GEG Indonesia WB

Green Economic
Public Disclosure Authorized
Growth in Indira Hapsari

Ahya Ihsan
Indonesia
Anthony Obeyesekere
Dwi Endah
Abriningrum
Muhammad
Khudadad Chattha
JAN.2024
This work is a product of the staff of The World Bank. The
findings, interpretations, and conclusions expressed in this
work do not necessarily reflect the views of the Executive
Directors of The World Bank or the governments they
represent. The World Bank does not guarantee the accuracy
of the data included in this work. The boundaries, colors,
denominations, and other information shown on any map
in this work do not imply any judgment on the part of The
World Bank concerning the legal status of any territory or
the endorsement or acceptance of such boundaries.
Rights & Permissions
© 2024 The World Bank
1818 H Street NW
Washington, DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
Some rights reserved.
The material in this work is subject to copyright. Because

The World Bank encourages dissemination of its knowl-
edge, this work may be reproduced, in whole or in part, for
noncommercial purposes as long as full attribution to this
work is given.
All queries on rights and licenses, including subsidiary

rights, should be addressed to World Bank Publications,
The World Bank Group, 1818 H Street NW, Washington, DC

20433, USA; fax: 202-522-2625; e-mail: pubrights@world-
bank.org.
Please cite the work as follows: “Hapsari,

AT T RI B U T I O N
Indira, Ahya Ihsan, Anthony Obeyesekere, Dwi Endah
Abriningrum, and Muhammad Khudadad Chattha. 2024.
“Green Economic Growth in Indonesia.” © World Bank.”
P. 1
Contents
06 0811
Executive Summary Summary Overview SECTION 1 Introduction
33 53 55
SECTION 2 Fiscal Policies to
Support Low-carbon Growth
in Indonesia
SECTION 3 Summary and
Conclusions
Bibliography
P. 2
Figures
Figure 1 GHG EMISSIONS 14
Figure 2 GHG EMISSIONS IN PER CAPITA TERMS 14
Figure 3 PER CAPITA EMISSIONS IN LINE WITH STAGE OF DEVELOPMENT 14
Figure 4 CARBON INTENSITY OF GROWTH SLOWING 14
Figure 5 FOLU AND ENERGY ARE INDONESIA’S MAIN DRIVERS OF GHG EMISSIONS (A) . ELECTRICITY AND
TRANSPORTATION ARE THE TWO LARGEST CONTRIBUTORS OF EMISSIONS FROM ENERGY (B) 15
Figure 6 COAL HAS BECOME THE HIGHEST CONTRIBUTOR TO ENERGY SUPPLY 16
Figure 7 … WHILE ENERGY SUPPLY FROM RENEWABLES HAS BEEN LIMITED 16
Figure 8 THERE ARE SIGNS OF RELATIVE DECOUPLING IN INDONESIA 18
Figure 9 MANY COUNTRIES HAVE MODERATE TO HIGH CONCENTRATIONS OF AMBIENT OZONE 19
Figure 10 WELFARE LOSS FROM PM2.5 EXPOSURE HAS BEEN RISING STEADILY 20
Figure 11 GLOBALLY, DEATHS RELATED TO EXPOSURE TO AIR POLLUTANTS HAVE BEEN INCREASING AND WERE MAINLY
CAUSED BY PM2.5 20
Figure 12 DEATHS RELATED TO EXPOSURE TO AMBIENT OZONE AND PM2.5 IN INDONESIA ROSE SIGNIFICANTLY 21
Figure 13 NON-COMMUNICABLE DISEASES CONTRIBUTE THE MOST TO INDONESIA'S REDUCTION IN DALYS 22
Figure 14 WHILE AIR POLLUTION IS MORE CLOSELY LINKED TO DALYS IN INDONESIA COMPARED TO OTHER COUNTRIES 22
Figure 15 DESPITE BEING ON THE LOWER RANGE, INDONESIA’S FOREGONE PER CAPITA INCOME INCREASED BETWEEN
2000 AND 2019 23
Figure 16 INDONESIA HAS HIGH PER CAPITA HUMAN CAPITAL LOSS 24
Figure 17 INDONESIA’S TOTAL WEALTH GREW ON PAR WITH MOST OF ITS PEERS SINCE 1995 26
Figure 18 DESPITE THE GROWTH IN TOTAL WEALTH, PER CAPITA WEALTH HAS GROWN RELATIVELY SLOWLY 26
Figure 19 PER CAPITA WEALTH OF LOWER-INCOME COUNTRIES ARE CONVERGING WITH HICS 27
Figure 20 INDONESIA'S PATH OF CONVERGENCE IS SIMILAR TO THAT EXPERIENCED BY THE BOTTOM 25 PERCENT OF PEERS 28
Figure 21 INDONESIA’S EXPORTS ARE NOT COMMODITY DEPENDENT 29
Figure 22 INDONESIA’S WEALTH ASSETS ARE ALSO SLIGHTLY MORE DIVERSIFIED COMPARED TO PEERS 29
Figure 23 INDONESIA'S NONRENEWABLE NATURAL CAPITAL DEPLETION RATE HAS BEEN DECLINING DURING 1995-2018 30
Figure 24 INDONESIA’S NONRENEWABLE RENTS REACHED ABOUT 4 PERCENT OF ITS GDP 30
Figure 25 AMONG INDONESIA’S RENEWABLE ASSETS, CROPLAND INCREASED THE MOST, BOTH IN ABSOLUTE TERMS AND
SHARE OF TOTAL RENEWABLE RESOURCES 31
Figure 26 NONRENWABLE NATURAL CAPITAL WEALTH PER CAPITA IS DECLINING; PRODUCED AND HUMAN CAPITAL IS
INCREASING 32
Figure 27 INDONESIA HAS A STABLE TREND OF OVERALL FISCAL BALANCE 34
Figure 28 FISCAL CONDITIONS HAVE BEEN RESILIENT TO COMMODITY PRICE SHOCKS 34
Figure 29 PUBLIC SPENDING IS POSITIVELY CORRELATED TO COMMODITY CYCLE 35
Figure 30 THERE IS A HIGH GAP BETWEEN OVERALL AND PRIMARY BALANCE DURING COMMODITY BOOM AND BUST 35
Figure 31 HIGH BUT DECREASING FOSSIL FUEL SUPPORT 36
Figure 32 MUCH SUPPORT GOES TOWARD PETROLEUM 36
Figure 33 MOST SUPPORT IS GEARED TO CONSUMERS 36
Figure 34 RESULTING IN HISTORICALLY LOW PETROL END-USER PRICES 36
Figure 35 AND LOW RESIDENTIAL ELECTRICITY PRICES 36

