Background

The Republic of Indonesia is located in Southeast Asia, consisting of about 17 000 islands. It has a tropical climate and a population of 264 million.  Agriculture, forestry and mining make up around 25 per cent of Indonesia’s GDP. While Indonesia has the second highest level of biodiversity in the world, it suffers from large-scale deforestation and over-fishing, which destroy habitats and endanger many species.  For example, a 2014 study found that Indonesia lost over 6 million hectares of forest between 2000 and 2012. In 2012 Indonesia’s rate of deforestation surpassed that of Brazil, making it the country which lost the largest area of forest cover in that year (Margono, 2014).

Overall Fiscal Profile

Indonesia’s growth rate slowed to about 5 per cent in 2014, particularly due to slowing investment, weaker external demand and limited funding conditions, and has stayed at this level since then. While inflation peaked in December 2013 and 2014 with rates of more than 8 per cent due to fuel price increases and the depreciation of the Indonesian Rupiah, this has since slowed down to more moderate levels  between 3 and 4 per cent. In 2013 and 2014, the current account deficit widened to more than 3 per cent, but in the following years fell to less than 2 per cent due to a modest global recovery and a softening of commodity prices (World Bank, 2018).

Policy and Legal Framework for a Green Economy

The Second United Indonesia Cabinet led by President Susilo Bambang Yudhoyono launched a green economy program in 2010 as part of its National Medium Term Development Plan 2010-2014 (RPJMN 2010-2014) to promote growth, jobs, and poverty alleviation. To support the implementation of a green growth path, programs covered a range of areas including sustainable agriculture, sustainable forestry management, energy efficiency and renewable energy usage, support for clean technology, waste management, efficient and low carbon transportation management and green infrastructure development (UN DESA, n.d.).

In 2009, Indonesia signed the Manila Declaration on Green Industry, which highlighted the government’s determination to transition to a resource-efficient and low-carbon industry through policy, regulations, and institutional reforms that are favorable to clean production technology and that harness renewable energy (IISD, 2009). In addition, the Ministry of Finance released a Green Paper in the same year promoting both economic and fiscal policy strategies for climate mitigation efforts (Ministry of Finance, 2009). This paper outlined areas for fiscal reform in the future such as the implementation of a carbon tax/levy on fossil fuel combustion of IDR 80,000 (USD 6.8) per ton with an annual increase of 5 per cent in real terms to 2020. The paper also proposed a gradual phasing out of fossil fuel subsidies, the use of fiscal transfers to incentivize carbon abatement in the land use and forestry sectors, and enhancing regulatory frameworks for climate change.

The most recent National Medium-Term Development Plan 2015-2019 specifies that the green economy is to be the foundation of Indonesia’s development program with an emphasis on inclusive and sustainable growth, increasing the value added of natural resources, increasing the quality of the environment, disaster mitigation and tackling climate change (LSE, 2015). To meet Indonesia’s commitment in its National Action Plan for the Reduction of Greenhouse Gas Emissions by the year 2020, the Centre for Climate Change Financing and Multilateral Policy of the Indonesian Ministry of Finance elaborated the Green Planning and Budgeting (GPB) Strategy for Indonesia’s Sustainable Development (2015-2020). This strategy adopted a green economy approach with a primary focus on climate mitigation and adaptation, environment and long-term growth, defining a more sustainable set of policies in six areas – forestry, agriculture, energy, transport, education, and other (PKPPIM, 2013). Similarly, in 2015 the Ministry of National Development Planning presented a roadmap outlining an ambitious approach to achieve transformational change over the next 35 years. This roadmap identifies green growth opportunities in the areas of : (1) energy and extractives, (2) manufacturing, (3) connectivity, and (4) renewable natural resources (Bapennas, 2015).

