Trading in Green Angella Montfaucon Csilla Lakatos Bayu Agnimaruto Policy Notes on Climate Change and Trade in Indonesia NOV. 2023 This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights & Permissions © 2023 The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Some rights reserved The material in this work is subject to copyright. 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Please cite the work as follows: “Montfaucon, AT T RI B U T I O N Angella, Csilla Lakatos and Bayu Agnimaruto, 2023. “Trading in Green: Policy Notes on Climate Change and Trade in Indonesia” © World Bank.” P. 1 Contents 040624 Executive Summary POLICY NOTE 1 Indonesia's Green International Competitiveness and Green Trade POLICY NOTE 2 Firm- Level Opportunities and Challenges of Green Goods, Technologies, and Services Trade in Indonesia 48 POLICY NOTE 3 The Role of Trade Policies in Indonesia’s Green Transition P. 2 Figures Figure 1 CO 2 EMISSIONS EMBODIED IN INDONESIA’S EXPORTS AND IMPORTS 12 Figure 2 CO 2 EMISSIONS IN TRADE: CROSS-COUNTRY COMPARISON (METRIC TONS OF CO 2/US$1 MILLION) 12 Figure 3 SOURCES OF EXPORTED CO 2 (%) 12 Figure 4 USE OF CO 2 CONTAINED IN IMPORTS (%) 12 Figure 5 CO 2 EMISSIONS EMBODIED IN EXPORTS BY SECTOR (MILLIONS OF METRIC TONS) 13 Figure 6 CO 2 EMISSIONS EMBODIED IN IMPORTS BY SECTOR (MILLIONS OF METRIC TONS) 13 Figure 7 GLOBAL SHARE OF GREEN GOODS EXPORTS 17 Figure 8 MAJOR TRADING PARTNERS FOR GREEN GOODS 18 Figure 9 GLOBAL SHARE OF GREEN GOODS IMPORTS 18 Figure 10 GREEN GOODS TRADE IN INDONESIA 18 Figure 11 GREEN GOODS EXPORTS BY CATEGORY, 2020 19 Figure 12 GREEN GOODS IMPORTS BY CATEGORY, 2020 19 Figure 13 INDONESIA’S GREEN COMPETITIVENESS RANKING 22 Figure 14 GREEN COMPETITIVENESS: REGIONAL COMPARISON OF RANKINGS 22 Figure 15 INDONESIA’S GREEN COMPETITIVENESS POTENTIAL BY GREEN PRODUCT CATEGORIES 23 Figure 16 GREEN GOODS EXPORTERS AND IMPORTERS: NUMBER (LHS) AND PERCENT (RHS) OF TOTAL 31 Figure 17 GREEN GOODS TRADE IN TRADERS’ BASKETS (PERCENT) 31 Figure 18 FIRM SIZE OF EG TRADERS (SURVEY RESULTS) 31 Figure 19 OWNERSHIP OF EG TRADERS (SURVEY RESULTS) 31 Figure 20 TWO-WAY TRADERS ARE MORE LIKELY TO EXPORT GREEN GOODS (PERCENT) 31 Figure 21 ..BUT LESS LIKELY TO IMPORT (PERCENT) 31 Figure 22 GREEN GOODS BASED ON END-USE CLASSIFICATION AND FUNCTION (% SHARE, WITHIN EACH CATEGORY) 34 Figure 23 AVERAGE SHARE OF IMPORTS BY GREEN GOOD CATEGORY AND FIRM TYPE (2014-18) 35 Figure 24 AVERAGE SHARE OF EXPORTS BY GREEN GOOD CATEGORY AND FIRM TYPE (2014-18) 35 Figure 25 TECHNOLOGY INTENSITY OF GREEN GOODS IMPORTS FOR IMPORTER-EXPORTERS 37 Figure 26 TECHNOLOGY INTENSITY OF GREEN GOODS EXPORTS BY IMPORTER-EXPORTERS 37 Figure 27 TWO-WAY TRADERS’ ENTRY RATES 41 Figure 28 EXPORTER-ONLY FIRMS’ ENTRY RATES 41 Figure 29 TWO-WAY TRADERS EXIT RATES 41 Figure 30 IMPORTER-ONLY/EXPORTER-ONLY FIRMS EXIT RATES 41 Figure 31 IMPORT CHALLENGES 45 Figure 32 EXPORT CHALLENGES 45 Figure 33 CHALLENGES WITH PRODUCT STANDARDS 46 Figure 34 DUTY-FREE OR SPECIAL PERMITS OR SUBSIDIES FOR TRADING EG 46 Figure 35 CHALLENGES RELATED TO INTERNATIONAL TRADE OF ENVIRONMENTAL SERVICES 46 Figure 36 INDONESIA’S AVERAGE TARIFFS ON GREEN GOODS IMPORTS 2019 55 Figure 37 TARIFFS FACED BY INDONESIAN GREEN GOODS EXPORTS 2019 55 P. 3 Figure 38 INDONESIA’S MFN TARIFFS ON GREEN GOODS IMPORTS 2019 56 Figure 39 AVERAGE TARIFFS FACED BY INDONESIAN GREEN GOODS IN MAJOR EXPORT MARKETS 2019 56 Figure 40 NUMBER OF INDONESIA'S NTMS ON GREEN GOODS 61 Figure 41 SHARE OF GREEN GOODS IMPORTS AND EXPORTS AFFECTED BY SPECIFIC NTMS 2020 61 Figure 42 TARIFF EQUIVALENTS OF MOST PROBLEMATIC NTMS (PERCENT) 62 Figure 43 TARIFF EQUIVALENT OF SPECIFIC NTMS ON MOST AFFECTED EGS 62 Figure 44 TARIFF EQUIVALENT OF MOST PROBLEMATIC NTMS ON GREEN GOODS RELATIVE TO EAP (AVE DIFFERENCE) 63 Figure 45 CHANGE IN AVERAGE ANNUAL FOREST LOSS AFTER PTA ENACTMENT 66 Figure 46 CHANGES IN AGRICULTURAL LAND USE, PRODUCTION AND EXPORTS 67 Figure 47 THE IMPACT OF REGIONAL LIBERALIZATION OF GREEN GOODS TRADE AMONG APEC COUNTRIES (PERCENT CHANGE) (SCENARIO TWO) 71 Figure 48 THE IMPACT OF UNILATERAL LIBERALIZATION OF GREEN GOODS IMPORTS (PERCENT CHANGE) (SCENARIO ONE) 71 Figure 49 THE IMPACTS OF THE WTO EGA WITH INDONESIA ON GREEN GOODS TRADE (PERCENT CHANGE) (SCENARIO FOUR) 72 Figure 50 THE IMPACTS OF THE WTO EGA WITHOUT INDONESIA ON GREEN GOODS TRADE (PERCENT CHANGE) (SCENARIO THREE) 72 Figure 51 TARIFF EQUIVALENT OF NTMS ON ALL GREEN GOODS 90 Tables Table 1 ENVIRONMENTAL PROVISIONS IN INDONESIA’S TRADE AGREEMENTS 65 Table 2 TOP ENVIRONMENTAL GOODS, EXAMPLES AND CLIMATE CHANGE/ENVIRONMENTAL ROLE 75 Table 3 TOP EGS TRADED IN 2020 (RANKED BY VALUE) 84 Table 4 FULL LIST OF ALL GREEN PRODUCTS AND CLIMATE CHANGE ROLE 89 Box Box 1 TRADE AGREEMENTS WITH ENVIRONMENTAL PROVISIONS MITIGATE DEFORESTATION 65 Appendix Appendix 1 75 Appendix 2 84 Appendix 3 87 P. 4 This report was authored by Angella Faith Montfaucon, Csilla Laka- tos and Bayu Agnimaruto. Valuable inputs were received from (in al- phabetical order) Aleksandar Stojanov, Andhyta Firselly Utami, Aufa Doarest, Fatima Anjum Quraishi, Hazmi Ash Shidqi, Lamiaa Bennis, Acknowledgments Michele Ruta, Mochamad Pasha, Pranidhi Sawhney, Reninta Fitrian- ti, Shafaat Yar Khan, and Vicky Chemutai. The authors are grateful for helpful comments from Massimiliano Cali, Muthukumara S. Mani, Hector Pollitt, and Andhyta Firselly Utami. The team worked under the guidance of Lars Moller and Habib Rab. The team thanks Devi- ana Djalil for her diligent administrative support and Zubair Qamar for editing the notes. Financial support for this report was generously provided by the Aus- tralian Government through the Australia-World Bank Indonesia Part- nership (ABIP). Financial support was also provided by the Climate Support facility Whole-of-Economy Program, administered by the World Bank. Executive P. 5 Summary his document is a compilation of three policy T notes that were prepared as background to the Indonesia Climate Change and Develop- ment Report (CCDR). Policy Note 1: To position itself to benefit from the global transition to a low-carbon econo- my, Indonesia needs to adapt to new sources of international demand, adjust its existing productive capabilities, and cultivate new green industries. While the carbon intensity of Indonesia’s international trade has declined, absolute CO2 emissions embedded in trade have increased. Indone- P. 6 sia has untapped potential in exports of green goods and technolo- gies. Green goods imports represent an important source of access and transmission of new green technologies, underscored also by the fact that Indonesia’s green goods imports are more technolo- gy-intensive than exports. The extent to which Indonesia can com- petitively export green, technologically sophisticated products is still low relative to other countries, however, its potential to diversify into these products is relatively high. Policy Note 2: Firms, not nations, compete in international mar- kets. The analysis of firm-level trade in green goods in this note high- lights firm-level dynamics in exports and imports of green goods and services, and the opportunities and challenges faced by firms trad- ing such products. The results show that the degree of involvement of Indonesian firms in international trade matters in trade of green goods, especially for exports. Two-way traders–firms that both export and import–export more green products, trade in higher-technology green goods, and have higher survival rates in export markets. Al- though firms’ entry rates in green goods exports is lower compared to other products, the number of firms engaged has been increasing, signaling potential to boost Indonesia’s competitiveness and trade in green goods. Trade policies such as import and export approvals, harmonization of standards, tariff and non-tariff measures, and ac- cess to critical foreign skills, are important to lowering barriers for Indonesian firms to enter, stay, and be competitive in green goods and services markets. Policy Note 3: An enabling trade policy framework will not only play a critical role in boosting Indonesia’s green competitiveness and enabling access to climate-friendly products and technologies critical for both mitigation of, and adaptation to, climate change. Targeted measures such as liberalizing remaining tariffs on imports of green goods, streamlining and eliminating unnecessary non-tariff measures including harmonizing national standards on green goods with international ones, reducing the stringency of local content re- quirements, including enforceable environmental provisions in trade agreements, and participating in plurilateral and multilateral trade policy initiatives on green goods are needed to create this enabling trade policy framework in Indonesia. 01 P. 7 P.7–24 INDONESIA'S GREEN INTERNATIONAL COMPETITIVENESS AND GREEN TRADE P. 8 Introduction lthough Indonesia’s economy has diversi- fied over the past decades, natural resource A extraction remains a key sector for both the domestic economy as well as international trade. Overall, exports of primary products and resource-based manufactures make up over 60 percent of Indonesia’s total exports. Indonesia is a large exporter of fossil fuels and the world’s largest palm oil exporter, with a 55 percent share in total global ex- ports (International Monetary Fund, 2021). Coal made up 11 percent of exports, followed by palm oil (8 percent), and petroleum gas (4 percent) in 2019. Over 60 percent of the total coal production was exported in 2019, making Indonesia the world’s largest coal exporter (International Energy Agency 2021). The government receives royal- ties from oil, gas, and coal mining, equivalent to 7.5 percent of total government revenue.1 Indonesia’s ability to diversify away from primary products, reduce carbon emissions, adapt to climate change, and transition to a low-carbon economy is strongly interlinked with trade and trade policy. Despite the declining importance of trade for Indonesia’s economy over the two decades to 2020 (trade openness more than halved, falling from 72 percent in 2000 to 33 percent in 2020), it is expected that trade and trade policies will play a crucial role in cli- mate adaptation and mitigation efforts. On one hand, increased glob- al demand for goods and technologies to reduce carbon emissions and enable the climate transition present Indonesia with opportu- nities to diversify production and exports into green products and technologies. On the other hand, access to lower cost environmen- tally friendly goods and technologies through imports will also enable Indonesia’s own climate transition. More generally, however, trade is linked to climate change through different mechanisms, including by affecting the location and scale of production; influencing consump- tion decisions; affecting the international movement of goods and 1 Oil, gas, and coal mining services; and through the transfer of technologies that may lead to royalties were 4.3 percent, 1.9 lower emissions in production. percent, and 1.3 percent of total revenue, respectively, in 2019 (IMF 2021). P. 9 To position itself to benefit from the global transition to a low-car- bon economy, Indonesia needs to adapt to new sources of interna- tional demand, adjust its existing productive capabilities, and cul- tivate new green industries. Indonesia has an untapped potential for exports of green goods. With exports of green goods of US$5.8 billion (3.6 percent of total goods exports) in 2020, Indonesia is far below the global and East Asia and Pacific (EAP) average at 12 per- cent and 9 percent, respectively. The analysis in this note shows that exports of Environmentally Preferable Products; Waste Management, Recycling and Remediation; and Cleaner or More Resource Efficient Technologies/Products are the green product categories that exhibit the highest Revealed Comparative Advantage (RCA) for Indonesia, while at the same time being the closest to current production facil- ities (proximity). This makes them ideal for potential export growth areas. Trade in green goods and technologies offer Indonesia not only previously untapped export opportunities but also access to en- vironmental technologies to combat climate change. There are a range of goods, services, and technologies that will be crucial for countries’ climate mitigation and adaptation strategies‒for example, wind and hydropower turbines, solar water heaters, photovoltaic cells, tanks for the production of biogas, and landfill liners for methane collection. Trade in such green goods and technologies enables and facilitates Indonesia’s access to global markets for green goods and access to cheaper and higher-quality green technologies. Accessing high-quality and affordable environmental goods in global markets would increase their use within Indonesia and stimulate innovation and technology transfer. In turn, increasing trade in clean technol- ogies can also promote development, job creation, and innovation while promoting climate change mitigation and adaptation. Apart from meeting its ambitious Nationally Determined Contribu- tion (NDC), trade and trade policy will also play a significant role in Indonesia’s Green Growth Program. The program focuses on three priority sectors: (i) sustainable energy; (ii) sustainable landscapes; and (iii) sustainable infrastructure in Special Economic Zones (SEZs). The objective of the program is to scale up green growth and to in- crease inclusive green investment in priority sectors, leading to re- duced emissions and healthier, more productive ecosystems that will P. 1 0 need to be enabled by the right policies, among which trade and in- vestment policies will play a major role. In addition to the climate transition, structural forces in the wake of the COVID-19 pandemic are expected to reshape the interna- tional trading landscape and present major opportunities and chal- lenges for Indonesia. The economic shock induced by the COVID-19 pandemic combined with the ensuing rise in shipping costs and sup- ply chain disruptions are likely to significantly alter the international trading landscape and reconfigure global value chains. A shift away from just-in-time supply chain management for businesses, com- bined with a renewed focus on “near-shoring”, will alter international trade and transportation flows and likely have a positive impact on reducing carbon emissions. The rest of this note focuses on crucial aspects related to Indo- nesia’s green competitiveness and diversification potential. The first note analyzes the carbon content of Indonesia’s trade flows, the second note explores the landscape of Indonesia’s trade of green goods, the third note focuses on identifying specific areas of Indone- sia’s green international competitiveness potential, and the last note offers policy recommendations. How Green is Indonesia’s Trade: Carbon Content he carbon intensity of Indonesia’s trade flows has seen a significant decline over the years, T more than halving since 2005. While imports and exports in goods and services each more than doubled‒from under US$100 billion in 2005 to over US$200 billion in 2019, CO2 emis- sions embedded in Indonesia’s trade flows have only increased by 9 percent (Figure 1). This over- all decline in CO2 intensity can be attributed to an increase in the carbon intensity of imports while, conversely, the carbon intensity of exports fell slightly over the same period. Overall, CO2 emissions em- bedded in Indonesia’s trade flows add up to 564 and 672 metric tons of CO2 for every US$1 million of exports and imports, respectively P. 1 1 (Figure 2). This is slightly lower than the carbon intensity of exports of Malaysia and Thailand, but higher than that of the Philippines. CO2 emissions embedded in Indonesia’s exports are mainly sourced domestically rather than imported (Figure 3), while imported CO2 emissions are mainly consumed, rather than re-exported (Figure 4). An estimated 84 percent of exported CO2 emissions originate from domestic sources, suggesting that international green compet- itiveness will require making changes in domestic production. This signals that there is room for greening inputs through imports and domestic reform for firms to change processes. On the other hand, and consistent with this observation, imported CO2 is mainly con- sumed (86 percent) and only a small share is re-exported. In terms of global ranking, this puts Indonesia’s carbon content of trade at the 19th and 20st rank, for exports and imports respectively.2 Among peer countries in the EAP region, however, Indonesia remains at the top‒with the highest CO2 emissions embedded in trade. Around 60 percent of CO2 emissions embedded in exports main- ly stem from agriculture (including mining and quarrying), manu- facturing, and coal and petroleum products (refined and plastic). During the 2005-18 period, nearly one-half of the emissions embed- ded in exports were accounted for by other manufacturing (food, tex- tiles, wood, and paper products at 25 percent) and agriculture, min- ing and quarrying (21 percent, Figure 5). An additional 14 percent was embedded in exports of coal and petroleum while transport and storage made up 12 percent). There has been a notable increase in export CO2 emissions stemming from transport and storage as well as basic metals, while the emissions from exports of coal and petro- leum products have been declining. Nearly one-half of CO2 emissions embedded in imports are from transport (including storage), basic metals, and coal and petro- leum products that account for the largest sectoral shares. On the imports side, in the 2005-18 period, emissions embedded in imports of transport and storage (17 percent), basic metals (15 percent), and coal and petroleum products (refined and plastic) (13 percent) ac- counted for nearly one-half of all emissions in imports. Other manu- facturing (at 12 percent) is also significant (Figure 6). Unlike exports, CO2 emissions in transport and storage imports have declined over 2 IMF Climate Change Dashboard based on 2019 prorated data. time, while emissions in basic metals and computer and other elec- P. 1 2 trical equipment has increased. There is, therefore, room to ensure 3 CCDR Trade Note 3 “The Role trade policy allows for greener imports, which would also play a role of Trade Policies in Indonesia’s Green Transition” discusses in in greening domestic production and exports, in addition to greener more detail the role of trade policy local raw materials.3 in greening trade in Indonesia. FIG 1 CO 2 EMISSIONS EMBODIED IN FIG 2 CO 2 EMISSIONS IN TRADE: INDONESIA’S EXPORTS AND CROSS-COUNTRY COMPARISON IMPORTS (METRIC TONS OF CO 2/US$1 MILLION) CO 2 EMISSIONS EMBODIED EXPORTS OF GOODS AND EXPORTS (TONNES OF C0 2 IMPORTS (TONNES OF C0 2 IN EXPORTS SERVICES (RHS) PER USD MN) PER USD MN) CO 2 EMISSIONS EMBODIED EXPORTS OF GOODS AND EXPORTS (TONNES OF C0 2 IMPORTS (TONNES OF C0 2 IN EXPORTS CO EMISSIONS EMBODIED SERVICES OF IMPORTS (RHS) GOODS AND PER USD MN) PER USD MN) 2 IN IMPORTS SERVICES (RHS) CO 2 EMISSIONS EMBODIED IMPORTS OF GOODS AND IN IMPORTS SERVICES (RHS) TONS 250 250 1,000 TONS 250 250 1,000 US$ METRIC 200 200 800 US$ METRIC 200 200 OF OF 800 150 150 BILLIONS OF OF 150 150 BILLIONS 600 MILLIONS 100 100 600 MILLIONS 100 100 STATES 400 PHILLIPPINES 50 50 STATES 400 INDONESIA PHILLIPPINES MALAYSIA THAILAND GERMANY 50 50 VIETNAM 200 FRANCE INDONESIA 0 0 RUSSIA UNITED MALAYSIA THAILAND GERMANY JAPAN CHINA INDIA VIETNAM ITALY 2005 2007 2009 2011 2013 2015 2017 2019 200 FRANCE 0 0 RUSSIA UNITED JAPAN CHINA INDIA ITALY 2005 2007 2009 2011 2013 2015 2017 2019 0 0 Source: World Bank staff calculations based on IMF. Source: World Bank staff calculations from OECD data 2018. FIG 3 SOURCES OF EXPORTED CO 2 (%) FIG 4 USE OF CO 2 CONTAINED IN IMPORTS (%) DOMESTIC CO 2 (%) IMPORTED CO 2 (%) EXTERNAL MARKET DOMESTIC MARKET (RE-EXPORTED, %) (CONSUMED, %) DOMESTIC CO 2 (%) IMPORTED CO 2 (%) EXTERNAL MARKET DOMESTIC MARKET (RE-EXPORTED, %) (CONSUMED, %) INDONESIA 84 16 VIETNAM 55 45 INDONESIA 84 16 VIETNAM 55 45 MALAYSIA 72 28 THAILAND 45 55 MALAYSIA 72 28 THAILAND 45 55 PHILLIPPINES 65 35 MALAYSIA 42 58 PHILLIPPINES 65 35 MALAYSIA 42 58 THAILAND PHILLIPPINES THAILAND 63 37 PHILLIPPINES 17 83 63 37 17 83 VIETNAM INDONESIA VIETNAM 59 41 INDONESIA 14 86 59 41 14 86 Source: World Bank staff calculations from OECD data 2018 Source: World Bank staff calculations from OECD data 2018. P. 1 3 FIG 5 CO 2 EMISSIONS EMBODIED IN EXPORTS BY SECTOR (MILLIONS OF METRIC TONS) 140 TRANSPORTATION AND STORAGE 140 TRANSPORTATION WHOLESALE AND STORAGE AND 120 RETAIL TRADE WHOLESALE AND 120 OTHER RETAIL SERVICES TRADE ENERGY OTHER AND WASTE SERVICES 100 TRANSPORT ENERGY ANDAND WASTE 100 EQUIPMENT TRANSPORT AND MACHINERY EQUIPMENT AND 80 EQUIPMENT MACHINERY AND 80 COMPUTERS AND EQUIPMENT OTHER ELECTRICAL 60 COMPUTERS EQUIPMENT AND OTHER ELECTRICAL BASIC METALS EQUIPMENT 60 CHEMICALS BASIC AND METALS 40 PHARMACEUTICALS CHEMICALS AND 40 COALS AND PHARMACEUTICALS PETROLEUM COALS AND(REFINED PRODUCTS 20 