes Observations 64,088 64,145 110,030 110,086 64,088 64,145 110,030 110,086 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Note: This table shows the probabilities of entry into trade in EGs, calculated by using the marginal effects following probit regression. EXP = Export- related measures; OTH = Others; PC = Price-control measures; QC = Quality-control measures; INSP = Pre-shipment inspections; TBT = Technical barriers to trade; SPS = Sanitary and Phytosanitary Measures. Each firm is allocated to one sector based on the highest export/import value of that firm. Sectors are defined based on the 21 different HS sections. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 66 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Table A.4: The marginal effects of NTMs on exporting and importing firms and their decision to trade in management of solid and hazardous waste and recycling system products (1) (2) (3) (4) (5) (6) NTM Importers Importers Importers Importers Exporter Exporters All NTMs All NTMs NTM Groups NTM Groups Appendices 0.0447*** 0.0142*** EXP (0.00295) (0.00221) 0.0273** -0.00911 -0.0662** -0.138*** -0.137*** -0.242*** Tariff (0.0114) (0.0130) (0.0319) (0.0309) (0.0342) (0.0333) 0.152*** 0.141*** NTM (0.00261) (0.00265) 0.0298*** 0.0127** OTH (0.00613) (0.00574) 0.0139 -0.0387 PC (0.0348) (0.0281) 0.130*** 0.125*** QC (0.00384) (0.00376) 0.138*** 0.132*** INSP (0.00329) (0.00319) 0.0521*** 0.0636*** TBT (0.00382) (0.00365) 0.0534*** -0.0176*** SPS (0.00471) (0.00369) Sector FE Yes No Yes No Yes No Observations 64,076 64,145 110,030 110,086 110,030 110,086 Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Note: This table shows the probabilities of entry into trade in EGs category 10, calculated by using the marginal effects following probit regression. EXP = Export-related measures; OTH = Others; PC = Price-control measures; QC = Quality-control measures; INSP = Pre- shipment inspections; TBT = Technical barriers to trade; SPS = Sanitary and Phytosanitary measures. Each firm is allocated to one sector based on the highest export/import value of that firm. Sectors are defined based on the 21 different HS sections. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 67 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Table A.5: The marginal effects of NTMs on exporting and importing firms and their decision to trade in renewable energy products (1) (2) (3) (4) (5) (6) NTM Importers Importers Importers Importers Exporter Exporters All NTMs All NTMs NTM Groups NTM Groups 0.0766*** 0.0244*** Appendices EXP (0.00367) (0.00265) 0.0204 -0.0587*** -0.0986*** -0.345*** -0.182*** -0.515*** Tariff (0.0150) (0.0176) (0.0349) (0.0355) (0.0368) (0.0378) 0.197*** 0.180*** NTM (0.00268) (0.00277) 0.00795 -0.0328*** OTH (0.00631) (0.00572) -0.0217 -0.0723** PC (0.0353) (0.0287) 0.126*** 0.113*** QC (0.00388) (0.00383) 0.138*** 0.136*** INSP (0.00337) (0.00330) 0.106*** 0.120*** TBT (0.00378) (0.00365) 0.0534*** -0.0474*** SPS (0.00497) (0.00387) Sector FE Yes No Yes No Yes No Observations 64,076 64,145 110,030 110,086 110,030 110,086 Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Note: This table shows the probabilities of entry into trade in EGs category 15, calculated by using the marginal effects following probit regression. Only statistically significant coefficients are shown for the sake of brevity but regressions include the universe of NTMs to avoid omitted variable bias. The results for import prohibitions, while statistically significant coefficient, are also not reported. EXP = Export-related measures; OTH = Others; PC = Price-control measures; QC = Quality-control measures; INSP = Pre-shipment inspections; TBT = Technical barriers to trade; SPS = Sanitary and Phytosanitary measures. Each firm is allocated to one sector based on the