P. 3
Figure 36 TAX INCENTIVES ARE TARGETED MOSTLY TOWARDS NON-GREEN SECTORS 38
Figure 37 MOST OF THE FISCAL SUPPORT TAKES THE FORM OF SUBSIDIES TO FOSSIL FUELS 47
Figure 38 THE NET FISCAL INCENTIVES IN INDONESIA SKEW TOWARDS ENCOURAGING EMISSIONS 51
Tables
Table 1 MEASURING WEALTH PER CAPITA 25
Table 2 FISCAL FOOTPRINT OF POLICY INSTRUMENTS THAT SHAPE THE INCENTIVES FOR CARBON USE AND CO 2EQ EMISSIONS 42
Table 3 THE COVERAGE AND DIRECTION OF INDONESIA’S FISCAL INCENTIVES FOR EMISSIONS-INTENSIVE ACTIVITIES 44
Box
Box 1 FISCAL INSTRUMENTS TO SUPPORT THE TRANSITION TO LOW-CARBON EMISSIONS 39
Box 2 THE EMISSIONS TRADING SCHEME: A NON-FISCAL INSTRUMENT FOR CUTTING EMISSIONS 48
Appendix
Appendix 1 LEGAL BASIS OF THE FISCAL INSTRUMENTS 56
P. 4 This report is prepared by the Macroeconomics, Trade and Investment
Global Practice and the Governance Global Practice of the World
Bank, led by Indira Maulani Hapsari with core authors comprising
Ahya Ihsan, Anthony Obeyesekere, Dwi Endah Abriningrum, and
Acknowledgments
Muhammad Khudadad Chattha. The analysis is conducted under
the guidance of Lars Moller (Practice Manager) and Habib Rab (Lead
Economist). Assyifa Szami Ilman, Innes Clara, and Kathleen Tedi
provided excellent research assistance. The authors would like to
thank Ralph Van Doorn for his support in designing the framework
for fiscal instruments analysis. The analysis also benefitted from
input and feedback from the reviewers, Apurva Sanghi, Hector Pollitt,
David Kaczan, and Muthukumara S. Mani. Valuable comments were
also received from the Fiscal Policy Agency of the Ministry of Finance.
The findings, interpretations, and conclusions expressed in this paper
are entirely those of the authors and do not necessarily represent the
views of the World Bank and its affiliated organizations, or those of
the Executive Directors or the countries they represent. All errors are
the authors’ responsibility.
Financial support for this report was generously provided by the

Australian Government through the Australia-World Bank Indonesia
Partnership (ABIP). Financial support was also provided by the
Climate Support facility Whole-of-Economy Program, administered by
the World Bank.
P. 5
Abbreviations and Acronyms
ANS Adjusted Net Savings
CAIT Climate Analysis Indicator Tools
CWoN Changing Wealth of Nations
DALY Disability-adjusted Life Year
DBE Demand-based Emissions
ETS Emissions Trading Scheme
FOLU Forestry and Other Land Use
GDP Gross Domestic Product
GHG Greenhouse Gas
GNI Gross National Income
HHI Hirschman-Herfindahl Index
HIC High-income Country
IPPU Industrial process and product use
LGST Luxury Goods and Services Tax
LUCF Land Use Change and Forestry
MoEF Ministry of Environment and Forestry
MoEMR Ministry of Energy and Mineral Resources
MoF Ministry of Finance
NCD Non-communicable Disease
OECD Organisation for Economic Co-operation and Development
PBE Production-based Emissions
PLN Perusahaan Listrik Negara (State-owned electricity company)
PSO Public Service Obligation
UNCTAD United Nations Conference on Trade and Development
Executive
P. 6
Summary
P. 7 his paper provides a macro-fiscal overview of
Indonesia’s progress along four dimensions of
T
green growth linked to each other from both
the outcomes and policy perspectives: (i) car-
bon use in the growth process; (ii) the impact
of carbon use through pollution on human cap-
ital; (iii) the consequence on national wealth;
and (iv) fiscal policies to support the low-carbon
transition. Although carbon emissions have risen in Indonesia, this
paper notes that they have started to slow down—including signs of
relative decoupling from growth in per capita income. This is mainly
attributed to land use change and forestry reforms, including mora-
toriums on land conversion—which has reduced deforestation rates.
Reducing carbon emissions in Indonesia can have important local
benefits through reduced pollution and its adverse effects on health
and human capital. Indonesia’s total wealth has grown in line with
other emerging markets, but per capita wealth has lagged that of
peer countries, and the composition of the wealth stock raises con-
cerns about the sustainability of growth. Sound macro-fiscal policies
have helped manage commodity price volatility, but the fiscal frame-
work overall could be better aligned with decarbonization objectives,
which could help Indonesia to achieve long-term growth sustainability.
Summary
P. 8
Overview
his paper provides a macro-fiscal overview of

