Indonesia: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
02 Mar 2021
eISBN:
9781513570860
Language:
English
Keywords:
ISCR; CR; government bond bond yield; IMF staff estimate; loan growth; headline CPI inflation; government bond bond market; energy subsidy reform; sliding scale; Energy subsidy reform; notification system; baseline price; Greenhouse gas emissions; Climate change; Carbon tax; Energy subsidies; Non-renewable resources; Global
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Selected Issues

Abstract

Selected Issues

Indonesia and Climate Change: Recent Developments and Challenges1

Indonesia is exposed to climate change related risks, notably more frequent and more damaging natural disasters and rising sea levels. It also likely faces transition risks from global moves away from fossil fuels, given its production, consumption and exports of carbon resources, especially coal. Indonesia has been proactively tackling climate change issues but could consider further reforms toward a greener economy. This would require additional mitigation and adaptation measures. This short note overviews recent developments and challenges ahead regarding climate change issues in Indonesia and offers recommendations for policy frameworks.

A.1 Background and Recent Development

1. Indonesia is one of the countries’ most vulnerable to climate change related risks, especially with regard to extreme weather and sea level rise. The 2021 INFORM Global Risk Index2 ranks Indonesia as the sixth most susceptible country to high-impact natural hazards (Table 1). The 2020 World Risk Index3 rates the disaster risk of Indonesia as high. In fact, after 2000, natural disasters have occurred more frequently, especially flooding (chart below). Wildfire due to extreme drought remains a major risk factor to the country’s tropical forest4—the third largest in the world— which plays a significant role in the mitigation of greenhouse gases (GHG) at the national and global level. Extreme weather importantly affects the agriculture, fishery and forestry sector, which accounts for 35 million workers (around 30 percent of total workers). Part of the high exposure to climate change reflects the geography of Indonesia: it is the world’s largest archipelago country and has extensive coast lines. A large part of Indonesia’s population5 lives in low-lying coastal areas, including the capital Jakarta, the most populous city in South East Asia and the fastest-sinking city in the world. These areas would be significantly affected by rising sea levels.

Table 1.

Natural Hazard Risk Index

article image
Source: INFORM Global Risk Index, 2021.

Natural Disasters in Indonesia

(Number of events)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source; CRED, Emergency Events Database (EM-DAT).

2. Indonesia is a large producer of fossil fuels and palm oil. The oil, gas and coal related sector accounts for 7.2 percent of total GDP.6 Over 1.4 million workers (1.1 percent of total) are employed in the mining and quarrying sector. Indonesia is the world largest coal exporter7 (left chart below). Coal exports account for around 10 percent of total exports. In terms of oil and gas, Indonesia is a net importer of oil and a net exporter of gas. The government receives royalties from oil, gas and coal mining equivalent to 7.5 percent of total government revenue.8 The share of commercial loans to the mining and quarrying sector is around 2.5 percent. The plantation sector accounts for 3.3 percent of total GDP. The share of palm oil exports in total exports is around 10 percent, which makes it the most important export good together with coal. Indonesia is the world’s largest palm oil exporter with a 55 percent share in total global exports (right chart below).

Major Coal Exporters, 2019

(In percent of total)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: International Energy Agency OECD. World Energy Statistics.

Major Palm Oil Exporters, 2019

(In percent of total)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: U.S. Department of Agriculture,

3. Indonesia could face early transition risk with the expected acceleration in global decarbonization, especially coal producers. Both the number of signatories of the Principle for Responsible Investment (PRI) and the asset value of the Environmental, Social and Governance (ESG) investment have been rapidly growing (charts below). Over 100 banks, including global financial institutions, have announced coal divestment, and Indonesian coal companies could increasingly face external financial constraints. Considering the global aspirations for moving toward greener economies, demand for Indonesian coal might not fully recover to pre-pandemic levels in the post-COVID-19 era, and coal prices could be subdued in the medium and long term. The possible deterioration of the financial health of coal companies could have broader economic and financial spillovers.

Signatories of Principles for Responsible Investment

(Number of signatories)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: Principles for Responsible Investment.

Environmental, Social, and Governance Asset Value

(In billions of U.S. dollar)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: 2018 Global Sustainable Investment Review.

