Indonesia has been subsidising fossil fuels since the late 1970s, with the aim to help poor and vulnerable households gain access to affordable energy. However, the policy has never achieved these goals, and household energy subsidies benefit wealthy groups more than poor and vulnerable groups.
Increasingly Indonesia is making energy transition a top priority: first as G20 President in 2022 and then as ASEAN Chair in 2023, and also submitting its long-term commitment to achieve Net Zero Emissions by 2060 (or earlier with international assistance). At the domestic level, policy measures such as the early retirement of coal-fired power plants and the acceleration of electric vehicles are receiving increased attention, and financing vehicles like the Energy Transition Mechanism Country Platform and Just Energy Transition Partnership (JETP) have also been established. However, this public commitment is being undermined by Indonesia’s household energy subsidy policy.
By tackling this challenging policy area, Indonesia’s new President Prabowo can accelerate pace towards achieving the country’s Net Zero Emissions target, and also help to facilitate his new government’s goal of achieving 8 per cent annual economic growth.
While Indonesia would benefit from tackling fossil fuel subsidies at all levels, this new CPD policy brief looks specifically at household subsidies for energy consumption. It outlines the case for reform, and demonstrates how the government could free up an estimated 50 trillion Indonesian Rupiah (over $3 billion USD) from the state budget.
This policy brief explores Indonesia’s household subsidies for energy consumption, and lays out a pathway for reform that will be crucial for achieving a just transition in Indonesia.
Household energy subsidy policy is not only not achieving its policy goals but actively worsening inequality and fossil fuel dependence in Indonesia. This brief outlines five main problems with the current system:
Reforming the household energy subsidy would not only create greater social equity, but would also lead to less overall demand for energy, and encourage greater use of renewables.
The over 50 trillion IDR saved by these reforms could also be spent on sustainable development priorities, including policies to facilitate greater take up of renewables.
This will have huge benefits to national wellbeing, and enable Indonesia to meet or exceed its climate targets. It’s not just about balancing budgets; it’s also about creating a fairer and more sustainable future for all.
After making the case for why reform is important, this short brief then outlines how this can be achieved, through the following four steps:
This policy brief expands on one of the nine recommendations made to new Indonesian President Prabowo at a media briefing in October, alongside colleagues from the Energy Transition Policy Development (ETP) Forum.
The ETP Forum was established in 2022 and comprises leading Indonesian and international think tanks including CPD, Climateworks Centre, the Indonesian Research Institute for Decarbonisation, the Institute for Essential Services Reform, the Purnomo Yusgiantoro Centre and the International Institute for Sustainable Development. The ETP Forum helped coordinate support to Indonesia’s G20 Presidency in 2022 and ASEAN Chairship in 2023.
