According to Statista Research Department, in 2022, the Indonesian government invested approximately 77.5 trillion IDR in fossil fuel subsidies. This investment is less than the 2020 COVID-19 recovery budget, which heavily supported the fossil fuel sector and provided 95.3 trillion IDR directly to state-owned enterprises. The total fossil fuel bill in 2020 was 206 trillion IDR, including subsidies to coal, electricity, transport fuels, and liquefied petroleum gas. Looking back at 2015, President Jokowi reformed subsidies to transport fuels which resulted in 211 trillion IDR savings redirected to social and welfare programs and infrastructure projects. The reform strategy involved eliminating gasoline subsidies and fixing diesel subsidies. However, over time the subsidies found their way back into the government budgets, and hence there has been a renewed opportunity to make reforms after 2015.
An Asian Development Bank Report published in 2015 highlights that government expenditure for below-market retail prices of petroleum products such as gasoline, diesel, LPG, kerosene; and electricity was the largest quantified subsidy. Additionally, import duty exemptions on petroleum products which were not included in official government estimates, also formed a subsequent subsidy. Recently, the government approved the reform for liquefied petroleum gas in July 2022. In the following months, in 2022, the gasoline subsidy was also reformed by the President with a 31% increase in the prices of Pertalite and a 32% increase in diesel prices. The higher prices bring forth a slight hope to make officials serious about shifting to clean energy and public transit. The decision has successfully limited the ballooning of subsidies but has adversely affected economically vulnerable groups. In this regard, the government is working to cushion the lower-income groups from high fuel prices by providing social assistance through cash from subsidy savings and tax exemptions.
Nevertheless, it is questionable where the maximum subsidy savings will be redirected. The 2023 Indonesia budget has proposed high spending in all sectors, including building the new capital city, and some of this is to be accomplished from the subsidy reform profits. According to the National Energy Management Blueprint, there is a foreseeable increase in the use of coal from 15.7% to 33% and gas from 23% to 30% by 2025. The 2022 Indonesia Energy Transition Outlook Report highlights that the government is strategizing the development of coal downstream products such as DME and methanol to replace oil imports. This approach contrasts with the trend of shifting to low-carbon industries. Further efforts are required to phase out fossil fuel subsidies and scale up green recovery if Indonesia is to reach its 23% renewable energy target by 2025.
The government can consider various interventions to shift fossil fuel subsidies to clean energy as recommended by the International Institute for Sustainable Development: 1) Reforming fossil fuel subsidies to transport fuels and coal while at the same time implementing an additional but modest tax on these fuels. The savings thus generated would amount to 166 trillion IDR, which is 33% of the estimated investment required for Indonesia to reach its renewable energy target for 2025. 2) The current expenditure on fossil fuels could be redirected to removing barriers to implementing renewable energy. One of the approaches could be reducing the cost of land to be used for renewable energy generation. 3) The savings from fossil fuel subsidy reforms could be used to incentivize the energy market by training energy service providers, identifying bankable projects, and expanding LED street lighting programs. 4) The money raised from reforms could increase energy access to remote islands where power is intermittent.
To summarize, Indonesia has supported the gradual reduction of fossil fuel subsidies but has not been able to phase them out completely to support economic growth and eradicate poverty. Formulating fossil fuel subsidy reforms requires support from the people and politicians. Hence communicating the new policy and its impacts is crucial while educating the population about the benefits of subsidy reforms. Detailed demographic surveys and data mining can help formalize the distribution of cash to the affected lower-income groups.
This Post was submitted by Climate Scorecard Indonesia Country Manager Netra Naik
- Phasing out Indonesia’s Fossil Fuel Subsidies – futurepolicy.org
Image Source: Jakarta Post, an attendant walk through a gas station belonging to state-owned energy company Pertamina in Kuningan, South Jakarta, on Dec. 4, 2018.