B. Indonesia’s GHG Emission Patterns and Paris Agreement Commitment

4. Indonesia has grown into being a large emitter of Greenhouse Gases (GHG), but its emissions on a per capita basis are still lagging those of advanced economies. In 2017, Indonesia ranked as the eighth largest GHG emitter in the world.9 However, its emissions on a per capita basis remain low (charts below). Given the stage of its economic development and vulnerability to climate change, Indonesia could be one of the leading countries actively seeking to balance policy requirements to foster development with those to reduce GHG emissions.

Greenhouse Gas Emissions, 2017

(In metric tons of C02 equivalent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: World Resources Institute, CAIT Climate Data Explorer.

Greenhouse Gas Emissions Per Capita

(In metric tons of C02 equivalent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: World Resources Institute, CAIT Climate Data Explorer.

5. Land Use Change and Forestry (LUCF) have accounted for a substantial share of the increase in GHG emissions over the past three decades. The increase in Indonesia’s GHG emissions reflects two broader sources (chart). LUCF, which accounts for more than half of the emissions, have been one main source, although the estimates of the related emissions are subject to significant uncertainty.10 Moreover, this source of emission is less controllable, as it includes emissions from wildfires. The other main source are emissions from energy use in the economy (see below).

Indonesia’s Greenhouse Gas Emissions—LUCF and Others

(In metric tons of C02 equivalent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: World Resources Institute, CAIT Climate Data Explorer.

6. Apart from LUCF, increase in energy use accounts for much of the rise in Indonesia’s GHG emissions. Carbon dioxide (CO₂) emissions have been rapidly increasing, while methane (CH₄) has been decreasing (chart). This pattern reflects divergences in GHG emissions by sector. While the emission levels of the waste and agriculture sectors have been reduced or maintained, emissions from energy use, reflected primarily in the emissions of the electricity and transportation sectors, have been increasing. These increases in turn mirror the country’s rapid economic growth (left chart below). In terms of fuel sources for electricity, coal-based power generation has been growing rapidly and reached a share of about 57 percent in 2018 (right chart below).

Greenhouse Gas Emissions by Type of Gas

(In metric tons of C02 equivalent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: World Resources Institute, CAIT Climate Data Explorer

Greenhouse Gas Emissions by Sector

(In metric tons of C02 equivalent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: World Resources Institute, CAIT Climate Data Explorer.

Electricity Production by Source

(In percent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: Perusahaan UstrikNegara,

7. Indonesia set an unconditional GHG reduction target of 29 percent and a conditional reduction target up to 41 percent as Nationally Determined Contribution (NDC) in the Paris Agreement (Table 2). In the NDC, the forestry and energy sectors are key sectors for policy measures. The main policy assumptions for the forestry sector include measures to control deforestation, support reforestation and promote sustainable forest management.11 The main policy assumptions for the reductions of GHG emissions from energy use include the use of carbon capture technology in power plants in addition to greater use of renewable energy and of biofuel.

Table 2.

Indonesia’s Nationally Determined Contribution (NDC) 1/

(Projected BAU and emission reduction from each sector category)

article image
Source: First Nationally Determined Contribution, Republic of Indonesia, November 2016.

CM1 = Counter Measure (unconditional mitigation scenario); CM2 = Counter Measure (conditional mitigation scenario).

Including fugitive.

IPPU in the table stands for the industrial processes and product use. IPPU sector covers the greenhouse gas emissions resulting from various industrial activities that produce emissions not directly the result of energy consumed during the process and the use of man-made greenhouse gases in products.

Including peat fire.

8. Indonesia is also a member of the Coalition of Finance Ministers for Climate Action and has been proactively tackling climate change issues. Climate change is incorporated into Indonesia’s planning and budgeting system. Since 2016, the government has implemented a Climate Budget Tagging (CBT) process to monitor and track expenditures on climate change actions in the budget system—focusing first on mitigation and since 2018 extending the scope also to adaptation expenses. The CBT data underpinned the issuance of green sukuks, a Shari’ah-compliant green bond, that exclusively finances or refinances sustainable and climate friendly investment projects. Three rounds of issuance have already taken place at the international level—raising US$1.25 billion in 2018, US$0.75 billion in 2019, and US$0.75 billion in June 2020.12 These funds are used in mitigation areas such as sustainable transport, waste management, waste to energy management, and renewable energy, and adaptation areas such as resilience to climate change for highly vulnerable areas and sectors. The government has also developed a Disaster Risk Financing and Insurance strategy.13

9. Bank Indonesia (BI) and Financial Services Authority of Indonesia (OJK) have also been supporting green investment through their policy tools. BI has adopted environmentally sound policies, including the adoption of Sustainable and Responsible Investment in foreign exchange management. OJK developed a regulation, effective as of 2020, specifying that financial services institutions shall apply sustainable finance principles to their business activities and shall submit their sustainable finance action plan to OJK on annual basis.

