IA-CEPA: A Bridge to Sustainable Mineral Practices in Indonesia’s Energy Transition

As two states strategically situated in close proximity to each other, both holding substantial potential for market infiltration, Indonesia and Australia successfully established a cooperative framework.

As two states strategically situated in close proximity to each other, both holding substantial potential for market infiltration, Indonesia and Australia successfully established a cooperative framework by formalizing a comprehensive economic agreement in 2021 known as IA-CEPA (Indonesia Australia Comprehensive Economic Partnership Agreement). This agreement aims not only to eliminate trade barriers but also to enhance the economic advantages of both states collaboratively, earning its designation as a “comprehensive partnership“. This collaborative effort is institutionalized through one of IA-CEPA’s arrangements called the “economic powerhouse,” where both nations contribute to the production of shared commodities intended for sale to a third country. IA-CEPA has the chance to assume a pivotal role in Indonesia’s imminent economic and energy transition agenda, particularly in addressing the challenges associated with its currently unsustainable nickel downstreaming policy and facilitating a more sustainable practice of mineral utilization in the future.

The Challenge of Indonesia’s Nickel Downstreaming Policy

Nickel, a critical global trade commodity, serves as a vital ingredient for steel production and has gained additional importance in recent years for green technology, notably in battery production. As the country with the largest nickel reserves supplying over half of the world’s needs, Indonesia wields its market power by implementing a ban on nickel exports. First initiated in 2014 with a ban on raw nickel ore, followed by regulations mandating domestic nickel refinery, the policy was deemed a success due to a surge in foreign investment during a stainless steel production boom. In 2020, this success was attempted to be replicated by the reinforcement of the same policy, justified by an ongoing Electric Vehicle (EV) production boom and  Indonesia’s ambitious goal to become one of the world’s leading EV producers by 2035, positioning nickel as a crucial commodity for the energy transition. Foreign investments are also imperative to advance ore extraction capabilities to match the grade required for EV battery production, with Indonesia acquiring the necessary technology, known as the HPAL process, largely through China’s investment.

Nevertheless, the recent ban on nickel exports has prompted concerns among experts. While the significant rise in export numbers from 17 billion to 510 billion may be perceived as a substantial success, in reality, it contributes minimally to Indonesia’s value addition. Most Chinese companies refine raw nickel into higher forms, such as feronickels, to be exported and processed in China, then sold back to Indonesia. Aside from that, a noticeable wage gap also exists between Indonesian and Chinese workers. This misdirection of added value makes the glorified revenue number collected from local taxes and royalties by foreign companies appear meager, especially in light of the significant cost Indonesia made on tax holidays and subsidies for the nickel industry.

Moreover, the inherently problematic aspects of the policy, coupled with Indonesia’s focus on quick results and mere growth in number, result in corner-cutting practices and unwarranted effects on domestic prices. A study by Angella Tritto (2023)  reveals rent-seeking behavior within one of the largest Chinese nickel-producing companies in Indonesia. The flexibility in investment, facilitated by the Job Creation Law, allows Chinese investors to bypass regulations through unsolicited practices, opting to bribe local governments rather than adhering to good mining practices and safety standards. Illegal practices found, such as employment brokers, further endanger the already vulnerable position of Indonesian workers. Beyond minimal employment benefits, this policy suppresses competition for domestic sellers, compelled to offer low prices to China, consequently extinguishing opportunities for exports. These challenges underscore the unsustainability and risks associated with Indonesia’s current empirical practices in nickel downstreaming.

The Path Ahead: Geopolitical Context and Prospects

The global pursuit of achieving net-zero emissions by 2050, as outlined in the Paris Agreement, requires an increase in demand for crucial minerals, including nickel in Indonesia and lithium in Australia. In 2022, China dominates 59.2% of the world’s primary nickel supply due to its thriving stainless steel and battery sector. In line with the Belt and Road Initiative (BRI)’s ambitious projects and Indonesia’s nickel export ban, China leads the most extensive mining processing project in Indonesia. Given Indonesia’s 55% share in the world’s nickel production, the world’s transition to green technology, as a result, heavily relies on China. Energy prices—inherently volatile compared to fossil fuel prices—drive countries like the US, the UK, and Japan to reduce dependence on China-produced nickel. In an effort to diversify sources and emerge as stable economic players, the US Inflation Reduction Act (IRA) subsidizes EV purchases with components, including nickel-based batteries, produced domestically or in FTA agreement countries. The EU’s proposed Critical Raw Material Act (CRMA) explicitly mandates reducing nickel supply from China from 80% to 65%. Japan’s Economic Security Promotion Act (ESPA) includes an industrial policy incentivizing the relocation of Japanese-owned facilities from China to ASEAN and other countries (Pangestu, 2023).

Considering this geopolitical context, Indonesia possesses significant potential to move up the global green technology value chain, diversify Foreign Direct Investment (FDI), and work towards more sustainable mineral practices. Indonesia would not be the only country grappling with the momentum of entering the mineral boom as a significant player. In parallel, Australia is facing similar challenges. As outlined in its Critical Mineral Strategy 2023-2030, Australia acknowledges its “unique position” to capitalize on economic partnerships with major countries like the US, rather than acting as a passive recipient of foreign investment. Australia is committed to building resilience and diversifying its critical mineral supply chain.

IA-CEPA Alignment with Indonesia’s Call for Sustainable Industrial Policy and Energy Transition

With the current regulations in place, Indonesia faces less difficulty in attracting investment but grapples more with ensuring the sustainability and safety of the sector in the future. Conversely, Australia’s mining sector is impacted by rising prices on mineral commodities. Despite Australia’s mining companies being renowned for ESG (environment, social, and corporate governance) compliance, mineral availability is paramount for Australia. This situation presents an opportunity for long-term investment and capability-building cooperation between Indonesia and Australia through IA-CEPA. Australia’s Department of Foreign Affairs blueprint for trade and investment in Indonesia indicates an approach centered on shared values, with each country contributing equally to both countries’ comparative advantages. While Indonesia contributes to the availability of minerals, Australia can contribute its expertise in contract mining, mining equipment, technology, and services (METS), as well as ESG practices. This can be achieved through joint ventures with state-owned or private Indonesian companies and is likely to be less risky for Australia compared to more capital-intensive investments like production and exploration.

Beyond services in mining, Indonesia can derive benefits from other facets of IA-CEPA cooperation, particularly in the education sector. Industrial engagement with leading institutions and vocational workplace training programs enhances the likelihood of widespread adoption of Australia’s techniques in Indonesia. Consortia-based approaches, large-scale and outcome-specific programs, can address sectoral human capital challenges. The “economic powerhouse” arrangement, integral to the IA-CEPA agreement, reflects a notable effort to redefine the roles of governments and businesses in realizing a shared economic future. In addition to practical policies to reduce trade barriers, such as free trade agreements and dispute settlement mechanisms, cooperative policies in the form of reciprocal skills packages compel respective countries to view each other not merely as market potential but as partners obligated to contribute to shared comparative advantage. This points towards an optimistic future for sustainable energy cooperation between Indonesia and Australia.

Karina A. Darmawardani
Karina A. Darmawardani
Karina is an undergraduate student majoring in International Relations at Gadjah Mada University, Indonesia. With concentration on international political economy and development, Karina also has a deep interest in the ASEAN region and inequality and development issues. She continues to explore various areas of interest throughout her academic journey.