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Distributional impacts of energy consumption subsidy phase out in Indonesia: A computable general equilibrium analysis

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  • Durand-Lasserve, Olivier
  • Campagnolo, Lorenza
  • Chateau, Jean
  • Dellink, Rob

Abstract

This paper focuses on the distributional impacts of a phasing out of energy consumption subsidies in Indonesia. Macroeconomic and environmental consequences are also considered. The analysis highlights the importance of redistribution schemes that can replace subsidies to make the reform progressive while being neutral for the government’s budget. A new version of the OECD ENV-Linkages CGE model is used that integrates more than 10 000 representative household groups for Indonesia, taken from IFLS4 survey data, to simulate a full phasing out of energy consumption subsidies for both households and firms at horizon 2020. Three alternative stylized redistribution schemes are considered: direct payment on a per household basis (cash transfer scenario), support to labour incomes (labour support scenario), and subsidies on food products (food subsidies scenario). It appears that the direct effect of the reform due to the increase in commodity prices (mostly energy) is regressive but that the cash transfers, and, to a lower extent the food subsidies, can make the total effect progressive. In contrast, the scenario with support to labour income is regressive, given that it fails to reach households with revenues from the informal sector, which are overrepresented among the poor. Depending on the redistribution scheme, the GDP impact ranges from +0.7% to +0.5% compared with a baseline. Beneficial impacts come from both the reduction of deadweight losses due to the subsidy phase out and from increased savings and investments. The best GDP performance is achieved by the cash transfers scenario, while food subsidies harm efficiency in the long run and labour support is detrimental to investment. The phasing out of subsidies contributes to a decrease of national energy-related CO2 emissions (w.r.t. baseline) by 10-12%, with the bulk of the emission reduction effort coming from the households. The more progressive the scheme is, the larger the contribution of high income household groups to total emission reductions.

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  • Durand-Lasserve, Olivier & Campagnolo, Lorenza & Chateau, Jean & Dellink, Rob, 2014. "Distributional impacts of energy consumption subsidy phase out in Indonesia: A computable general equilibrium analysis," Conference papers 332451, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332451
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    3. World Bank, 2008. "Climate Change and the World Bank Group - Phase I : An Evaluation of World Bank Win-Win Energy Policy Reforms," World Bank Publications - Reports 10594, The World Bank Group.
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