Indonesia currently stands as a remarkable player in the global iron and steel industry, with export values reaching approximately US$27.5 billion in 2023.
This growth has resulted in the iron and steel industry accounting for nearly 40 per cent of Indonesia’s national trade surplus in the same year. The investment in this sector has also increased significantly, reaching US$37.7 billion, driven by both domestic and foreign funding.
However, this success also brings a blindspot: steel industry becomes an extensive emitter in the whole of global emissions from the industrial sector.
The industrial sector as a whole accounts for approximately 30 per cent of global greenhouse gas (GHG) emissions, while the production of basic materials – including steel, cement, aluminum, fertilisers, and plastics – accounts for 60 per cent to 80 per cent of all industrial emissions.
Given these facts, decarbonising the iron and steel industry has become a pressing necessity, not only in terms of emissions reduction, but also in enhancing Indonesia’s iron and steel industry competitiveness in the global market.
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Although Indonesia has demonstrated regulatory progress and is increasingly recognising the strategic role of Green Pulic Procurement in driving industrial transformation, the realisation of its implementation remains uneven.
The European Union (EU) introduces Carbon Border Adjustment Mechanism (CBAM) – a mechanism that applies a carbon price to import commodities based on their embedded emissions.
The OECD has also noted that carbon border provisions are an accelerating feature of global trade governance more broadly, with carbonlinked import requirements also emerging in the United States through the Waxman-Markey proposal.
Therefore, iron and steel are among the sectors covered from the outset, meaning that carbon intensity will directly affect the cost competitiveness of Indonesian steel in European markets going forward.
To address these challenges, Green Iron and Steel, the output of decarbonisation efforts in this industry, can contribute to emissions reductions while also holding economic value that has the potential to open up new economic opportunities.
However, it should be noted that when green iron and steel are sold to the domestic market, a key question to address is whether there are potential buyers, particularly in the Indonesian market, given that green iron and steel are priced higher than conventional iron and steel.
By comparison, iron and steel produced through conventional methods are approximately 30 to 60 per cent cheaper than green iron and steel, meaning that green iron and steel are not yet price-competitive.
On paper, the foundation is there. In practice, it isn’t doing much
The government with its purchasing power can generate clear signals to create a substantial market for developing domestic green steel progress, stimulating private sectors to play in the green industrial sector.
Green Public Procurement (GPP) from the government plays a strategic role in driving industrial decarbonisation due to its capacity to shape market demand and create incentives for production transformation.
As a demand-side policy instrument, public procurement can influence industrial behavior through standardized and measurable environmental criteria, thereby accelerating the adoption of low carbon technologies in emissions-intensive sectors.
This is also reaffirmed by the RPJMN (National Medium-Term Development Plan) and the Circular Economy Roadmap, recognising public procurement as a supporting instrument for transition toward a low- arbon economy.
On paper, the government has initiated a GPP framework through Presidential Regulation Number 16 of 2018 on Government Procurement of Goods and Services, along with its amendment in Presidential Regulation Number 12 of 2021.
This regulation affirms that public procurement must take into account aspects of sustainability encompassing economic, social, and environmental dimensions, and references green certification in relation to sustainable procurement.
Given that the government is the largest procurement actor, particularly through infrastructure projects, this policy holds significant potential to shape demand for green steel in the domestic market.
However, although Indonesia has demonstrated regulatory progress and is increasingly recognising the strategic role of GPP in driving industrial transformation, the realisation of its implementation remains uneven and faces various structural barriers.
This is due to the fact that the current GPP policy remains voluntary in nature. LKPP’s (National Public Procurement Agency) own guidelines state plainly that eco-labeling cannot be made a mandatory requirement in procurement decisions.
There are no sanctions for non-compliance, no binding targets, and no enforcement mechanism of any kind. This reflects weak coercive pressure within the institutional framework, so that GPP has not yet functioned as a demand-side innovation policy instrument capable of creating credible and long-term demand signals.
On the other hand, Indonesia already has the Ecolabel Certificate, the Green Industry Standard (SIH) of the Ministry of Industry, as well as various international references such as ISO and Environmental Product Declaration (EPD). However, these instruments have not yet been integrated into the LKPP procurement system.
This condition reflects that widely recognised standards have not yet been formalised as mandatory references to ensure the credibility of green products in procurement.
The way forward
The implementation of GPP in the iron and steel industry can be strengthened by adopting a policy approach similar to the Domestic Component Level (TKDN) mechanism, which has proven to provide regulatory certainty and encourage business compliance through clear and measurable regulations.
The TKDN experience demonstrates that percentage-based obligations, explicitly stipulated in regulations, are more effective at directing market behavior and industry actors compared to voluntary approaches.
Moreover, the experience of mandating the use of TKDN and SME products in government procurement, governed by a law, shows that strong political commitment only emerges when a policy has a legal foundation at the statutory level. A legislative mandate not only confers legitimacy but also creates binding obligations for all ministries and institutions.
A binding target is necessary, but not sufficient. Green steel’s price premium is real, and simply mandating its use without addressing cost would put the burden on already stretched project budgets and risk pushback that undermines the policy before it takes hold.
To ensure effectiveness, mandates must be paired with financial support mechanisms such as subsidies, grants, or tax incentives that directly offset the higher costs for both producers and project developers. At the same time, non-financial measures can play a powerful role in shaping market behavior.
Recognition schemes, certifications, and public acknowledgment of institutions and companies that meet green procurement targets can help build a culture of compliance that endures beyond fiscal incentives.
Equally important is a phased and context-sensitive approach to implementation. Applying a uniform national quota for green steel use may prove unrealistic in regions facing supply constraints or high logistics costs, while setting targets too low risks failing to stimulate meaningful demand.
Minimum percentages should instead be differentiated by sector and region, giving industry room to adapt while still building momentum toward higher standards over time.
Muhammad Arief Virgy is a researcher for Just Energy Transition and Climate Action program at The Habibie Center, a think tank organisation based in Jakarta.