Estimating the Effects of Energy Subsidy Removal on Indonesias Economic Sectors Using Input-Output Analysis

Abstract

Energy subsidies often have adverse effects on the economy and the environment, stimulating excessive energy consumption, wrongly targeted subsidy, and pressure on the state budget. The implementation of energy subsidy reform might not be easy to carry out, however, due to the strong objection to it and the political challenges involved, but the government should continuously work to reallocate the subsidy. Still, energy subsidy removal may have an impact on economic growth, resident welfare, energy consumption, etc. This paper estimates the effects of energy subsidy removal in Indonesia particularly in the oil fuel and electricity sectors, in relation with sustainable economic development indicators such as inducing price increase in the other economic sectors as well as in the GDP, employment, and energy consumption and environmental aspects. Input-output analysis is undertaken to explore the impacts in the short term. The estimation results showed that energy subsidy removal will have the largest impact on the refinery, electricity, and transportation sectors. In all these industries, the high energy consumption and energy cost account for a high proportion of the industry prices. Energy subsidy removal will lead to an about 1.2% (9.2 Peta Joule) drop in the total energy consumption and a 1% (3.3 million tons) drop in CO2 emission compared with the 2009 levels. The price increases of the commodities produced by different sectors are likely to enforce knock-on effects on the final demand and potentially would be paid off by a 0.53% drop in the GDP compared with the 2009 level. A decline in the total output will lead to excess labor per unit output. It is estimated that employment will be reduced by 849,000 as a result of the energy subsidy removal. In addition, energy price removal will reduce the peoples real income and purchasing power, with the higher-income group in the urban areas likely to be the most affected.