Energy Transition in Support of the Low-Carbon Development Initiative in Indonesia

The report examines Indonesia's transport fuel subsidy regime, noting that while 2015 reforms initially saved over USD 15 billion, subsidies re-emerged as the government fixed prices despite rising international oil costs. This underpricing, particularly of 'Premium' gasoline, resulted in an estimated IDR 54.5 trillion in foregone revenue for Pertamina between 2014 and 2019. The author argues that subsidizing low-quality, high-sulphur fuels exacerbates urban air pollution and health costs, citing a 2010 study where air pollution-related treatment costs in Jakarta reached IDR 38.5 trillion. The document also analyzes the life-cycle emissions of biodiesel and electric vehicles, noting that EVs powered by Indonesia's coal-heavy grid may increase global warming potential compared to internal combustion engines. To resolve these issues, the report proposes three pricing models—smoothing, ratcheting, and cap-and-floor—to minimize price volatility while ensuring fiscal sustainability.

• Indonesia's 2015 fuel subsidy reforms initially achieved significant savings, exceeding USD 15 billion in that year, by removing budgetary support for 'Premium' gasoline and capping diesel subsidies at IDR 1,000 per litre.
• Despite reforms, the government's decision to hold fuel prices steady between April 2016 and June 2018 while international oil prices nearly doubled led to the re-emergence of subsidies, primarily borne off-budget by Pertamina.
• The underpricing of 'Premium' gasoline between 2014 and 2019 is estimated to have caused a loss of IDR 54.5 trillion (approximately USD 3.8 billion) in foregone revenue for Pertamina.
• Fuel subsidies encourage the use of low-quality, high-sulphur fuels, contributing to severe air pollution in Jakarta; a 2010 study estimated health treatment costs for pollution-related conditions in the city at IDR 38.5 trillion (USD 4.6 billion).
• The life-cycle global warming potential of electric vehicles (EVs) in Indonesia may be 1727 per cent higher than internal combustion engine vehicles because the national electricity mix is dominated by coal (54 per cent).
• The report proposes three alternative pricing mechanismssmoothing, ratcheting, and cap-and-floorto protect consumers from price spikes while maintaining fiscal sustainability and reducing subsidies.
• Simulations indicate that a 'smoothing' formula would have been the most effective at reducing both price and fiscal volatility, potentially resulting in a net gain for the government rather than the IDR 54.5 trillion subsidy incurred for Premium.

APA

Laan, T., & McCulloch, N. (2019). Energy Transition in Support of the Low-Carbon Development Initiative in Indonesia. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/energy-transition-transport-sector-indonesia.pdf

Chicago

Laan, Tara, and Neil McCulloch. Energy Transition in Support of the Low-Carbon Development Initiative in Indonesia. International Institute for Sustainable Development, 2019. https://www.iisd.org/system/files/publications/energy-transition-transport-sector-indonesia.pdf.

Wikipedia

{{cite report |last1=Laan |first1=Tara |last2=McCulloch |first2=Neil |title=Energy Transition in Support of the Low-Carbon Development Initiative in Indonesia |publisher=International Institute for Sustainable Development |date=October 2019 |url=https://www.iisd.org/system/files/publications/energy-transition-transport-sector-indonesia.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{laan2019energy, author = {Laan, Tara and McCulloch, Neil}, title = {{Energy Transition in Support of the Low-Carbon Development Initiative in Indonesia}}, institution = {International Institute for Sustainable Development}, year = {2019}, month = oct, url = {https://www.iisd.org/system/files/publications/energy-transition-transport-sector-indonesia.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }