The pressing need for Indonesia's energy transformation to be supported by strong fiscal policies explained.
Indonesia, with its vast renewable energy resources, is embarking on a significant energy transition journey. However, the path is not without hurdles.
The country's heavy reliance on fossil fuels, particularly coal, which accounted for 59% of power generation in 2024, presents a formidable challenge. Additionally, energy disparities persist, with over 10,000 villages remaining unpowered. Uncertainties in government policy and institutional reforms under the current administration further complicate matters.
Economic priorities often conflict with ambitious climate goals, delaying the formal approval of stringent emission reduction targets and energy reforms. Political resistance and restructuring within energy governance agencies have caused setbacks in coherent policy execution.
However, there are potential solutions. The shift towards renewable energy sources is already underway, with a 40% capacity growth since 2019 and nearly 1,000 MW added recently. Indonesia aims to generate 42.6 gigawatts of renewable energy electricity by 2034.
Securing international support and investment can help bridge financing gaps and align conditional climate targets with domestic goals. Policies promoting just and inclusive energy development aim to ensure energy access equity while spurring green economic growth, job creation, and attracting billion-dollar investments.
Clear, ambitious, and consistent national climate plans, such as a robust next Nationally Determined Contribution (NDC), are key to steering Indonesia towards its net-zero target by 2060, balancing climate imperatives with economic realities.
The government has established carbon trading as one of its national climate control instruments, and carbon taxes are not merely fiscal measures but also important instruments in driving systemic energy transformation and low-carbon development. The minimum tax rate for carbon emissions in the coal-based electricity sector is IDR 30,000 (US$1.84) per tonne of CO2e.
Gradual carbon tax rate adjustments can encourage shifts towards more environmentally friendly energy consumption and enhance investor confidence in the government's consistent policy direction in supporting the energy transition and decarbonisation agenda.
However, the implementation of carbon taxes in sectors beyond the coal-based electricity sector requires a supporting regulatory framework. The measurement and reporting mechanisms for calculating emissions vary by sector, necessitating the involvement of relevant ministries from sectors with the potential to generate greenhouse gas emissions.
M. Arief Virgy, a researcher at The Habibie Center, a Jakarta-based human rights and democracy non-profit, emphasises the importance of these measures. As of the end of last year, renewables contributed to only 14.1% of the energy mix.
The domestic market obligation (DMO) policy requires coal producers to supply domestic power plants' needs at a maximum price of US$70 per tonne. The regulatory framework for carbon taxes has been established in the electricity sub-sector through Ministerial Regulation No. 16/2022.
However, challenges remain. The potential loss due to inappropriate subsidy allocation reached Rp 1.2 trillion (US$73.8 million) per month due to the unlinked data between the electricity customer data and the national ID number. Moreover, Indonesia only raised US$1.47 billion towards renewables in 2023, which is well short of the funds required to attain net zero by 2060 or earlier.
The government can integrate recipients of social assistance programs such as the Family Hope Program (PKH) and Non-Cash Food Assistance (BPNT) as eligible recipients of electricity subsidies to address this issue.
In conclusion, Indonesia's energy transition hurdles are primarily systemic, economic, and political, but with concerted policy clarity, investment, and inclusive growth strategies, the country has potential pathways to accelerate its renewable energy development and reduce greenhouse gas emissions effectively.
- Indonesia's energy transition journey is significant, but challenges persist due to heavy reliance on coal, energy disparities, uncertainties in policy, and political resistance.
- The shift towards renewable energy is underway in Indonesia, with a target of generating 42.6 gigawatts of renewable energy electricity by 2034.
- Securing international support and investment can help bridge financing gaps and align conditional climate targets with domestic goals.
- Policies promoting just and inclusive energy development aim to ensure energy access equity while spurring green economic growth, job creation, and attracting billion-dollar investments.
- Clear, ambitious, and consistent national climate plans, such as a robust next Nationally Determined Contribution (NDC), are key to steering Indonesia towards its net-zero target by 2060.
- Carbon taxes in the coal-based electricity sector have been established, and gradual tax rate adjustments can encourage environmentally friendly energy consumption and investor confidence.
- However, challenges remain, such as inappropriate subsidy allocation, insufficient funds raised for renewables, potential loss in revenue, and the need for a supporting regulatory framework beyond the coal-based electricity sector.