Indonesia’s progress along four interlinked
T
dimensions of green growth. The first three
sections will discuss green growth from the out-
comes perspective, while the last section will
look at green growth from the policy perspec-
tive: (i) carbon use in the growth process; (ii) the
impact of carbon use through pollution on hu-
man capital; (iii) the consequence of carbon use on national wealth;
and (iv) the fiscal policies to support the low-carbon transition. The
paper takes stock of Indonesia’s progress in decarbonizing growth. It
then analyzes the extent to which fiscal policies are aligned with this
overall objective.
P. 9 Although greenhouse gas (GHG) emissions have risen in Indone-
sia, this has started to slow down and there are signs of a rela-
tive decoupling from growth in per capita income. Per capita emis-
sion levels align with Indonesia’s development stage and other large
emerging market economies. Unlike other emerging market econo-
mies, Indonesia’s biggest GHG contributor is forestry and other land
use (FOLU). The slowdown in CO2 emissions in recent years has been
associated with reforms around LUCF, including moratoriums on land
conversion—which have reduced deforestation rates. The energy sec-
tor is Indonesia’s second largest contributor to emissions due to the
significant use of fossil fuels in the energy mix.
Reducing GHG emissions in Indonesia could have important local

benefits through reduced pollution and associated negative effects
on health and human capital. GHG emissions result in increased lo-
cal air pollution. Forest fires and the use of fossil fuels—particularly
coal for power generation and industry, and oil for transport—are sig-
nificant sources of such pollution. In Indonesia, the casualties from
air pollution have been rising rapidly. The number of deaths from am-
bient ozone and fine particulate matter (PM2.5) in Indonesia was less
than 60,000 in 2000 but had almost doubled by 2019. These have
contributed to a decrease in disability-adjusted life years (DALYs) and
thereby a lower life expectancy in Indonesia. For example, residents
of Jakarta can expect to lose 2.3 years of their life expectancy if the
pollution levels in 2016 are sustained over their lifetime.
The carbon-intensive growth has consequences for Indonesia’s

wealth, which although growing in line with other emerging mar-
ket economies, has lagged peer countries on a per capita basis.
The composition of the wealth stock raises concerns about the sus-
tainability of growth. Indonesia experienced faster growth in per capi-
ta gross domestic product (GDP) than in per capita wealth from 1990
to 2018, suggesting that, despite rapid short-term GDP growth, long-
term growth could slow unless earnings can be better used to build
up national wealth. Increasing human capital wealth will be essential
for fulfilling Indonesia's ambition of becoming a high-income country
(HIC) by 2045.
Sound macro-fiscal policies have helped manage commodity

price volatility, but the fiscal framework overall could be better
aligned with decarbonization objectives. Indonesia’s fiscal policies
P. 1 0 have historically incentivized fossil fuel consumption and GHG emis-
sions, although ongoing reforms are trying to redress this issue. This
paper considers how key fiscal instruments alter the incentives for
carbon-intensive activities, and how they come together as an over-
arching framework that promotes or discourages GHG emissions. It
finds that fiscal instruments encourage more than they discourage
polluting activities. For example, non-green sectors received almost
30 percent of tax expenditures. In this context, cross-sector coverage
gaps in fiscal disincentives, conflicting incentives within sectors, and
cross-sector inconsistencies in incentives are worth reviewing.
01
P. 1 1
P.11-32 INTRODUCTION
limate action and sustainable use of nature in
C
Indonesia are intertwined with the country’s
long-term growth prospects. Sustaining growth
and improvements in the standard of living will
require continued progress towards a low-carbon
and climate-resilient economy. These shifts will
require policies incentivizing more efficient use
of natural resources and low-carbon production.
Indonesia has experienced significant development transitions in

the past 25 years, which have resulted in rising GHG emissions.1
As seen in many countries, economic growth has had negative im-
pacts on climate and environmental sustainability. At the same time,
Indonesia has made important commitments and actions to meet its
climate and development targets. As stated in the Low Carbon Devel-
opment Initiative (LCDI), Indonesia is looking for ways to “maintain
economic and social growth through development activities with low
GHG emissions and minimizing the exploitation of natural resources”
(Bappenas 2021). Therefore, it is important to analyze green growth
1 In this note, we measure
carbon emissions as net emissions
developments in Indonesia and what policies, particularly from a
which include emissions from
forestry and other land use (FOLU).
P. 1 2 macro-fiscal perpective, have and can be further implemented to
support green growth.
The paper draws upon on a clear definition of green growth. Spe-

cifically, it uses the Organisation for Economic Co-operation and De-
velopment (OECD) definition as laid out in its green indicators report
(OECD 2011). Green growth is defined as “fostering economic growth
and development while ensuring that the natural assets continue
to provide the resources and environmental services on which our
well-being relies. To do this, it must catalyze investment and innova-
tion, which will underpin sustained growth and give rise to new eco-
nomic opportunities” (OECD 2011).
This paper provides a macro-fiscal overview of Indonesia’s progress

on green growth, benchmarked against selected structural peer
countries2 along four linked dimensions. The first three sections will
discuss green growth from an outcomes perspective, while the last
section will look at green growth from a policy perspective:
• Carbon use in the growth process—including the sources of

carbon emissions in the economy and the carbon intensity
of growth. Both Indonesia’s emissions and global emissions
negatively impact the country’s development through climate
shocks, pollution, and the erosion of adaptation capacity.
• Pollution and its impact on human capital—in particular, the