10. Indonesia is projected to overachieve on its commitment under the Paris Agreement, but could consider upgrading its mitigation commitments. The expected overachievement excludes LUCF and is projected on the basis of currently implemented policies (chart).14 However, given the inevitable risk of wildfires, which is not perfectly controllable, Indonesia would need to make further efforts to reduce GHG emissions beyond the targets in order to reduce the risk of missing the overall target. As elsewhere, the NDC is supposed to be updated ahead of the United Nations Framework Convention on Climate Change Conference of Parties (COP 26) in November 2021. Major large emitters have recently made carbon neutrality pledges for 2050 (European Union, Japan, Korea, United Kingdom) or for 2060 (China). Indonesia, as a large emitter of GHG and G-20 member, could also consider such a pledge, which could show solid commitment toward a greener economy, thereby boosting further green investments.

Greeenhouse Gas Emissions excluding Forestry

(Metric ton C02 per year)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: Climate Action Tracker.

C. Policy Options for Climate Change Mitigation

11. When transitioning toward a greener economy, Indonesia would need to strike a balance between promoting development and lowering GHG emissions. In this regard, a comprehensive transition plan toward a greener economy would facilitate policy design, especially regarding energy use. Given the policy impacts on people’s livelihood, it would be appropriate to discuss the plan in a national level conference consisting of all interest groups in a transparent manner and to communicate well with the public to achieve a nation-wide consensus. The plan could include incentives and disincentives, using expenditure, tax and regulatory measures. It would be also important to provide the necessary compensatory support for households and other parties negatively affected by the measures. At the same time, the authorities should consider transition risks from the move toward a greener economy, which would likely affect the coal sector in particular. Measures to facilitate employment in other sectors and reduce financial sectors risks through financial regulations including additional bank capital buffer requirement would help in reducing the costs from such risks.

12. Forest and land use management can contribute to climate change mitigation in Indonesia. Indonesia has taken policy actions aimed at reducing deforestation and forest degradation as well as reinforcing wildfire monitoring. These actions include regulatory measures such as a moratorium on the development of peatland15 and the social forestry programs.16 Recently, Indonesia has shifted the emphasis toward restoration of its mangrove and peatland to enhance the GHG absorption capacity of its tropical forest. In order to enhance favorable cycles of deforestation and reforestation, it would be worth considering a feebate scheme consisting of levies imposed on landowners for reducing carbon storage and of subsidies to landowners who increase carbon storage. Alternatively, a tax on commodities from plantations could be another option to support reforestation. These measures could help reduce GHG emissions without adding a fiscal burden.

13. Achieving Indonesia’s NDC target for the energy sector could be challenging. The National Energy Policy (KEN) was adopted in 2017, aiming to increase renewable energy in its electricity to 23 percent in 2025.17 However, given the need to increase electric generation capacity to meet the needs of a growing economy, it seems uncertain that this target can be reached under current plans. Much of the planned increase in capacity is based on coal-based generation. The National Energy Policy might have to be complemented with policies to support renewable energy. A feebate scheme—e.g., levies imposed on power generators with above average emissions per kWh and rebates for generators with below average emissions per kWh—could be an instrument to foster change in the electricity mix. The scheme could be designed in a revenue-neutral manner. It could complement other measures for a greener recovery. The 2020 fiscal stimulus mostly consists of climate neutral expenditure. Nevertheless, it also includes some climate-negative measures, notably fossil fuel subsidies, that dominate climate-positive measures, including biofuel subsidies (charts below).

Fiscal Stimulus Measures

(In trillions of rupiah)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: Fiscal Monitor, October2020.

G-20: Climate Relevance of Fiscal Measures Related to COVID-19 Crisis 1/

(In percent of GDP, left scale; in percent of total, right scale)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: IMF staff estimates,1/ Measures are categorized into positive and negative policy 'archetypes’. based on the climate relevance of specific activities. A similar methodology is applied in the Greenness of Stimulus Index http://www.vivideconomics.com/casestudy/greenness-for-stimulus-index).