PETROLEUM AND PLASTICS) 20 PRODUCTS (REFINED OTHER AND PLASTICS) MANUFACTURING 0 OTHER AGRICULTURE, MANUFACTURING 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 MINING AND AGRICULTURE, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 QUARRYING MINING AND QUARRYING Source: World Bank staff calculations from OECD data. FIG 6 CO 2 EMISSIONS EMBODIED IN IMPORTS BY SECTOR (MILLIONS OF METRIC TONS) 160 TRANSPORTATION AND STORAGE 160 TRANSPORTATION WHOLESALE AND STORAGE AND 140 RETAIL TRADE WHOLESALE AND 140 OTHER RETAIL SERVICES TRADE 120 ENERGY OTHER AND WASTE SERVICES 120 ANDAND TRANSPORT ENERGY WASTE EQUIPMENT 100 TRANSPORT AND MACHINERY EQUIPMENT AND 100 EQUIPMENT MACHINERY AND 80 COMPUTERS EQUIPMENT AND OTHER ELECTRICAL 80 COMPUTERS EQUIPMENT AND OTHER ELECTRICAL 60 BASIC METALS EQUIPMENT 60 CHEMICALS BASIC AND METALS PHARMACEUTICALS 40 CHEMICALS AND COALS AND PHARMACEUTICALS 40 PETROLEUM COALS AND(REFINED PRODUCTS 20 PETROLEUM AND PLASTICS) PRODUCTS (REFINED 20 OTHER AND PLASTICS) MANUFACTURING 0 OTHER AGRICULTURE, MANUFACTURING 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 MINING AND AGRICULTURE, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 QUARRYING MINING AND QUARRYING Source: World Bank staff calculations from OECD data. P. 1 4 Indonesia’s Trade in Green Goods and Technologies Defining Environmental Goods here have been several attempts to develop lists of products with environmental benefits. T The Organisation for Economic Co-operation and Development (OECD) has put together indicative lists of products ranging across a number of en- vironmental categories such as air pollution con- trol; wastewater management; renewable ener- gy; and environmental monitoring, analysis, and assessment (OECD 1999). The World Trade Organization (WTO) and Asia-Pacific Economic Co-operation (APEC) were created specifically for trade negotiation purposes. The WTO lists were created through a process of product submission from member countries, following the Doha Declaration mandate (WTO 2001). The APEC list is a set of envi- ronmental goods that the 21 APEC member states agreed to reduce applied tariff rates to 5 percent or less by the end of 2015 (APEC 2012). This is a non-binding commitment, but it has advanced, as there are now 19 APEC member economies who are fully compliant (APEC 2021). P. 1 5 The green goods referred to in this note are based on the list of green products defined by the Green Transition Navigator (GTN)‒a compilation of the APEC, OECD, and WTO green goods classifica- tions. The GTN of green products‒or products with environmental benefits–lists and collates these into a single dataset totaling 543 products classified at the six-digit level of the 1992 version of the Harmonized Standard (HS). The list is also inclusive of green tech- nologies in the World Bank’s (2007) “International Trade and Climate Change: Economic, Legal, and Institutional Perspectives” report. Compilation and agreement of an equivalent list on environmental services, and data on trade in such services is still challenging. WTO commitments remain even more modest compared to commitments of greens/environmental goods. The discussion in this note, there- fore, focuses on environmental goods trade. Appendix 1 provides detailed examples of each category of environmental goods/green goods used in this analysis. Indonesia’s trade in Environmental Goods Indonesia has significant untapped potential in exports of green goods and technologies,4 while imports are at par with global and regional averages. Green goods amounted to US$5.8 billion or 3.6 percent of total goods exports in 2020, far below the global and EAP average of 12 percent and 9 percent, respectively (Figure 7). Con- versely, with imports of green goods at about 12 percent of total goods imports (Figure 8) or US$17 billion (Figure 9), Indonesia’s imports of green goods are relatively higher compared to regional peers in East Asia Pacific‒at an average of 11 percent. The number of products im- ported (extensive margin) had a historically higher share of imports than the values (intensive margin), at an average of 12 percent of all products imported during 2010-20, compared to about 9.3 percent of value of imports for the same period. Major destination markets for Indonesia’s exports of green goods are Singapore, the United States, and Japan, while the main im- port markets are China and Japan (Figure 10). As such, main des- 4 Green goods are defined based tination and source markets are well aligned with that of aggregate on the environmental benefits they goods exports and imports, with the biggest trading partners being provide rather than their carbon content. The term green goods and China, Japan, and Singapore. In terms of exports, more than one-half environmental goods (EGs) are used interchangeably. of Indonesia’s exports of green goods are destined to markets in the P. 1 6 EAP region‒to Singapore (16 percent), Japan (9 percent), Thailand (7 percent), China (7 percent), Malaysia (5 percent), Philippines (4 percent), Republic of Korea (4 percent), and Vietnam (4 percent). In turn, imports of green goods are much more concentrated from a few source markets: China accounts for 43 percent of Indonesia’s imports of green goods, followed by Japan with 10 percent. Outside of the EAP region, the United States and Germany are also import- ant trading partners. The United States accounts for 15 percent of Indonesia’s exports of green goods and about 5 percent of imports of green goods, while Germany accounts for 4 percent of imports (Figure 10). Exports of Wastewater Management and Potable Water Treat- ment Products, Renewable Energy Plants, and Cleaner or More Resource Efficient Technologies represent significant export po- tential for Indonesia. These categories of green goods accounted for more than two-thirds of Indonesia’s exports of green goods and were also the fastest growing export segments (Figure 11). Wastewater management and potable water treatment products and renewable energy plants made up the largest share of exports with 28 percent and 23 percent of total green goods exports in 2020. In turn, the fastest growing green goods export categories were environmental monitoring, analysis, and assessment equipment and products for the clean-up or remediation of soil and water, growing by 42 percent and 38 percent during the 2017-20 period, respectively. In terms of products, exports of motorcycles (Cleaner or More Resource Efficient Technologies and Products), anhydrous ammonia (Wastewater Man- agement and Potable Water Treatment), primary lithium cells and batteries (Cleaner or More Resource Efficient Technologies and Prod- ucts), and other electronic integrated circuits (Management of Solid and Hazardous Waste and Recycling Systems) were among the top green products exported with potential to be further expanded, given also existing comparative advantages (see list in Appendix 1). On the imports side, in addition to Wastewater Management and Potable Water Treatment products, Renewable Energy Plants, Management of Solid and Hazardous Waste and Recycling Sys- tems and Air Pollution Control also make up notable shares (15 and 13 percent respectively). The fastest growing imported green goods categories were Environmentally Preferable Products based P. 1 7 on end use or disposal characteristics, Air Pollution Control, and Wastewater Management and Potable Water Treatment products growing by 94 percent, 45 percent, and 45 percent between 2017- 20, respectively (Figure 12). Top imported products were diagnostic/ laboratory reagents (Wastewater Management and Potable Water Treatment, steam turbines and other vapor turbines (Renewable En- ergy Plant), and processors and controllers of electronics integrated circuits (Management of Solid and Hazardous Waste and Recycling Systems). Green goods imports represent an important source of access and transmission of new green technologies for Indonesia, under- scored also by the fact that green goods imports are more inten- sive in medium and high-tech products than exports. Exports of green goods include 64 percent of medium and high-tech products, compared to imports with 73 percent. Green goods exports’ intensity in medium and high-tech product has increased significantly‒from 56 percent in 2008 to 64 percent in 2020. In addition, Indonesia’s green goods 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 a more effi- cient allocation of resources 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. FIG 7 GLOBAL SHARE OF GREEN GOODS EXPORTS GTN EXPORT SHARE GLOBAL GTN EXPORT SHARE AEP GTN EXPORT SHARE INDONESIA 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 5 Statistics Indonesia (Badan Pusat Statistik: BPS) is a non- 2.0% departmental government institute of Indonesia that is responsible for 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 conducting statistical surveys. Its main customer is the government, but statistical data is also available to the public. Source: World Bank staff calculations from BPS5 data P. 1 8 FIG 8 GLOBAL SHARE OF GREEN GOODS IMPORTS GTN IMPORT SHARE GLOBAL GTN IMPORT SHARE AEP GTN IMPORT SHARE INDONESIA 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 6 Statistics Indonesia (Badan Pusat Statistik: BPS) is a non- 2.0% departmental government institute 0.0% of Indonesia that is responsible for 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 conducting statistical surveys. Its main customer is the government, but statistical data is also available to the public. Source: World Bank staff calculations from BPS6 data FIG 9 GREEN GOODS TRADE IN INDONESIA "Indonesia has significant GREEN GOODS EXPORTS GREEN GOODS IMPORTS SHARE OF GREEN GOODS EXPORTS IN TOTAL EXPORTS (RHS) untapped SHARE OF GREEN GOODS EXPORTS IN TOTAL IMPORTS (RHS potential in 20 14.0% exports of green 12.0% BILLION OF US$ 15 goods and 10.0% technologies." 8.0% 10 6.0% 4.0% 5 2.0% - 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: World Bank staff calculations from BPS data. 2020 FIG 10 MAJOR TRADING PARTNERS FOR GREEN GOODS 50% 43% 40% 30% 20% 16% 15% 9% 10% 7% 7% 5% 4% 4% 4% 10% 3% 6% 6% 5% 4% 4% 3% 2% 2% 0% SINGAPORE UNITED STATES JAPAN THAILAND CHINA MALAYSIA PHILLIPPINES KOREAN, REP. VIETNAM INDIA CHINA JAPAN KOREAN, REP. SINGAPORE UNITED STATES MALAYSIA GERMANY THAILAND TAIWAN INDIA EXPORTS OF GREEN GOODS Source: World Bank staff calculations. IMPORTS OF GREEN GOODS P. 1 9 FIG 11 GREEN GOODS EXPORTS BY CATEGORY, 2020 50 Environmental Monitoring, Analysis 40 and Assessment Equipment Clean Up or Remediation of Soil and Water 2017-2020 GROWTH RATE (PERCENT) 30 Heat and Energy Waste Water Cleaner or More Resource Management Management and Efficient Technologies 20 and Products Potable Water Treatment 10 Natural Resources Protection Renewable Energy 0 Plant Noise and Vibration Air Pollution Control -10 Abatement Management of Solid and Hazardous Waste and Recycling -20 Systems Environmentally Preferable Products Based on End Use or -30 Disposal Characteristics -40 - 10 20 30 SHARE OF TOTAL GREEN GOODS EXPORTS (PERCENT) Source: World Bank staff calculations based on GTN data FIG 12 GREEN GOODS IMPORTS BY CATEGORY, 2020 100 Environmentally Preferable Products Based on End Use or Disposal Characteristics 80 2017-2020 GROWTH RATE (PERCENT) 60 Waste Water Management and Air Pollution Control Potable Water 40 Treatment Cleaner or More Resource Efficient Renewable Natural Energy Plant Resources Technologies and Products 20 Protection Environmental Monitoring, Management of Solid and Hazardous Analysis and Assessment Waste and Recycling Systems Equipment Clean Up or 0 Remediation of Heat and Energy Soil And Water Management -20 Noise and Vibration Abatement -40 - 10 20 30 SHARE OF TOTAL GREEN GOODS IMPORTS (PERCENT) Source: World Bank staff calculations based on GTN data P. 2 0 Green Competitiveness Potential nternational competitiveness encompasses several that can help explain international I trade trends and determine countries’ ability to successfully transition to the green economy. International competitiveness mainly encom- passes factors such as capacity for technologi- cal innovation, degree of product specialization, and the quality of the products traded. Such structural factors may influence a country's trade performance favor- ably. These are enabled by country-specific factors that affect firm performance and, therefore, determine a country’s competitiveness. The country-level aspects include resource endowments, cost of la- bor and production inputs, financial and technological infrastructure, access to markets, and institutional and regulatory frameworks. The extent to which Indonesia can competitively export green, technologically sophisticated products (green complexity index), 7 For details on these metrics, is still low relative to other countries, and has sharply declined see Andres and Mealy (2021). Retrieved from www.green- since 2014 (Figures 13 and 14).7 The Green Complexity Index transition-navigator.org P. 2 1 (GCI) sums up the Product Complexity Index (PCI) of green prod- ucts a country is competitive in. 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. Indonesia currently ranks 69 on the GCI,8 much lower than peer countries in the region‒Malaysia and Thailand at number 36 and 34, respectively. Indonesia’s performance on the green compet- itiveness index and green competitiveness potential, is strongly in- terlinked with its economic complexity. On this Indonesia performs relatively poorly, ranked at number 127, much lower than Thailand and Malaysia at number 38 and 25, respectively (Figure 14). Indonesia’s potential to diversify into green, technologically so- phisticated products (green complexity potential: GCP) ranks rela- tively higher than other countries and has been steadily improving since 2005 (Figures 13 and 14). With respect to GCP, Indonesia ranks number 37, higher than Malaysia and Vietnam but lower than Thailand (at number 25). The GCP measures how much potential a country has to diversify into green, complex products in the future based on the proximity and complexity of products it is not yet com- petitive in. On this measure, Indonesia’s performance on the com- plexity potential is promising. Indonesia has a higher probability of developing future compet- itiveness in green products with lower product complexity, as green products closest to current capabilities are those with low- er product complexity and technologies. Proximity measures the product's alignment with the country's productive capabilities and identifies green diversification opportunities that were closely relat- ed to their existing production capabilities, as this would allow them to take advantage of skills, infrastructure, and know-how that they already possess. Green products with the closest proximity to Indo- nesia’s current production capabilities are Environmentally Prefera- ble Products; Waste Management, Recycling and Remediation; and Cleaner or More Resource Efficient Technologies/Products (Figure 15). Among these, bicycle hubs and free-wheel sprocket wheels, pri- mary cells and batteries, and machinery for liquifying air and other gases are shown to be at the intersection of products with high po- 8 The GCI aims to capture the extent to which countries are able tential and high RCA. This may be because Indonesia’s productive to competitively export green, technologically sophisticated know-how is more closely focused on extracting fossil fuel resources. products. P. 2 2 Conversely, green products with the lowest proximity to Indonesia’s current production possibilities are Gas Flaring Emission Reduction products, Clean Up or Remediation of Soil and Water, Resources and Pollution Management, and Environmental Monitoring and Analysis Equipment. Environmentally Preferable Products, Waste Management, Recy- cling and Remediation, and Cleaner or More Resource Efficient Technologies and Products are also the green products that exhib- it the highest RCA and, therefore, making them ideal potential ex- port growth areas (Figure 15). Nevertheless, Indonesia’s potential to diversify into products the country is not yet competitive in is prom- ising. Countries with higher green competitiveness potential scores are significantly more likely to have greater future increases in their green competitiveness index, green export ratio, and the number of green products they can export competitively. Indonesia’s potential increased until 2005 but has since worsened slightly and stagnated in recent years. Access to green technologies through trade could play a key role in realizing this potential. FIG 13 INDONESIA’S GREEN FIG 14 GREEN COMPETITIVENESS: COMPETITIVENESS RANKING REGIONAL COMPARISON OF RANKINGS GREEN COMPLEXITY INDEX VIETNAM THAILAND MALAYSIA INDONESIA GREEN COMPLEXITY POTENTIAL ECONOMIC COMPLEXITY INDEX (HRS) 142 120 200 ECONOMIC 38 COMPLEXITY INDEX (HRS) 25 100 127 150 39 80 GREEN 25 100 COMPLEXITY POTENTIAL 44 60 37 50 40 49 GREEN 34 COMPLEXITY 20 0 INDEX 36 69 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 20 120 220 Source: World Bank staff calculations from GTN data. Source: World Bank staff calculations from GTN data. P. 2 3 FIG 15 INDONESIA’S GREEN COMPETITIVENESS POTENTIAL BY GREEN PRODUCT CATEGORIES 0.26 Environmentally Preferable Products 0.24 Waste Management, Recycling and Remediation Waste Water Management and 0.22 Natural Risk Potable Water Treatment Management Efficient Consumption of Energy PROXIMITY Technologies 0.2 Management of Solid Hazardous Heat and Waste Energy Energy Renewable Energy Cleaner or More Resource Efficiency Water Management Efficient Technologies/Products 0.18 Supply Clean Up or Remediation Air Pollution Control of Solid and Water Environmental 0.16 Monitoring, Gas Flairing Emission and Analysis Resources Noise and Reduction Equipment and Pollution Vibration Management Abatement 0.14 0 0.2 0.4 0.6 0.8 1 REVEALED COMPARATIVE ADVANTAGE Source: World Bank staff calculations from GTN data. Conclusions and Recommendations he global and Indonesia’s own transition to a greener and more sustainable growth are like- T ly to accelerate the need to reduce the carbon content of Indonesia’s trade flows. As Indone- sia transitions away from natural resource-based growth, the role of carbon-intensive sectors is expected to decline‒ directly reducing the emis- sions embedded in Indonesia’s trade flows. This will be due to both a decarbonizing global and domestic economy, as well as Indonesia’s ongoing efforts to diversify the economy to be less vulnerable to commodity prices. At the global level, decarboniza- tion efforts and the increased focus on the use of green goods will likely also alter the carbon content of Indonesia’s trade. In addition, the carbon content of Indonesia’s trade will be affected by climate policies of major trading partners such as the United States and the European Union (EU). Trade with the EU‒Indonesia’s third-largest P. 2 4 trading partner after China and Japan‒and policies such as the EU Green Deal or the EU Carbon Border Adjustment Mechanism (CBAM) will impact on Indonesia’s exports. It is likely that selected carbon-in- tensive sectors with a high share of exports to the EU will see a de- cline in output. With the right policies in place,9 Indonesia stands to benefit from green technology spillovers, especially given that green products most similar to current capabilities are those with lower product complexity and technologies. Technology diffusion, including inter- national diffusion of ideas in the form of knowledge spillovers are the hallmark of international trade. Trade is a channel of diffusion for innovation‒including through imports and trade in technology. Trade policies such as liberalization of both tariff and non-tariff barriers contributes to ensuring the link between trade and innovation. Trade is, therefore, a key channel for improving green production capabili- ties, technology spillovers for green goods, and realizing the potential of green trade. Identifying green products and technologies that are key to In- donesia’s decarbonization and climate adaptation and mitigation will be key to reducing the carbon content of trade and becoming more competitive. Although still low relative to other countries, In- donesia’s green competitiveness has been steadily improving after 2014, while its green competitiveness potential has been stable. En- vironmentally Preferable Products; Waste Management, Recycling, and Remediation; and Cleaner or More Resource Efficient Technol- ogies/Products are also the green products that exhibit the highest RCA‒thereby making them ideal for potential export growth areas. Indonesia could boost its export potential in environmentally pref- erable products and allow access to green goods for final use and production of other green goods. Imports of green goods could be used for decarbonizing processes such as monitoring emissions and energy as well as renewable energy products‒both at the consumer and producer level. At the production level, access to these products would facilitate cleaner production processes readiness for extreme weather events. In doing so, trade would also potentially contribute to lower emissions in consumption and production. 