Fossil fuel subsidy reform: lessons from the Indonesian case

Global assessments of consumption and the Indonesian case show the relevance of non-household consumers of subsidized energy products. As shown in this study, understanding in more nuance how reforms affect them has the potential to improve the reforms that will be developed by policy-makers worldwide. Further study can reinforce the many benefits of successful reform for the countries and societies slowly turning away from these policies of the past. Estimates regarding the amount of public funds utilized to subsidize the production or consumption of fossil fuels are staggering. For 2011, they range from $83 billion in OECD member states, to nearly $4.1 trillion worldwide if environmental externalities are considered. Numerous studies have demonstrated that subsidies repress economic growth, undermine energy sector investment, increase public debt, benefit wealthy citizens over the poor, instigate a rise in illicit activities, and engender greater global and local pollution. The negative effects of fossil fuel subsidies have led numerous governments to reform their energy policies. There has also been a growing international consensus in favor of reform. While the components of successful reform programs have been identified through past case studies, the nature of reforms adopted by several governments that target non-households have not been systematically examined. Since the late 1990s, the Indonesian government has implemented numerous reforms of its fossil fuel subsidies, including measures targeting household as well as non-household energy consumption. In doing so, it has incurred significant fiscal savings. However, an innovative budgetary analysis reveals that households receive a minority, and a declining share, of fossil fuel subsidy funds. This is the case despite the fact that subsidies were implemented to ensure poor households have access to cheap energy. These findings demonstrate the need to consider non-household sectors in the design of fossil fuel subsidy reforms. They also highlight the limitations of conventional policy approaches and past studies of reforms which focus almost exclusively on household consumption