Escalating oil prices and the need to control carbon emissions sound the alarm for Indonesia to reduce or be more efficient in its energy
use. Instead of eliminating the fuel oil subsidy to promote better and more efficient use of energy, the Indonesian government seems to
be more in favour of restricting energy use by, for example, requiring all hotels, restaurants, night clubs and other business activities to
close down by 1 am. Societies need to understand the full consequences of adopting restricting energy use and more efficient energy use
strategies toward their incomes. This paper aims to analyse the impact on the economy of energy policies aiming to reduce and to
improve the efficiency of energy use, particularly on the income of various household groups. This paper will, first, construct a Social
Accounting Matrix for Indonesia with detailed energy sectors and, second, utilise various multiplier analyses to observe and understand
the impact of these energy policies.
Oil has played an important role as Indonesia’s main
energy source. In the last 10 years, approximately 65.5
percent of Indonesia’s total energy consumption has come
from crude oil (Center of Data and Information—Ministry
of Energy and Mineral Resources, 2005). Furthermore,
crude oil has long been an important source of government
revenue. Nowadays, however, more and more people are
questioning whether Indonesia can continue to depend on
oil as its main source of energy and as one of its main
sources of revenue. Fig. 1 shows that Indonesian oil
production has been declining in the last several years;
domestic demand for oil has increased significantly in spite
of the increase in price. That Indonesia depends too much
on oil is one of the energy-related concerns.
The second energy-related concern is the government
energy subsidy. The government has always controlled the
price of domestic oil products—fuel oils—such as gasoline,
automotive diesel oil and kerosene, so as to be lower than
the world price, by providing a subsidy to Pertamina, the
only oil processor and distributor of fuel oils in the
country. The government also controls the price of
electricity at a lower than production cost by subsidising
the national electricity company.
In recent years, the increasing demand for fuel oils has
forced Indonesia to increase the amount of crude oil
imported, while the world price of crude oil has increased.
Demand for electricity has also increased. Hence, overall,
the government spends a significant amount of its budget
on energy subsidies (Table 1).
The third concern is energy intensity, which has not
improved. Energy Information Administration (EIA)
reported that, in the last two decades, energy intensity in
several East Asian countries, particularly China, has
improved significantly, and developed countries around
the world have been able to keep their level low, while
Indonesia’s has worsened at a rate of 1.94 percent
annually.1 This situation indicates, though not precisely, that there has been an increasing trend towards inefficiency
in primary energy use in Indonesia. Hence, there has been
growing pressure on Indonesia to improve its efficiency in
using primary energy.
The fourth concern is negative externalities to the
environment, both at local and global levels. At the local
level, environmental problems related to energy use are
generally human health problems caused by emissions from
vehicles and industrial activities. At the global level, the
main concerns are global climate change and global
warming due to increasing emissions of greenhouse gases.
The energy sector, through its production and exploitation
activities, is considered to be the main contributor of
greenhouse gases. EIA reported that the CO2 emission
intensity of Indonesia has been worsening at a rate of 4.1%
annually during the 1990s and early 2000s.
With the above-mentioned problems in mind, the
Indonesian government must develop various programs
to promote better and more efficient use of energy.
Eliminating the fuel oil subsidy; i.e., increasing the price
of fuel oil, is the most common measure suggested as a way
to encourage households and industries to be more efficient
in using energy (or to save energy). Instead, the Indonesian
government seems to be more in favour of restricting energy use by, for example, requiring all hotels, restaurants,
night clubs and other business activities to close
down by 1 am. The main argument is that, first, reducing
the subsidy is expected to affect the poor more than the
rich (Ikhsan et al., 2005; Sugema et al., 2005; World Bank,
2006). Second, innovations improving the efficiency of
energy use might end up using more energy (Khazzoom,
1980; Lovins, 1988; Brookes, 1990; Binswanger, 2001).
This phenomenon, commonly known as the rebound effect,
occurs since the money saved by using less energy will
eventually be used to buy other goods and services (which
in turn need energy to be produced). Furthermore, lower
use of energy pulls the energy price down. A lower energy
price results in higher income, which is followed by a rise in
demand for goods and services. Producers anticipate the
rise in demand by raising their level of production (which
results in higher use of energy).
On the other hand, limiting the operating time of hotels,
restaurants, night clubs, street lights, etc. will most likely
not affect the poor and will avoid the rebound effect
phenomenon. This paper aims to contribute to these
debates between the need to improve energy efficiency
and to limit its use. This paper develops a simple economywide
model to analyse the impact of an improvement in
efficiency of energy use, the cutting of the fuel oil subsidy
and the restrictions of energy use for households and
industries on the Indonesian economy, particularly on the
income of various household groups. Whether or not a
rebound effect phenomenon is happening will also be
observed. This paper is expected to be useful as a
comparative study for other developing countries which
intend to control their energy use.
This paper, using an Indonesia Energy SAM, has
elaborated the calculation methods for energy efficiency
and energy restrictions, and analysed energy issues related
to efficiency and restrictions in energy use, and their
impacts on the Indonesian economy. There are some
constraints concerning this study: (i) the method is
relatively simple and does not address the price issue,
while price is an important variable in energy issues in
Indonesia, especially for fuel oil; (ii) the general equilibrium
of the SAM in this model is static in nature, while in
reality the system structure changes over time meaning that
the parameters of the matrix change, hence less reliable for
forecasting long-run trends; (iii) the SAM assumes fixed
Leontief Technology, which implies that technologies are
constant from the base year of the model until a particular
period (usually 5 years).
The other issue is on the reliability and validity of the
Indonesian SAM, namely whether or not the SAM covers
the whole of Indonesian economy, including those in rural
areas and in informal sectors. BPS understands this issue,
so when conducting the socio-economic survey which is
one of the main input sources for the SAM, BPS tries to
cover the informal sectors and rural economies as much as
possible. It is, however, difficult to judge how successful
BPS is in doing so.
It is worth noting that only a few scholars and
researchers have used the Energy SAM Table to discuss
energy issues in Indonesia and by carefully taking into
account all weaknesses concerning the methods implemented,
some of the important conclusions that can
be drawn from this study are as follows. First, a
policy improving the efficiency of energy use is relatively
better than a policy restricting the use of energy. In general,
an improvement in energy efficiency increases the income
of most household groups, while energy restriction
decreases their incomes. Furthermore, the simulations
show that an improvement in energy efficiency most
likely will not cause a rebound effect or an increase in
energy use.
Second, a combination of reduction energy subsidy
policy and policy improving the efficiency of energy use
produces the best outcome in general. In the case where
greater energy efficiency is reached without any reduction
in government subsidy, household incomes will increase the
most when all industry sectors and all households use
electricity more efficiently. In case where more efficient
energy use is achieved by a reduction of energy subsidy,
household incomes will increase the most when all industry sectors and all households use automotive diesel oil more
efficiently.
Third, an improvement in energy efficiency should be
emphasised more in industrial sectors than in households,
as the former will increase household income by a greater
amount than the increase created by the improvement in
household energy efficiency. In general, the improvement
in efficiency in industrial sectors should focus on the use of automotive diesel oil and electricity. Furthermore, specific
recommendations on the industrial sectors that are
suggested to trial more efficiency in energy consumption
in order to result in a positive effect on household income
are: (i) The Pulp and Paper Industry, Construction and
Land Transportation for automotive diesel oil; and (ii) The Trade, Pulp and Paper Industry and Textile Industry for
electricity.
