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Scenarios for Climate Change Mitigation from the Energy Sector in Indonesia: The Role of Fiscal Instruments

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Author Info

  • Arief Anshory Yusuf

    ()
    (Department of Economics, Padjadjaran University)

  • Ahmad Komarulzaman

    ()
    (Department of Economics, Padjadjaran University)

  • Wawan Hermawan

    ()
    (Department of Economics, Padjadjaran University)

  • Djoni Hartono

    ()
    (Graduate Program of Economics, University of Indonesia)

  • Kindy R. Sjahrir

    ()
    (Fiscal Policy Office, Ministry of Finance. Republic of Indonesia)

Abstract

As mandated by the recent Copenhagen Accord, Indonesia submitted a nationally appropriate mitigation actions plan to reduce greenhouse gasses emission by 26% by 2020. However, for now, specific strategies especially appropriate instruments to achieve those targets are yet under early planning stage. This study is an attempt to contribute to the policy design on how Indonesia can achieve that target in particular for the energy sector by looking directly at specific instruments available and under the discretion of Indonesian government particularly the Ministry of Finance. For this purpose, we constructed AGEFIS-E model, a computable general equilibrium (CGE) model with a focus on energy sector and fiscal instruments. As the departure from the previous literature on CGE modeling in Indonesia, this model incorporates explicitly the renewable energy such as geothermal and hydropower. It was used to exercise various scenarios of finding an effective mix of instruments to reduce emissions from the energy sector. We find that a scenario of engineering the energy relative prices through pricing-instruments is an effective way to achieve a given target of reducing emissions from the energy sectors. More specifically, we conclude that removing energy subsidy (fuel and electricity) can contribute to significant reduction in carbon emissions. Adding a carbon tax to the policy mix will complement to find the best scenario to achieve a certain target of emissions reduction. A target of 14% reduction of emissions from the energy sector, for example, can be achieved by removing energy subsidy complemented by a carbon tax of only around US$3/ton CO2. Half of the reduction is attributed to the removing energy subsidy alone, suggesting evidence that the emissions reduction potential of energy pricing reform has been overlooked in the policy agenda.

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File URL: http://lp3e.fe.unpad.ac.id/wopeds/201005.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Department of Economics, Padjadjaran University in its series Working Papers in Economics and Development Studies (WoPEDS) with number 201005.

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Length: 13 pages
Date of creation: Jul 2010
Date of revision: Jul 2010
Handle: RePEc:unp:wpaper:201005

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Keywords: climate change; computable general equilibrium model; fiscal instruments; energy; Indonesia;

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