Phasing Out Energy Subsidies in Indonesia

Abstract

The oil price hike in 2007-08 underlined the vulnerability of Indonesia’s energy subsidy policy to oil price volatility. In addition to entailing significant economic and environmental costs, energy subsidies put pressure on the public budget and benefit mostly rich households. Phasing them out would benefit both the economy and the environment. At the same time, past experience in Indonesia and elsewhere suggests that such a reform is likely to face stiff opposition and will therefore need to be carefully designed and communicated. Compensation in the form of targeted cash transfers will help to shield low-income households from attendant rise in energy prices. This Working Paper relates to the 2010 OECD Economic Review of Indonesia (www.oecd.org/eco/surveys/Indonesia). Éliminer progressivement les subventions à l'énergie en l'Indonésie La flambée des prix du pétrole de 2007-08 a montré que la politique de subventions à l’énergie de l’Indonésie était sensible à la volatilité des prix du pétrole. En plus d’entraîner des coûts économiques et environnementaux importants, les subventions à l’énergie pèsent sur les finances publiques et profitent essentiellement aux ménages aisés. Leur suppression progressive aurait donc des effets positifs sur l’économie comme sur l’environnement. Toutefois, l’expérience de l’Indonésie et d’autres pays montre qu’une telle réforme risque de rencontrer une vive opposition et qu’il importe donc d’accorder une grande attention à la façon dont elle est conçue et expliquée. Des mécanismes de compensation sous forme de transferts monétaires ciblés contribueront à protéger les ménages à faible revenu de la hausse des prix de l’énergie induite par la réforme. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de l’Indonésie 2010 (www.oecd.org/eco/etudes/Indonesie).Indonesia, biofuels, energy subsidies, bio-carburants, Indonésie, subventions d'énergie

Modelling of Distributional Impacts of Energy Subsidy Reforms: An Illustration with Indonesia

“…To limit the impact of the 2005 reform on the poorest households, the Bantuan Langsung Tunai (BLT) unconditional cash transfer programme was introduced (Mourougane, 2010;Miranti et al, 2013). This programme, working through the postal system, concerned more than 19 million households who received a monthly a payment equivalent to USD 10 during 12 months in [2005][2006].…”

Modelling of distributional impacts of energy subsidy reforms

“…Source: Authors' review, inspired by Mourougane (2010) The studies in Table 1 are generally in line in terms of their evaluation of distributional impacts. The direct effect of the subsidies phase-out reform, due to the increase in final consumer prices, will benefit more proportionally to low and middle income households.…”

“…Given that commercial energy consumption increases with income, the subsidies benefit wealthier households more (Mourougane, 2010). According to IEA (2012) Fuel subsidies, by encouraging fossil-fuel burning, increase GHG emissions, as well as local air pollution.…”

“…Since the early 2000s, the fossil fuel subsidy mechanism has been progressively reformed. In 2001, fuel prices for industrial users were anchored to 50% of international prices (Dartanto, 2013, as a result of an increase in international prices there was a rise in fossil fuel subsidy expenditure (Dartanto, 2013;Mourougane, 2010).…”

“…In 2005, energy consumption subsidies were partially cut and energy prices for households and small businesses were very strongly increased (Dartanto, 2013;Mourougane, 2010). On the one hand, the higher consumer prices introduced in 2005 lifted temporarily the pressure on public finances.…”