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Scenarios for Climate Change Mitigation from the Energy Sector in Indonesia: The Role of Fiscal Instruments

Author

Listed:
  • Arief Anshory Yusuf

    (Department of Economics, Padjadjaran University)

  • Ahmad Komarulzaman

    (Department of Economics, Padjadjaran University)

  • Wawan Hermawan

    (Department of Economics, Padjadjaran University)

  • Djoni Hartono

    (Graduate Program of Economics, University of Indonesia)

  • Kindy R. Sjahrir

    (Fiscal Policy Office, Ministry of Finance. Republic of Indonesia)

Abstract

As mandated by the recent Copenhagen Accord, Indonesia submitted a nationally appropriate mitigation actions plan to reduce greenhouse gasses emission by 26% by 2020. However, for now, specific strategies especially appropriate instruments to achieve those targets are yet under early planning stage. This study is an attempt to contribute to the policy design on how Indonesia can achieve that target in particular for the energy sector by looking directly at specific instruments available and under the discretion of Indonesian government particularly the Ministry of Finance. For this purpose, we constructed AGEFIS-E model, a computable general equilibrium (CGE) model with a focus on energy sector and fiscal instruments. As the departure from the previous literature on CGE modeling in Indonesia, this model incorporates explicitly the renewable energy such as geothermal and hydropower. It was used to exercise various scenarios of finding an effective mix of instruments to reduce emissions from the energy sector. We find that a scenario of engineering the energy relative prices through pricing-instruments is an effective way to achieve a given target of reducing emissions from the energy sectors. More specifically, we conclude that removing energy subsidy (fuel and electricity) can contribute to significant reduction in carbon emissions. Adding a carbon tax to the policy mix will complement to find the best scenario to achieve a certain target of emissions reduction. A target of 14% reduction of emissions from the energy sector, for example, can be achieved by removing energy subsidy complemented by a carbon tax of only around US$3/ton CO2. Half of the reduction is attributed to the removing energy subsidy alone, suggesting evidence that the emissions reduction potential of energy pricing reform has been overlooked in the policy agenda.

Suggested Citation

  • Arief Anshory Yusuf & Ahmad Komarulzaman & Wawan Hermawan & Djoni Hartono & Kindy R. Sjahrir, 2010. "Scenarios for Climate Change Mitigation from the Energy Sector in Indonesia: The Role of Fiscal Instruments," Working Papers in Economics and Development Studies (WoPEDS) 201005, Department of Economics, Padjadjaran University, revised Jul 2010.
  • Handle: RePEc:unp:wpaper:201005
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    Citations

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    Cited by:

    1. Alberto Gago & Xavier Labandeira & Xiral López Otero, 2014. "A Panorama on Energy Taxes and Green Tax Reforms," Hacienda Pública Española / Review of Public Economics, IEF, vol. 208(1), pages 145-190, March.
    2. Kindy R. Sjahrir, 2018. "Systems Dynamics Economic Modelling of the Fiscal Impacts from the Indonesia’s 1st Nationally Determined Contribution (NDC)," Working Papers in Economics and Development Studies (WoPEDS) 201805, Department of Economics, Padjadjaran University, revised Dec 2018.
    3. Olivier Durand-Lasserve & Lorenza Campagnolo & Jean Chateau & Rob Dellink, 2015. "Modelling of distributional impacts of energy subsidy reforms: an illustration with Indonesia," OECD Environment Working Papers 86, OECD Publishing.
    4. Lee, Soo Min & Kim, Yeon-Su & Jaung, Wanggi & Latifah, Sitti & Afifi, Mansur & Fisher, Larry A., 2015. "Forests, fuelwood and livelihoods—energy transition patterns in eastern Indonesia," Energy Policy, Elsevier, vol. 85(C), pages 61-70.
    5. Djoni Hartono & Tony Irawan & Ahmad Komarulzaman, 2014. "Energy Pricing Policies in Indonesia: A Computable General Equilibrium Model," EcoMod2014 7344, EcoMod.
    6. Cabalu, Helen & Koshy, Paul & Corong, Erwin & Rodriguez, U-Primo E. & Endriga, Benjamin A., 2015. "Modelling the impact of energy policies on the Philippine economy: Carbon tax, energy efficiency, and changes in the energy mix," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 222-237.
    7. Asian Development Bank Institute, 2017. "Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reforms - Integrative Report," Working Papers id:11807, eSocialSciences.

    More about this item

    Keywords

    climate change; computable general equilibrium model; fiscal instruments; energy; Indonesia;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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