Jakarta as the capital city continues to be a major national concern thanks to its air quality which from time to time stabilizes at unhealthy status based on data from IQAir and has been named the city with the worst air quality in the world. Moreover, air pollution caused by burning fossil fuels and methane emissions are also major contributors to climate change. These two problems are closely related and must be addressed immediately. Quoting data from the Minister of Environment & Forestry, the emissions produced mostly come from the transportation sector, which contributes 44% to air quality in Jakarta and 96.36% of carbon monoxide (CO) emissions. Apart from that, quite a few also accuse coal-fired power plants as the main source of air pollution in Jakarta, although not as dominant as motor vehicles, long dry seasons, pollutant concentrations and industrial manufacturing as other causes.
This phenomenon can be understood through microeconomic theory as a form of market failure: negative externalities, namely the burden of social and unquantifiable losses on producers due to increased production. Increased motorbike production & PLTU emissions will bring losses of around US$2.1 billion & 8,100 deaths in Jakarta during 2023. However, energy transition is the solution. So, how does Islamic finance play a role in this problem?
The Indonesian government has several times financed green projects to support the green transition, such as renewable energy, energy efficiency, sustainable transportation, waste management and climate resilience. Since 2018, Indonesia has issued a total of USD 6.9 billion green sukuk, making Indonesia the largest green sukuk issuer and leader of the sukuk market in the world.
Top 3 largest mega project financing through green sukuk:
- Sustainable Transportation
Development of infrastructure and transportation facilities will contribute significantly to reducing the greenhouse effect along with increasing community mobility; - Climate Resilience
increasing the capacity of building discharge services and raw water infrastructure to achieve the national standard target of 4.10 m3/sec through the rehabilitation of 685 units of raw water buildings and a 50 km long groundwater irrigation network which will provide benefits to areas prone to flooding and drought; - Waste Management
Increasing the capacity of water supply services for ±284,628 hectares of agricultural areas that are prone to flooding and drought through the construction/rehabilitation of 33 irrigation area units and 1,158 km of surface water irrigation network/swamps/ponds with a length of 1,158 km;
The green sukuk initiative in Indonesia has paved the way for sustainable financing flows through green project financing. On the other hand, CWLS as an integration of social finance with Islamic commercial finance is a form of the government's seriousness towards sharia finance for sustainable social projects.
However, both green sukuk and CWLS still have weaknesses, namely redemption at maturity which requires the government to return the principal funds. Mrs. Khairunnisa then proposed a perpetual concept for both mechanisms as an alternative.
In the Perpetual Green CWLS scheme, the maturity date can only occur if the government/Ministry of Finance intends to stop this mechanism by disbursing the wakif principal funds. Green productive projects from BUMN/BUMD will be the underlying assets as well as paying profit sharing to the government/Ministry of Finance which will then be distributed to sharia banks.
