Financing Green Recovery From Fossil Fuel Taxation and Subsidy Reform
Achieving a Fossil-Free Recovery in Indonesia | Brief 2
COVID-19 created a worldwide economic disruption, and many countries are developing support and recovery packages to help counterbalance the socio-economic effects of the crisis. The government could partially fill this budget gap by reforming some types of fossil fuel subsidies and taxes.
This brief provides an analysis of different options for raising money to support both the COVID-19 recovery budget and the energy transition.
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A total of IDR 261 trillion could be raised per year from taxing transport fuels and coal as well as reforming subsidies to these fuels. This amount is comparable to the total expenditures on social protection and health programs under COVID-19 recovery spending in 2020.
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Money raised from taxing and reforming subsidies to transport fuels and coal could be used to protect the poor, accelerate economic recovery, and support renewable energy development in Indonesia.
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Indonesia has pledged to combat climate change and submitted its updated NDC to the UNFCCC. Taxing and reforming subsidies to transport fuels and coal can drive consumers to move away from fossil fuel to cleaner energy alternative and help Indonesia achieve its climate and net-zero targets.
The COVID-19 pandemic has had a significant impact on Indonesia’s fiscal position, increasing debt levels above the 3% of GDP limit. As the Government of Indonesia (GoI) continues to support the recovery of its economy, it has to consider options to raise funds for the recovery budget that could also help the country achieve an energy transition away from fossil fuels. Taxing and reforming subsidies to coal and transport fuels are potential options to raise money while giving the right incentives to promote renewable energies. A total of IDR 261 trillion could be raised from these taxes and subsidy reforms which is almost half of the total 2020 COVID-19 recovery budget of IDR 584 trillion. Taxing fossil fuels and reforming fossil fuel subsidies could lead to increases in energy prices. The GoI can use the money raised to protect the poor by better targeting the subsidies. As the president of the G20 in 2022, Indonesia could take this opportunity to showcase its efforts to support the energy transition and make it an engine of economic recovery, while achieving its NDC targets and net-zero commitments.
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