9 See Policy Note 3: “The Role of Trade Policies in Indonesia’s Green Transition”. 02 P. 2 5 P.25–48 FIRM-LEVEL OPPORTUNITIES AND CHALLENGES OF GREEN GOODS, TECHNOLOGIES, AND SERVICES TRADE IN INDONESIA P. 2 6 Introduction Indonesia’s green international competitive- ness will be determined by a combination of I both country-specific and firm-level factors. On the one hand, country-specific factors such as resource endowments, the production and other input costs, financial and technological in- frastructure, access to markets, and institution- al and regulatory frameworks shape a country’s overall competitiveness (Hawawini et al. 2004). In turn, international competitiveness is a function of a firm's capability to achieve high- er performance than its competitors in foreign markets. As a result, firm-level determinants also play a major role in shaping green com- petitiveness. As such, a firm-level examination of the international trade in green goods and services in this note highlights opportunities and challenges faced by trading firms, and policies needed to boost their competitiveness going forward. This note zooms in on firm-lev- el aspects of Indonesia’s green trade and competitiveness and out- lines recent trends in the trade of green goods and technologies by types of firms, the importance of green goods trade in firms’ total trade, their entry and exit in the import and export market of green goods, as well as the challenges they face in importing and exporting green goods. Results highlight that due to key challenges to both importing and exporting, trade in green goods and services remains limited but, with the right policy mix, Indonesia can take advantage of exist- ing and increasing opportunities. There are several key findings. First, firms trading in green goods are more likely to be large and a higher share are foreign owned. Second, the share of firms entering green goods export markets is lower than the share of firms entering non-green goods export markets, suggesting that expected returns remain relatively low. The number of two-way traders entering export markets for green goods has, however, increased over time. Third, Indonesian firms that are more internationally exposed (two-way trad- ers that both import and export) are better performers, export more green products, trade in higher-technology green goods, and have P. 2 7 higher survival rates in export markets. Fourth, further measures to streamline import and export approvals, harmonize standards, and reduce tariff and non-tariff measures (NTMs) where possible, will help to lower barriers for Indonesian firms to enter, stay, and be com- petitive in producing and exporting green goods Open markets can improve access to new technologies and make local production processes more efficient and environmental- ly sound for firms in Indonesia, especially as over 90 percent of green goods are intermediate and capital goods that are used for production. With the right policies in place, there are a set of new green export opportunities that firms in Indonesia can tap into. On the one hand, this is because global value chains are reconfiguring both in response to a decarbonizing world and due to the effects of the ongoing COVID-19 pandemic shocks and responses. On the oth- er hand, both climate change and COVID-19 have brought forward a renewed emphasis on the role of sustainable supply chains and new green industries in international trade. Firms that simultaneously ex- port and import (that is, two-way traders or Global Value Chain or GVC 10 GVC firms are loosely defined firms)10 are more involved in international activities than those en- as firms that both import and export, as these are the firms that gaged in only one of those modes of internationalization. This involve- are more internationally involved ment creates opportunities to increase competitiveness by sharing and GVC firms typically import to export. technological knowledge, skills, and resources. P. 2 8 Firm-Level Trade in Green Goods, Technologies, and Services Firm Characteristics in Green Trade he number of firms involved in green goods11 T trade has increased in Indonesia, with a larg- er share of firms importing green goods than exporting. The number of firms trading green goods reached 19,911 importers and 6,362 exporters in 2018, up from 15,231 importers and 6,080 exporters in 2014.12 Between 2014- 18, an average of 38 percent of all exporters were traders of green goods‒of which two-thirds were firms that are two-way traders‒while the corresponding figure for importers was an average of 70 percent‒ 11 Green goods or environmental goods (EGs) as referred to in this of which 40 percent are two-way traders. The share of firms trading note are aligned with the list of green products defined by the green goods remained broadly stable between 2014-18 (Figure 16) Green Transition Navigator (GTN). This list is based on a compilation as has the share of green goods per firm (Figure 17). of the Asia-Pacific Economic Co- operation (APEC), Organisation Survey responses show that most EG firms trading international- for Economic Co-operation and Development (OECD), and the ly are large and have relatively higher foreign ownership relative World Trade Organization (WTO) green goods classifications and add to domestic EG traders and non-EG traders. A 2022 World Bank up to a list totaling 543 products classified at the six-digit level in survey of a total of 621 firms were asked about their green manufac- HS1992. Throughout this note, the terms green goods and EGs will be turing practices and whether they traded in green goods in the last used interchangeably. fiscal year. Among these, about 22 percent were international traders 12 Exporter or importer is defined of green goods, of which, about 30 percent reported to be importers as a firm that imported pr exported at least one green good in the only, 31 percent were exporter-only firms and 39 percent were both time period. This is obtained from customs data sourced from the importers and exporters.13 Of the interviewed firms, 21 percent of Indonesian Directorate General of the 621 were domestic traders of EGs. Some 67 percent of EG inter- Customs and Excise (DGCE). national traders are large firms, 33 percent are medium-sized firms, 13 Since the survey only asks about trade in the last year while while there are no small firms (Figure 18). Nearly 30 percent are the customs data considers trade in a period of five years, the foreign owned (Figure 19) while, interestingly, 40 percent are locat- lower shares are to be expected. Moreover, the customs data ed in Central Java. Domestic EG traders’ characteristics are similar covers the universe of traders in to non-EG traders, with the majority being medium-sized and only 5 Indonesia, while the survey is from a limited sample but provides us percent being foreign-owned. Interestingly, 8 percent of international with more updated information. Values are weighted averages of the responses. P. 2 9 EG traders reported to be government owned‒a higher share than for both non-EG traders and domestic EG traders (Figure 19). EG exporters are also more likely to trade in environmental ser- vices (ES) compared to importers, but information on ES trade re- mains limited. Environmental services are often challenging to dis- tinguish. They may involve construction of a geothermal power plant to the installation, repair, or maintenance of a facility critical to miti- gation and adaptation to climate change. Generally, they are services crucial to the delivery and proper functioning of environmental equip- ment (OECD 2017). Among the surveyed firms, only 3.6 percent of importer-only firms participated in ES trade. In contrast, 14.6 percent and 17.0 percent of exporter-only firms and two-way EG traders re- spectively reported participating in ES trade. The average among all EG traders that were also involved in ES trade was only 6.3 percent (around 20 firms). Firms that both export and import account for a larger share of green goods trade. Firms that both export and import are more likely to export than import green goods and make up a large share of the firms that export green goods in Indonesia (64 percent) but a smaller share (around one-third) among importers (Figure 20 and 21). Simi- larly, among the surveyed firms, there are a slightly higher number of two-way traders among firms in international green goods trade (41 percent of all EG traders) compared to importer-only or exporter-on- ly firms (both making up 7 percent). This is consistent with broader characteristics of trading firms in Indonesia where 73 percent of ex- porters and 40 percent of importers are two-way traders and with the stylized fact that over two-thirds of export value in Indonesia is generated by two-way traders (Cali et al. 2022). Firms trading in green goods are not specialized in such trade, as green goods make up a small share of the export and import bas- kets of firms, although this has increased slightly between 2014 and 2018. In both value terms and the number of products traded, imports of green goods have a larger share in the firms’ basket of traded goods compared to exports, although both are very low over- all. On average, green goods made up about 12 percent of the num- ber of products exported and 9 percent of value in 2018 (Figure 17). Firms trading green goods are, therefore, rarely specialized in such trade, and mostly trade in non-green goods. Conversely, imports of P. 3 0 green goods accounted for about 21 and 20 percent of the number and value of imports, respectively in 2018. Apart from a slight recent increase, these shares have been broadly stable between 2014-18. Indonesia’s exports and imports of green goods are quite geo- graphically concentrated among trade partners. Green goods ex- porters have only one-half the number of trading partner countries as exporters of non-green goods. The average number of partner countries per firm is three for green goods exporters, compared to six for non-green goods exporters. In terms of source countries, the difference is smaller: non-green goods are imported from an average of four countries per firm, compared to three for importers of green goods. These numbers have not changed much in recent years. Green goods trade is highly concentrated among firms and, of the biggest Indonesian firms, the top 5 percent account for more than two-thirds of green goods trade. Conversely, the bottom 75 percent made up only 6 percent of exports and 8 percent of imports of green goods in 2018. Of all trading firms, the concentration of green goods traders is slightly higher than the concentration of all trading firms. For non-green goods, the top 5 percent of firms make up about 5 percent- age points lower share than green goods imports and 10 percentage points for exports generated by the top 5 percent. Import concentra- tion is higher than for exports of green goods. Nearly 70 percent of imports and about 65 percent of export value is generated by the top 5 percent of firms, while the top 1 percent generate an average of 44 percent of imports and 30 percent of exports in green goods. "The number of firms involved in green goods trade has increased in Indonesia, with a larger share of firms importing green goods than exporting." P. 3 1 FIG 16 GREEN GOODS EXPORTERS AND FIG 17 GREEN GOODS TRADE IN TRADERS’ BASKETS (PERCENT) # 0F IMPORTERS IMPORTERS: NUMBER # 0F EXPORTERS 2014 2018 (LHS) AND PERCENT % GREEN GOODS EXPORTERS % GREEN GOODS IMPORTERS (RHS) OF TOTAL 25% # 0F IMPORTERS # 0F EXPORTERS 2014 2018 EXPORTS IMPORTS % GREEN # 0F GOODS EXPORTERS IMPORTERS % GREEN # 0F GOODS IMPORTERS EXPORTERS 2014 20% 2018 30,000 % GREEN GOODS EXPORTERS % GREEN GOODS IMPORTERS 80% 25% 15% 25% EXPORTS IMPORTS 70% 20% 25,000 EXPORTS IMPORTS 30,000 80% 60% 10% 20% 21%21% 20%20% 15% 19%19% 20,000 30,000 80% 18%18% 70% 50% 25,000 70% 60% 5% 15% 11%11% 12%12% 15,000 25,000 40% 10% 20,000 9% 9% 8% 8% 60% 50% 0% 10% 21% 30% 20% 5% 19% 10,000 20,000 18% 15,000 50% 40% 20% 5%- 11% 12% 5,000 15,000 40% 30% 0% GREEN GOODS GREEN GOODS GREEN GOODS GREEN GOODS 10,000 10% 9% EXPORTERS: EXPORTERS: IMPORTERS: IMPORTERS: 8% 30% 20% 0% SHARE OF SHARE OF SHARE OF SHARE OF 10,000- 0% - EXPORTED EXPORT VALUE IMPORTED IMPORT VALUE 5,000 2014 2015 2016 2017 2018 20% GREEN GOODS PRODUCTS GREEN GOODS GREEN GOODS PRODUCTS GREEN GOODS 10% - EXPORTERS: EXPORTERS: IMPORTERS: IMPORTERS: 5,000 GREEN GOODS SHARE OF GREEN GOODS SHARE OF GREEN GOODS SHARE OF GREEN GOODS SHARE OF - 10% 0% EXPORTERS: EXPORTED EXPORTERS: EXPORT VALUE IMPORTERS: IMPORTED IMPORTERS: IMPORT VALUE 2014 2015 2016 2017 2018 SHARE OF PRODUCTS SHARE OF SHARE OF PRODUCTS SHARE OF - 0% EXPORTED EXPORT VALUE IMPORTED IMPORT VALUE 2014 2015 2016 2017 2018 PRODUCTS PRODUCTS FIG 18 FIRM SIZE OF EG TRADERS FIG 19 OWNERSHIP OF EG TRADERS MEDIUM LARGE TOTAL RESULTS) (SURVEY NUMBER OF FIRMS DOMESTIC (SURVEY RESULTS) DOMESTIC:FOREIGN 50:50 FOREIGN GOVERNMENT 80% MEDIUM LARGE TOTAL NUMBER OF FIRMS 400 DOMESTIC DOMESTIC:FOREIGN 50:50 70% MEDIUM LARGE TOTAL NUMBER OF FIRMS 350 DOMESTIC FOREIGN DOMESTIC:FOREIGN GOVERNMENT 50:50 80% 400 NON-EG OF FIRMS FOREIGN GOVERNMENT FIRMS GROUP 60% 80% 300 400 TRADER EACH GROUP 70% 350 50% 70% 250 350 NON-EG OF FIRMS OF GROUP 60% 300 TRADER NON-EG GROUP OFNUMBER 40% 200 FIRMS DOMESTIC GROUP 60% 300 TRADER 50% 250 GROUP EG TRADER FIRMS WITHIN 30% 50% 150 250 EACH NUMBER SHARE 40% 200 DOMESTIC TOTAL OF FIRMS EACH 20% 100 NUMBER 40% 200 EG TRADER OF DOMESTIC WITHIN 30% 150 INTERNATIONAL SHARE 10% 50 EG TRADER TOTAL WITHIN 30% 150 EG TRADER 20% 100 SHARE TOTAL 0% 20% 0 100 INTERNATIONAL 10% INTERNATIONAL DOMESTIC NON-EG 50 EG TRADER 0% 20% 40% 60% 80% 100% EG TRADER EG TRADER TRADER INTERNATIONAL 10% 50 EG TRADER 0% 0 0% INTERNATIONAL DOMESTIC NON-EG 0 0% 20% 40% 60% 80% 100% EG TRADER EG TRADER TRADER INTERNATIONAL DOMESTIC NON-EG 0% 20% 40% 60% 80% 100% EG TRADER EG TRADER TRADER FIG 20 TWO-WAY TRADERS ARE MORE FIG 21 ..BUT LESS LIKELY TO IMPORT LIKELY TO EXPORT GREEN (PERCENT) GOODS (PERCENT) SHARE OF GREEN GOODS EXPORTERS AMONG ALL EXPORTERS SHARE OF GREEN GOODS EXPORTERS AMONG ALL EXPORTERS SHARE OF EXPORTER-IMPORTERS IN GREEN EXPORTS SHARE OF EXPORTER-IMPORTERS IN GREEN EXPORTS SHARE OF GREEN GOODS EXPORTERS AMONG ALL EXPORTERS SHARE OF GREEN GOODS EXPORTERS AMONG ALL EXPORTERS 75% SHARE OF GREEN EXPORTER-IMPORTERS IN GREEN GOODS EXPORTERS AMONGEXPORTS ALL EXPORTERS 75% EXPORTER-IMPORTERS SHARE OF GREEN IN GREEN GOODS EXPORTERS AMONGEXPORTS ALL EXPORTERS 70% SHARE OF EXPORTER-IMPORTERS IN GREEN EXPORTS 70% SHARE OF EXPORTER-IMPORTERS IN GREEN EXPORTS 75% 65% 75% 65% 75% 70% 60% 75% 70% 60% 70% 65% 55% 70% 65% 55% 65% 60% 50% 65% 60% 50% 60% 55% 45% 60% 55% 45% 55% 50% 40% 55% 50% 40% 50% 45% 35% 50% 45% 35% 45% 40% 30% 45% 40% 30% 40% 35% 2014 2015 2016 2017 2018 40% 35% 2014 2015 2016 2017 2018 35% 30% 35% 30% 30% 2014 2015 2016 2017 2018 30% 2014 2015 2016 2017 2018 2014 Source: Figures 2015 16, 17, 20, 2016 and 21: World Bank staff 2017 2018 calculations using 2014 DGCE data and green goods list from 2015 GTN. 2016 2017 2018 Figures 18 and 19: World Bank 2022 CCDR Survey. P. 3 2 Products Traded by Firms in Green Trade Green goods14 mainly consist of intermediate products (53 per- cent) and capital goods (38 percent) and only a small share of con- sumption products (8 percent) (Figure 22). Within each category of EGs, Waste Management, Recycling and Remediation products have the largest share of consumption goods (38 percent), followed by nat- ural resource management (25 percent). These categories contain some goods that are purposed for end use. Nevertheless, the bulk of EGs are used for production of other goods. Appendix 2 provides the top traded environmental goods and their environmental categories. The main category of green goods exported by two-way traders are Efficient Consumption of Energy Technologies and Carbon Cap- ture and Storage (ECETCCS) which mainly consist of capital and intermediate products. Among ECETCCS HS-10 products, 53 per- cent are intermediate products and 47 percent are capital products (Figure 22). This indicates that these imports are used as inputs for production and exports. This is followed by Natural Resource Protec- tion Products, of which 75 percent are intermediate products, and Cleaner or More Resource Efficient Technologies and Products (Fig- ure 22-24). Conversely, export only firms are engaged in the exports of Environmentally Preferable Products (EPPs) followed by ECETCCS goods. Two-way traders have higher shares in the exports of all types of green goods relative to export-only firms. Each firm exports an av- erage of one to three green goods with ECETCCSs having the largest number of distinct exported products per firm. Overall, there has been an increase in the average value of export- ed green goods per firm, driven mostly by two-way traders. With the exception of Waste Management, Recycling, and Remediation, and Energy Efficiency Products, there has been an increase in the aver- age firm-level value shares of EGs. For instance, the value of exports of Gas Flaring Emission Reduction and Cleaner or More Resource Ef- ficient Technologies Products each increased by 6 percentage points between 2014-18. On the other hand, there have been slight de- clines or stagnations, with minimal growth in the green goods exports 14 Green goods are defined by of exporter-only firms. the environmental benefits they provide rather than their carbon content. The term green goods and environmental goods (EGs) are used interchangeably. P. 3 3 ECETCCS products are also the most imported green goods by all firms, followed by Cleaner or More Resource Efficient Technolo- gies which have seen the highest increase in the firm-level import shares. This is closely followed by Renewable Energy and EPPs, both averaging 16 percent of import value for two-way traders (Figure 23).15 For importer-only firms, Natural Risk Management products made up a larger share than EPPs based on end use, followed by Cleaner or More Resource Efficient Technologies products. Among importer-only firms, Natural Resource Protection, Cleaner or More Resource Effi- cient Technologies, and Natural Risk Management products had an increase in average firm-level shares between 2014-18. Conversely, Water Supply products declined in the shares of both firm types and EPPs dropped in the firm-level share of two-way traders. There is more variation in the distinct number of imported green goods compared to exports. The number of imported products var- ies between one and six products on average per firm. Once again, ECETCCS make up the highest number of products imported per firm (an average of five products between 2014-18 for both two-way traders and importer-only firms). There are also heterogeneities in the concentration of firms across different types of green goods. For instance, the export concentration of firms in the Renewable Ener- 15 The discussion focuses on gy and Cleaner or More Resource Efficient Technologies products is EGs most closely linked to climate change. Statistically, the second higher than the average, with 79 percent and 82 percent of value ac- most imported product was Wastewater Management and counted for by the top 5 percent of firms. Within the subset of energy Potable Water Treatment with 18 efficiency products, the share of the top 5 percent of firms is only 42 percent average value share per firm. percent of exports and 50 percent of imports. P. 3 4 FIG 22 GREEN GOODS BASED ON END-USE CLASSIFICATION AND FUNCTION (% SHARE, WITHIN EACH CATEGORY) CAPITAL INTERMEDIATE CONSUMPTION 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 RESOURCES 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.... CLEANER OR MORE RESOURCE EFFICIENT TECHNOLOGIES AND PRODUCTS CLEAN UP OR REMEDIATION OF SOIL AND WATER AIR POLLUTION CONTROL ALL ENVIRONMENTAL GOODS (EGS) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: World Bank staff calculations from GTN list. Capital, intermediate and consumption goods are categorized using UNSTAT concordance of System of National Accounts (SNA) P. 3 5 FIG 23 AVERAGE SHARE OF IMPORTS BY GREEN GOOD CATEGORY AND FIRM TYPE (2014-18) IMPORTER-EXPORTER AVERAGE SHARE OF EXPORTER ONLY AVERAGE SHARE OF EXPORT VALUE PER FIRM EXPORT VALUE PER FIRM IMPORTER-EXPORTER AVERAGE SHARE OF EXPORTER ONLY AVERAGE SHARE OF EXPORT VALUE PER FIRM EXPORT VALUE PER FIRM WATER SUPPLY WASTE WATER MANAGEMENT WATER SUPPLY AND POTABLE WATER TREATMENT WASTE WATER MANAGEMENT AND POTABLE WASTE MANAGEMENT, RECYCLING AND WATER TREATMENT REMEDIATION WASTE MANAGEMENT, RECYCLING AND REMEDIATION RESOURCES AND POLLUTION MANAGEMENT RESOURCES AND POLLUTION MANAGEMENT RENEWABLE ENERGY RENEWABLE ENERGY NOISE AND VIBRATION ABATEMENT NOISE AND VIBRATION