detrimental effects on health, including respiratory problems,
premature deaths, and loss of productive capacities and
labor earnings.
2 This analysis uses a standard
basket of peers where data allows.
Structural peers are Nigeria,
• Impact of carbon use on national wealth3—including human,
China, India, Ukraine, Thailand, physical, and natural stocks.
the Philippines, Mexico, the Arab
Republic of Egypt, the Russian
Federation, and Brazil, selected • Fiscal policies for the low-carbon transition and how they
based on their statistical similarity
in terms of population, GDP per affect household and firm incentives to reduce carbon-inten-
capita, and total GDP. An additional
set of aspirational peers is also sive consumption.
used when relevant: Republic
of Korea, Chile, Poland, and the
Czech Republic. In some instances,
The objective of the paper is to provide a snapshot of Indonesia’s
developed countries are also used progress on these dimensions of green growth relative to other large
as comparisons when discussing
emissions levels and targets. emerging market economies. It draws on two frameworks and their
3 Definition of wealth and the associated datasets: (i) the OECD Green Growth Indicators framework;
methodology to calculate wealth
will be explained in the respective
and (ii) the World Bank’s Changing Wealth of Nations (CWoN) framework
section (Section 1.12). that measures a country’s natural, human, and physical capital stocks.
P. 1 3 The Carbon Content of Growth in
Indonesia
Carbon Emission in the Growth Process
ndonesia has experienced remarkable eco-
nomic transformations since the early 1990s.
I
Its real income per capita more than doubled
from US$1,488 in 1990 to US$3,757 in 2020
(constant 2015), with the poverty rate declin-
ing from 19 percent in 2000 to 9.4 percent in
2019. Growth has been accompanied by rapid
urbanization (from 36 percent of the population
in 1995 to 66 percent in 2020) and improved access to services and
development outcomes. Today, Indonesia is the 16th largest economy
globally, accounting for 1.25 percent of global GDP, and the 4th most
populous country globally.
Economic transformation has come with rising GHG emissions,

which (per capita) are broadly in line with Indonesia’s stage of
economic development. Indonesia accounts for about 3.5 percent
of global GHG emissions (Climate Watch 2023).4 Annual GHG emis-
sions per capita have increased since the mid-2000s as income per
capita increased. GHG emissions annually averaged 1,495 million
tonnes of carbon dioxide equivalent (MtCO2eq), during 2018-2020
(Figure 1). However, it now shows signs of slowing (Figure 2). In re-
cent years, per capita emissions in Indonesia have been in line with
those of other large developing economies and lower than those of
large, developed economies (Figure 3). No country has yet transi-
tioned to high-income while reducing emissions.
The high emissions base has meant that GHG emissions overall in-
creased only moderately between 1990 and 2018 (by 35 percent).
China and India saw much larger overall increases in GHG emissions
(above 400 percent and 300 percent, respectively) but also have
larger populations and economies and experienced faster economic
growth. GHG emissions in Indonesia have translated to high but de-
clining GHGs emitted per unit of GDP (Figure 4). GHG emissions from
4 Emissions for 2018 include
forestry and land use, and all major
greenhouse gases (link).
P. 1 4 energy per unit of GDP have not increased as dramatically as in peer
countries despite Indonesia's increased dependence on coal.
FIG 1 GHG EMISSIONS FIG 2 GHG EMISSIONS IN PER CAPITA TERMS
ANNUAL GHG EMMISIONS INTERQUARTILE RANGE ANNUAL GHG EMMISIONS INTERQUARTILE RANGE
(ALL GHG, 3-YEAR MOVING INDONESIA PER CAPITA (ALL GHG, INDONESIA
AVERAGE) 3-YEAR MOVING AVERAGE)
2.500 8
7
2.000
6
5
MTC0 2 EQ
1.500
4
1.000 3
2
500
1
0 0
1995
2000
2005
2010
2015
2020
2000
2005
2010
2015
2020
FIG 3 PER CAPITA EMISSIONS IN LINE WITH FIG 4 CARBON INTENSITY OF GROWTH SLOWING
STAGE OF DEVELOPMENT
PER CAPITA GDP (PPP CONSTANT 2017) VS. PER CAPITA CARBON INTENSITY OF INTERQUARTILE RANGE
EMISSIONS (ALL GHG, TCO 2 EQ) (1990-2019) GROWTH (ALL GHG, 3-YEAR INDONESIA
MOVING AVERAGE)
25 0,005
UNITED STATES
PER CAPITA EMISSIONS
MTC0 2 E/1000 USD GDP
20 0,004
15 0,003
NIGERIA
10 ITALY GERMANY
0,002
CHINA JAPAN
INDONESIA
THAILAND UNITED KINGDOM
5 0,001
INDIA BRAZIL FRANCE
MEXICO
PHILIPPINES
0 0,000
0 20.000 40.000 60.000
1995
2000
2005
2010
2015
2020
PER CAPITA GDP
Sources: World Development Indicators (World Bank databank); Climate Notes: Interquartile range, the difference between the first quartile (lower
Watch Data Explorer; Ministry of Environment and Forestry (MoEF) data; range) and the third quartile (upper range), refers to the performance of
figures compiled by World Bank Group staff. structural peers (see Footnote 1). Figures include emissions from land use
change and forestry. For the bottom left figure, lines show polynomial trends
for 1990-2019 in per capita emissions.
The main source of GHG emissions in Indonesia historically has

come from FOLU, but land-based emissions have started to de-
cline in recent years. FOLU accounted for the largest share of GHGs—
about 40 percent of all GHGs on average between 2016-18 (Figure
5). Forest and peatland fires fueled GHG emissions, caused environ-
P. 1 5 mental degradation, and imposed economic and health costs. The
forest fires in 2015 burned approximately 2.6 million hectares of
land and caused economic costs exceeding US$16 billion (or nearly
2 percent of GDP). However, in recent years, tightened forest and
peatland protection from the authorities—along with other measures
such as peatland rewetting and reduced impact logging, contributed
to a slowdown in land-related emissions. Deforestation slowed from
an average of 1.08 million hectares per year between 2000-07, to
0.61 million hectares per year between 2007-14 and to an average
of 0.48 million hectares per year between 2014-21. Deforestation
averaged 0.11 million hectares per year between 2019-21, its lowest
rate since 1990.
FIG 5 FOLU AND ENERGY ARE INDONESIA’S MAIN DRIVERS OF GHG EMISSIONS (A) .
ELECTRICITY AND TRANSPORTATION ARE THE TWO LARGEST CONTRIBUTORS OF
EMISSIONS FROM ENERGY (B)
A. SECTOR CONTRIBUTION TO AGRICULTURE B. SECTOR CONTRIBUTION TO ENERGY GHG EMISSION

