Balancing equity, environmental and growth objectives: a case study of electricity subsidy reform in a large polluting developing country

ABSTRACT

This article examines the impact of Indonesia’s electricity reform and meeting its 2030 carbon emissions and 2050 renewable energy targets on the country’s economic growth, carbon emissions and poverty and income distribution. Simulation results from a dynamic computable general equilibrium model show that energy reform and carbon tax in Indonesia have a regressive impact while the gasoline tax has a progressive impact. Of the two demand side policies, gasoline tax was found to be more harmful than the carbon tax, resulting in GDP loss, declining investment, higher energy prices, and rising urban and rural poverty. A hybrid policy comprising a renewable energy mix target (supply side policy) and a carbon tax (demand side policy) is a viable option for minimising GDP loss, income disparity and carbon emissions. However, the transition towards renewable energy use is fraught with challenges for Indonesia.

KEYWORDS:

• Rural and urban poverty
• income inequality
• carbon emissions
• dynamic computable general equilibrium model
• renewable energy mix

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 An inclusive error concerns a subsidy that benefits a wealthy household and an exclusive error concerns a subsidy that misses a poor household.

2 Under SIM2, we target a 31 per cent target of renewable energy in 2050. We work backwards by running several trials using various levels of carbon tax (simultaneously with electricity subsidy removal and renewable energy investment) to achieve a 31 per cent target of renewable energy in 2050. We identified that $3.9/tCO₂ is sufficient to annually generate tax revenue to fund the ‘green’ investment gap.

3 These taxes are applied at a constant tax rate to simplify the analysis for readers to follow. More importantly, this approach is in line with the other studies and has been commonly used in dynamic CGE model analyses such as Freire-González (2018) and Liu and Lu (2015). However, as pointed out by a reviewer, constant carbon tax rate implementation is less realistic in real world application.