Fiscal Measures for a Green Economy

Fiscal incentives have played a role in Indonesia’s transition towards a green economy. In 2007, the government announced a scheme to support renewable and geothermal energy which entails tax incentives for renewable energy projects, in particular geothermal energy projects. Incentives include an investment credit of 20 per cent for capital investment, and a tax loss carry forward period of up to 10 years, an accelerated depreciation rate and a cap on dividend withholding tax of 10 per cent (Ministry of Finance, 2012). Today, the major subsidies to promote the renewable energy industry are subsidies provided through feed-in tariffs (FiTs), mainly for solar PV, mini-hydro (<10 MW), geothermal, biomass and onshore wind. According to a GSI report (2017), the total subsidy through FiTs in 2015 was estimated to be USD 126 million, with a cumulative total of USD 162 million between 2010 and 2015. Due to the high installation volumes and generated electricity, biomass (47 per cent), geothermal (42 per cent) and mini-hydro (9 per cent) received the most subsidies, even though solar PV is getting the highest unit price per installation, at an average of USD 15 cents/ kWh. In 2009, a fiscal stimulus package was launched to tackle the impacts of the global financial crisis, amounting to USD 6.3 billion. Roughly 7 per cent of these funds were used to boost energy saving investments.

As of 2010, the budget for the Ministry of Environment was approximately 0.06 per cent of total government spending, this small allocation does not cover all of the country’s environmental management programmes. When environmental budgets of other ministries are included, the total central government environmental budget was approximately 1.1 per cent (Resosudarmo/Abdurohman, 2018). This reflects the still relatively low importance of environ­mental issues in Indonesia and the relatively limited influence of the Ministry of the Environment within the cabinet.

Indonesia has also integrated the use of fiscal and financial instruments in its climate change activities as outlined in the medium term plans and the National Action Plan for GHG Emission Reduction. For instance, trust funds have been set up, including the Indonesia Climate Change Trust Fund and the Indonesia Green Investment Fund, which receive funding from grants and donors that are allocated to green projects and climate initiatives. The aim is to provide loans and grants to green initiatives that simultaneously promote economic growth (ICCTF, 2018). As mentioned above, the Ministry of Finance has also considered a carbon tax since 2009 but so far, no action has been taken yet.

Even though environmental taxation is not used on the central level in Indonesia, several quasi-environmental taxes have been imposed under the Local Tax and User Charge Act since 2009 (Irianto et al, 2018). This law aimed at harmonizing regional and local taxation established a list of local tax and user charges that provincial and municipal governments can adopt. The quasi-environmental taxes specified by this law include a vehicle tax, a motor vehicle fuel tax, and a surface water tax at the provincial level. At the municipal level this includes a parking tax and a groundwater tax. In addition, article 141 of the law allows for a levy for causing an (environmental) disturbance determined as a  percentage of (1)  investment expenditure, (2) gross sales, or (3) operating costs (Government of Indonesia, 2009).

Moreover, the Indonesian government has imposed various royalties for the extraction of natural resources. These are related to oil, gas, geothermal, general mining, fish, and forest extrac­tion activities with each having a different fee system. The most significant natural resource revenues come from oil and gas. In the 2018 budget, non-tax revenues from oil and gas amounted to IRD 80.3 trillion; non-tax revenues for general mining (IRD 17.9 trillion), forestry (IRD 4.2 trillion), geothermal (IRD 0.7 trillion), and fisheries (IRD 0.6 trillion) are much smaller (Government of Indonesia, 2018). In total, the revenue from natural resource extraction is significant, amounting to around 18 per cent of total government revenue in 2018.