ALL GHG EMISSIONS (PERCENT, FOLU (PERCENT, AVERAGE 2016-2018)
AVERAGE 2016-2018) ENERGY
BUILDING OTHER FUEL COMBUSTION MANUFACTURING/
INDUSTRIAL CONSTRUCTION
FUGITIVE EMISSIONS ELECTRICITY/HEAT
WASTE TRANSPORTATION
140 100
120
100 80
PHILIPPINES
80
INDONESIA
60
THAILAND
60
UKRAINE
NIGERIA
TURKEY
MEXICO
RUSSIA
BRAZIL
PHILIPPINES
CHINA
40
INDIA
INDONESIA
40
THAILAND
20
UKRAINE
NIGERIA
TURKEY
MEXICO
RUSSIA
BRAZIL
EGYPT
CHINA
0
INDIA
20
-20
-40 0
C. GROWTH OF ALL GHG FOLU INDUSTRIAL D. GROWTH OF CO 2 ELECTRICITY/HEAT

TRANSPORTATION
EMISSIONS BY SECTOR WASTE AGRICULTURE EMISSIONS WITHIN ENERGY
MANUFACTURING/CONSTRUCTION
(1990=100) ENERGY SECTOR (1990=100)
OTHER FUEL COMBUSTION
FUGITIVE EMISSIONS
500 600 BUILDING
400 500
400
300
300
200
200
100
100
0 0
1990 1994 1998 2002 2006 2010 2014 2018 1990 1994 1998 2002 2006 2010 2014 2018
Sources: Climate Analysis Indicators Tool (CAIT) dataset, World Bank staff estimates.
RENEWABLE COAL GAS OIL RENEWABLE GAS OIL COAL NUCLEAR
100 100
100 80
PHILIPPINES
80
INDONESIA
60
THAILAND
60
UKRAINE
P40. 1 6 The energy sector is the second largest contributor to GHG emis-
NIGERIA
TURKEY
MEXICO
RUSSIA
BRAZIL
PHILIPPINES
CHINA
INDIA
INDONESIA
40
sions in Indonesia due to the significant use of fossil fuels in the
THAILAND
20
UKRAINE
NIGERIA
TURKEY
MEXICO
RUSSIA
BRAZIL
energy mix. Energy accounted for about 39 percent of GHG emis-
EGYPT
CHINA
0
INDIA
20
-20
sions in Indonesia between 2000 and 2020. About 93 percent of the
-40 0
energy supply comes from fossil fuels, namely coal (43 percent), oil
C. GROWTH OF ALL GHG FOLU INDUSTRIAL D. GROWTH OF CO ELECTRICITY/HEAT
EMISSIONS BY SECTOR (31 percent),

WASTE and gas (19
AGRICULTURE percent).
EMISSIONS WITHINFrom 1985 toTRANSPORTATION
ENERGY 2019, the share 2
MANUFACTURING/CONSTRUCTION
(1990=100)
of coal in Indonesia’s SECTOR
ENERGY
energy(1990=100)
mix increased dramatically (Figure
OTHER FUEL COMBUSTION
FUGITIVE EMISSIONS
500 6). Although the coal industry’s
600 share in the economy
BUILDING is less than
2 percent and only employs 500

0.2 percent of the workforce, Indone-
400
sia has become the world’s second-largest coal exporter. About
400
300 80 percent of Indonesia’s coal is exported (coal briquettes account for
300
200 11.5 percent of total exports), while 90 percent of domestic coal
consumption fuels more200 than 50 percent of electricity generation. The
100
share of renewables has100 remained relatively low (Figure 7).
0 0
1990 1994 1998 2002 2006 2010 2014 2018 1990 1994 1998 2002 2006 2010 2014 2018
FIG 6 COAL HAS BECOME THE HIGHEST FIG 7 … WHILE ENERGY SUPPLY FROM
CONTRIBUTOR TO ENERGY SUPPLY RENEWABLES HAS BEEN LIMITED
RENEWABLE COAL GAS OIL RENEWABLE GAS OIL COAL NUCLEAR
100 100
80
80
60
60
40
40
PHILIPPINES
KOREA REP.
20
INDONESIA
THAILAND
UKRAINE
TURKIYE
POLAND
MEXICO
WORLD
BRAZIL
20
EGYPT
CHINA
CHILE
INDIA
0
OECD
1965
1968
1971
1974
1977
1980
1983
1986
1989
1990
1993
1996
1999
2001
2004
2007
2010
2016
2019
Source: BP Statistical Review of World Energy through OurWorldinData. Source: BP Statistical Review of World Energy through OurWorldinData.
Note: Renewables include biofuels, solar, wind, hydro, geothermal, biomass,
and others.
Some high-income countries (HICs) have managed to reduce emis-

sions while accelerating growth, although their per capita emis-
sions remain higher than many large developing countries. GHG
emissions have been strongly correlated with income—particularly
at low-to-middle income levels. As a country’s income rises, it emits
more GHG because of the higher use of energy, which often comes
from fossil fuels. However, this relationship does not necessarily
hold at high-income levels. Many countries have achieved econom-
P. 1 7 ic growth while reducing emissions—known as absolute decoupling.
One study (Hubacek et al. 2021) shows that 32 of 116 countries have
decoupled production-based emissions (PBE) and GDP, 23 countries
have decoupled demand-based emissions (DBE)5 and GDP, and 14
countries have decoupled both DBE and PBE from GDP. There are
two main reasons: first, some countries have managed to decouple
energy use and economic growth (GDP has increased while total en-
ergy use has remained flat or even fallen), and second, countries are
replacing fossil fuels with low-carbon energy.
The challenge for Indonesia and other developing countries is that

