Carbon crossroads: Chinese firms’ investments reshape Indonesia’s petrochemical ambitions

As China tightens environmental standards for its most carbon-intensive industries at home, thousands of kilometres away in Indonesia, Chinese companies are investing billions of dollars in petrochemical production.

In June, the Chinese government launched a three-year campaign to improve energy efficiency and reduce carbon emissions across nine heavy industries, including oil refining and ethylene production. It requires inefficient facilities to upgrade or face closure as Beijing pursues peaking of carbon emissions before 2030 and carbon neutrality by 2060.

Meanwhile, petrochemicals have become a growing part of Indonesia’s economic relationship with China, alongside investments in nickel processing, electric vehicles and infrastructure under the Belt and Road Initiative (BRI).

Among the largest projects is a planned USD 6 billion integrated complex in North Kalimantan. A project of PT Taikun Petro Chemical, a consortium of Chinese companies, it is expected to add millions of tonnes of new production capacity for basic chemicals such as ethylene and propylene. Such chemicals are converted into plastic resins used in food packaging, textiles, household products, electronics and automotive components.

The project is one among a steady flow of investments from China to Indonesia in recent years. Data from the Ministry of Investment and Downstream Industry shows that Chinese investment reached USD 2.2 billion in the first quarter of 2026 and totalled USD 34.4 billion between 2021 and 2025.

Economic sense

Economic considerations remain the primary driver behind Chinese industry interest in Indonesia’s petrochemical sector, said Mohammad Faisal, executive director of the Centre of Reform on Economics.

“If the industry is targeting the [Indonesian] domestic market, the investment makes economic sense because Indonesia’s demand for petrochemical products continues to grow and remains much larger than existing domestic production capacity,” Faisal said. “If the investment is also intended to supply export markets, then China may see Indonesia as a competitive production base with lower manufacturing costs that can serve global markets.”

As restrictions increase in some Western markets, such as the imposition of tariffs, “Southeast Asia becomes a more attractive destination for both exports and investment”, said Suzie Sudarman, an international relations lecturer at the University of Indonesia.

She added that while Indonesia needs investment, the question is whether decisions are being made strategically enough: “The issue is not simply attracting capital but ensuring investments support long-term national interests.”

In a November 2024 visit to Beijing, President Prabowo Subianto publicly encouraged greater Chinese investment in strategic sectors, expressing confidence that closer cooperation would contribute to regional stability and economic growth.

Muhammad Andri Perdana, research director at the Bright Institute, a Jakarta-based think-tank, said several factors make the country particularly hospitable for Chinese investment. These include Indonesia’s long-standing relationship with China – which continues under the current administration – as well as its geographical proximity and relatively lower labour costs.

“Indonesia has maintained a relatively accommodative position toward China because the relationship has existed for a long time,” Perdana said. “Compared with countries like Vietnam or the Philippines, geopolitical tensions [with China] are lower and Indonesia is more open to Chinese investment.”

But there are limits to the economic benefits of Chinese investments in the petrochemicals industry.

Bhima Yudhistira, executive director of the Centre of Economic and Law Studies, said these investments could help preserve employment in the short term as domestic manufacturers face rising production costs. But the benefits may prove temporary if global demand shifts, for example toward lower-carbon alternatives, he noted.

“In that sense, decarbonising the petrochemical industry is like taking paracetamol,” he said. “It relieves the symptoms but does not cure the underlying problem.”

Yudhistira explained that Indonesia’s economy risked remaining trapped in an extractive structure reliant on large imports of fossil feedstocks, “which could worsen the oil and gas trade deficit and weaken the rupiah”. 

Environmental impacts

The petrochemicals sector has become an increasing source of global emissions because it relies heavily on fossil fuels both as feedstock and as an energy source. Large-scale petrochemical projects could make Indonesia’s climate goals harder to achieve.