Fossil Fuel Subsidy Reform

With the aim to protect parts of the population from high prices of essential commodities and to stabilize fuel prices, fossil fuel subsidies were introduced around the time of independence in 1949 and by the 1960s accounted for nearly 20 per cent of fiscal expenditure. (IEA, 2016). Gasoline, diesel, kerosene, and liquefied petroleum gas (LPG) were historically sold below their market price. In 2011, fuel subsidies amounted to 2.2 per cent of GDP and as of 2012, the state budget proposed an allocation of IDR 168.6 (USD 19.15 billion) for energy subsidies with IDR 123.6 trillion (USD 14.05) and IDR 45 trillion (USD 5.1 billion) allocated for fuel and electricity subsidies respectively. However, these subsidies have mostly benefitted the wealthy, promoted smuggling and encouraged overconsumption of energy. For instance, in 2012, nearly 40 per cent of fuel subsidies went to the richest 10 per cent of households and less than 1 per cent went to the poorest 10 per cent (Chelminski, 2018). This has helped make the case for fossil fuel subsidy reform within the country. Internationally, Indonesia has committed to rationalize inefficient fossil fuel subsidies that encourage wasteful consumption under the framework of its membership in the G20 and APEC. In 2018, Indonesia conducted a voluntary peer review of its fossil fuel subsidies under the G20 process.

The government’s first attempt at subsidy reform was in 1997, when it raised the prices of kerosene, diesel fuel and gasoline by 25, 60, and 71 per cent respectively, in the wake of the Asian financial crisis. This initial attempt was unsuccessful and led to massive street protests that contributed to the fall of the government. A second attempt was made in 2001, when prices of fuels were increased by 30 per cent while introducing compensation packages such as health care, a rice program, and village infrastructure support. However, the government was forced to roll back the price increases in 2003 after a wave of popular protests. Then in 2005, fuel prices were increased by 29 per cent in March and once again by 114 per cent October. This gradual reform strategy, which was complemented by information campaigns, compensation packages, and unconditional cash transfers to reduce the impacts on the poor, provided a buffer for the resulting economic shock but also for the government’s commitment to social welfare (Chelminski, 2018).

Faced with particularly high kerosene subsidies, a kerosene-to-LPG conversion program was later introduced in 2007 which supported start-up packages (tanks, LPG stoves, accessories) through investment of an estimated IDR 14.11 trillion (USD 1.56 billion) between 2007 and 2011 as well as a VAT exemption for the purchase of tank products. In addition, LPG was subsidized to promote the initiative. This was estimated to save IDR 35.34 trillion (USD 3.9 billion) on the kerosene subsidy. The total share  of fuel subsidies declined from 2.8 per cent of GDP in 2008 to 0.8 per cent of GDP in 2009. The government also introduced a new unconditional cash transfer as well as additional benefits for a rice program, scholarships, and village infrastructure. For example, 15.5 million households were targeted at the bottom 25 percent, allocating IDR 150,000 (around USD 17) to each household per month for a four-month period to compensate for high fuel prices.

Various ministries and agencies have also proposed additional schemes to reduce fossil fuel subsidies. For example, the Ministry of Energy and Mineral Resources (MEMR) proposed a gradual increase in gasoline prices by increments of IDR 500 (USD 0.042) per liter, coupled with a smart-card system to support cash-back mechanisms for public transit. Consumption limits on motor vehicles were also recommended by the MEMR. Additionally, task forces are being developed to prepare materials that highlight the negative impacts of subsidies on state budgets and to evaluate infrastructure to determine the feasibility of non-subsidized fuels. The Ministry for Economy has been assessing various options for subsidy withdrawal, while the Ministry of Finance has helped prepare a road map to phase out fossil fuels at the regional level. As reiterated by the government, the process should become less ad hoc and potentially shift to a subsidy cap or a fixed subsidy, as opposed to fixing prices to allow for market fluctuation and maintain cost control, while demand side management should become a focus, particularly in the transport sector.

In June 2013, the government increased subsidized fuel prices: petrol increased by 44 per cent and diesel by 22 per cent. Social and economic mitigation programs aimed at the most vulnerable segments of the population, through cash transfers, food aid, educational assistance, and infrastructure support, accompanied the price increase. Over 2013, the government also gradually increased the base electricity tariff to a total of 15%. The new electricity tariff was not applied to customers in the 450–900 volt-ampere (VA) segment; in 2016, the 900 VA classes were excluded from the subsidy (ADB, 2015).