no country has transitioned to high income while simultaneously
reducing emissions. This is the challenge implicit in the low-carbon
transition. Although progress has been made in reducing emissions
while growing, results at the country level have been mixed (Hubacek
et al. 2021). For example, most EU countries and the US have seen
absolute decoupling at high per capita GDP and emissions due to
more efficient technology and improved energy mix. However, other
countries have experienced no decoupling between GDP and emis-
sions. It is also important to note that decoupling can also be tem-
porary, and decoupled countries may revert to increasing emissions.
Decoupling growth from emissions will be easier for developing coun-
tries if the cost of low-carbon (cleaner) energy continues to fall.
Nevertheless, there are encouraging signs of relative decoupling

5 Consumption-based emissions
are emissions that have been in Indonesia (where the rate of emissions growth is slower than
adjusted for trade (i.e., production
emissions within the countries that of economic growth). Between 1990 and 2018, the growth of
minus emissions embedded in
exports plus emissions embedded
real GDP (270 percent) surpassed the growth of all GHG emissions
in imports). Production-based (36 percent) and of emissions from energy (190 percent) during the
emissions is production emissions
within the countries, which do not same period—indicating relative decoupling but not absolute decou-
account for emissions coming from
traded goods and services. pling (Figure 8).6 It is worth noting that higher growth countries such
6 Decoupling occurs when the
as China show stronger relative decoupling, although they also pro-
growth rate of an environmental
pressure (for example, CO2
duce higher emissions, while India shows weaker relative decoupling.
emissions) is less than that of
its economic driving force (for
example, GDP per capita) over
a given period. Decoupling can
be either absolute or relative.
Absolute decoupling is said to occur
when CO2 emissions are stable or
decreasing while the GDP per head
is growing. Relative decoupling
is when the growth rate of CO2
emissions is positive, but less than
the growth rate of the GDP per
capita (Link).
P. 1 8 FIG 8 THERE ARE SIGNS OF RELATIVE DECOUPLING IN INDONESIA
(GDP and Total GHG, Constant 2015 US$, MtCO 2eq)
INDONESIA GDP (CONSTANT 2015 US$) CHINA GDP (CONSTANT 2015 US$) INDIA GDP (CONSTANT 2015 US$)
ALL GHG (MtCO 2 EQ) ALL GHG (MtCO 2 EQ) ALL GHG (MtCO 2 EQ)
400 1400 600
350 1200 500

300
1000
400
250
800
200 300
600
150
200
400
100
200 100
50
0 0 0
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
Sources: CAIT dataset, World Bank staff estimates.
The Impact of GHG Emissions and

Pollution on Human Capital
HG emissions result in increased pollution,7
which is indirectly detrimental to welfare and
G
productivity. Pollutants of major health concern
include particulate matter (PM) or black carbon,
methane, carbon monoxide (CO), ozone (O3), ni-
trogen dioxide (NO2), and sulfur dioxide (SO2).
The use of fossil fuels for power generation, in-
dustry, and transport, as well as forest fires, are
a significant sources of many of these pollutants. In addition, house-
hold activities such as cooking and heating with solid fuels on open
7 Pollution is defined as the
fires or traditional stoves, though excluded in the measurement of
OZONE µG/M³
presence of substances and heat
0 TO <42
GHG emissions, can also contribute to air pollution.
in environmental media (air, water,
42 TO <50
land) whose nature, location, or
50 TO produces
quantity <58 undesirable Many countries—including Indonesia—have high concentrations of
58 TO <65 effects (UN
environmental
Database).
65 TO <73 pollutants8, where the air quality was rated moderately unsafe in
NO DATA
8 Black carbon, a component
2020. This was due to a high annual mean concentration of PM2.5 at
of fine PM, warms the earth’s 8.1 times above the WHO annual guideline (IQAir 2021). The mining
atmosphere by absorbing sunlight
and accelerating the melting and oil and gas industries, automobile manufacturing, vehicle emis-
of snow and ice. Methane is a
potent GHG that is 84 times more sions, and forest fires are all contributing factors to this poor air qual-
powerful than CO2 and a precursor
to the air pollutant ozone (WHO
ity. The significant increases in electricity generation from coal-fired
2021).
P. 1 9 power plants has been another significant contributor (Greenstone
and Fan 2019). Seasonal air pollution variations also exist, with the
INDONESIA highest CHINA
GDP (CONSTANT 2015 US$)
levels of pollution occurring during
GDP (CONSTANT 2015 US$) INDIA the dry season (June to
GDP (CONSTANT 2015 US$)
ALL GHG (MtCO EQ) ALL GHG (MtCO EQ) ALL GHG (MtCO EQ)
October).
2 2 2
400 1400 600
350
Air pollution contributes to welfare loss, although Indonesia’s
1200 500
300
welfare losses appear to be at the lower range of peer countries.
1000
250
Between 2000 and 2019, the welfare losses 400 from ambient ozone in
200
Indonesia800grew by 10.2 percent. Similarly,
300
exposure to PM2.5 caused
150
rising welfare
600 losses in Indonesia between 2000 and 2019 (Figure
200
100
10). By one
400 estimate, air pollution due to ambient ozone and PM2.5
50
could have
200 cost Indonesia about 4.5 percent
100 of GDP in welfare loss.
0 0 0
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
FIG 9 MANY COUNTRIES HAVE MODERATE TO HIGH CONCENTRATIONS OF
AMBIENT OZONE
(Population-weighted concentration of ambient air pollution to
which the population is potentially exposed, 2019)
OZONE µG/M³
0 TO <42
42 TO <50
50 TO <58
58 TO <65
65 TO <73
NO DATA
Source: https://www.stateofglobalair.org/data/#/air/map Note: 60µg/m³ represents the lower range of WHO recommendations for air pollution
exposure over which adverse health effects are observed.
P. 2 0 FIG 10 WELFARE LOSS FROM PM2.5 EXPOSURE HAS BEEN RISING STEADILY
(Welfare loss from PM2.5 exposure, GDP equivalent)
INTERQUARTILE OF TOP-10 POLLUTERS INDONESIA
9,0
8,0
7,0
6,0
5,0
4,0
3,0
Source: Green Growth Indicators, 2,0