14. The proposed energy subsidy reform in the 2021 budget would be an important step forward. While energy subsidies significantly decreased in 2015 due to a successful reform, they still amount to over 10 percent of total government expenditure. In the 2021 budget, the authorities proposed an energy subsidy reform with the goal of transforming energy subsidies into social assistance (Box 1). While this is encouraging, unfortunately, the reform has been postponed, given the current COVID-19 crisis. As a result, expenditures on climate change remain below those on energy subsidies (chart).

Share of Energy Subsidies

(In trillions of rupiah)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: Haver Analytics; and IMF staff estimates.

15. Energy subsidy reforms would be beneficial for several reasons. Generalized energy subsidies tend to be regressive—richer households tend to consume more energy than poor household. They are thus not a cost-effective way to support the poorest and most vulnerable households. Targeted social assistance programs would be more effective. They would also help avoid leakages, by explicitly excluding more well-off households (e.g., through means-testing), and allow to increase the support to households in greater need. More broadly, a comparison of household spending on electricity, gas and gasoline suggests a lower share in Indonesia compared to other ASEAN countries (chart). More targeted subsidies with clear policy purposes would also enable reallocation of scarce budget for other policy purposes.

Household Consumption Expenditure

(In percent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Source: UN data.

16. A broader reform of energy price control mechanisms would also be beneficial. With a move to targeted social assistance, the government could also consider more frequent adjustments in domestic retail prices with global market prices (Box 1). It could also consider a relaxation of price controls to promote competitiveness in fuel retail sales and power generation. While price controls can be justifiable in the case of a monopoly situation, private companies are permitted to enter the markets for retail fuels and power generation in Indonesia. Ex post regulation such as a price notification system would be superior to ex-ante regulation from the perspective of economic efficiency. The ex post regulation could ensure the regional pricing equality that the current ex ante regulation is required to achieve. More granular and targeted support to regions with high energy costs amid functioning market mechanism could be also an option.

17. Regulatory frameworks to promote investment should aim toward a greener economy. In 2019, Indonesia formulated a new regulation to accelerate the battery electric vehicle (EV) program for road transportation, to support the goal of becoming an EV hub for Asia and beyond with a 20 percent target share in total car production by 2025. Indonesia has natural resources such as nickel, that are important raw materials for batteries. This EV policy could be a solution to reconcile both development and green strategy and could contribute to absorbing labor from fossil related industries.18 The policy could be complemented by a feebate scheme imposing sliding scale of fees on cars with above average emissions rates and giving a sliding scale of rebates to vehicles with below average emission rates. On the other hand, the recent omnibus bill on job creation has relaxed the regulation on environmental assessment and included royalty incentives to promote investment in the mining sector, which might include coal mining. In formulating the implementing regulation, the government should ensure that it incentivizes green investment and disincentivizes fossil fuel investment.

18. Looking ahead, the introduction of a carbon tax could be also an effective mitigation measure. The estimated reduction in CO2 emission from a carbon tax indicates that this instrument could help Indonesia further in achieving emission targets (Table 3, IMF (2021)). Even in the case of a moderate rate of US$25 per ton CO2, the carbon tax could cut emissions by 13.0 percent. The domestic environmental benefits from reduced pollution, traffic congestion, and accident casualties, would likely outweigh the domestic economic costs. On the revenue side, a carbon tax with the rate of US$25 per ton CO2 could raise 0.7 percent of GDP, which could be used in part for compensation payments.

Table 3.

Indonesia: Impact of Carbon Tax, 2030 1/

article image
Sources: IMF (2021); and IMF staff calculations.

Baseline prices are retail prices estimated in Coady and others (2019) and include preexisting energy taxes. Baseline prices for coal and natural gas are based on regional reference prices. Baseline prices for electricity and gasoline are from cross-country databases. Impacts of carbon taxes on electricity prices depend on the emission intensity of power generation. Carbon tax prices are per ton. GJ = gigajoule; kWh = kilowatt-hour.

19. The carbon tax impact on cost varies among industry sectors (Table 4). In the case of US$25 tax per ton CO₂, overall jobs at risk are limited in the medium term. By sector, the mining and quarrying sector and the electric and gas sector could not absorb the carbon tax impact in the short term. This suggests that labor reallocation from the mining and quarrying sector would be inevitable. In the case of a US$50 or US$75 tax per ton CO₂, the cost increase and jobs-at-risk are higher. However, gradual implementation over several years could spread out the jobs-at-risk. New jobs related to green technology could smooth the movement of labor into other sectors. The introduction of a carbon tax could help raise budgetary resources to support and accelerate job reallocation and finance workers retraining programs.