ABATEMENT NATURAL RISK MANAGEMENT NATURAL RISK MANAGEMENT NATURAL RESOURCES PROTECTION OF SOLID RESOURCES MANAGEMENT NATURAL PROTECTION AND HAZARDOUS WASTE AND RECYCLING SYSTEMS MANAGEMENT OF SOLID AND HAZARDOUS WASTE AND HEAT AND RECYCLING ENERGY SYSTEMS MANAGEMENT HEAT AND ENERGY MANAGEMENT GAS FLAIRING EMISSION REDUCTION FLAIRING EMISSION GAS PREFERABLE ENVIRONMENTALLY REDUCTION PRODUCTS BASED ON END USE OR DISPOSAL CHARACTERISTICS ENVIRONMENTALLY PREFERABLE PRODUCTS BASED ENVIRONMENTAL MONITORING, ANALYSIS AND ON END USE OR DISPOSAL CHARACTERISTICS ASSESSMENT EQUIPMENT ENVIRONMENTAL MONITORING, ANALYSIS AND ASSESSMENT EQUIPMENT ENERGY EFFICIENCY ENERGY EFFICIENT CONSUMPTION OF ENERGY EFFICIENCY TECHNOLOGIES AND CARBON CAPTURE.... EFFICIENT CONSUMPTION OF ENERGY TECHNOLOGIES CLEANER OR MORE RESOURCE EFFICIENT AND CARBON CAPTURE.... TECHNOLOGIES AND PRODUCTS CLEANER OR MORE RESOURCE EFFICIENT TECHNOLOGIES CLEAN UP OR REMEDIATION AND OF SOIL PRODUCTS AND WATER CLEAN UP OR REMEDIATION OF SOIL AND WATER AIR POLLUTION CONTROL AIR POLLUTION CONTROL 0% 5% 10% 15% 20% 25% 30% 35% 0% Source: World Bank staff calculations from DGCE data. 5% 10% 15% 20% 25% 30% 35% FIG 24 AVERAGE SHARE OF EXPORTS BY GREEN GOOD CATEGORY AND FIRM TYPE (2014-18) IMPORTER-EXPORTER AVERAGE SHARE OF IMPORTER ONLY AVERAGE SHARE OF IMPORT VALUE PER FIRM IMPORT VALUE PER FIRM IMPORTER-EXPORTER AVERAGE SHARE OF IMPORTER ONLY AVERAGE SHARE OF IMPORT VALUE PER FIRM IMPORT VALUE PER FIRM WATER SUPPLY WASTE WATER MANAGEMENT WATER SUPPLY AND POTABLE WATER TREATMENT WASTE WATER MANAGEMENT AND POTABLE WASTE MANAGEMENT, RECYCLING AND WATER TREATMENT REMEDIATION WASTE MANAGEMENT, RECYCLING AND REMEDIATION RESOURCES AND POLLUTION MANAGEMENT RESOURCES AND POLLUTION MANAGEMENT RENEWABLE ENERGY RENEWABLE ENERGY NATURAL RISK MANAGEMENT NATURAL RISK MANAGEMENT NATURAL RESOURCES PROTECTION OF SOLID RESOURCES MANAGEMENT NATURAL PROTECTION AND HAZARDOUS WASTE AND RECYCLING SYSTEMS MANAGEMENT OF SOLID AND HAZARDOUS WASTE AND HEAT AND RECYCLING ENERGY SYSTEMS MANAGEMENT HEAT AND ENERGY MANAGEMENT GAS FLAIRING EMISSION REDUCTION FLAIRING EMISSION GAS PREFERABLE ENVIRONMENTALLY REDUCTION PRODUCTS BASED ON END USE OR DISPOSAL CHARACTERISTICS ENVIRONMENTALLY PREFERABLE PRODUCTS BASED ENVIRONMENTAL MONITORING, ANALYSIS AND ON END USE OR DISPOSAL CHARACTERISTICS ASSESSMENT EQUIPMENT ENVIRONMENTAL MONITORING, ANALYSIS AND ASSESSMENT EQUIPMENT ENERGY EFFICIENCY ENERGY EFFICIENT CONSUMPTION OF ENERGY EFFICIENCY TECHNOLOGIES AND CARBON CAPTURE.... EFFICIENT CONSUMPTION OF ENERGY TECHNOLOGIES CLEANER OR MORE RESOURCE EFFICIENT AND CARBON CAPTURE.... TECHNOLOGIES AND PRODUCTS CLEANER OR MORE RESOURCE EFFICIENT TECHNOLOGIES CLEAN UP OR REMEDIATION AND OF SOIL PRODUCTS AND WATER CLEAN UP OR REMEDIATION OF SOIL AND WATER AIR POLLUTION CONTROL AIR POLLUTION CONTROL 0% 5% 10% 15% 20% 25% 0% 5% 10% 15% 20% 25% Source: World Bank staff calculations from DGCE data. P. 3 6 Technology Intensity of Firm-Level Trade in Green Goods A country’s ability to compete in high-technology markets is im- portant to its overall competitiveness in the global market, and this is even more critical in a decarbonizing global economy and the role of trade in technology spillovers. Imported technology has the potential to further restructure the Indonesian economy, not only from resource-based but also to a greener trading economy. Furthermore, imports are one of the channels for technological spillover from trade. The green goods imported by two-way traders have a higher technol- ogy-intensity than average trade.16 Importer-exporters imported, on average, 9 percent of high-technology goods in 2018 but 26 percent of high-technology green goods (Figure 25).17 The share of high-technology green goods imports is also slightly higher than the high-technology green goods imports of importer-only firms (19 percent). Notably, the share of high-technology green goods imports has increased over time for both two-way traders (by 8 percentage points between 2014 and 2018) and importer-only firms (by 5 percentage points). Similarly, exports of green goods by two-way traders have relatively high technology embodied in them. The green goods exports of two- way traders include, on average, 20 percent of high-technology goods (Figure 26). This is lower than the high-technology imports share but slightly higher than the high-technology exports of exporter-only firms (18 percent) and much higher than the share in non-green goods exports of these firms (3 percent). Reflecting the nature of the Indo- nesian economy and relative comparative advantages, the share of resource-based manufactures is higher in the exports of green goods by two-way traders (13 percent), compared to their imports (2 per- cent). Similarly, the share of low-technology exports is much higher (13 percent) than their imports (10 percent). There are a few products where exporter-only firms trade in higher technology goods. Heat and Energy Management, Wastewater Man- 16 Technology intensity agement and Potable Water Treatment, and Clean up or Remediation is categorized using the Lall classification. of Soil and Water are the three products that have higher technology intensity in the exports of exporter-only firms compared to two-way firms. 17 All averages are for the 2014- 18 period. Most EGs are usually machinery and other equipment so this result is unsurprising. P. 3 7 FIG 25 TECHNOLOGY INTENSITY OF GREEN GOODS IMPORTS FIG 26 TECHNOLOGY INTENSITY OF GREEN GOODS EXPORTS BY FOR IMPORTER-EXPORTERS IMPORTER-EXPORTERS UNCLASSIFIED PRODUCTS RESOURCE-BASED MANUFACTURES HIGH TECHNOLOGY MANUFACTURES MEDIUM TECHNOLOGY MANUFACTURES PRIMARY PRODUCTS LOW TECHNOLOGY MANUFACTURES LOW TECHNOLOGY MANUFACTURES PRIMARY PRODUCTS MEDIUM TECHNOLOGY HIGH TECHNOLOGY MANUFACTURES RESOURCE-BASED MANUFACTURES MANUFACTURES UNCLASSIFIED PRODUCTS 19.7% 18.3% 20.2% 26.1% 42.4% 51.3% 48.0% 47.4% 9.6% 24.2% 12.9% 10.3% 3.8% 15.8% 12.1% 4.1% 1.6% 2.1% 9.7% 13.2% 2014 2018 2014 2018 Source: World Bank staff calculations. Source: World Bank staff calculations. "A country’s ability to compete in high-technology markets is important to its overall competitiveness in the global market, and this is even more critical in a decarbonizing global economy and the role of trade in technology spillovers." P. 3 8 How Competitive is Green Goods Trade for Firms in Indonesia? nderstanding trends in the entry/exit and the survival of firms trading green goods is essen- U tial to understanding the competitiveness of trade in green goods and for the design of a policy environment that enables firms not only to export but also to stay active in trading. Firm entry to, exit from, and survival in foreign markets, can be a signal of the external environ- ment (favorable or unfavorable) such as government regulations or macroeconomic uncertainty. Entry into export markets involves sub- stantial sunk costs and a firm’s decision to enter depends on the ex- pected demand and future returns from exporting. Free market entry and conditions that enable firms to operate are essential for the de- velopment of new ideas. Firms tend to persist in exporting once they begin to export to recoup sunk costs but may exit if they were initially overly optimistic about the market’s demand or risks faced in the for- eign market (Dixit 1988). Firm exit can also be a key to transferring resources to more productive uses and, thereby, achieving, over time, structural shifts in the economy. In Indonesia, the share of firms entering green goods export mar- kets is lower than the share of firms entering non-green goods ex- port markets, suggesting that expected returns remain relatively low. Entry rates into non-green goods exports are twice as high as for green goods‒averaging around 10 percent higher and 1,272 firms a year between 2015 and 2018.18 Although entry rates of import- er-exporter firms into green goods exports has been relatively stable (Figure 27), overall entry in has slightly decreased over time, mostly driven by exporter-only firms (Figure 28). Conversely, entry into the im- 18 Entry is defined as if a firm porting of green goods is higher than exports by 8 percentage points. was not trading green goods, Firm differences are not as pronounced for imports of green goods, but starts trading green goods in the following year, such a firm is where entry rates are only 4 percentage points lower than non-green defined as entering in the following year into trade in that particular good. P. 3 9 goods imports, and there is little difference between the entry rates of importer-only firms and two-way traders. The number of two-way trader firms entering export markets for green goods has increased over time, and these traders also have higher entry rates relative to exporter-only firms. The entry rate into green exports is slightly higher for two-way traders, at around 11 per- cent or an average of over 776 firms a year‒over 1.5 times that of exporter-only firms. Exporter-only firms have also been declining in their entry rates and in the numbers. On the other hand, exporter-on- ly firms have slightly higher entry rates into non-EG trade (22 percent) compared to two-way traders. This suggests that being more inter- nationally exposed, these GVC firms or two-way traders can leverage existing relationships and learn more from their trading activities to enable them to take advantage of market access opportunities. Exit rates from both import and export markets are also lower in green goods than in non-green goods‒suggesting more firms con- tinue EG trade than non-EG trade‒but the proportion of EG traders has not changed over the 2015-18 period. Using firm-level trade data, firms’ decisions to stop trading in green goods is examined.19 The results show that exit rates from importing and exporting green goods are lower than non-green goods for all firm types (Figure 29 and 30). For two-way traders, the average exit rates were 12 per- cent for green goods imports and 15 percent for other imports. For exports, the gap is larger at 10 percent for green goods and 15 per- cent for other products. However, exits for two-way traders remain slightly lower than the average for non-green goods (20 percent). The percentage point differences in green goods and other goods exit rates are similar for importer-only or exporter-only firms. As average entry and exit rates are broadly the same, this explains the broadly unchanged share of traders in green goods in the time period (see Figure 16). ECETCCS and renewable energy have the highest entry rates, 19 Exit is defined as if a firm suggesting that expected demand and future returns from these was trading green goods but stops trading green goods in the following products are high. Entry rates for both import and export markets year. Such a firm is defined as exited in the following year from are highest for these two groups of products, while Natural Resource trade in that particular good. Protection has the lowest entry and exit rates. About 600 firms start 20 For examples of products exporting ECETCCS products each year, and around 3,000 start im- within each category, see Policy Note 1. porting.20 For renewable energy, these numbers are 561 and 2,673 P. 4 0 respectively. Around 57 percent of new exporters in renewable ener- gy are two-way traders. Natural Risk Management has had the lowest number of new traders per year (28 for exports and 47 for imports) while Natural Resource Protection the lowest share (less than 1 per- cent for both imports and exports). These products also have the highest exit rates, therefore, turn- overs are much higher in these products. For imports and exports, the largest share of firms stopped trading the products of ECETCCS and renewable energy. The exit rates for imports of these products averaged 9 and 8 percent per year, respectively, representing an av- erage of over 2,000 and 1,800 firms per year. For exports, the aver- ages are 5 percent per year, or 571 and 591 firms per year, respec- tively. These shares are slightly higher for two-way traders for both imports and exports‒except for renewable energy exports where two-way traders have lower exit rates. The lowest exit from imports and exports is in Natural Risk Management which averaged less than 1 percent. Overall, firm survival in green goods trade is lower than in other products, but the difference in survival rates reduces over time. As firms trading in green goods have lower entry and exit rates, the ques- tion arises about how long firms survive in the market. The firm sur- vival rates for both imports and exports are lower for trade in green goods than other products for all firm types. This difference lessens over time, however, for both import and export survival, as survival rates improve the longer a firm stays in the market. Two-way traders have higher survival rates in green goods mar- kets and being a two-way trader matters more for survival in green goods export markets than imports. Overall, survival rates are high- er for two-way traders in export markets. This difference is evident across most green goods with a few exceptions, however, this differ- ence is not pronounced for imports, where survival rates of importer firms and two-way traders are at par. Only the most productive firms engage in exporting activities and two-way traders are more likely to survive and continue exporting. P. 4 1 FIG 27 TWO-WAY TRADERS’ ENTRY RATES FIG 28 EXPORTER-ONLY FIRMS’ ENTRY RATES NUMBER OF EXPORTER-IMPORTER FIRMS THAT ENTER GREEN EXPORTS NUMBER OF EXPORTER-ONLY FIRMS THAT ENTER GREEN EXPORTS NUMBER OF EXPORTER-IMPORTER FIRMS THAT ENTER NON-GREEN EXPORTS NUMBER OF EXPORTER-ONLY FIRMS THAT ENTER NON-GREEN EXPORTS SHARE OF EXPORTER-IMPORTERS THAT ENTER GREEN EXPORTS (RHS) SHARE OF EXPORTER-ONLY FIRMS THAT ENTER GREEN EXPORTS (RHS) SHARE OF EXPORTER-IMPORTERS THAT ENTER NON-GREEN EXPORTS (RHS) SHARE OF EXPORTER-ONLY FIRMS THAT ENTER NON-GREEN EXPORTS (RHS) 1,400 20% 1,000 40% 1,200 35% 800 15% 30% 1,000 600 25% 800 10% 20% 600 400 15% 400 5% 10% 200 200 5% - 0% - 0% 2015 2016 2017 2018 2015 2016 2017 2018 Source: World Bank staff calculations. Source: World Bank staff calculations. FIG 29 TWO-WAY TRADERS FIG 30 IMPORTER-ONLY/EXPORTER-ONLY EXIT RATES FIRMS EXIT RATES SHARE OF IMPORTER-EXPORTER FIRMS THAT EXIT GREEN GOODS IMPORT TRADE SHARE OF IMPORTER-ONLY FIRMS THAT EXIT GREEN IMPORT TRADE SHARE OF IMPORTER-EXPORTER FIRMS THAT EXIT NON-GREEN GOODS IMPORT TRADE SHARE OF IMPORTER-ONLY FIRMS THAT EXIT NON-GREEN GOODS IMPORT TRADE SHARE OF IMPORTER-EXPORTER FIRMS THAT EXIT GREEN GOODS EXPORT TRADE SHARE OF EXPORTER-ONLY FIRMS THAT EXIT GREEN GOODS EXPORT TRADE SHARE OF IMPORTER-EXPORTER FIRMS THAT EXIT NON-GREEN GOODS EXPORT TRADE SHARE OF EXPORTER-ONLY FIRMS THAT EXIT NON-GREEN GOODS EXPORTS TRADE 18% 25% 16% 20% 14% 15% 12% 10% 10% 8% 5% 6% 0% 2015 2016 2017 2018 2016 2017 2018 Source: World Bank staff calculations. Source: World Bank staff calculations. P. 4 2 Trade-Related Challenges Faced by Firms Trading in Green Goods and Services Finally, we examine some of the underlying F challenges firms face in trading green goods which may provide insights into competitive- ness constraints and firm entry and exit rates. Using the CCDR survey described earlier, we ex- amine challenges reported by firms trading in green goods in Indonesia. A total of 145 of the surveyed firms trade in green goods internation- ally 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 green goods. Overall, 72 percent of firms reported facing import challenges, while 70 percent reported facing export challenges, with each firm facing multiple trade-related challenges. The challenges identified included trade regulations including tariff and NTMs. Among these, NTMs such as customs procedures and compliance with Indonesian national standards were cited, as well as destination markets’ local content requirement (LCR) rules among others. LCRs are prevalent for products such as solar panels and electric motors and vehicles. Despite tariffs on green goods being relatively low, import tariffs were reported by the majority to be an obstacle or the main obsta- cle for importing of green goods. Among import challenges listed, 23 percent identified import tariffs, the highest share of any single ob- 21 The survey did not have information on which specific stacle (Figure 31). There may be several reasons why firms reported products firms were referring to this. First, tariffs are straightforward and easier to estimate in terms when they reported the challenges. Rather the question was: ”What are of costs. Second, firms trading in green goods are importing not only the main challenges this company faces when importing EGs” with a green goods (Figure 17), and this response may refer to other prod- list of options. ucts outside of the green goods list.21 Notably, products outside of 22 See Policy Note 3: “The Role the green goods list may be used as inputs in the production of green of Trade Policies in Indonesia’s Green Transition” on the tariff goods and tariffs on those may still be high. Finally, further analysis schedule on the full list of green goods. shows that tariffs on a limited number of green goods remain high.22 P. 4 3 Among non-tariff related obstacles, customs procedures (18 per- cent),23 and compliance with Indonesian national standards Stan- dar Nasional Indonesia (SNI) (13 percent), are key hindrances to importing green goods. Customs and administrative procedures are necessary for the smooth application of trade and other policies, however, they can restrict trade and increase costs if the procedures are more stringent than necessary, or they are inefficiently applied. Import customs procedures include both documentary and border compliance requirements, contributing to the increase in the number of hours and days at the border. Some examples include recommen- dation documents, import licenses, SNI compliance, pre-shipment verification certificate (Surveyor Report), and bill of lading insurance policy. Indeed, SNI compliance was further singled out as an import- ant obstacle. SNI compliance is mandatory in Indonesia for thou- sands of intermediate and capital goods (which most green goods 23 The survey did not elaborate which specific customs procedures are, including domestically produced ones). As certification requires a visit to the factory premises by an Indonesian certifying agency, the 24 SNI certification is also a recurrent cost as the certification cost is considerably higher for imported goods. The monetary cost must be renewed every year against a fee and the certification is compounded by the uncertain duration of the process and World process must be carried out again every three or four years depending Bank research has found this procedure to negatively impact firms in on the product (see Cali and Montfaucon 2021). Indonesia.24 P. 4 4 Other challenges to importing include the lack of information for importing (10 percent), port-of-entry restrictions (7 percent), government procurement (5 percent), and LCRs (5 percent). The survey revealed that firms face multiple trade-related challenges in importing green goods and, while this is a limited sample, the results are in line with previous findings about some of the most problem- atic NTMs that traders face in Indonesia. This additional information reveals that these same measures potentially affect the greening of Indonesia’s production and exports. The main challenge identified in exporting green goods are stan- dards in export markets (25 percent) and the lack of harmoniza- tion between Indonesia’s standards and international ones, fol- lowed by export approvals (15 percent) (Figure 32). Firms exporting green goods face challenges in meeting product standards in desti- nation markets. This may be because most of these products are highly technologically sophisticated (Figure 25 and 26). Crucially, this is consistent with Indonesia’s low harmonization with international standards and an increased trend toward the adoption of national standards, among the reasons why firms may find it more challenging to compete internationally. Indeed, over 80 percent of firms surveyed reported that the recognition of Indonesian standards in foreign mar- kets and harmonization with that of trading partners is a key obstacle (Figure 33). This also relates to reported challenges with obtaining export approvals from Indonesian authorities which can be cumber- some when some of the documents and restrictions apply. Among other 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 des- tination markets (11 percent) (Figure 32). 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 require- ments of export approvals domestically, and standard certifications. This relates to the lack of information on foreign markets. This lack of information on market access further resonates with the finding that more internationally exposed firms (two-way traders) dominate green goods trade, especially exports (see Figure 20). P. 4 5 Despite these challenges, 41 percent of importers and 32 percent of exporters reported benefiting from duty-free or special permits or subsidies when trading green goods (Figure 34). 