Only one month after Joko Widodo became president in October 2014, his government initiated price increases of 31 per cent for gasoline and 36 per cent for diesel. In 2015, gasoline subsidies were completely phased out and a cap on diesel subsidies was implemented to limit outlays of support for diesel consumption. The Indonesian government has continued to develop its energy-market reforms in an effort to rein in expenditure on fossil fuels. In 2016, it reduced its cap on diesel subsidies by half, from USD 0.08 per litre to USD 0.04 per litre, and began a pilot programme to better target subsidies for 3-kg LPG cylinders used by households as cooking fuel with the objective of lowering the number of beneficiaries from 57 million to 26 million households. As a result of these fiscal consolidation efforts, projected fiscal savings from fuel subsidy reforms are around USD 15 billion a year. The 2017 budget allocation for fuel subsidies is only 12 per cent of its 2014 value (OECD, 2018)

In summary, the two fossil fuel subsidy reforms in Indonesia, first between 2005 and 2007 and then again between 2013 and 2015, were the most successful reforms as they achieved both social acceptability and the economic objectives of alleviating government expenditure on fuel subsidies. In March 2018, president Widodo instructed his ministers to keep fuel and electricity prices stable over the next two years (IEA/OECD, 2018), thus further reforms and adjustments of domestic fuel prices are unlikely to be implemented in the near future.

Sources

ADB (2015). Fossil Fuel Subsidies in Indonesia. Trends, Impacts, and Reforms. Asian Development Bank. https://www.adb.org/sites/default/files/publication/175444/fossil-fuel-subsidies-indonesia.pdf

Bappenas (2015) Delivering Green Growth for a Prosperous Indonesia: A Roadmap for Policy, Planning, and Investment. Ministry of National Development. http://greengrowth.bappenas.go.id/en/handbooks-en/

Chelminski, Kathryn (2014). Fossil Fuel Subsidy Reform in Indonesia. In: Skovgaard, Jakob & van Asselt, Harro (edit.). The Politics of Fossil Fuel Subsidies and their Reform. 2014, pp.193-211.

GIZ N.d. Instruments and Mechanisms for Financing of GHG Emission Reduction Programs. Retrieved from:http://www.climatefinance-asiapacific.org/attachments/article/28/BKF%202012%20Financing%20Intrument%20Land%20Based%20Sector%20ENG.pdf

GIZ (2013). Ready for Climate Finance: GIZ’s Approach to Making Climate Finance Work. Retrieved from: http://www.giz.de/expertise/downloads/giz2013-en-climate-finance-approach.pdf

GIZ (2014). Climate Finance Approach GIZ Indonesia (http://climatefinance-asiapacific.org/index.php/projects/giz-indonesia)

GSI (2014).  “The Future of Social Welfare Programs in Indonesia: From Fossil-Fuel Subsidies to Better Social Protection” – IISD and GSI Working Paper. Retrieved from: http://www.iisd.org/gsi/sites/default/files/ffs_indonesia_briefing_welfare.pdf

GSI (2012). Indonesia’s Fuel Subsidies: Action Plan for Reform. Retrieved from: http://www.iisd.org/gsi/sites/default/files/ffs_actionplan_indonesia.pdf

GSI (2017). Financial Supports for Coal and Renewables in Indonesia. Global subsidies Initiative. https://www.iisd.org/sites/default/files/publications/financial-supports-coal-renewables-indonesia.pdf

Government of Indonesia (2009). Undang-Undang Republik Indonesia Nomor 28 Tahun 2009 Tentang Pajak Daerah Dan Retribusi. http://www.djpk.depkeu.go.id/attach/post-no-28-tahun-2009-tentang-pajak-daerah-dan-retribusi-daerah/UU-427-973-UU_28_Tahun_2009_Ttg_PDRD.pdf

