The Political Economy of Energy Subsidy Policy for a Just Energy Transition in Indonesia

The energy transition represents a critical strategy for fulfilling climate commitments, including Indonesia’s ambition to reach Net Zero Emissions. The energy transition, in response to the likely catastrophic effects of climate change, offers opportunities for developing countries while posing distinct challenges. These economies must simultaneously expand their electricity supply to support growth while reducing dependence on fossil fuels to meet climate commitments. The government is taking a role by executing policies to accelerate the energy transition. However, it is far from clear whether these policies are effective amid the many difficulties faced by developing economies, such as regulatory uncertainty, higher capital costs, infrastructure bottlenecks, and coexisting fossil-fuel subsidies. On the other hand, the evaluation results from the implemented policies are an essential input for better policy-making. It is also crucial to ensure a transition that considers justice, especially how sectors, households, and individuals will be affected by the energy transition policy. In this project, we examine three policies relevant to the energy transition. The first policy is a tax holiday for renewable energy investment. Tax incentives may involve substantial foregone government revenue, and their success depends on whether they stimulate additional investment rather than lowering the tax burden for projects that would have proceeded regardless. Understanding to what extent these policies mobilize additional private capital is therefore essential to evaluate their economic justification and to design development strategies that efficiently allocate limited public resources. The second policy is the LPG (liquefied petroleum gas) subsidy. LPG remains the most viable modern and clean cooking fuel alternative in Indonesia, surpassing natural gas and electricity due to various factors, including uneven energy infrastructure development (natural gas pipeline connections and electricity grids), insufficient electricity reliability, and islands’ geographical characteristics that restrict the extensive establishment of grid infrastructure. The transition to LPG not only saved costs but also provided significant health and environmental benefits. We analyse the effectiveness of an LPG subsidy for increasing households’ clean energy accessibility, reducing energy-cost burden, and alleviating energy poverty in Indonesia. The third policy is the downstream processing of minerals policy. The energy transition has sharply increased demand for critical minerals (nickel, cobalt, lithium) needed for renewable power plant components, batteries, and electric vehicles (IEA 2021; World Bank 2020). The availability of these critical minerals will play a decisive role in the long run. Understanding whether this policy translates into better employment impact and higher labour income, or whether it risks leaving workers behind in capital-intensive industries, is essential. Therefore, we examine the impact of the downstream processing of minerals policy on individual employment. We use econometric tools to assess policy impacts. The data are mainly sourced from administrative accounts. The project is funded by the Indonesia Endowment Fund for Education (LPDP) (KEP-1521/LPDP/LPDP.3/2021).