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 25 The survey does not provide policies may not necessarily be of environmental benefit.25 Unfortu- more details of the type of benefits and subsidies that are most nately, more in-depth information on these was unavailable at the prevalent, and this is an area of follow-up research. time of writing this note. 26 Until recently, Indonesia operated a highly restrictive As for environmental services trade, and despite recent reforms, work permit system that involved the main identified challenges have to do with businesses being a limited set of occupations eligible for work permits and a unable to access critical foreign skills (Figure 35). The main chal- cumbersome approval process. This included the approval of the lenges faced by firms have to do with getting working visas and per- Expatriate Manpower Employment Plan and the issuance of the mits for foreign workers (13 percent), restrictions on the number of Expatriate Manpower Employment License by the Ministry of foreign workers (11 percent), and requirements for workers to be local Manpower. Any work permit or native (9 percent). These contribute to shortages of needed skills needed for a position outside the eligible ones required the approval for firms.26 Although the Omnibus Law has also adopted complemen- of the line ministries related to the specific sector and occupation. tary reforms to address skills shortages that could reduce the bene- The restrictiveness of the work permit system effectively prevented fits from investment liberalization, it appears that the impact has not businesses from accessing foreign yet been realized and these reforms may not have covered services talent‒unlike the case in most other countries in the region. critical to trade and production of green goods and technologies. FIG 31 IMPORT CHALLENGES FIG 32 EXPORT CHALLENGES LOCAL CONTENT PACKAGING, PACKAGING, EXPORT GOODS REQUIREMENT MARKING, AND MARKING, AND REGISTRATION 8% LABELING SURVEYOR LABELING 3% 5% REPORT CUSTOMS 5% GOVERNMENT 5% SECURITY IN DESTINATION PROCUREMENT COUNTRY 8% 8% ISO IN IMPORT TARIFF DESTINATION 23% COUNTRY PORT RESTRICTION OTHER 25% 9% 9% INFORMATION FOR IMPORTING PRODUCTION COSTUMS 11% PROCEDURE COST OF IMPORTED EXPORT APPROVAL 18% INPUTS 15% 11% OTHER COSTUMS 13% SNI PROCEDURE MARKET 13% 11% ACCESS INFORMATION 13% P. 4 6 FIG 33 CHALLENGES WITH PRODUCT STANDARDS FIG 34 DUTY-FREE OR SPECIAL PERMITS OR SUBSIDIES FOR TRADING EG SNI ISN’T RECOGNIZED BY IMPORTING COUNTRIES SNI ISN’T HARMONIZED WITH IMPORTING COUNTRIES STANDARD YES NO DON’T KNOW OTHER 18% 32% 41% 86% 81% 82% 59% 45% 14% 19% 14% 9% EG EXPORTER EG IMPORTER EG EXPORTER AND IMPORTER EXPORTER ONLY ONLY IMPORTER FIG 35 CHALLENGES RELATED TO INTERNATIONAL TRADE OF ENVIRONMENTAL SERVICES OTHER 2% REQUIREMENT FOR FOREIGN SKILLED WORKER TO MEET LOCAL QUALIFICATION 6% 6% SERVICE PROVIDER HAS TO BE LOCAL /NATIVE 7% RESTRICTION ON STORAGE AND/OR DATA TRANSMISION 7% REQUIREMENT TO PARTNER UP WITH DOMESTIC ENTIT Y 8% LIMITED STAY PERMIT FOR FOREIGN SKILLED WORKER FOREIGN EQUIT Y LIMIT 9% 11% RESTRICTION ON NUMBER OF FOREIGN SKILLED WORKER 13% COST TO GET A BUSINESS/WORK VISA Source: Figures 5.1-5.5 : Authors calculations based on the World Bank 2022 CCDR Firm Survey. P. 4 7 Conclusions and Key Takeaways lthough Indonesian firms’ entry rates in green goods trade is lower compared to other prod- A ucts, an increasing number of firms are en- gaged in green goods trade in Indonesia, sig- naling increased opportunities. As demand for green products increases globally, more oppor- tunities are opening up and firms have the op- portunity to scale up trade in green goods. In- donesian firms that both export and import are better performers, export more green products, trade in higher-technology green goods, and have higher survival rates in export markets. This is because these two-way traders are generally more exposed to international competition compared to importer-only and exporter-only firms, mak- ing them more competitive, more informed, and adaptable to shocks. Furthermore, in the presence of today’s GVCs, firms need to import to export, and two-way traders are more likely to have access to a larger variety of high-quality inputs. Trade policies such as import and export approvals, harmoniza- tion of standards, and tariff and non-tariff measures are import- ant to lowering barriers for Indonesian firms to enter, stay, and be competitive in producing and exporting green goods. To stimulate non-exporters to engage in exports, reducing foreign market entry costs will be more effective. This includes addressing challenges such as tariffs for products that still have high tariffs, harmoniza- tion of standards, export approval processes, access to imported in- puts through addressing non-tariff measures such as pre-shipment inspection (surveyor report), and customs procedures. To stimulate existing exporters to export more to their established trade partners, lowering bilateral trade tariffs and non-tariff barriers would be more appropriate‒especially mutual recognition of standards and interna- tional harmonization of some standards in Indonesia. In addition to these behind the border steps, trade agreements may have a large impact by reducing information costs and unlocking export markets.27 27 Policy Note 3 explores in more detail the role of trade agreements in the climate change agenda. P. 4 8 Keeping the costs of environmental goods and services low, in- cluding access to critical skills and technologies, is not only a way of ensuring competitiveness, but also of making cleaner practices more accessible and widespread, including for domestic firms. An enabling environment for firms to import and export green goods and environmental services could benefit both domestic importers and exporters and non-traders. Ensuring access to green goods imports would also enable greater competitiveness in green goods exports for Indonesian firms. GVC firms tend to have lower export market exit rates because of their embeddedness in specific segments of the international production chain and close collaboration with GVC firms in other countries. Two-way traders can also use the contacts that their trade partners already have to obtain information and access to foreign markets. Such firms tend to have increased efficiency derived from purchasing intermediate inputs abroad which improves export performance (Bertrand 2011). As such, ensuring that firms can eas- ily import would also ensure that firms are exporting green goods efficiently. 03 P. 4 9 P.49–74 THE ROLE OF TRADE POLICIES IN INDONESIA’S GREEN TRANSITION P. 5 0 Introduction ligning trade policies with green develop- ment will be of crucial importance for Indone- A sia’s green transition and climate adaptation and mitigation plans. An enabling trade policy framework is needed to ensure that Indonesian companies and consumers have access to green and environmentally friendly goods, services, and cutting-edge technologies at competitive prices. In turn, this will help incentivize the private sector to scale up green activities and the adoption of green technologies, boost invest- ment and innovation in clean sectors and create green jobs. It will also encourage consumers to adopt more environmentally friendly consumption habits. With lower barriers on green and climate-friend- ly products and services, international trade can be a powerful tool for Indonesia’s climate change mitigation and adaptation efforts. Despite low average tariffs on imports of green goods and tech- nologies, burdensome and costly non-tariff measures (NTMs) pose a significant cost to green goods in Indonesia, and their compet- itiveness. At an average of 1.1 percent, Indonesia’s tariffs on green goods are generally low and also lower than aggregate average tariffs. Estimates, however, suggest that NTMs on green goods impose sig- nificant costs, equivalent to an average 20 percent tariff and higher than “non-green” goods. Among NTMs, import approvals, compliance with Indonesian national standards (Standar Nasional Indonesia: SNI), and pre-shipment inspections have a major impact on products critical to climate change adaptation and a worse impact than other countries in the region. Targeted NTM reforms are needed to ensure that discriminatory and costly NTMs are streamlined or eliminated. In addition, local content requirements (LCR), aimed at creating local manufacturing capacity, are particularly burdensome, espe- cially in the case of renewable energy and green technologies. For example, LCR regulations set the level of domestic components for solar modules at a minimum of 40 percent, contributing not only to distortions and efficiency losses but also, to date, the underde- velopment of the local solar industry. This is because, domestically P. 5 1 produced solar panels are more expensive, their efficiency is lower, and they are not suitable substitutes for solar panels that could be imported from foreign markets (Institute for Essential Services Re- form: IESR 2021). Similarly, stringent LCRs for electric vehicles (EVs) are unlikely to achieve their intended objective of developing Indone- sia’s EV industry and will instead delay its growth. Finally, LCRs act as barriers to international public procurement and as such reduce the attractiveness of major renewable energy sector public procurement projects. Of Indonesia’s 11 trade agreements, four contain environmental provisions and only two of these are (weakly) legally enforceable. Conversely, at the global level, close to 90 percent of trade agree- ments currently in force include some form of commitments con- cerning the environment. Of Indonesia’s trade agreements in force, only the ASEAN-Republic of Korea, ASEAN-Japan, Indonesia-Chile, and Indonesia-Japan agreements include environmental provisions. Of these, the Indonesia-Chile and ASEAN-Japan agreements include environmental provisions that could be (weakly) legally enforced. The inclusion of such provisions in trade agreements has been shown to mitigate their potential adverse environmental effects‒including de- forestation. Indonesia also ratified a trade agreement with countries of the European Free Trade Association (EFTA)28 in May 2021 which strengthens its certification and monitoring, reporting and verifica- tion (MRV) systems for the trade of sustainable palm oil. Although EFTA countries are a very small market for Indonesia (less than 0.5 percent of Indonesia’s imports and exports), the use of MRV in trade agreements could be scaled up. Indonesia is not one of the 46 members of the World Trade Organi- zation (WTO) engaged in plurilateral negotiations seeking to elimi- nate tariffs on green goods under the Environmental Goods Agree- ment (EGA). Indonesia also does not participate in the three recently launched multilateral initiatives aimed at tackling issues at the nexus between trade policy and climate change, namely the Trade and En- vironmental Sustainability Structured Discussions (TESSD), the In- formal Dialogue on Plastics Pollution and Sustainable Plastics Trade (IDP), and the Fossil Fuel Subsidy Reform (FFSR). Despite recent mo- mentum on trade-related environmental issues during the prepara- 28 Iceland, Liechtenstein, tion for the 12th WTO Ministerial Conference in December 2021, so Norway, and Switzerland. P. 5 2 far there has not been much progress on this agenda globally. In the early stages, however, Indonesia was one of the signatories of the Asia-Pacific Economic Cooperation (APEC) agreement in 2012 com- mitting to limit tariffs on 54 environmental goods (EGs) to a maximum of 5 percent. Other multilateral and plurilateral initiatives have so far been limited in terms of country participation, and negotiations were limited to reducing tariffs, not tackling significant NTMs and barriers affecting environmental services (de Melo and Solleder 2020). Results of simulations using a partial equilibrium trade model at the product level suggest that unilateral, regional, and multilateral liberalization of tariffs on green goods trade would have previously untapped benefits for Indonesia. First, unilateral liberalization of tariffs would boost the private sector’s access to cheaper and cut- ting-edge green goods and technologies, increase imports of green goods (especially of Cleaner or More Resources Efficient technologies and Natural Risk Management), and strengthen trade ties with import- ant trading partners such as the United States; Taiwan, China; Hong Kong SAR, China; and India. Second, regional liberalization of tariffs on green goods trade among APEC countries would create important “trade creation” effects with other participating countries and would benefit Indonesian exporters of green goods such as Energy Efficiency; Resource and Pollution Management; and Water Supply. Third, results also show that the opportunity costs of not participating in the WTO EGA could be significant for Indonesia‒not only in terms of lost export and import opportunities but also for being able to shape the content and course of negotiations in these different multilateral forums. Con- versely, liberalizing tariffs on green goods under the umbrella of the WTO EGA is estimated to boost Indonesia’s green goods exports by 1.1 percent (US$99 million) and imports by 1.2 percent (US$214 million). The rest of the note focuses on trade policy constraints to develop- ing Indonesia’s green competitiveness and diversification poten- tial. The first note takes stock of tariffs applied by Indonesia on imports and tariffs faced by exports of green goods; the second note looks at the landscape of NTMs affecting green goods imports and reports estimates of their ad valorem equivalents; the third note zooms in on environmental provisions in Indonesia’s existing free trade agree- ments; the fourth note quantifies the benefits of liberalizing trade in green goods; and the last note offers policy recommendations. P. 5 3 Tariffs on Green Goods and Technologies t an average of 1.1 percent,29 Indonesia’s tar- iffs on green goods are generally low and lower A than aggregate average tariffs (at 2 percent). These lower-than-average tariffs on green goods are mostly a result of green goods liberalization under the APEC agreement, under which Indonesia and other APEC countries30 committed to limiting tariffs on 54 EGs to a maximum of 5 percent. As such, Indonesia’s tariffs on green goods are consistent with global trends, with average tariffs on green goods being lower than average aggregate tariffs. Low average tariffs, however, hide some tariff peaks that still remain for several products and product categories. For ex- ample, while on the one hand imports of green products for Waste Management, Recycling and Remediation and Gas Flaring Emission Reduction benefit from close to zero average import tariffs (Figure 36), higher than average tariffs are applied on green goods categories such as Cleaner or More Resource Efficient Products (2.9 percent), Natural Risk Management (2.6 percent) and Environmentally Prefera- ble Products (1.7 percent). There are also more than 20 product lines with applied tariffs of more than 5 percent, among which the highest apply to imports of motor vehicles, undenatured ethyl alcohol and 29 All tariffs reported in this note were calculated using trade tanks, casks, and drums with tariffs above 20 percent. weighted averages. 30 APEC countries are Australia; Indonesia’s Most Favored Nation (MFN) tariffs31 on green goods im- Brunei Darussalam; Canada; ports remain high (6.1 percent), and there are several product lines Chile; China; Hong Kong SAR, China; Indonesia; Japan; Republic with tariff peaks of above 25 percent. MFN tariffs are the highest on of Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; green goods categories such as Cleaner or More Resource Efficient Peru; the Philippines; the Russian Federation; Singapore; Taiwan, Products (10 percent), Water Supply (9.5 percent), and Heat and En- China; Thailand; the United States ergy Management (8.2 percent) (Figure 38). There are several tariffs of America; and Vietnam. peaks that apply to imports of products such as motor vehicles, and 31 MFN tariffs are tariffs imposed on imports from other bicycles (including tricycles) with tariffs of 35-40 percent and over 25 members of the WTO, unless the country is part of a preferential percent, respectively. Participation in the WTO EGA would allow Indo- trade agreement. nesia to reduce these MFN tariffs and benefit from increased market 32 For a list of adaptation access for exports to other participating countries.32 and mitigation categorization of the green goods, see Table 4 in Appendix Three. P. 5 4 In terms of market access, Indonesia also faces relatively low av- erage tariffs (1.8 percent) on its exports of green goods in desti- nation markets. Among green goods categories, tariffs on Indone- sia’s exports of products for Natural Risk Management (6 percent), Cleaner or More Resource Efficient Products (3.2 percent), Energy Efficiency (2.9 percent), and Noise and Vibration Abatement (2.9 per- cent) are among the highest (Figure 37). There are also high tariffs of above 10 percent applied to Indonesia’s exports of products such as undenatured ethyl alcohol, motor vehicles for the transport of more than 10 persons, vapor-generating boilers (including hybrid boilers), and bicycles (including tricycles). Overall, however, tariffs on Indone- sia’s exports to major destination markets (EU, China, Japan, United States) are generally low but high tariffs reduce Indonesia’s exports to Pakistan, Argentina, and Brazil (Figure 39).33 33 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 liberalization of green goods. P. 5 5 FIG 36 INDONESIA’S AVERAGE TARIFFS ON GREEN GOODS IMPORTS 2019 AVERAGE APPLIED TARIFF ON GREEN GOODS IMPORTS WATER SUPPLY 1.4 WASTEWATER MANAGEMENT AND TREATMENT 1.3 WASTE MANAGEMENT RECYCLING, REMEDIATION 0.1 RESOURCES AND POLLUTION MANAGEMENT 1.1 RENEWABLE ENERGY 0.8 OTHERS 0.2 NOISE AND VIBRATION ABATEMENT 0.5 NATURAL RISK MANAGEMENT 2.6 NATURAL RESOURCES PROTECTION 0.5 MANAGEMENT OF SOLID AND HAZARDOUS WASTE 0.5 HEAT AND ENERGY MANAGEMENT 1.0 GAS FLAIRING EMISSION REDUCTION 0.4 ENVIRONMENTALLY PREFERABLE PRODUCTS 1.7 ENVIRONMENTAL MONITORING, ANALYSIS EQUIPMENT 1.2 ENERGY EFFICIENCY 0.4 ENVIRONMENTAL CONSUMPTION OF ENERGY TECHNOLOGIES 0.8 CLEANER OR MORE RESOURCE EFFICIENT PRODUCTS 2.9 CLEAN UP OR REMEDIATION OF SOIL AND WATER 0.5 AIR POLLUTION CONTROL 0.5 0 1 2 3 4 FIG 37 TARIFFS FACED BY INDONESIAN GREEN GOODS EXPORTS 2019 AVERAGE FACED TARIFF ON GREEN GOODS EXPORTS WATER SUPPLY 0.6 WASTEWATER MANAGEMENT AND TREATMENT 1.6 WASTE MANAGEMENT RECYCLING, REMEDIATION 0.9 RESOURCES AND POLLUTION MANAGEMENT 1.7 RENEWABLE ENERGY 1.2 OTHERS 0.5 NOISE AND VIBRATION ABATEMENT 2.9 NATURAL RISK MANAGEMENT 6.0 NATURAL RESOURCES PROTECTION 2.4 MANAGEMENT OF SOLID AND HAZARDOUS WASTE 1.4 HEAT AND ENERGY MANAGEMENT 1.4 GAS FLAIRING EMISSION REDUCTION 1.0 ENVIRONMENTALLY PREFERABLE PRODUCTS 1.8 ENVIRONMENTAL MONITORING, ANALYSIS EQUIPMENT 0.9 ENERGY EFFICIENCY 2.9 ENVIRONMENTAL CONSUMPTION OF ENERGY TECHNOLOGIES 1.7 CLEANER OR MORE RESOURCE EFFICIENT PRODUCTS 3.2 CLEAN UP OR REMEDIATION OF SOIL AND WATER 1.3 AIR POLLUTION CONTROL 2.1 0 2 4 6 8 P. 5 6 FIG 38 INDONESIA’S MFN TARIFFS ON GREEN GOODS IMPORTS 2019 AVERGAE MFN TARRIF ON GREEN GOODS IMPORTS WATER SUPPLY 9.5 WASTEWATER MANAGEMENT AND TREATMENT 6.8 WASTE MANAGEMENT RECYCLING, REMEDIATION 5.6 RESOURCES AND POLLUTION MANAGEMENT 7.2 RENEWABLE ENERGY 6.1 OTHERS 5.0 NOISE AND VIBRATION ABATEMENT 3.6 NATURAL RISK MANAGEMENT 5.0 NATURAL RESOURCES PROTECTION 7.1 MANAGEMENT OF SOLID AND HAZARDOUS WASTE 4.5 HEAT AND ENERGY MANAGEMENT 8.2 GAS FLAIRING EMISSION REDUCTION 4.3 ENVIRONMENTALLY PREFERABLE PRODUCTS 4.9 ENVIRONMENTAL MONITORING, ANALYSIS EQUIPMENT 4.8 ENERGY EFFICIENCY 8.1 ENVIRONMENTAL CONSUMPTION OF ENERGY TECHNOLOGIES 5.0 CLEANER OR MORE RESOURCE EFFICIENT PRODUCTS 10.0 CLEAN UP OR REMEDIATION OF SOIL AND WATER 4.3 AIR POLLUTION CONTROL 4.9 0 2 4 6 8 10 12 FIG 39 AVERAGE TARIFFS FACED BY INDONESIAN GREEN GOODS IN MAJOR EXPORT MARKETS 2019 1.2 1 EU GREEN GOODS EXPORTS (US$ MILLION) CHN 0.8 JPN USA 0.6 0.4 KOR IND MYS KAZ 0.2 TWN AUS GBR BRA MEX TUR CAN BGD NZL ARE ARG PAK 0 0 5 10 15 20 AVERAGE TARIFF FACED BY GREEN GOODS EXPORT (PERCENT) Source: Figures 36-39 World Bank staff calculations based on the World Bank WITS database. P. 5 7 Non-Tariff Measures (NTMS) Affecting Green Goods and Technologies espite low tariffs, a high incidence of NTMs on imports of green goods and technologies pre- D vails in Indonesia. In 2020, there were over 40 NTMs applied to imports of green goods out of over 60 NTMs applied to all imports into Indo- nesia.34 The bulk of these are technical barriers to trade (TBT) (18 percent in 2020),35 followed by sanitary or phytosanitary (SPS) measures (12 percent) (Figure 40).36 With the exception of quantity controls (QC) and inspection measures, NTMs applied to imports of green goods 34 For NTMs, we use the most recently updated database on NTM have increased over the years. The more pronounced increase in measures from the World Bank Jakarta (see Cali and Montfaucon SPS measures may be associated with an increasing preference for 2021 for details). This database quality products as a country’s income rises (Munadi 2019). More contains information on NTMs at the three-digits level of the MAST generally, however, the increase in NTMs applied on green goods is NTM classification for all existing regulations for Indonesia at HS10 consistent with Indonesia’s increasing incidence of NTMs applied to level. The database is novel and time varying at a monthly level, and all imports (Cali and Montfaucon 2021). The measure which affects spans from 2008 to 2020. the highest share of green goods imports is traceability of informa- 35 These are measures tion requirements (a TBT measure), affecting 27 percent of imports referring to technical regulations, and procedures for assessment in 2020, closely followed by pre-shipment inspections and import ap- of conformity with technical regulations and standards. provals (Figure 41). 