The Australia-Indonesia green economic opportunity

A developing opportunity between Australia and Indonesia could underpin a green “powerhouse” partnership in a net-zero world, but coal-fired processing, downstreaming rules and geopolitics keep straining progress, writes Tyson Parker.

CANBERRA AND JAKARTA have spent years pitching a green economic “powerhouse” partnership, but coal-fired processing, downstreaming rules and investment viability have slowed progress.

Imagine an electric vehicle built on an Indonesian assembly line and powered by a battery developed from Australian lithium and Indonesian nickel.

This is the vision of two neighbours who, despite some turbulence over the years, have found a potent bilateral economic opportunity in the resources and manufacturing sectors.

Historically, the relationship between Australia and Indonesia has been described as significant but underdeveloped.

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Around 2015, Indonesia was Australia’s 13th largest trading partner, sitting behind smaller markets such as New Zealand and Malaysia.

Two-way trade reached about $34.8 billion in 2024–25, elevating Indonesia to Australia’s ninth-largest two-way trading partner.

Indonesia is projected to overtake Australia’s economy in nominal GDP (measured at market exchange rates) before 2030, making it a powerful economic player within the Indo-Pacific region and an increasing priority for Canberra.

Negotiations towards a comprehensive trade deal began in 2010, but progress stalled soon after, knocked off course by events such as the 2013 surveillance scandal revelations.

Formal trade talks restarted in 2016, culminating in the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), signed in March 2019 and commencing in July 2020.

This agreement marked a step forward in the bilateral economic relationship and shifted the dynamic into mutual economic cooperation across key areas.

It created the scaffolding for joint economic programs and business-to-business dealmaking and heightened economic integration, including the elimination or lowering of tariffs.

IA-CEPA came just after the two countries elevated their relationship to a Comprehensive Strategic Partnership (CSP) in August 2018, which provided a formal framework for enhanced cooperation and committed to deeper coordination across a range of areas.

The CSP frames cooperation across:

economic partnership;
people-to-people links;
shared security;
maritime cooperation; and
supporting a stable regional order (including ASEAN centrality).

This architecture shows up through long-running instruments like Australia Awards, development partnerships such as Kemitraan Indonesia Australia Untuk Infrastruktur (KIAT) and regular security and maritime coordination.

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Additionally, there has been a concerted effort from both sides to link key industries, forming the basis of an “economic powerhouse model”.

This is an attempt to combine Australia’s critical minerals, technology and know-how with Indonesia’s manufacturing scale and capabilities, creating a shared value chain in key sectors.

In theory, it is a neat division of labour, but in practice, the partnership runs into three hard constraints. Indonesia’s downstreaming rules, the carbon intensity of current processing and the pull of major-power capital and geopolitics.

In November 2023, the Australian and Indonesian governments signed a memorandum of understanding to establish a bilateral mechanism to progress collaboration in the electric vehicle ecosystem.

The stakes are long-term and to capitalise, both countries are looking to utilise the energy transition as a joint strategic economic transformation.

For Australia, the partnership represents a crucial avenue for trade diversification and economic security as it seeks to become a renewable energy superpower.

For Indonesia, it is a pathway to achieve high-income country status by 2045 through the downstream processing of its vast natural resources (particularly nickel) and industries critical for a net-zero world.

Australia dominates lithium mining and is a top five producer of cobalt, while Indonesia has significant nickel, manganese and copper deposits.

The proposed supply-chain would feed Australia’s critical minerals (primarily lithium) and skills into Indonesian processing and manufacturing, with finished battery components and electric vehicles exported to third markets.

Australian investment in Indonesia remains small and outside the top 20 economies in which Australia invests. Meanwhile, Indonesia’s nickel processing boom has been built largely with Chinese capital and is still heavily powered by coal.

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The partnership is currently navigating Indonesia’s downstreaming rules and resource nationalism, the carbon intensity of existing processing and the gravitational pull of major-power capital, especially China’s entrenched position in Indonesia’s nickel industry.

These are the driving factors that are hindering the process of integrating the two economies.

Indonesia’s downstreaming and resource nationalisation agenda includes a layer of foreign ownership controls and regulatory expectations, which shifts bargaining power towards Jakarta and raises perceived risk for foreign investors.

Jakarta’s downstreaming settings and local participation expectations mean foreign partners often have to negotiate equity, offtake, technology transfer and onshore processing commitments in exchange for access and approvals to engage with Indonesian markets.

Investor navigation of Indonesia’s legal environment and the permitting and regulatory system has been described as slow and difficult.

Although reforms intended to streamline key areas have been enacted in recent years, uncertainty still delays the kind of processing and industrial infrastructure the partnership needs.

That risk can be enough to stall long-term mining and processing commitments, though there are indications that Indonesia is expanding its openness to foreign ownership and investment.

There is also friction between Western Environmental, Social and Governance (ESG) standards and the reality of Indonesian production.

Much of Indonesia’s nickel processing is still powered by captive coal generation, producing a carbon profile that sits poorly with ESG frameworks guiding many Australian investors.

The result is a financing asymmetry, where projects that struggle to raise capital from Australia can still be built with capital that is less strictly constrained by those frameworks, such as from China.

Indonesia’s long-standing bebas aktif (“free and active”) posture gives it room to accept capital from wherever it comes. Chinese firms are deeply embedded, with multibillion-dollar integration projects underway.

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For Australia, that intersects awkwardly with a strategic posture increasingly aligned with the United States through arrangements like AUKUS.

In parts of Indonesia’s security and policy establishment, AUKUS has been met with concern about escalation and bloc dynamics, inspiring an atmosphere that can strain confidence needed for deep, long-term economic integration.

With both China and Australia looking to develop an improved economic relationship with Indonesia in similar sectors, Indonesia has options, suggesting that Australia may have less negotiating power at these friction points.

There’s also a quieter structural tension, in which both governments want to escape the “dig-and-ship” model and capture downstream value at home.

That creates overlap, even competition, in areas like battery components and cell manufacturing, where both sides are trying to attract the same investment and subsidise the same steps in the chain.

Although slow and far from perfect, progress is being made.

Australia has put funding on the table, including the $200 million KINETIK partnership and the $40 million Katalis program, which backs efforts by Australian firms to introduce grid-scale battery storage capability into Indonesia.

Much of the practical work is meant to run through Katalis, an IA-CEPA program designed to fund feasibility studies and early-stage partnership development in areas like battery supply chains and key infrastructure.

Indonesia’s Organisation for Economic Co-operation and Development (OECD) accession push also signals an interest in aligning with international standards, largely servicing its domestic goals under its 2045 Golden Indonesia vision.

Although progress is ongoing, a fully developed economic powerhouse is far from a certainty, with a workable partnership requiring further policy alignment and concessions on the part of both nations.