A naphtha cracking plant within a petrochemical complex in Cilegon, Indonesia. Here, naphtha is broken down at high temperatures to create olefins, key building blocks for producing plastic (Image: BJ Warnick / Newscom / Alamy)

Most petrochemicals are made from oil-and-gas-based feedstocks such as naphtha and natural gas liquids, and their production requires large amounts of heat and electricity. In Indonesia, much of that energy still comes from coal-fired power plants, particularly in industrial estates directly powered by captive coal plants.

In recent years, the Indonesian government has participated in pilot projects to decarbonise the petrochemical industry, using emerging technologies such as carbon capture. But such decarbonisation attempts risk becoming little more than “greenwashing” if fossil fuel dependence remains unchanged, said Ahmad Ashov Birry, programme director at Trend Asia, a Jakarta-based environmental advocacy group.

“Without intervention on the demand side, decarbonisation in this sector is not realistic,” Birry said.

He explained that decarbonisation alone is not enough as a mitigation mechanism. There needs to be a focus on minimising fossil fuel feedstocks, using alternative raw materials, switching to renewable energy, and minimising emissions and waste from the petrochemical industry.

“Credible mitigation therefore cannot be limited to decarbonisation. It must also include more efficient use of natural resources and, more broadly, the democratisation of energy,” he said, referring to a shift to decentralised renewables systems governed by local communities.

Analysts Dialogue Earth spoke to note that while China is increasing its own decarbonisation efforts domestically, this does not guarantee the same for their overseas investments.

Faisal explained that environmental outcomes of projects would depend largely on Indonesian regulation rather than on investing companies.

“If domestic regulations do not require investors to meet higher environmental standards, companies will simply follow the rules that are in place,” he said. “On the other hand, if the Indonesian government requires investors to comply with ESG [environmental, social and governance] principles and enforces those requirements, investors, including Chinese companies, will generally follow them.”

For Perdana, projects under the BRI do not necessarily have higher environmental standards than those backed by domestic or other international investors.

“The standards are often very case by case,” he said. “But the tendency is that the government still allows many of these vulnerabilities to persist without major improvements.”

Yudhistira noted that within China, the country “has begun refurbishing petrochemical and refinery facilities with lower-carbon technologies”. He added that this includes reducing coal use, improving energy efficiency and shifting toward electricity and gas.

But for Chinese investment overseas, the environmental impact of projects depend heavily on conditions in the host country, he said.

Yudhistira noted that in countries with stronger governance and environmental standards, guidelines governing the Green BRI will have more impact, referring to China’s strategy to shift its overseas investment towards more sustainable development. “In countries where carbon-intensive industries continue expanding, implementation becomes weaker.”

Putra Adhiguna, managing director of the Energy Shift Institute, said Chinese investments still lack transparency when it comes to emissions or environmental data.

“This can be seen in the development of industrial estates, where access to data is extremely limited. In some cases, even provincial governors have been unable to enter these industrial zones freely or obtain comprehensive information,” he said.

Bargaining power

Analysts say the long-term impact of investment from Chinese companies may depend less on the investment itself than on Indonesia’s ability to negotiate stronger safeguards, technology transfer and environmental standards.

Adhiguna said BRI projects often lack clear universal environmental standards and depend heavily on host-country regulation.

Sudarman said Indonesia’s ability to secure stronger safeguards ultimately depends on the strength of its domestic institutions.

“Bargaining power comes from having strong institutions and clear national priorities,” she noted. “A country can only negotiate effectively if it has the capacity to say ‘yes’ when projects are beneficial and ‘no’ when they are not.”

She added: “If every proposal is accepted without considering its long-term consequences or potential risks, then the country has little real bargaining power.”

Perdana said environmental protection also needs to involve monitoring by civil society. This is key to avoiding problems that have been seen in BRI projects like the Indonesia Morowali Industrial Park, which has faced sanctions for environmental violations, he noted.

“While China is a global leader in transitioning toward renewable energy domestically, this is primarily a strategic move for future positioning rather than purely climate-driven altruism,” he said. “When expanding heavy or petrochemical industries overseas, environmental protection often depends heavily on civil society oversight and local regulatory enforcement to prevent vulnerabilities.”