OECD Stat, 2021. World Bank staff 1,0
calculations.
0,0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Note: Interquartile range includes
both lower and upper ranges
The consequence
RESIDENTIAL RADON
of air pollution on welfare loss takes the form
AMBIENT OZONE
LEAD PM2.5
of
6,0
health problems and premature deaths. Globally, in 2019, about
5.4
5,5 million deaths (9.6 percent of total deaths) were caused by air
5,0
pollution,
4,5 which is rising (Figure 11). Air pollution-related diseases in-
4,0
clude
3,5 respiratory infections and
INTERQUARTILE OF TOP-10 POLLUTERS
tuberculosis, neoplasms, cardiovas-
INDONESIA
3,0
cular
2,5
9,0
diseases, chronic respiratory disease, cancers, diabetes, and
2,0
chronic
1,5
8,0
kidney disease. The burden of diseases attributable to air
pollution
1,0
7,0
0,5
is estimated to be equivalent to other major global health
risks,
0,0
6,0 such as unhealthy diets and tobacco smoking. In 2017, the
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
State
5,0
of Global Air ranked air pollution in the top five risk factors that
4,0
cause death, ranked by the total number of deaths from all causes
3,0
for all ages and both sexes. INDONESIA
2,0 INTERQUARTILE OF TOP-10 POLLUTERS
1,0
0,14
0,0
FIG
0,12 11 GLOBALLY, DEATHS RELATED TO EXPOSURE TO AIR POLLUTANTS HAVE
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
BEEN INCREASING AND WERE MAINLY CAUSED BY PM2.5
0,10 (Number of deaths, millions)
0,08
RESIDENTIAL RADON AMBIENT OZONE
LEAD PM2.5
0,06
6,0
0,04
5,5
5,0
0,02
4,5
4,0
0,00
3,5
3,0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2,5
2,0
1,5
1,0
0,5
0,0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Green Growth Indicators,

OECD Stat, 2021.
1,0
0,5
0,0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
P. 2 1 FIG 12 DEATHS RELATED TO EXPOSURE TO AMBIENT OZONE AND PM2.5 IN
INDONESIA ROSE SIGNIFICANTLY
(Number of deaths, millions)
0,14
0,12
0,10
0,08
0,06
0,04
0,02
Source: Green Growth Indicators, 0,00

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
OECD Stat, 2021. World Bank staff
calculation.
The casualties from air pollution, the byproduct of GHG emissions,

have been rising rapidly in Indonesia. The number of deaths from
ambient ozone and PM2.5 in Indonesia were less than 60 thousand
in 2000, but this has increased rapidly (Figure 12). Chronic respira-
tory disease from indoor air pollution has also increased the risks
of premature deaths and deteriorating health conditions. Indoor air
pollution contributed to higher respiratory infections and chronic ob-
structive pulmonary disease, with those most at risk being women and
young children who spend a large amount of time exposed to open
fires (WHO). Indoor air pollution comes from cooking fuel—45 percent
of households use kerosene as their source of cooking fuel.
These ambient air pollutants have contributed to an increase in

disability-adjusted life years (DALYs)9 and a lower life expectancy
in Indonesia. According to Mboi et al. (2018), although health out-
comes across many indicators had improved in Indonesia between
1990 and 2016, the improvements were partly offset by rising deaths
and a growing burden of non-communicable diseases (NCDs). For
the same period, total DALYs from NCDs rose—with a substantial in-
crease linked to air pollution. The existing pollution levels in Indone-
sia are estimated to have lowered life expectancy by an average of
1.2 years (Figure 13). For example, residents of Jakarta can expect
to lose 2.3 years of their life expectancy if the 2016 pollution levels
are sustained over their lifetime.
9 One DALY represents the loss
of the equivalent of one year of full
health.
P. 2 2 Indonesia has lost a full-health year due to NCDs linked to ambient
air pollution. Indonesia’s DALYs attributed to air pollution reached
7.6 percent of total DALYs—significantly higher than the average
for aspirational peers10 and major global emitters (4.2 percent and
10 Aspirational peers are
countries where Indonesia aspires
4.7 percent, respectively) (Figure 14). According to Gordon et al.
to be, typically higher per capita (2017), people most affected by air pollution are children and the
income countries.
elderly, particularly in low- and middle-income countries.
FIG 13 NON-COMMUNICABLE DISEASES FIG 14 WHILE AIR POLLUTION IS MORE CLOSELY

CONTRIBUTE THE MOST TO INDONESIA'S LINKED TO DALYS IN INDONESIA
REDUCTION IN DALYS COMPARED TO OTHER COUNTRIES
(Rank of contributors to DALYs in 2016) (Contribution, percent, 2019)
RANK 12,0% TOP-10 POLLUTERS ASPIRATIONAL