36 These are measures that Between 2009-18, Indonesia submitted 46 environment-related are applied to protect human/ animal life from risks arising from NTM notifications to the WTO. The majority of these were related additives, contaminants, toxins, or disease-causing organisms in their to sustainable agriculture management, the implementation of mul- food; to protect human life from plant- or animal-carried diseases; tilateral environmental agreements (MEAs) and the management of to protect animal or plant life from pests, diseases, or disease-causing chemical, toxic, and hazardous substances. Among types of mea- organisms; to prevent or limit other sures, these NTMs fall mostly under technical regulations, import damage to a country from the entry, establishment or spread of licenses, and conformity assessments and pertain to agriculture, pests; and to protect biodiversity. These include measures taken to manufacturing, and chemicals. protect the health of fish and wild fauna, as well as of forests and wild flora. Note that measures for To estimate the costs and distortedness of NTMs on green goods environmental protection (other trade, a two-step estimation method is used. The rationale for the than as defined above), to protect consumer interests, or for the two-step estimation is that trade policy affects both the trade vol- welfare of animals are not covered by SPS. ume and price of green goods. The first step is to estimate how trade P. 5 8 volumes adjust in the presence of a wide variety of NTMs and im- plicitly the price effects on imports and import demand. In a second step, the change in the domestic price of a product in response to a change in NTMs (that is, the ad valorem equivalent (AVE) of NTMs) is calculated. Finally, a unique AVE for each NTM affecting green goods is derived by taking the weighted average of product-specific AVE for each NTM. The import share of each product relative to all products exposed to that NTM is used as weight. Estimates show that in addition to their high incidence, NTMs on green goods are burdensome and distortive, with tariff equivalents that are much higher than for other products (non-green goods). Estimations of the tariff equivalent of NTMs on green goods reveals that most NTMs impose significant costs, equivalent on average to a 20 percent tariff, compared to only 12 percent on other products. Among NTMs, SPS measures are shown to have the highest tariff equivalent of 147 percent, while TBTs are estimated to impose a bur- den equivalent to a tariff of 26 percent, compared to only 9 percent for other products. Among TBT measures, tolerance limits and pack- aging requirements pose the highest cost on imports and among SPS, special authorization requirements are the most burdensome. While the majority of SPS measures are applied to protect human, animal or plant life or health, these regulations can be implemented more ef- fectively, reducing their costs. For TBT measures, requirements such as labelling, packaging, and product identification, as well as the pro- hibition of the use of certain substances and of repaired or used products also pose very high costs. Among the most affected by NTMs are green products and tech- nologies critical for climate change mitigation efforts, especial- ly in terms of the energy transition. In most cases, various NTMs are applied to the same products at the same time, compounding the compliance cost of NTMs. This is evident for products used for resources and pollution management,37 where 10 different sets of regulations are applied, each adding up to very high ad valorem tariff equivalents for these products (Figure 42). Similarly, products used for Air Pollution Control, Gas Flaring Emission Reduction, and Effi- cient Consumption of Energy Technologies and Carbon Capture and 37 Agriculture and land use Storage (ECETCCS), are affected by multiple NTMs at a time and, transition/natural resource management that are important for therefore, have particularly high costs compounding to over 200 per- mitigation efforts. P. 5 9 cent ad valorem tariffs. This shows the most affected products in both number and tariff-equivalent costs but there are more than 13 NTMs and trade in all green products is adversely affected by NTMs. Not all NTMs are problematic and require reform, rather the key is identifying measures which impose an unnecessary burden, and negatively impact green trade. The focus is on measures that fulfill the three conditions underlying the breach of a key principle of WTO rules: (i) they discriminate against imports; (ii) they are not necessary to achieve a non-trade objective; and (iii) they are likely to impose sig- nificant costs on imports. Based on these conditions, previous World Bank research identified four trade reforms that Indonesia needs for competitiveness, export growth, and resilience of firms to shocks. These are: (i) pre-shipment inspection; (ii) restrictions on port of en- try of imports; (iii) mandatory certification with SNI; and (iv) import approval requirements. The results show that these NTMs that need reform are also detri- mental to green goods trade critical to the climate agenda‒result- ing in their increased imported cost and hindering their access to the Indonesian economy. Results show that pre-shipment inspec- tions, compliance with SNI, and import approvals are indeed costly to the access of green goods and technologies through imports (Fig- ure 43). For instance, the cost of SNI compliance is above 100 per- cent‒that is, US$1.00 for every US$1.00 of imported products used for Resource and Pollution Management‒and US$0.23 per US$1.00 for import approval compliance for these products. Reforming these NTMs would have a positive impact on firms’ access to green inputs. The impact of these NTMs is also worse in Indonesia compared to other countries in the region, suggesting lower implementation efficiency and higher compliance costs, thereby hampering Indo- nesia’s green transition and comparative competitiveness. Even when the same measures are applied to the same goods in differ- ent countries, the cost of the measures will differ, depending on how the measures are implemented‒which translates to the compliance cost to traders. This compliance cost is captured through the tariff ad valorem equivalent of NTMs. Further analysis reveals that when the same non-tariff measure is applied in other countries, the cost of these measures in Indonesia is significantly higher for green goods. For example, the cost of pre-shipment inspections of green goods are P. 6 0 18.6 percent higher in Indonesia and port of entry restrictions up to 17.5 percent (Figure 44).38 LCRs or “localization rules” are also often cited as distortive, es- pecially in the case of renewable energy and green technologies, and these policies have not achieved the desired result in other countries (World Economic Forum 2021). LCRs require firms to use a certain percentage of domestically produced goods or services and are among the fastest growing NTM measures applied worldwide.39 To comply with LCRs, firms are often required or incentivized to sub- stitute imported inputs for what may be more expensive and lower quality domestically produced ones, leading to increases in costs, loss of efficiency and competitiveness. LCRs are imposed by govern- ments with the objective of helping the development of local indus- tries but stringent and high minimum LCRs often act as a deterrent to their growth. Indeed, LCRs applied in other countries for the purpos- es of developing domestic productive capability of renewables have mostly led to increased costs.40 LCRs pose a major obstacle to the development of the renewable wind and solar industry in Indonesia. Despite significant potential to expand the use of wind and solar energy, their growth has been lag- ging, partially due to stringent LCRs. For example, LCR regulations41 set the level of domestic components for solar modules at 40 per- cent, contributing to the underdevelopment of the local industry as domestically produced solar panels are more expensive than import- ed ones and local production of solar panels is highly reliant on im- ported parts and components. The price of imported solar modules 38 Data for other countries from China ranges from US$0.25-0.37/Wp42 while the average price for import approval NTM was unavailable. of local solar modules is US$0.47/Wp (IESR 2019), implying that the 39 Link efficiency of local solar modules is also lower. 40 For example in Brazil, India, and South Africa as discussed in Stringent LCRs also apply to the EV industry in Indonesia, com- Bazilian et al. (2020). pensated by generous incentives to attract investors. For two- and 41 MoEMR Regulation No. three-wheeled EVs, a minimum local content of 40 percent and for 49/2018 on the Utilization of Roof Top Solar PV by PT. four-wheeled EVs a minimum 35 percent local content is currently Perusahaan Listrik Negara (PLN) and MoI Regulation No. 5/M-IND/ required. LCRs will be further raised to a minimum of 60 percent for PER/2/2017. two- or three-wheeled EVs produced between 2024 and 2025, and 80 42 The capacity of solar percent for those manufactured after 2026. For four-wheeled or more installation is measured in watt peak (Wp) which is the maximum EVs the LCR will be raised to 40 percent if manufactured during 2022- electrical capacity a solar cell can yield under ideal circumstances. 23, 60 percent during 2024-29, and 80 percent from 2030 onwards. P. 6 1 Developing and maximizing domestic linkages needs to be balanced with achieving international competitiveness, including through the use of competitively priced imported intermediates. The Indonesian Government is very keen to develop the domestic EV industry and, in addition to LCRs, it also introduced incentives to attract investors and stimulate growth of the local industry.43 For example, imports of parts and components are allowed if local suppliers do not have the capacity to produce these components. In addition, EV manufacturers who develop production facilities in Indonesia can import completely built-up EVs and are exempted from luxury goods tax.44 These initiatives are expected to jump-start sales of EVs in Indonesia. 43 PR No. 55/2019. 44 Government Regulation " Despite low tariffs, a high incidence of NTMs on imports No. 74/2021 and Ministry of Finance Regulation No. 141/  of green goods and technologies prevails in Indonesia." PMK.010/2021. FIG 40 NUMBER OF INDONESIA'S FIG 41 SHARE OF GREEN GOODS IMPORTS NTMS ON GREEN GOODS AND EXPORTS AFFECTED BY SPECIFIC NTMS 2020 EXPORT-RELATED MEASURES TRACEABILIT Y REQUIREMENTS 27% OTHER NON-AUTOMATIC LICENSING, QUOTAS, PROHIBITIONS & AMP; PRE-SHIPMENT INSPECTIONS 25% QUANTITY-CONTROL PRE-SHIPMENT INSPECTION AND OTHERS FORMALITIES IMPORT APPROVALS 24% TECHNICAL BARRIERS TO TRADE LABELLING REQUIREMENTS 12% SANITARY AND PHYTOSANITARY MEASURES TESTING REQUIREMENTS 8% 5 5 5 CERTIFICATION WITH 8% 5 5 NATIONAL STANDARDS 2 2 2 RECOMMENDATION 6% 2 2 LETTERS 4 4 4 3 3 5 5 CERTIFICATION REQUIREMENT 4% 4 2 2 2 2 2 3 4 2 2 PRODUCT REGISTRATION REQUIREMENT 3% 3 2 1 1 4 4 EXPORT TECHNICAL 2% 1 4 MEASURES, N.E.S. 1 3 3 3 2 2 2 2 2 2 PROHIBITION OF REPAIRED GOODS 2% 1 2 18 18 18 18 18 2 2 EXPORT QUOTAS 1% MARKING REQUIREMENTS 1% 17 17 15 16 16 16 13 14 PACKAGING REQUIREMENTS 1% RESTRICTED USE OF SUBSTANCES 1% 12 12 12 12 12 TOLERANCE LIMITS 1% 5 5 5 5 5 5 5 5 PROHIBITION FOR TBT REASONS 1% IMPORT BANS 1% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 P. 6 2 FIG 42 TARIFF EQUIVALENT OF SPECIFIC NTMS ON MOST AFFECTED EGS IMPORT ARRIVAL RESOURCES AND TOLERANCE LIMITS POLLUTION MANAGEMENT RESTRICTED USE O CERTAIN SUBSTANCES LABELLING REQUIREMENTS MANAGEMENT OF SOLID MARKING AND HAZARDOUS WASTE REQUIREMENTS AND RECYCLING SYSTEMS PACKAGING REQUIREMENTS COMPLIANCE WITH SNI HEAT AND ENERGY PRODUCT REGISTRATION/ MANAGEMENT APPROVAL REQUIREMENT TESTING REQUIREMENTS CERTIFICATION GAS FLAIRING REQUIREMENT EMISSSION REDUCTION TRACEABILIT Y REQUIREMENT PRE-SHIPMENT EFFICIENT CONSUMPTION INSPECTION OF ENERGY TECHNOLOGIES PROHIBITION OF USED, AND CARBON CAPTURE REPAIRED OR AND STORAGE REMANUFACTURED GOODS CLEANER OR MORE RESOURCES EFFICIENT TECHNOLOGIES AND PRODUCTS AIR POLLUTION CONTROL (MITIGATION) 0% 100% 200% 300% 400% FIG 43 TARIFF EQUIVALENTS OF MOST PROBLEMATIC NTMS (PERCENT) IMPORT APPROVALS SNI PRE-SHIPMENT INSPECTIONS 100.0 94.4 27.2 30.4 23.0 15.9 4.3 0.6 0.6 MANAGEMENT OF SOLID RESOURCES AND GAS FLAIRING NATURAL RISK AIR POLLUTION CLEANER OR MORE AND HAZARDOUS POLLUTION EMISSION REDUCTION MANGEMENT CONTROL (MITIGATION) RESOURCE EFFICIENT WASTE AND RECYCLING MANAGEMENT* (MITIGATION) (ADAPTATION) TECHNOLOGIES AND SYSTEMS (MITIGATION) (MITIGATION) PRODUCTS (MITIGATION) Source: Fig 40, 41, 42, and 43 are World Bank staff estimates based on GTN data and World Bank NTM data for Indonesia available at World Bank data catalog (link) Fig 42 and Fig 43 sample period is 2008-2018. P. 6 3 FIG 44 TARIFF EQUIVALENT OF MOST PROBLEMATIC NTMS ON GREEN GOODS RELATIVE TO EAP (AVE DIFFERENCE) PSI 18.6 PORT OF ENTRY 17.5 SNI 3.3 Note: This chart plots the ad-valorem equivalent for green goods for Indonesia relative to other EA countries. SNI result is not statistically significant. Countries included: Brunei Darussalam, Cambodia, China, Indonesia, South Korea, Lao PDR, Malaysia, Myanmar, Philippines, Thailand, and Vietnam. Source: World bank staff estimates based on ERIA-UNCTAD data for ASEAN countries Environmental Provisions in Indonesia’s Trade Agreements he inclusion of environmental provisions in T preferential trade agreements (PTAs) is not a recent or an uncommon phenomenon‒close to 90 percent of trade agreements currently in force include some form of commitments concerning the environment. Prior to the 1990s, however, environmental provisions in PTAs did not establish any binding obligation for environmental protection. Rather, these provisions took the form of environmental exception clauses to trade policy commitments‒such as those to protect the conservation of natural resources. This progressively changed in the 1990s and, with much stronger emphasis, in the late 2000s when PTAs increasingly included commitments to environmental protection. P. 6 4 In contrast to global trends, among Indonesia’s 11 trade agree- ments only four contain environmental provisions, of which none are legally enforceable. The ASEAN-Republic of Korea, ASEAN-Ja- pan, Indonesia-Chile, and Indonesia-Japan trade agreement all in- clude some form of environmental provisions; however, these are not legally enforceable (Table 1). Of these, only the Indonesia-Chile and ASEAN-Japan agreements include environmental provisions with weak legal enforceability. For example, in the Indonesia-Chile trade agreement that went into effect in August 2019, the two countries commit to “effectively enforce environmental laws and not weaken or reduce levels of environmental protection with the sole intention to encourage investment or to seek or to enhance a competitive trade advantage.” In addition, the parties commit to ensure that “environ- mental laws, regulations and policies not be used for trade protec- tionist purposes” and that they will cooperate to “prevent or reduce the contamination, and degradation of ecosystems and natural re- sources through developing and endorsing special programs and projects for the transfer of knowledge and technology.”45 In May 2021, Indonesia ratified a trade agreement with the EFTA states that strengthens its certification and MRV systems for trade of sustainable palm oil. It is a mechanism through which the implicit carbon pricing from EFTA tariffs on Indonesian palm oil varies accord- ing to the carbon intensity of Indonesian palm oil production‒as cap- tured by the certification system. In the agreement, EFTA countries will then use this information to vary their tariff rate on palm oil im- ported from Indonesia. This agreement presents a possible solution for carbon pricing for land uses. This is among the first carbon border adjustment mechanisms (CBAM) for land uses. Although a very small market for Indonesia (for instance Switzerland has less than 0.5 per- cent share of each of Indonesia’s imports and exports), the design could scale. There is evidence that trade agreements with environ- mental provisions do indeed mitigate deforestation (Box 1) and this could be a positive step towards reducing Indonesia’s high carbon content of trade.46 In the past, similar policies such as the EU’s For- est Law Enforcement, Governance and Trade (FLEGT) worked well, as Indonesia was the first country to export “verified legal” timber to the 45 Indonesia-Chile EU through this licensing system for the certification of wood. Comprehensive Economic Association Agreement. 46 See Policy Note 2. P. 6 5 TABLE 1 ENVIRONMENTAL PROVISIONS IN INDONESIA’S TRADE AGREEMENTS Environmental provision Environmental provision Agreement is mentioned but is not is mentioned and has legally enforceable? weak legal enforceability? ASEAN-Hong Kong, China No No ASEAN Free Trade Area No No ASEAN-Australia-New Zealand No No ASEAN-India No No ASEAN-Republic of Korea Yes No ASEAN-China No No ASEAN-Japan Yes Yes Indonesia-Chile Yes Yes Indonesia-Australia No No Indonesia-Pakistan No No Indonesia-Japan Yes No Total Share 36% 18% Source: World Bank Deep Trade Agreements database. BOX 1 TRADE AGREEMENTS WITH ENVIRONMENTAL PROVISIONS MITIGATE DEFORESTATION D eforestation is one of the most pressing environmental challenges of the modern era, and very relevant for Indone- sia, given that the largest share of carbon emissions orig- inates from changes in land use.47 Globally, the extent of forest loss over the past 30 years has been unprecedented: the world lost an approximately net 178 million hectares of forest area be- tween 1990 and 2020 (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. 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. 47 Its emissions stem from deforestation and peatland 2020). megafires and, to a lesser extent, the burning of fossil fuels for energy. From 2000 to 2015, Results show that there are large and significant net increases Indonesia lost an average of 498,000 hectares of forest each in annual forest loss following the entry into force of PTAs with- year–making it the world’s second out environmental provisions (23 percent). Results, however, biggest deforester after Brazil (link). P. 6 6 also show that the inclusion of environmental provisions entirely offsets the rise in forest loss (Figure 45). 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 for- estry and biodiversity provisions in PTAs mitigate environmental damage. It is found that PTAs without these environmental provi- sions lead to an average 5 percent increase in the annual land area harvested, while there is no evidence of an increase in ag- ricultural extensification following PTAs that include these provi- sions. Trade liberalization also leads to increases in agricultural output (as measured in tonnes harvested) that is partially, but not completely, offset by the inclusion of forestry and biodiversity pro- visions (Figure 46). This suggests that environmental provisions may limit agricultural land expansion, but not intensification. Net increases in agricultural exports are also lower in PTAs with envi- ronmental provisions, but not entirely offset. FIG 45 CHANGE IN AVERAGE ANNUAL FOREST LOSS AFTER PTA ENACTMENT 0.3 FOREST LOSS (%) 0.2 0.1 0.0 -0.1 W/O PROVISIONS W/ PROVISIONS Source: World Bank staff calculations. CHANGE IN AREA CHANGE IN AMOUNT CHANGE IN TOTAL CULTIVATED PRODUCED AGRICULTURAL EXPORTS -0.1 P. 6 7 W/O PROVISIONS W/ PROVISIONS FIG 46 CHANGES IN AGRICULTURAL LAND USE, PRODUCTION AND EXPORTS CHANGE IN AREA CHANGE IN AMOUNT CHANGE IN TOTAL CULTIVATED PRODUCED AGRICULTURAL EXPORTS 0.25 0.20 0.15 % INCREASE 0.10 0.005 0.00 -0.005 HA W/O HA W/ TON W/O TON W/ EX W/O EX W/ Source: World Bank staff calculations. The effectiveness of forest-related PTA provisions at limiting de- forestation 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 while 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 ki- lometers of deforestation from 2003–14 which is greater than the entire forested area of countries like Belgium or Ireland. 