Table 4.

Indonesia: Effects of Carbon Tax on Cost and Employment 1/

article image
Source: IMF staff estimates.

See Annex 5 of the IMF (2021) for methodology. The figures of the cost increase by carbon tax show the production cost increase from higher energy prices, both direct and indirect, as a result of a carbon tax, assuming full pass-through in upstream sectors, and no pass-through of higher costs to producer prices. The figures of the medium -term jobs-at-risk are calculated by subtracting sector growth rates as of 2019 from thejobs-at-risk number based on the methodology.

D. Policies for Climate Change Adaptation

20. The National Action Plan for Climate Change Adaptation (RAN-API) developed in 2014 includes comprehensive strategies for adaptation. The plan identified areas affected by the rise in land and sea surface temperature and sea level, change in rainfall patterns, and the occurrence of extreme weather events. The objective of the plan is to build the resilience of (i) economy with emphasis of food security and energy independence aspects; (ii) living systems with emphasis of public health, housing and infrastructure; (iii) environmental ecosystems of forest and biodiversity; and (iv) urban areas, coastal areas and small islands.

21. The adaptation plan should include fiscal costs to facilitate its implementation. The plan should have fiscal backing for its implementation, but currently lacks such resources. In order to make the plan feasible, it would be crucial to determine the necessary medium-term expenditure, given Indonesia’s limited tax base.

22. The progress in advancing the plan should be monitored and reviewed regularly. It would be crucial to ensure nationwide capacity development for adaptation given the broad impacts of climate change on Indonesia. The government should strengthen the monitoring and review process for the plan to enhance the Indonesia’s adaptation capacity. The capital movement plan, including its fiscal aspects, should be integrated into the adaptation plan to allow for a holistic perspective on adaptation policies.

E. Conclusion and Recommended Policy Frameworks

23. Indonesia’s climate change related risks, including transition risk, have been increasing, given more frequent natural disasters and the economy’s reliance on coal. Preparations for managing these risks should continue.

24. To this end, additional climate change mitigation and adaptation measures should be initiated.19 Particularly, Indonesian people could instantly benefit from energy subsidy reforms and from restructuring of energy pricing mechanism since some fuel retail prices are estimated to be higher than cost of supply due to market price drop. The paper suggests that the following policy steps should be considered:

  • A comprehensive transition plan toward a greener economy: It should be formulated as early as possible to allow for gradual transition. The plan should include steps to facilitate the reallocation of labor to other sectors, including capacity building, a road map of alternative revenue mobilization, such as carbon tax, and additional financial regulation for bank capital buffers, given risks from stranded assets.

  • Reforestation incentive scheme: In order to facilitate a cycle of deforestation and subsequent reforestation, it would be worthwhile considering a feebate scheme consisting of levies imposed on landowners for reducing carbon storage and subsidies for landowners who increase carbon storage. Alternatively, a tax on commodities from plantations could be an option of revenue resources for reforestation.

  • Renewable energy generation incentive scheme: A feebate scheme—e.g., levies imposed on power generators with above average emissions per kWh and rebates for generators with below average emissions per kWh—could be an option. Updating the National Energy Policy including policy support for renewable energy generation could reinforce its commitment toward a greener economy and attract international support as well as the ESG investment.

  • Reforms of energy subsidies and energy pricing mechanisms: The 2021 energy subsidy reform should be implemented as soon as possible. A functioning, market-based price adjustment for fuels and electricity, which would allow for full cost recovery in the related sectors, would be an important structural reform for greener economic development in Indonesia. At the same time, the direct support of low-income households should be strengthened.

  • Vehicle incentive scheme: A feebate scheme—imposes sliding scale of fees on cars with above average emissions rates and gives a sliding scale of rebates to vehicles with below average emission rates—could support a greater market share for electric vehicles.

  • Harmonizing implementing rules for the Omnibus Bill on Job Creation with green investment: The regulation could include incentives for green investment and disincentives for fossil investment.

  • Introduction of a carbon tax: It could be an effective mitigation measure for the Indonesian economy, given its reliance on coal and limited revenue base. A coal tax could be an alternative;

  • Strengthening the monitoring and reviewing process of adaptation measures: The government should ensure the progress of the adaptation action plan, including the capital movement plan. Its fiscal costs and financing should be integrated into the plan.

