Jakarta, January 31, 2019— Indonesia is one of the few developing countries that can boast it has reduced fiscal dependence on revenues from fossil fuel production while growing and diversifying both its economy and government revenue base, according to a new report released today by the Global Subsidies Initiative of the International Institute for Sustainable Development.

The report, Beyond Fossil Fuels: Indonesia’s Fiscal Transition, examines how Indonesia taxes and subsidizes oil, gas, coal and electricity. The authors found that, as those commodity prices plunge on the world market, a clean energy transition would benefit not just the environment, but also Indonesia’s government budget.

The contribution of tax and non-tax revenue to the Government of Indonesia’s budget depends on fluctuations in world prices for oil, gas and coal. While these prices are volatile, the overall downward trend is clear. Revenues from upstream oil and gas dropped from 35 per cent of the total Government of Indonesia revenues (7 per cent of GDP) in 2001 to just 6 per cent (less than 1 per cent of GDP) in 2016. With the decreasing oil and gas exports and uncertain prices on the world market, revenues from the fossil fuel sector are bound to plunge further in the near future.

For several decades, the Indonesian government stimulated the development of manufacturing, finance and other sectors. As those sectors grew, they also became bigger taxpayers. Due to this economic diversification, Indonesia’s rates of GDP growth (at 3–4 per cent per year) and budget deficit (at 2–3 per cent) remained largely unchanged over 2001 to 2016, regardless of the decreasing role of the fossil fuel sector. 

“Indonesia’s past shows it can grow its economy without expanding fossil fuel extraction, though more can be done to build up its clean energy sector,” says Philip Gass, Senior Policy Advisor and Lead of IISD’s Indonesia program. “As revenues from fossil fuels decline, it is more important than ever that this clean energy transition be accelerated.”

From 2014 to 2016, the Government of Indonesia collected an annual average of IDR 190 trillion (USD 16 billion) in tax and non-tax revenues from upstream oil and gas. According to the IISD analysis, during the same period it spent the same amount on fuel and electricity subsidies. Without increasing net revenue, these subsidies encourage wasteful consumption of energy, leading to faster depletion of Indonesia’s oil, gas and coal reserves. 

For efficient allocation of resources and a level playing field for various energy types, such subsidies should be phased out while vulnerable energy consumers should receive more targeted assistance. “To the Government’s credit, it has already reformed some fossil fuel subsidies, with positive results,” notes Lucky Lontoh, IISD Coordinator in Indonesia. “For example, as part of its recent subsidy reforms in 2014, the Government of Indonesia removed transport fuel subsidies, and at the same time was able to make greater investments into infrastructure, supports for communities and social assistance programs. If Indonesia undertakes more subsidy reform, we can move faster to clean energy and save revenues for investments that benefit all people.”

IISD’s report argues that revenues from the taxation of fossil fuel production and consumption as well as savings from fuel subsidy reform should be invested in productive uses supporting social development and economic diversification. Investment of government revenues from fossil fuels should also be visible and in line with the interests of vulnerable groups. Potential areas for this investment include social safety nets, healthcare, education and other public services and infrastructure. These investments should also create sustainable jobs and support a transition path, including in rural areas and areas currently depending on fossil fuels. Investments in renewable energy and energy efficiency could drive diversification of the Indonesian economy and its fiscal transition away from fossil fuels.