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. P. 6 8 The Untapped Benefits of Liberalizing Green Goods Trade o estimate the effects of potential liberaliza- tion scenarios of tariffs on green goods trade T for Indonesia, a partial equilibrium trade model is used. The modeling framework un- derlying the simulations is a modified version of the Global Simulation Analysis Model (GSIM) (Francois and Hall 2009). The model is calibrat- ed on green goods trade data at the HS6 prod- uct level for all bilateral country pairs, explicitly representing glob- al export and import flows for 358 HS6 level green products, with more than 401,000 observations. The model is specified based on the assumption of national product differentiation‒that is, Armington (1969) preferences, according to which goods produced by different countries are imperfect substitutes, and thereby allowing for two-way trade between countries exporting the same goods. The elasticity of substitution is held equal and constant across products from differ- ent sources, while the elasticity of demand in aggregate is also con- stant. Import demand and export supply equations are cleared by a market price that is directly affected by tariffs. P. 6 9 Four increasingly more ambitious scenarios are considered, rep- resenting Indonesia’s unilateral, regional, and multilateral liberal- ization of tariffs on green goods trade. The scenarios are as follows. Scenario One assumes the full unilateral liberalization of tariffs on green goods imports by Indonesia; Scenario Two represents the full regional liberalization of tariffs on green goods among APEC coun- tries; Scenario Three depicts the implementation of the WTO EGA without Indonesia’s participation; finally, Scenario Four assumes the full liberalization of tariffs on green goods under the WTO EGA with Indonesia’s participation. Under Scenario One, unilateral liberalization of tariffs on green goods by Indonesia would boost the competitiveness of Indone- sian firms that already use these as inputs into their production by boosting firm’s access to cheaper environmental technologies. This could, in turn, incentivize the private sector’s transition to the use of green technologies. Overall, imports of green goods are es- timated to increase by 3 percent or US$521 million. The overall ef- fects are muted as Indonesia already applies low tariffs on imports of green goods. Imports of Cleaner or More Resources Efficient Technol- ogies and Natural Risk Management are estimated to increase the most‒by 8 percent and 7.4 percent, respectively (Figure 47). On the one hand, this unilateral liberalization would boost Indonesia’s trade with important partners such as the United States (42 percent), Tai- wan, China (49 percent), and India (22 percent), while at the same time slightly reduce imports from countries with already low tariffs on green goods such as Japan, China, Singapore, and others in the EAP region. Scenario Two (full regional liberalization of tariffs on green goods trade among APEC countries) is estimated to boost Indonesia’s ex- ports of green goods by 0.2 percent or US$15 million and imports by 1.2 percent or US$214 million. While the increase in imports un- der this scenario is more muted than under unilateral liberalization, regional APEC liberalization of green goods trade would ensure Indo- nesia not only access to lower prices and quality imported environ- mental technologies but also improved market access for its exports. Indonesian exporters of green goods such as for Energy Efficiency; Resource and Pollution Management; and Water Supply are estimat- ed to benefit the most, with an increase in exports by 4.3 percent, P. 7 0 1.7 percent, and 1.6 percent, respectively (Figure 48). Conversely, imports of Natural Risk Management and Cleaner or More Resource Efficient products increase the most. Regional liberalization would benefit trade with the United States; Hong Kong SAR, China; Canada; and Mexico the most. The implementation of the WTO EGA without Indonesia’s partici- pation (Scenario Three) would hurt not only Indonesian exporters but also importers of green goods. Due to trade diversion effects, Indonesia’s exports and imports of green goods decline by 0.3 per- cent (US$29 million) and 0.8 percent (US$129 million), respectively. Except for exports of green goods for Water Supply; Noise and Vibra- tion Abatement; Air Pollution Control and Natural Risk Management, all of Indonesia’s export and imports are estimated to be hurt (Fig- ure 49). Interestingly, results also show that, while Indonesia’s trade with non-participating countries increases (for example, Thailand, Vietnam, and India), these increases are outweighed by the contrac- tion in trade with major trading partners such as the United States, Japan, and China. By joining the WTO EGA (Scenario Four), exports would significant- ly expand the benefits of participation in a regional APEC liberal- ization and boost Indonesia’s green goods exports by 1.1 percent (US$99 million) and imports by 1.2 percent (US$214 million). On the one hand, eliminating remaining tariffs on green goods would boost imports of products categories such as Natural Risk Manage- ment; Cleaner or More Resource Efficient Products; and Environmen- tally Preferable Products by 6.2 percent, 4.6 percent, and 2 percent, respectively (Figure 50). Conversely, improved market access to par- ticipating countries markets would benefit exporters of green goods such as Energy Efficiency; Cleaner or More Resource Efficient Prod- ucts; and Natural Resource Protection. There are additional benefits from freeing up trade in green goods not captured in this analysis, including in terms of promoting com- petition and innovation within Indonesia. This analysis provides the impact of tariff liberalization using largely static and of partial equilibrium assumptions. There are additional benefits from freeing up trade not only through tariffs but also crucially, NTMs on environmental products and technologies as demonstrated earlier. In addition, environmental products must be well-defined for the measures to be effective. P. 7 1 FIG 47 THE IMPACT OF UNILATERAL LIBERALIZATION OF GREEN GOODS IMPORTS (PERCENT CHANGE) (SCENARIO ONE) IMPORTS WATER SUPPLY WASTEWATER MANAGEMENT AND TREATMENT WASTE MANAGEMENT RECYCLING, REMEDIATION RESOURCES AND POLLUTION MANAGEMENT RENEWABLE ENERGY OTHERS NOISE AND VIBRATION ABATEMENT NATURAL RISK MANAGEMENT NATURAL RESOURCES 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 2 4 6 8 FIG 48 THE IMPACT OF REGIONAL LIBERALIZATION OF GREEN GOODS TRADE AMONG APEC COUNTRIES (PERCENT CHANGE) (SCENARIO TWO) IMPORTS EXPORTS WATER SUPPLY WASTEWATER MANAGEMENT AND TREATMENT WASTE MANAGEMENT RECYCLING, REMEDIATION RESOURCES AND POLLUTION MANAGEMENT RENEWABLE ENERGY OTHERS NOISE AND VIBRATION ABATEMENT NATURAL RISK MANAGEMENT NATURAL RESOURCES 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 P. 7 2 FIG 49 THE IMPACTS OF THE WTO EGA WITHOUT INDONESIA ON GREEN GOODS TRADE (PERCENT CHANGE) (SCENARIO THREE) IMPORTS EXPORTS WATER SUPPLY WASTEWATER MANAGEMENT AND TREATMENT WASTE MANAGEMENT RECYCLING, REMEDIATION RESOURCES AND POLLUTION MANAGEMENT RENEWABLE ENERGY OTHERS NOISE AND VIBRATION ABATEMENT NATURAL RISK MANAGEMENT NATURAL RESOURCES PROTECTION MANAGEMENT OF SOLID AND HAZARDOUS WASTE HEAT AND ENERGY MANAGEMENT GAS FLAIRING EMISSION REDUCTION ENVIRONMENTALLY PREFERABLE PRODUCTS ENVIRONMENTAL MONITORING, ANALYSIS EQUIPMENT ENERGY EFFICIENCY ENVIRONMENTAL CONSUMPTION OF ENERGY TECHNOLOGIES CLEANER OR MORE RESOURCE EFFICIENT PRODUCTS CLEAN UP OR REMEDIATION OF SOIL AND WATER AIR POLLUTION CONTROL -3 -2 -1 0 1 2 FIG 50 THE IMPACTS OF THE WTO EGA WITH INDONESIA ON GREEN GOODS TRADE (PERCENT CHANGE) (SCENARIO FOUR) IMPORTS EXPORTS WATER SUPPLY WASTEWATER MANAGEMENT AND TREATMENT WASTE MANAGEMENT RECYCLING, REMEDIATION RESOURCES AND POLLUTION MANAGEMENT RENEWABLE ENERGY OTHERS NOISE AND VIBRATION ABATEMENT NATURAL RISK MANAGEMENT NATURAL RESOURCES PROTECTION MANAGEMENT OF SOLID AND HAZARDOUS WASTE HEAT AND ENERGY MANAGEMENT GAS FLAIRING EMISSION REDUCTION ENVIRONMENTALLY PREFERABLE PRODUCTS ENVIRONMENTAL MONITORING, ANALYSIS EQUIPMENT ENERGY EFFICIENCY ENVIRONMENTAL 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: Figure 47-50 World Bank staff calculations using WITS and GTN data. P. 7 3 Conclusions and Recommendations his analysis focuses on the role of tariff and non-tariff measures is facilitating Indonesia’s T green transition through access to foreign environmental goods and technologies. The findings suggest that non-tariff measures pose significant costs on green goods trade and sup- ply in Indonesia, with specific measures such as pre-shipment inspections, port of entry require- ments and compliance with national standards being more costly compared to other countries. The analysis also finds that unilateral, regional, and multilateral liberalization of tariffs on green goods trade would have previously untapped benefits for Indonesia. The recommendations emerging from the findings are as follows: Fully liberalize remaining tariffs on imports of green goods, includ- ing through multilateral participation. Reducing import tariffs on green goods will reduce their price and boost access to lower-cost and more energy-efficient technologies. This may be particularly im- portant for industries that must comply with climate change mitiga- tion policies. Streamline NTMs on green goods and eliminate unnecessary ones. Specific NTMs could be implemented more cost-effectively, such as import approvals and compliance with SNI. Some NTMs that are re- dundant could be removed entirely, such as pre-shipment inspec- tions and port of entry restrictions. Over time, more NTM measures could be entirely phased out as a robust National Single Window and integrated risk management system would make some measures ob- solete while improving remaining NTMs. Harmonize existing local standards with international ones and de- velop new standards that are aligned with international standards 48 See Policy Note 2: Opportunities and Challenges of and practices. The majority of SNI are not aligned with international Green Goods Trade for Firms in Indonesia where firms trading in product standards.48 As a result, these are among the most distortive green goods reported a lack of harmonization with international types of NTMs, imposing significant additional costs on exporters and standards as a key challenge. P. 74 increase the time required to bring a green goods to market. Working toward a harmonization of product standards across markets could be a supportive policy to encourage not only imports of green goods, but also boost Indonesian exports in new export markets with com- parable standards. Reduce the stringency of LCR. LCRs are prohibited under WTO law as they violate several WTO provisions including the national treat- ment principle. High LCRs prior to establishment of a market large enough to achieve domestic manufacturing economies of scale will not achieve the desired result. The market must be allowed to devel- op to a point where domestic production could achieve the econo- mies of scale required to keep prices affordable. Include enforceable environmental provisions in trade agreements and participate in plurilateral and multilateral trade policy initia- tives on green goods. On the one hand, environmental provisions and commitments will need to become more detailed in terms of scope and ambition. On the other hand, direct participation in mul- tilateral and plurilateral environment-related trade policy initiatives would not only allow Indonesian exporters to benefit from improved market access in destination markets but would also give Indonesia a seat at the table to shape the content and course of discussions. Strengthen the mutual complementarity between trade and cli- mate policies. Among others, this could include more and better col- laboration across countries on the design, use, and implementation of environmental provisions in trade agreements. P. 7 5 Appendix Table 2: Top Environmental One Goods, Examples and Climate Change/Environmental Role Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Air Pollution Control Compressors used for automotive air conditioners. 1 (Mitigation) Cylinder block; crank case for vehicle of Chapter 87, other 2 For example: Parts of vacuum than of heading 87.01 & 87.11. pumps, compressors, fans, blowers, hoods. Part of vehicle of Chapter 87, other than carburetor, 3 piston, cylinder, other than of heading 87.01 & 87.11. Used for: (i) air handling Cylinder liner with internal diameter <= 50mm or <= 155 4 equipment; (ii) transport or mm for marine propulsion engine of a power > 22.38 kW. extraction of polluted air, corrosive gases, or dust; and Parts of marine propulsion engine of a power > 22.38 kW, 5 (iii) transport or extraction other than piston & cylinder. of polluted air and corrosive gases or dust. Compressor exclusively for refrigerating equip, air, gas 6 in oil drill operation, automotive AC & sealed unit for AC machine. Other automatic service-vending machines, not electrically 7 operated. Machinery, plant & equipment other than for making hot 8 drink/cooking/heating food, electrically operated. Other automatic service-vending machines, electrically 9 operated. Laminar airflow cabinets fitted with filters in horizontal 10 side > 120 cm. Clean Up or Remediation of Remote control apparatus, other than radio remote control 1 Soil and Water (Mitigation, apparatus. Adaptation) Other equipment/machine for removal of dust particles 2 For example: Water filtering & curing material by UV light for manufacturing of printed or purifying machinery or circuit boards. apparatus. Environmental benefit: Used to filter and Other floating structures. 3 purify water for a variety of Smart cards. 4 environmental, industrial, and scientific applications, Filtering/purifying machine & apparatus, other than for 5 including water treatment medical/surgical/laboratory, sugar manufacture & oil plants and wastewater drilling operation. treatment facilities. Purifying machinery and apparatus of a capacity <= 500 6 Other Environmental l/hfor domestic use. categories: Efficient Consumption of Energy Light-emitting diode (LED) lamps. 7 Technologies and Carbon Capture and Storage Centrifuge machinery other than used for sugar 8 (ECETCCS): Wastewater manufacture. Management and Potable Filtering or purifying machinery and apparatus for water of 9 Water Treatment. a capacity > 500 l/h, electrically operated. Oil filter other than for medical/surgical/laboratory use, 10 sugar manufacture & oil drilling operations. P. 7 6 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Cleaner or More Resource Other motorcycles (including mopeds). 1 Efficient Technologies and Products (Mitigation) Primary cells and primary lithium batteries. 2 For example: Railway/tramway Chain wheels and cranks; other parts for bicycles 3 rails, iron, or steel. designed to be used by children. Other bicycles not motorized. 4 Environmental benefit: Cleaner or more resource efficient Other primary cells and primary batteries not zinc-carbon, 5 technologies and products. having an external volume > 300 cm3. Environmental categories: Electrical machines, domestic other than vacuum cleaner, 6 Cleaner or more resource- floor polisher, grinder, mixer, juice extractor, kitchen waste efficient technologies and disposers. products. Other primary cells and primary batteries zinc-carbon, 7 having an external volume <= 300 cm3. Railway/tramway passenger coach & other special 8 purpose railway or tramway coaches not self-propelled. Brakes and parts thereof of motorcycles (incl mopeds). 9 Self-propelled railway or tramway coaches, van, and truck 10 powered from internal source of electricity. Efficient Consumption of Static converters other than UPS, battery chargers, 1 Energy Technologies and inverters and rectifiers. Carbon Capture and Storage (ECETCCS) (Mitigation) Part of other gas turbines. 2 For example: Parts of gas Cylinder block; crank case for vehicle of Chapter 87, other 3 turbine engines except turbo- than of heading 87.01 & 87.11. jet/prop. Part of vehicle of Chapter 87, other than carburetor, piston 4 & cylinder, excluding heading 87.01 & 87.11. Environmental benefit: Gas turbines for electrical power Cylinder liner with <= 50 mm internal diameter <= 155 5 generation from recovered mm for marine propulsion engine of a power > 22.38 kW. landfill gas, coal mine vent gas, or biogas (clean energy Other parts undefined of gasoline engine for other 6 system). vehicles of chapter 87, other than 87.01 or 87.11. Other environmental Liquid dielectric transformers, power capacity >30.000 7 categories: Renewable energy. kVA. Uninterruptible power supplies (UPS), not automatic data 8 processing machines & units thereof, telecommunications apparatus. Parts of marine propulsion engine of a power > 22.38 kW, 9 other than piston & cylinder. Other parts undefined of gasoline engine for vehicles of 10 heading 87.11. P. 7 7 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Energy Efficiency (Mitigation) Pilot lamp with fitting for electro-thermic domestic 1 applications of heading 85.16. For example: Electric lamps, lighting fittings. Other lighting fittings. 2 Environmental benefit: Other fluorescent lamps and lighting fittings other than for 3 Compared with the operating rooms. conventional fluorescent Lamps of electric table, desk, bedside/ floor-standing 4 or incandescent lamps, lamps. they are long life, low power consumption, energy saving Fluorescent lamps and lighting fittings. 5 and no toxic substance (mercury free). Other exterior lighting. 6 Other environmental Searchlights. 7 categories: Heat and energy management. Other electric lamps, of a kind used for lighting public 8 open space/thoroughfares. Other electric lamps of spotlights. 9 AC machinery of cooling capacity >21.10kW & air flow rate 10 >67.96m3/min, incorporating refrigerating & reversible heat pump, in marine. Environmental Monitoring, Other instruments & apparatus other than exposure 1 Analysis and Assessment meters, electrically operated. Equipment (Broader Environmental Protection) Other automatic regulating/controlling instruments & 2 applications, not electrically operated. For example: Monocular, telescopes, etc. Other instruments, appliances and machines, other cable 3 tester. Environmental benefit: Water meters. 4 Applications in environmental monitoring, analysis. And Thermometers & pyrometers, electrically operated, other 5 assessment equipment. temperature gauges for motor vehicles. Other optical instruments and appliances for other 6 purposes. Microtomes, not electrically operated. 7 Thermostats, electrically operated. 8 Parts & accessories (not specified/incl elsewhere in this 9 chapter) for machines, applications of Chapter 90 for electrically operated equipment. Thermometers & pyrometers, elect operated, temperature 10 gauges for motor vehicles. P. 7 8 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Environmentally Preferable Assembled flooring panels other than of bamboo or with 1 Products based on End-Use at least the top layer (wear layer) of bamboo, multilayer. or Disposal Characteristics (Broader Environmental Other assembled flooring panels. 2 Protection) Coconut fibers (coir) and abaca fibers, other coconut 3 For example: Vegetable fiber, fibers. processed not spun, tow & Gas turbines of a power > 5,000 kW. 4 waste. Coconut fibers (coir) and abaca fibers, coconut fibers, raw. 5 Environmental benefit: More biodegradable than synthetic Twine, cordage, ropes, cables, other than of jute/other 6 fiber alternatives and made textile bast fibers of head 53.03. from a renewable resource. Vegetable textile fibers other than 5305.00.10-23. 7 Sacks and bags, of a kind used for the packing of 8 goods, new, of other textile bast fibers of heading 53.03, excluding jute. Sisal & other textile fibers of the genus agave, tow & waste 9 of these fibers. Gas turbines of a power <= 5,000 kW. 10 Gas Flaring Emission Other automatic regulating/controlling instruments & 1 Reduction (Mitigation) applications, not electrically operated. For example: Industrial Machinery, plant & equipment, other than for making hot 2 furnace, oven, incinerator non- drink/cooking/heating food, electrically operated. electric. Thermostats, electrically operated. 