Indonesia’s Energy Subsidies and the 2021 Reform Proposed by the Government

The government uses energy subsidies and price controls to support low-income household and to ensure price equality across provinces. Indonesia has two types of energy subsides, namely ex ante and ex post subsidies. An ex ante subsidy aims to lower costs for mainly supporting low-income households. An ex post subsidy, called as a compensation subsidy, fills the gap between the unit costs of supply and the retail prices for a unit of energy determined by the government. In other words, the need for compensation subsidies arises from the energy price controls imposed on energy distributors.

The subsidized fuels are premium gasoline, diesel, kerosene, and 3 kg LPG cylinders (LPG), all fuels that are widely used by households. Among the subsidized fuels, only diesel enjoys a fixed rate subsidy (IDR 1,000 per liter). Due to the price controls, all authorized retailers receive compensatory subsidies for kerosene and LPG. Similarly, Pertamina receives compensation subsidies for premium gasoline and diesel since the prices of these fuels sold by Pertamina are determined by the government. However, there is no effective monitoring system in place, and all users benefit from these subsidized fuels despite the policy intentions.

The Ministry of Energy and Mineral Resources determines all fuel retail price settings of Pertamina, the state-owned oil company. Other retailers also need to adhere to the government’s pricing guidelines for fuels. Retail prices of fuels should, in principle, be adjusted in line with international market prices at least every three months. In practice, however, adjustments are infrequent. The price of LPG, for example, has been constant since 2008. Retail prices of other fuels have also been unchanged in recent years (charts 1–4).

Electricity is also partly subsidized. PLN, the state-owned electricity company, has a monopoly for electricity distribution. The subsidy targets customers purchasing 450VA and 900VA, assuming that they are poor households. The government controls all retail prices and provides compensation to PLN for the price difference between cost of supply and retail prices. According to the Ministry of Finance, however, the subsidies and compensation are not well targeted to low-income household. Like fuels, retail prices of electricity should, in principle, be adjusted to fluctuation of cost of supply at least every three months, but real price adjustments are infrequent in practice (chart 5–6).

The measures used in the 2021 energy subsidy reform plan will make subsidies more targeted and effective, and they should be implemented as early as possible. The reform involves a paradigm change, shifting from commodity-based subsidies to people-based subsidies, with the latter being part of the Social Protection Program. The plan intends to take advantage of the market price mechanism given the momentum of falling oil prices. The plan includes the following measures: reduction of the fixed diesel subsidy from IDR 1,000 to IDR 500 per liter; application of market price adjustments to premium gasoline and electricity for non-subsidized customers, leading to elimination of the relevant compensation subsidy; gradual price adjustment of LPG, accompanied by integrating related subsidies into social assistance transfers.

LPG Price

(In rupiah per kilogram)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: Indonesian Ministry of Finance estimation; and IMF staff estimates.

Gasoline 88 Price

(In rupiah per liter)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: Indonesian Ministry of Finance; and IMF staff estimates.

Diesel Price

(In rupiah per liter)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: Indonesian Ministry of Finance; and IMF staff estimates.

Kerosene Price

(In rupiah per liter)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: Indonesian Ministry of Finance; and IMF staff estimates.

Distribution of Subsidy and Compensation among Households, Electricity

(In percent)

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: 5usenas 2013; and Indonesian Ministry of Finance estimates.

Compensation Beneficiary, 2019

Citation: IMF Staff Country Reports 2021, 047; 10.5089/9781513570860.002.A007

Sources: Pemsahaan Listrik Negara; and Indonesian Ministry of Finance.

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1

Prepared by Koki Harada (APD).

2

INFORM is a collaboration of the Inter-Agency Standing Committee Reference Group and the European Commission; it publishes natural hazard risk based on a country’s hazards and exposure, vulnerability and lack of coping capacity dimension.

3

Bündnis Entwicklung Hilft and Ruhr University Bochum, Institute for International Law of Peace and Armed Conflict (IFHV) publishes the World Risk Index based on countries’ exposure, vulnerability, susceptibility, lack of coping capacities and lack of adaptive capacities.

4

The forest contains 50 percent of tropical peat swamps in the world. Peatland contains rich carbon and highly flammable. Wildfire would be difficult to extinguish, and greenhouse gas emission level would intensify.

5

According to the First Nationally Determined Contribution of Indonesia, 42 million people may be affected.

