Based on the material contained in Economic Growth and AD-AS Model read the article from NYT (Wealthy Nations Offer Indonesia $20 Billion to Curb Coal, November 19, 2022). Then, discuss and analyze the following two statements (at least one paragraph per statement):

1. The details of the funding package are critically important to the question of the fairness of this arrangement. The $20 billion package will be a mixture of grants, loans, and private investment, as well as a mixture of public and private support. As the article mentions, the exact mix of these elements is unclear. But it will probably include significantly more loans than grants and private investment. Private investment would probably be the most beneficial to Indonesia, because it adds to the countrys capital stock. In addition, foreign direct investment like this almost always involves what trade experts call technology transferthe passing of advanced technologies to the countries that receive the investments. Both the increase in capital and the increase in technology in Indonesia will help the economy grow, in addition to reducing the nations carbon emissions.

2. On the other hand, the use of loans as part of this deal may make it less beneficial to the citizens of Indonesia. As the article says, new loans, even if taken out to pay for renewable energy, will add to the existing debt burden of the Indonesian government. Additional debt could lead to several macroeconomic problems. First, unless the interest rates on the new debt are low, the additional interest payments could create budget strains on the Indonesian government, forcing it to cut beneficial government spending on its citizens. If the government doesnt cut other spending, or raise taxes, then it may have to borrow additional funds domestically to make the interest payments, which could lead to crowding out of domestic investment. Finally, if international investors become worried about the total amount of debt that Indonesia owes to foreigners, they may sell off their holdings of Indonesian assets, which would put downward pressure on the value of the rupiah, Indonesias currency. This could raise the costs of imports, including imported inputs, moving the Short Run Aggregate Supply up and to the left, causing inflation and a fall in GDP.

Wealthy Nations Offer Indonesia $20 Billion to Curb Coal

SHARM EL SHEIKH, Egypt Indonesia, one of the worlds largest consumers of coal, pledged to sharply reduce its reliance on the fossil fuel and speed up its transition to renewable power as part of a $20 billion climate finance deal announced on Tuesday with the United States, Japan and other developed countries.

The deal is the most ambitious effort yet by wealthy countries to persuade a developing economy to abandon coal, the most polluting of all fossil fuels, in order to keep global warming in check. It was unveiled at the G20 summit in Bali, Indonesia, following more than a year of negotiations between leaders. The news received a flurry of attention in Egypt, where diplomats from nearly 200 countries have gathered since Nov. 6 for a two-week United Nations climate conference.

The plan roughly follows the contours of an agreement from last year in which the United States and European countries pledged $8.5 billion in grants and loans to South Africa in exchange for that countrys commitment to retire coal plants, shift to renewable energy and retrain workers. Similar arrangements, known as Just Energy Transition Partnerships, are also being discussed with Vietnam, Senegal and India.

As part of the deal, Indonesia has pledged to cap carbon dioxide emissions from its power sector at 290 million tons by 2030, which would require the country to reach peak emissions seven years earlier than expected and curtail its use of coal.

Indonesia will also aim to generate 34 percent of its electricity from renewable sources such as wind and solar power by 2030, up from a current level of about 11 percent.

In exchange, wealthy countries would provide a mix of loans, grants and private investments to Indonesia, though the precise mix remains to be worked out. Roughly $10 billion would come from the governments of the United States, Japan, Canada and several European countries, including Britain, France and Germany. Another $10 billion is expected to come from private investors, including banks like Bank of America and Citibank, according to the U.S. State Department.

At every step, Indonesia has communicated the importance of building a clean economy that works for the people of Indonesia and attracts investment, John Kerry, President Bidens climate envoy, said in a statement. Together, we have a shared vision for that goal and are going to be working hand in glove to work tirelessly toward it.

Indonesia generates 60 percent of its electricity from coal and was the worlds ninth biggest emitter of planet-warming carbon dioxide last year. The state-run electric utility has plans to build more than 13 gigawatts of new coal capacity to support the nations fast-growing economy and provide electricity to the millions of Indonesians who dont have reliable access.

Still, important questions remain about how the deal will work in practice. Andri Prasetiyo, a researcher at Trend Asia, an Indonesian foundation, said he worried that much of the deal could consist of loans that would put Indonesia further in debt, rather than grants and funding with more favorable terms. He also said that Indonesia would need major assistance in revamping current policies that make it hard to add more renewable energy to the grid.

Over the next three to six months, Indonesia, the United States and other partners aim to finalize the details of the plan, including the structure of financing as well as what sorts of policy changes Indonesia will need to make. That could include permitting reform for renewable projects as well as new procurement policies.

This wont be easy at all, and everything is going to depend on the details, Mr. Prasetiyo said.

The fight over money has become a major point of tension at the climate talks in Egypt. Developing countries have argued that they will probably need hundreds of billions of dollars per year to help transition to cleaner energy, adapt to the effects of climate change and recover from damage caused by extreme weather. To date, wealthy nations have fallen far short of the $100 billion per year in climate funding they had previously pledged by 2020.

If the coal deals in South Africa and Indonesia are successful, they could be a model for the rest of the world, said Camilla Fenning, an expert on fossil fuel transitions at E3G, a climate change think tank in London. While it would probably be too time-consuming for wealthy countries like the United States and Japan to negotiate partnerships with each country in need of support for an energy transition, she said, these deals could provide a template for larger-scale programs at multilateral development banks and elsewhere.

The big question is whether money is going to flow swiftly and properly into these partnerships, Ms. Fenning said. If it doesnt, thats really going to degrade confidence in these deals, given how much attention theyve received so far.