Government of Indonesia (2018). Informasi APBN 2018. Pemantapan pengelolaan fiskal untuk mengakselerasi pertumbuhan ekonomi yang berkeadilan. https://www.kemenkeu.go.id/media/6886/informasi-apbn-2018.pdf

ICCTF (2018). ICCTF at a glance. Indonesia Climate Change Trust Fund. https://www.icctf.or.id/overviews/

IEA (2016). Indonesia’s steady progress in tackling fossil fuel subsidies. International Energy Agency. https://www.iea.org/newsroom/news/2016/december/indonesias-steady-progress-in-tackling-fossil-fuel-subsidies.html

IEA/OECD (2018). Update On Recent Progress In Reform Of Inefficient Fossil Fuel Subsidies That Encourage Wasteful Consumption. http://www.oecd.org/site/tadffss/publication/update-progress-reform-fossil-fuel-subsidies-g20.pdf

IISD (2009). Summary of the International Conference on Green Industry in Asia. International Institute for Sustainable Development. http://enb.iisd.org/crs/industry/icgia/html/ymbvol166num3e.html

Irianto, Edi Slamet/Rosdiana, Haula/Tambunan, Maria Rud (2018). On quest of environmental tax implementation in Indonesia. https://www.e3s-conferences.org/articles/e3sconf/pdf/2018/27/e3sconf_nrm2018_00013.pdf

LSE (2015). National Medium Term Development Plan 2015-2019 (RPJMN 2015-2019). London School of Economics. http://www.lse.ac.uk/GranthamInstitute/law/national-medium-term-development-plan-2015-2019-rpjmn-2015-2019/

Margono, Belinda Arunarwati/Potapov, Peter V./Turubanova, Svetlana/Stolle, Fred/Hansen, Matthew C. (2014). Primary forest cover loss in Indonesia over 2000–2012. Nature Climate Change. https://www.nature.com/articles/nclimate2277

Ministry of Finance (2009), Ministry of Finance Green Paper: Economic and Fiscal Policy Strategies for Climate Change Mitigation in Indonesia, Ministry of Finance and Australia Indonesia Partnership. https://www.scribd.com/document/28195592/Green-Paper-MoF-Indonesia

Ministry of Finance (2012). Fiscal Policies to Support Renewable Energy Implementation. http://energy-indonesia.com/03dge/05.pdf

OECD (2018). OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018. Organization for Economic Co-operation and Development. https://www.oecd-ilibrary.org/docserver/9789264286061-en.pdf?expires=1544713711&id=id&accname=ocid57015274&checksum=B100C17A1A8EDC4D41EA240F81B8F029

PKPPIM, Green Planning and Budgeting Strategy for Indonesia’s Sustainable Development, 2015-2020. Centre for Climate Change Financing and Multilateral Policy, Ministry of Finance. https://www.kemenkeu.go.id/sites/default/files/gpb-strategy.pdf

Resosudarmo, Budy P & Abdurohman. Green Fiscal Policy Strategies in Response to Climate Change in Indonesia. In: A. Mori, A./Ekins, P./Lee, S./Speck, S./Ueta, K. (edit.). The Green Fiscal Mechanism and Reform for Low Carbon Development. 2014, pp.240-257.

Tumiwa, F., L. Lontoh, T. Laan, K. Lang and D. Vis-Dunbar (2012). A Citizens’ Guide to Energy Subsidies in Indonesia: Geneva.

UN DESA (n.d.). Indonesia’s Second Medium Term Development Plan. UN Division for Sustainable Development Goals. https://sustainabledevelopment.un.org/index.php?page=view&type=99&nr=167&menu=1449

World Bank (2014). World Bank and Environment in Indonesia. http://www.worldbank.org/en/country/indonesia/brief/world-bank-and-environment-in-indonesia

World Bank (2018). Data: Current account balance (% of GDP). https://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS?end=2017&locations=ID&start=1981&view=chart