6

The oil, gas and geothermal mining sector, the coal and lignite coal mining sector, and the coal and gas refining sector account for 2.8 percent, 2.3 percent and 2.1 percent of total GDP, respectively, in 2019.

7

Over 60 percent of the total coal production in Indonesia was exported in 2019.

8

Oil, gas, and coal mining royalties were 4.3 percent, 1.9 percent, and 1.3 percent of total revenue, respectively, in 2019.

9

Based on the total emission excluding Land Use Change and Forestry (LUCF).

10

According to the World Resources Institute, this data is useful as reference. More generally, users should note that the errors and uncertainties associated with these (and other LUCF) estimates may be significant (See World Resources Institute, 2015, CAIT Country Greenhouse Gas Emissions: Source & Methods, June).

11

It includes social forestry program, which offers farmers the opportunity to use designated forest plots legally for up to 35 years.

12

A retail issuance also took place for local investors in November 2019, for a total of IDR 1.46 trillion, approximately US$0.10 billion.

13

The strategy aims at protecting state-owned asset (national and subnational), key public infrastructure, households and communities, recovering social aspect of communities, supporting the development of domestic insurance industry. Its financing schemes such as pooling fund and insurance are tailored to fit to respective disaster risk.

14

The source of the estimates is the Climate Action Tracker (CAT). It also states that Indonesia’s climate commitments are not consistent with either limiting global temperature increase to 2°C or the Paris Agreement goal of 1.5°C. The CAT is an independent scientific analysis under a collaboration of two organizations, Climate Analytics and New Climate Institute.

15

Following the disastrous fire of 2015, the government issued regulations suspending the development of peatlands and rezoning conservatory lands to prevent future outbreaks of fire.

16

In 2014, Indonesia announced a project allowing forest-dependent communities access to 12.7 million hectares of forest through social forestry permits, which give local communities control of some parts of the forest. The permitted communities use the land to establish forest enterprises like ecotourism ventures or sustainable production of goods such as bamboo or rattan. As of June 2020, Indonesia has distributed around 4.2 million hectares of land.

17

As of 2018, power plant installed capacity of new renewable energy is 14 percent of total and power production of new renewable energy is 17.1 percent.

18

Regarding its related spending, investment support should be temporary in nature. This should be clearly and transparently communicated in the budget and accompanied by cost-effectiveness assessment.

19

See also IMF (2021). The paper analyzes how fiscal policy can address challenges from climate change in Asia and the Pacific. It aims to answer how policymakers can best promote mitigation, adaptation, and the transition to a low-carbon economy, emphasizing the economic and social implications of reforms, potential policy trade-offs, and country circumstances.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Indonesia: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2021: Issue 047
Publisher:
International Monetary Fund
ISBN:
9781513570860
ISSN:
1934-7685
Pages:
117
DOI:
https://doi.org/10.5089/9781513570860.002

Natural Disasters in Indonesia

(Number of events)

Major Coal Exporters, 2019

(In percent of total)

Major Palm Oil Exporters, 2019

(In percent of total)

Signatories of Principles for Responsible Investment

(Number of signatories)

Environmental, Social, and Governance Asset Value

(In billions of U.S. dollar)

Greenhouse Gas Emissions, 2017

(In metric tons of C02 equivalent)

Greenhouse Gas Emissions Per Capita

(In metric tons of C02 equivalent)

Indonesia’s Greenhouse Gas Emissions—LUCF and Others

(In metric tons of C02 equivalent)

Greenhouse Gas Emissions by Type of Gas

(In metric tons of C02 equivalent)

Greenhouse Gas Emissions by Sector

(In metric tons of C02 equivalent)

Electricity Production by Source

(In percent)

Greeenhouse Gas Emissions excluding Forestry

(Metric ton C02 per year)

Fiscal Stimulus Measures

(In trillions of rupiah)

G-20: Climate Relevance of Fiscal Measures Related to COVID-19 Crisis 1/

(In percent of GDP, left scale; in percent of total, right scale)

Share of Energy Subsidies

(In trillions of rupiah)

Household Consumption Expenditure

(In percent)

LPG Price

(In rupiah per kilogram)

Gasoline 88 Price

(In rupiah per liter)

Diesel Price

(In rupiah per liter)

Kerosene Price

(In rupiah per liter)

Distribution of Subsidy and Compensation among Households, Electricity

(In percent)

Compensation Beneficiary, 2019