Green Public Procurement and the Transformation of Indonesia's Green Steel Industry
Iron and steel are vital materials for global infrastructure and the transition to clean energy. In the context of heavy industry, the iron and steel sector as a whole accounts for around 6-7% of global CO2 emissions (Åhman et al., 2023). The iron and steel sector also contributes about one-third of emissions from materials used in construction (around 1.2 gigatonnes of CO2 per year). This makes the iron and steel sector one of the highest-emitting industrial sectors.
According to the International Energy Agency (IEA, 2020), the steel industry accounts for about 7% of total global CO2 emissions. In Indonesia, the Bappenas (2021) study shows that the iron and steel industry contributes significantly to the national carbon footprint.
Indonesia is the world’s fourth-largest exporter of iron and steel with exports valued at around US$27.5 billion — up 3.5 times since 2019 and twelve times higher than in 2015 (CREA, 2024).
This growth has resulted in the iron and steel industry contributing nearly 40% of Indonesia’s trade surplus in 2023 (CREA, 2024). Meanwhile investments in the iron and steel sector have risen significantly, reaching US$37.7 billion in 2023, up from US$14.8 billion in 2020, driven by financing from domestic and foreign sources (CREA, 2024).
With these facts, decarbonisation of the iron and steel industry becomes essential given the strategic role of these commodities in both emissions reduction and international trade. Green iron and steel, which are outputs of decarbonisation efforts in the industry, can contribute to emission reductions and hold economic value that could unlock new economic opportunities.
However, as a note, it is necessary to identify when green iron and steel are sold to the domestic market whether there are potential buyers, particularly in Indonesia, given that the price of green iron and steel is higher than that of conventional iron and steel.
By comparison, the price of iron and steel produced conventionally is around 30-60% cheaper than green iron and steel (Agora Industry and Wuppertal Institute, 2023), so green iron and steel is not yet price-competitive.
Therefore, to create a market for green iron and steel in Indonesia, one of the efforts undertaken is through the implementation of Green Public Procurement (GPP).
According to the EU Commission (2016), GPP is the process by which public authorities or government procure goods, services and works with a negative environmental impact that is lower than that of goods, services, and works procured if the policy had not been implemented where the public authorities operate.
As a demand-side policy instrument, public procurement policy can influence industry players’ behaviour through standardised and measurable environmental criteria, thereby spurring the adoption of low-carbon technologies in high-emitting sectors (Krieger & Zipperer, 2022; SEI, 2023).
GPP specifically integrates green guidelines into public tenders as a mechanism to promote the production and use of sustainable products and services (Lăzăroiu et al., 2020). GPP requires environmental impact assessment of products, services, or works across their life cycle, from procurement of raw materials to end-of-life disposal.
In Indonesia, the government has initiated the GPP framework through Presidential Regulation No. 16 of 2018 on Government Goods/Services Procurement and its amendments in Presidential Regulation No. 12 of 2021.
This regulation asserts that public procurement should consider sustainability aspects across economic, social, and environmental dimensions, and refer to green certification for sustainable procurement. Given that the government is the largest procurement actor, particularly through infrastructure projects, this policy has significant potential to shape demand for green steel in the domestic market.
However, although Indonesia has shown regulatory progress and increasingly recognises the strategic role of GPP in driving industry transformation, its realisation of implementation remains uneven and faces various structural obstacles as well as institutional capacity constraints (Wirahadikusumah et al., 2020). As a result, the potential of GPP as a lever for transforming the iron and steel industry has not been fully exploited.
LKPP (Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah), as the government’s Non-Ministerial Body directly responsible to the President in developing and setting government procurement policy in Indonesia, issued the Head of LKPP Decree No. 157 of 2024 on Guidelines for Sustainable Government Goods/Services Procurement, which is the most specific regulation to operationalise the concept of green procurement.
In this document, it is stated that sustainable procurement comprises three main dimensions: economic, social, and environmental, with the environmental focus aimed at the use of environmentally friendly products or services. One concrete form of support for green procurement is the clause that procurement of goods/services may prioritise products with environmental labels or ecolabels regulated by KLHK.
Therefore, there are several things that can be done to strengthen the implementation of GPP to support the national green iron and steel ecosystem. The experience of imposing mandatory use of Domestic Content (TKDN) and UMKM products in government procurement as regulated by a law such as the Omnibus Law (UU Cipta Kerja) shows that strong political commitment only arises when policies have