highest export/import value of that firm. Sectors are defined based on the 21 different HS sections Table A.6: The marginal effects of input exposure to NTMs on exporting firms values their decision to trade in EGs (1) (2) (3) (4) (5) (6) NTM All NTMs All NTMs All NTMs NTMs Groups NTM Groups NTM Groups -0.328*** -0.342*** -0.343*** Exposure OTH (0.0721) (0.0695) (0.0695) -0.0401** -0.0160 -0.0163 Exposure INSP (0.0184) (0.0182) (0.0182) 0.0208 0.0596*** 0.0601*** Exposure SPS (0.0226) (0.0225) (0.0224) 0.186*** 0.0541 0.183*** 0.0511 Tariff (0.0381) (0.0357) (0.0381) (0.0358) -0.0281*** -0.0129 -0.0130 Exposure NTM (0.00939) (0.00921) (0.00921) Sector FE Yes No No Yes No No Observations 54,532 54,562 54,562 54,532 54,562 54,562 Standard errors in parentheses. * p<0.05, ** p<0.01, *** p<0.001 Note: This table shows the probabilities of entry into trade in EGs, calculated by using the marginal effects following probit regression. Only statistically significant coefficients are shown for the sake of brevity but regressions include the universe of NTMs to avoid omitted variable bias. The exposure is defined as the weighted share of inputs that are exposed to NTMs per product at a particular time. EXP = Export-related measures; OTH = Others; PC = Price-control measures; QC = Quality-control measures; INSP = Pre-shipment inspections; TBT = Technical barriers to trade; SPS = Sanitary and Phytosanitary measures. Each firm is allocated to one sector based on the highest export/import value of that firm. Sectors are defined based on the 21 different HS sections. TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 68 TRADING TOWARDS SUSTAINABILITY: The Role of Trade Policies in Indonesia’s Green Transformation Appendix 3 Figure A.1: The Largest Share of CO2 Emissions Embedded in Exports Stem from Agriculture and Manufacturing (millions of metric tons) (2005-18) Appendices 140 Transportation and storage Wholesale and retail trade 120 Other services 100 Energy and waste Transport equipment 80 Machinery and equipment 60 Computers and other electricial equipment Basic metals 40 Chemicals and pharmaceuticals 20 Coal and petroleum products (refined and plastic) Other manufacturing 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Agriculture, mining and quarrying Source: World Bank staff calculations from OECD data. Figure A.2: CO2 Emissions Embedded in Imports are Mainly from Transport and Basic Metals (millions of metric tons) (2005-18) 160 Transportation and storage Wholesale and retail trade 140 Other services 120 Energy and waste 100 Transport equipment Machinery and equipment 80 Computers and other electricial equipment 60 Basic metals 40 Chemicals and pharmaceuticals Coal and petroleum products (refined and plastic) 20 Other manufacturing 0 Agriculture, mining and quarrying 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: World Bank staff calculations from OECD data. Table A.7: Top five trade partners for Indonesia in plastic substitutes Value (in Flow Country HS2017 Description Rank million US$) Chemical wood pulp, soda or sulphate other than dissolving CHINA 47032900 1831.78 1 grades CHINA 47020000 Chemical wood pulp, dissolving grades 946.11 2 Export JAPAN 40012220 Technically specified natural rubber (TSNR) 20 803.83 3 UNITED STATES 40012220 Technically specified natural rubber (TSNR) 20 743.27 4 JAPAN 14049091 Palm kernel shells 392.69 5 AUSTRALIA 52010000 Cotton, not carded or combed 415.92 1 BRAZIL 52010000 Cotton, not carded or combed 370.67 2 Import INDIA 12024200 Groundnuts, not roasted or otherwise cooked 322.39 3 UNITED STATES 23033000 Brewing or distilling dregs and waste 284.39 4 UNITED STATES 52010000 Cotton, not carded or combed 255.97 5 Source: World Bank staff calculations from BPS data. 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