3 Environmental benefit: Parts & accessories (not specified/incl elsewhere in this 4 Used to destroy solid and chapter) for machines, appliances of Chapter 90 for hazardous wastes. Catalytic electrically operated equipment. incinerators are designed for the destruction of pollutants Filtering/purifying machinery & apparatus for gases. 5 by heating polluted air and oxidation of organic Instrument & apparatus other than automatic regulating 6 components. voltage units (stabilizers), electrically operated. Other environmental Part of evaporator/condenser for AC machine for motor 7 categories: Several. vehicle with a cooling capacity <= 21.10 kW. Parts & accessories for electrically operated instruments 8 & apparatus, measure/check the flow level, pressure. Part of filtering/purifying machinery & apparatus for 9 liquid/gas of 8421.21.19-90,8421.29.10,8421.29.30- 40,8421.29.90,8421.39.20. Other instruments/apparatus for measuring/checking the 10 flow, level, pressure, electrically operated. P. 7 9 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Heat and Energy Management Pilot lamp with fitting for electro-thermic domestic 1 (Mitigation) application of heading 85.16. For example: Thermostats. Water meters. 2 Environmental benefit: Used Thermostats, electrically operated. 3 to control the efficiency of air Kilowatt hour meters (kwh). 4 conditioning, refrigeration, or heating systems. Phenolic resins, other than molding compounds, other 5 than phenol formaldehyde. Other environmental categories: ECETCCS; Slag wool, rock wool & similar mineral wools in bulk/ 6 Environmental monitoring, sheets/rolls. analysis and assessment equipment; gas flaring Part of evaporator/condenser for AC machine for motor 7 vehicle with a cooling capacity <= 21.10 kW. Flagstones, reinforced or not. 8 Other lighting fittings. 9 Acrylonitrile butadiene styrene (ABS) sheets of a kind 10 used in the manufacture of refrigerators. Management of Solid Other electronic integrated circuits. 1 and Hazardous Waste and Recycling Systems Biaxially oriented polypropylene (BOPP) film. 2 (Mitigation) Processor & controller of electronics integrated circuits. 3 For example: Film not cellular/ Plates & sheets of polymers of ethylene, unreinforced, 4 reinforced polymers of laminated, supported or similarly combined with other ethylene. materials, unrigid. Environmental benefit: Plates & sheets, of polymers of propylene, unreinforced, 5 Membrane systems have laminated, supported or similarly combined with other multiple uses including: (i) materials. to line landfills to prevent leachate (water run-off) from Film, foil and strip, of polymers of ethylene, unreinforced, 6 contaminating groundwater laminated, supported or similarly combined with other resources; (ii) to cover landfills materials. and prevent methane from escaping into atmosphere; Other aluminum casks, drums, cans, boxes & containers 7 and (iii) for the reinforcement for any material. and protection of soil, including under oil refineries Brooms consisting of twig/other vegetable materials 8 and gas stations. bound together. Other automatic service-vending machines, not electrically 9 operated. Film, foil & strip, of polymers of propylene, unreinforced, 10 laminated, supported or similarly combined with other materials. P. 8 0 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role 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 3 man-made textiles, other than of net bags. Environmental benefit: More Twine, cordage or rope, knotted netting, of other than 4 biodegradable than synthetic man-made textiles, net bags. fiber alternatives and made from a renewable resource. Twine, binder or baler twine, of sisal or other textile fibers 5 of the genus agave Other environmental categories: Environmentally preferable products. Natural Risk Management Other instruments & appliances other than radio sonde 1 (Adaptation) and radio wind apparatus. For example: Surveying, Parts & accessories of surveying instruments & 2 instruments nes appliances. Environmental benefit: Used for measuring the ozone layer Photogrammetrically surveying instruments and 3 and to monitor, measure and appliances. assist planning for natural risks such as earthquakes, cyclones, and tsunamis. Other environmental categories: ECETCCS; Environmental monitoring. Noise and Vibration Cylinder block; crank case for vehicle of Chapter 87, other 1 Abatement (Broader than of heading 87.01 & 87.11. Environmental Protection) Part of vehicle of Chapter 87, other than carburetor, piston 2 For example: Locks, sheets, & cylinder, excluding heading 87.01 & 87.11. strip and tiles of agglomerated cork. Cylinder liner with <= 50mm internal diameter <= 155 3 mm for marine propulsion engine of a power > 22.38 kW. Environmental benefit: Assists Other parts undefined of gasoline engine for other vehicle 4 in the reduction of noise levels of Chapter 87, other than 8701 or 87.11. in buildings. Parts of marine propulsion engine of a power > 22.38 kW, 5 other than piston & cylinder. Other parts undefined of gasoline engine for vehicles of 6 heading 87.11. Carburetors and parts of gasoline engines, for vehicles of 7 Chapter 87, other than 87.01 or 87.11. Piston rings and gudgeon pins for other vehicles of 8 Chapter87, other than 87.01 or 87.11. Compressor excluding for refrigerating equipment, air, gas 9 in oil drill operation, automotive AC & sealed unit for AC machine. Laminar airflow cabinets fitted with filters in horizontal 10 side > 120 cm. P. 8 1 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Others (Broader Machinery, plant & equipment, other than for making hot 1 Environmental Protection) drink/cooking/heating food, electrically operated. For example: Distilling or Machines for working by removal of material, by 2 rectifying plant. laser/other light/photon beam in the production of semiconductor wafers. Environmental benefit: Desalination plants remove Distilling or rectifying plant, electrically operated. 3 salt from water and are Machines for bending, folding, and straightening 4 important in conditions semiconductor leads. of water scarcity. Biogas refinement equipment Other laser cutters for cutting contacting tracks in 5 “upgrades” biogas resulting semiconductor production by laser beam. from organic matter to give it the same properties as natural Epitaxial deposition machines, spinners for coating 6 gas. Allows the recovery photographic emulsions on semiconductor wafers. and reuse of solvents, (for example, solvents used in Spin dryers for semiconductor wafer processing. 7 the printing, painting or dry- cleaning industries). Grinding, polishing, and lapping machines for processing 8 of semiconductor wafers. Other environmental Resistance heated furnaces and ovens for the 9 categories: Several. manufacture of semiconductor devices on semiconductor wafers. Machinery for processing material by heating, for the 10 manufacture of PCB/PWB/PCA, electrically operated. Renewable Energy Primary cells and primary lithium batteries. 1 (Mitigation) Switchboard & control panels: use for other purposes. 2 For example: Heat exchange units, non-domestic, non- Other guardrails of iron or steel. 3 electric. Static converters other than UPS, battery chargers, 4 inverters rectifiers. Environmental benefit: Provide cooling effect to heat Part of other gas turbines. 5 exchangers in solar collector or solar system controllers to Other towers of iron or steel. 6 avoid overheating. Some are specifically designed for use Other primary cells and primary batteries not zinc-carbon, 7 with renewable energy sources having an external volume > 300 cm3. such as geothermal energy. Other board for electrical control for voltage <1,000 volts. 8 Other environmental Other primary cells and primary batteries zinc-carbon, 9 categories: ECETCCS; having an external volume <= 300 cm3. gas flaring emission reduction; Heat and energy Switchboard & control panels: use in distributed control 10 management. systems. P. 8 2 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Resources and Pollution Swing check-valves, of cast iron, with an inlet of <=4cms, 1 Management (Mitigation) internal diameter =60 cm. For example: Valves, safety or Other fuel cut-off valves for vehicles of copper/alloy. 2 relief. Other manually operated gate valves of cast iron. 3 Environmental benefit: Used Other taps, cocks, valves & similar appliances for pipes, 4 for handling and transport of boiler shells, tanks, vats, or the like. wastewater or slurries during treatment. Other parts of housing for sluice or gate valves. 5 Environmental categories: Parts of table, floor, wall, window, ceiling/roof fans 6 ECETCCS; Wastewater &explosion-proof air fans. management and potable water treatment. Other swing check-valves, of cast iron, with an inlet of 7 <=4cms, internal diameter =60 cms. Mixing taps and valves. 8 Housings for sluice or gate valves with inlet or outlet of 50 9 mm, an internal diameter <=400 mm. Part of free piston generator, oil drilling gas/automotive 10 AC/sealed unit AC compressor, electrically operated. Waste Management, Mats, matting and screens of vegetable materials of 1 Recycling and Remediation rattan. (Broader Environmental Protection) Mats, matting, and screens of vegetable materials other 2 than bamboo and rattan. For example: Mats, matting and screens, vegetable Parts for steam/other vapor-generating boilers, other than 3 plaiting material. boiler bodies, shells or casings. Mats, matting and screens of vegetable materials of 4 Environmental benefit: Used bamboo. for soil erosion as a soil cover, biodegradable from waste. Boiler bodies, shells or casings, parts for steam or other 5 vapor-generating boilers. Wastewater Management Anhydrous ammonia. 1 and Potable Water Treatment (Mitigation, Broader Compressors used for automotive air conditioners. 2 Environmental Protection) Babies garments and clothing accessories, knitted or 3 For example: Porcelain crocheted, of cotton. bathroom, kitchen, & other Remote control apparatus, other than radio remote control 4 sanitary fixtures. apparatus. Environmental benefit: Other women’s or girls’ protective work garments 5 Waterless urinals and (excluding those used for protection from fire/chemical composting toilets minimize substances/radiation). water use. Composting toilets also provide self-contained Parts of other electrical machines and apparatus, having 6 sewage treatment on site, individual functions. with no need for sewers and treatment plants. These items Surgical masks. 7 also do not pollute ground or surface water or soil (unlike Other made-up articles excluding umbrella covers/surgical 8 septic tanks or pit latrines) masks/safety harnesses/fans & handscreens/laces, and produce safe, useful shoes, boots, and corsets. compost. Baby napkins and pads for incontinence, of paper, paper 9 pulp, cellulose wadding or webs of cellulose fibers. Other articles of plastics & other materials of headings 10 39.01 to 39.14. other than 3926.10.00-3926.90.92. P. 8 3 Green Good Description, Top 10 Products in 2020 Exports Rank Examples, and Climate Change Role Water Supply Naphthenic acids, their water insoluble salts and their 1 esters. For example: Mineral and aerated waters not sweetened Other nucleic acids their salts, whether/not chemically 2 or flavored. defined, other heterocyclic components other than HS29341000-29349950. Environmental benefit: Potable water supply and distribution. Biodiesel, not containing petroleum oil, coconut methyl 3 ester (CME), with ester alkyl content 96.5% or more but <98%. Other acetone oil, chemical preparations containing 4 monosodium glutamate (MSG), Other chemical preparation used in manufacturing of foodstuffs. Mineral waters. 5 Biodiesel, not containing petroleum oil, coconut methyl 6 ester (CME), with ester alkyl content exceeding 98%. In addition to biodiesel, containing petroleum oil. 7 Peptones & their derivatives, other protein substances, 8 not specified or included, hide powder, chromed or not. Carbides, whether or not chemically defined, other than of 9 calcium & silicon. Oxadiazon, with a purity of 94% or more. 10 Source: World Bank staff calculation based on GTN list of green goods and BPS trade data. P. 8 4 Appendix Table 3: Top EGs Traded in Two 2020 (Ranked by Value) No. 8-digit HS Description EG Category Exports 8-digit Description EG Category Imports code (Climate (2020) code (Climate (2020) Change/ (millions Change (millions Environmental of US$) Role) of US$) Role) 1 87141090 Other mo- Cleaner or 438.9 38220090 Diagnostic/ Wastewater 496.5 torcycles more resource laboratory manage- (including efficient reagents on ment and mopeds) technologies a backing potable wa- and products prepared ter treatment (mitigation) diagnostic/ (Broader En- laboratory vironmental reagents Protection) 2 28141000 Anhydrous Wastewater 386.9 84068100 Steam Renewable 472.6 ammonia management turbines and energy (miti- and potable other vapor gation) water treat- turbines. ment (Broader output > 40 Environmental MW, other Protection) than for ma- rine propul- sion 3 85065000 Primary cells Cleaner or 191.1 85423100 Processor & Manage- 332.2 and primary more resource controller of ment of solid batteries efficient electronics and hazard- (lithium) technologies integrated ous waste and products circuits and recycling (mitigation) systems (mitigation) 4 85423900 Other Management 151.1 85423900 Other Wastewater 322.8 electronic of solid and electronic manage- integrated hazardous integrated ment and circuits waste and circuits potable wa- recycling sys- ter treatment tems (mitiga- (Broader En- tion) vironmental Protection) 5 85371099 Switchboard Renewable 145.4 85143090 Other fur- Air pollution 310.5 & control energy (miti- naces and control (miti- panels: use gation) ovens gation) for other purposes 6 73089099 Other guard- Renewable 135.5 84818099 Other fuel Wastewater 288.0 rails of iron energy (miti- cut-off valves manage- or steel gation) for vehicles ment and of copper/ potable wa- alloy ter treatment (Broader En- vironmental Protection) 7 85044090 Static Renewable 132.3 84798939 Other auto- Air pollution 273.2 converters energy (miti- matic ser- control (miti- other than gation) vice-vending gation) UPS, battery machines, chargers, electrically inverters, rec- operated tifiers P. 8 5 No. 8-digit HS Description EG Category Exports 8-digit Description EG Category Imports code (Climate (2020) code (Climate (2020) Change/ (millions Change (millions Environmental of US$) Role) of US$) Role) 8 87149994 Chain wheels Cleaner or 126.4 84118200 Gas turbines Environmen- 260.3 and cranks; more resource of a power > tally prefera- other parts efficient 5,000 kW ble products for bicycles technologies based on designed to and products end use or be used by (mitigation) disposal children characteris- tics (Broader Environmen- tal Protec- tion) 9 39202010 Biaxially Management 123.3 84178000 Furnace & Air pollution 258.1 oriented poly- of solid and oven includ- control (miti- propylene hazardous ing incin- gation) (BOPP) film waste and erators for recycling sys- laboratory, tems (mitiga- non-electric tion) 10 87120030 Other bi- Cleaner or 112.1 85023939 Other gen- Renewable 243.3 cycles not more resource erating sets energy (miti- motorized efficient other-pow- gation) technologies ered of and products 10,000 kVA (mitigation) < output< 12,500 kVA 11 84148042 Compressors Air pollution 110.2 87141090 Other of Cleaner 230.6 used for au- control (miti- motorcycles or more tomotive air gation) (including resource- conditioners mopeds) efficient technologies and products (mitigation) 12 61112000 Babies Wastewater 107.6 73089099 Other guard- Renewable 222.6 garments management rails of iron energy (miti- and clothing and potable or steel gation) accessories, water treat- knitted or ment (Broader crocheted, of Environmental cotton Protection) 13 85437020 Remote Clean up or 105.9 84798210 Mixing, Manage- 218.3 control appa- remediation of kneading, ment of solid ratus, other soil and water crushing, and hazard- radio remote (mitigation, grinding, ous waste controlled adaptation) screening, and recycling apparatus sifting, ho- systems mogenizing, (mitigation) emulsifying/ stirring machines, electrically operated P. 8 6 No. 8-digit HS Description EG Category Exports 8-digit Description EG Category Imports code (Climate (2020) code (Climate (2020) Change/ (millions Change (millions Environmental of US$) Role) of US$) Role) 14 62105090 Other Wastewater 98.3 84069000 Part steam Renewable 216.6 women’s or management and other va- energy (miti- girls’ pro- and potable por turbines gation) tective work water treat- garments ment (Broader (excluding Environmental those used Protection) for protection from fire/ chemical substances/ radiation) 15 84119900 Part of other Renewable 89.9 29051100 Methanol Renewable 213.3 gas turbines energy (miti- (methyl alco- energy (miti- gation) hol) gation) P. 8 7 Appendix The Estimation of Ad Three Valorem Equivalents for NTMs on Green Goods We estimate the ad valorem equivalent of NTMs using a two-step approach. The rationale for the two step estimations is that trade policy to its very core would affect both volumes and prices of goods. One needs to have a concrete and consistent answer on how trade volume will adjust given the nature of trade policies that present in different forms. The reasonable way by Kee et al (2009). is to use the GDP function approach due to its capa- bility to be generalized to a multi-country setting. It requires net outputs, factor endowments, and prices. This will give us the price effect of imports and import demand elasticities in a broad sense as the first step. Next, we introduce a particular trade restriction into the analysis, in this case NTMs. We follow these estimations, also similar to Cali et al. (2021), but using the subset of green goods in the estimation. The specification for the first step of estimation is as follows: (E1) where is the import value of an environmental product (at HS 2007 10 digits) in quarter of year , is the price elasticity of import for prod- uct , is the ad valorem tariff on good in a given , is a dummy that takes value 1 if NTM of type is applied to in a given pair, is a dummy that takes value 1 if NTM of type other than is applied to in a given pair in order to control for other NTMs applied to the prod- uct, is a product dummy that allows to control for product-specific char- acteristics, is a quarter-year dummy that accounts for shocks specific to a given quarter-year and common across products, and is the error term. The price elasticities of import are estimated using the methodology proposed by Soderbery (2015). The coefficient implies that if an NTM applied to a product then its import changes by percent, more formally . The next step is to use these estimates to calculate the change in the do- mestic price of product , . This price change is referred to as ad valorem equivalent (AVE) of NTMs. Kee et al. (2009) find a simple way to compute it by noting that the elasticity of import to NTMs can be rewritten as P. 8 8 the product between the price elasticity of import and the elasticity of the domestic price to NTM, as follows: (E2) so that, (E3) E.3 provides AVE for a specific product-NTM pairs. The final step is to derive a unique AVE for each NTM by taking the weighted average of product-specific AVE for each NTM. The import share of each product over all products exposed to NTM is used as weight: , where is the total import of product p on which an NTM was im- plemented at any point of the sample period and . The AVE for each NTM n is computed as follows: (E4) P. 8 9 Table 4: Full List of All Green Products and Climate Change Role Product Energy Agriculture Waste Adaptation Broader Category Transition And Land Manage- Environ- (Mitiga- Use Transi- ment (Miti- mental tion) tion/NRM gation) Protection (Mitiga- tion) 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 Environmentally Preferable         * Products based on End-Use or Disposal Characteristics Gas Flaring Emission *         Reduction Heat and Energy *         Management Management of Solid and     *     Hazardous Waste and Recycling Systems Natural Resource Protection   *       Natural Risk Management       *   Noise and Vibration         * Abatement Others         * Renewable Energy *         Resources and Pollution   *       Management Waste Management,     *     Recycling and Remediation Wastewater Management and         * Potable Water Treatment Water Supply   *     * P. 9 0 FIG 51 TARIFF EQUIVALENT OF NTMS ON ALL GREEN GOODS SPECIAL AUTHORIZATION REQUIREMENT (SPS) 131% CERTIFICATION REQUIREMENT (SPS) 123% PACKAGING REQUIREMENTS (SPS) 113% TOLERANCE LIMITS (TBT) 60% PACKAGING REQUIREMENTS (TBT) 59% RESTRICTED USE OF CERTAIN SUBSTANCES (TBT) 56% PROHIBITION OF US REPAIRED OF MANUFACTURE GOODS 51% MARKING REQUIREMENTS (TBT) 50% PROHIBITION FOR TBT REASONS (TBT) 37% FOOD AND FEED PROCESSING (SPS) 34% SYSTEMS APPROACH (SPS) 34% TESTING REQUIREMENT (TBT) 26% PRODUCT IDENTIT Y REQUIREMENT (TBT) 22% LABELLING REQUIREMENT (TBT) 21% Source: World Bank staff estimations. 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