Indonesia Subsidies

Indonesia—8 billion USD in 2015/ 4 billion US in 2016

In 2015, $22.1 billion was initially allocated to fuel subsidies. In that year, major reforms in energy subsidies were implemented. Indonesia’s energy subsidies, especially for fossil fuel, have been a drain on the state budget. In 2013, 17% of government expenditure went to energy subsidies. Since becoming a net fossil fuel importing country in 2004, especially in oil, Indonesia’s energy subsides have become a burden on the country’s current account. In 2014 and 2015, major reforms were implemented to take advantage of lower gas prices. Domestic fuel prices were allowed to float according to global market prices. Indonesia phased out subsidies on gasoline and set a fixed diesel subsidy. From the 2015 reforms, the removal of major energy subsidies decreased subsidy spending to $8 billion (under RSB-2105) from the initial budget of $22.1 billion. In 2016, this number fell to $4 billion. Other electricity and petroleum fuel subsidies remain. Fossil fuel subsidies amounted to 3% of GDP in 2014. In 2016, this spending has fallen to 1% of GDP.

The government, however, shifted the cost of gasoline subsidies to the state-owned oil company Pertamina which now must pay for the difference between the subsidy price and the global price of gasoline. The reforms have simply moved the deficit the government was running onto Pertamina, which it must eventually refund. To more truly implement fossil fuel subsidy reform, price controls must be removed entirely. The government still offsets distribution costs for provinces outside Java-Madura-Bali. This subsidy is important to provide energy in less developed provinces. Much of the state budget savings that came out of energy reform went to building new infrastructure and to the budgets of the ministries to increase growth and fight poverty. Most of the fossil fuel subsidy reform has come from the president. Subsidies to fuel distributors are approved or removed by parliament. There is fear of public resistance to rising fuel costs that stalls government action to further reduce subsidies until fossil fuels have another period of low global prices.

The policy to reduce fossil fuel subsidies will encourage the development of and investment in renewables, decrease air pollution in urban areas, shift people away from cars towards public transportation and active transport, and reduce emissions from the extraction and importation of fossil fuels. Expenditures on subsidies can also be shifted to infrastructure that could decrease fossil fuel consumption, such as in transportation and more updated, more energy efficient infrastructure. The decrease in CO2 emissions from the end of fossil fuel subsidies was estimated at 5-7% for 2015. MARKAL projects that there will be a 9% reduction by 2030, driven mostly from a decline in energy consumption and growth in alternatives.

These fossil fuel subsidies will be easier to phase out when the price of alternative fuels drops. This will occur as investment in renewables increases, aided by government policies (such as a Feed-in-Tarrif–FiT). However, Indonesia remains the largest exporter of coal in the world and expects to see an increase in coal’s percent of the energy mix from 23% to 30% by 2025. Although this plan includes increases in renewable sources such as geothermal and biofuels, the increase in coal extraction and use is of concern. Currently, Indonesia does not subsidize coal. The shift to a decarbonized Indonesian economy will take more than the removal of fossil fuel subsidies, coal and other dirty fuels must be dis-incentivized. There needs to be a greater push for renewables.

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