1 2 3-4
PHILIPPINES
INDONESIA
MALAYSIA
THAILAND
5-7 8-12 >13

VIETNAM
TURKEY
BRAZIL
INDIA
HIGH SYSTOLIC BLOOD

1 1 4 1 3 5 3 2 10,0%
PRESURE
DIETARY RISKS 2 4 3 2 1 3 5 4
HIGH FASTING PLASMA

3 6 5 4 4 4 4 5
GLUCOSE
TOBACCO 4 5 6 3 2 1 2 1 8,0%
7,6%
CHILD AND MATERNAL
5 7 1 11 7 12 6 8
MALNUTRITION
HIGH BODY-MASS INDEX 6 2 9 5 6 6 1 10
AIR POLLUTION 7 11 2 8 5 8 10 6 6,0%
HIGH TOTAL CHOLESTROL 8 8 8 6 8 10 7 9
OCCUPATIONAL RISKS 9 9 12 9 11 7 8 7
4,0%
IMPAIRED KIDNEY FUNCTION 10 10 11 10 10 9 9 11
UNSAFE WATER, SANITATION,

11 14 7 16 12 13 14 15
AND HANDWASHING
ALCOHOL AND DRUG USE 12 3 10 7 9 2 11 3
2,0%
LOW PHYSICAL ACTIVITY 13 13 13 12 13 14 12 13
UNSAFE SEX 14 12 15 13 14 11 16 12
LOW BONE MINERAL DENSITY 15 15 16 14 16 15 15 14
OTHER ENVIRONMENTAL 0,0%

16 16 14 15 15 17 13 16
INDIA
CHINA
INDONESIA
UKRAINE
RUSSIA
BRAZIL
JAPAN
GERMANY
US
CANADA
POLAND
KOREA
CZECH
CHILE
RISKS
SEXUAL ABUSE AND VIOLENCE 17 17 17 17 17 16 17 17
Source: Mboi et al. June 2018. Source: World Bank 2021b.

P. 2 3 The health impacts of air pollution in Indonesia also erode human
capital, which is detrimental to the country’s potential output. In
2018, Indonesia lost 0.9 percent of per capita human capital due to
air pollution (Figure 16). It is worth noting, however, that the relative
impact of reducing air pollution-related deaths decreases as income
levels increase, resulting in a smaller change in per capita human
capital from decreased air pollution as total human capital increases
due to economic growth (CwoN World Bank 2021). For example, some
major global emitters such as Japan, Canada, Germany, and the US
11 Adjusted Net Savings is an
indicator to measure a country’s
experience lower per capita losses due to air pollution compared to
particulate emission damage (in other top polluters such as Russia, Ukraine, Brazil, and China.
current US$). In this note, the
estimate is adjusted into per capita
terms in current US$/capita. In addition, exposure to ambient pollutants also erodes Indone-
Moreover, the database defines
particulate emissions damage as sia’s Adjusted Net Savings (ANS).11 In 2019, the foregone per
the damage due to exposure of a
country’s population to ambient
capita income due to exposure to air pollutants in Indonesia was
concentrations of PM2.5, ambient
ozone, and indoor concentrations of
US$22.20—more than three times higher than US$7.30 in 2000
PM2.5 in households cooking with (Figure 15). This suggests that if there were no premature deaths
solid fuels. Damages are calculated
as foregone labor income due to resulting from exposure to air pollution, Indonesia’s per capita in-
premature death. Estimates of
health impacts from the Global come would have increased by about US$22.20 in 2019. The impact
Burden of Disease Study 2013
are for 1990, 1995, 2000, 2005,
of eliminating air pollution on per capita income was higher in 2019
2010, and 2013. Data for other than in 2000, indicating a deteriorating air quality trend in Indonesia
years have been extrapolated from
trends in mortality rates. between 2000 and 2019.
FIG 15 DESPITE BEING ON THE LOWER RANGE, INDONESIA’S FOREGONE PER

CAPITA INCOME INCREASED BETWEEN 2000 AND 2019
(Foregone labor income due to premature deaths attributable to air
pollution, current US$/capita)
40
35
30
25
20
15
10
Source: World Bank 2021b. World 0

Bank staff calculation.
1990
2000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Note: The indicator is ANS:

particulate emission damage.
0
1990
2000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
P. 2 4 FIG 16 INDONESIA HAS HIGH PER CAPITA HUMAN CAPITAL LOSS
(X axis: per capita human wealth, log, 2018 US$; Y axis: hypothetical
human capital wealth per capita, percent from base)
15
STRUCTURAL AND
TOP-10 POLLUTERS India
STRUCTURAL
BENCHMARK
TOP-10 POLLUTERS Philippines
Egypt
ASPIRATIONAL
10
Indonesia
Nigeria
5 China
Ukraine
Thailand
Poland
Turkey Mexico Czech Rep Germany
Russia
Japan
Brazil
Chile United States
Korea Rep Canada
0
2 3 4 5 6 7
Source: Global Burden of Disease Study and World Bank 2021b. World Bank staff calculation.
The Consequence of Carbon-Emitting

Growth on the Accumulation of
Wealth
he carbon content of growth, which is the flow
of national income, has implications for na-
T
tional wealth accumulation, which is the stock
of human, physical, and natural resources in
the country. National wealth is central to long-
term growth. The wealth accounting methodol-
ogy tries to quantify the lifetime earnings of a
country’s assets and considers the sustainabili-
ty of natural, produced, and human capital (World Bank 2021b). For
example, human capital is calculated as a population’s discounted
expected lifetime earnings. A similar approach applies to fossil fuel
wealth, estimated as the discounted value of future resource rents
until these assets are depleted. The methodology tries to provide a
more complete picture of an economy than traditional GDP accounts
by covering issues such as depletion of subsoil assets, loss of ecosys-
tems, or agricultural damage resulting from extreme weather events
(Table 1).
P. 2 5 TABLE 1 MEASURING WEALTH PER CAPITA
Wealth per capita, beginning of period

Factor Minus Plus
Produced capital Normal depreciation Investment in produced capital: buildings,
Not included: catastrophic losses from natural structures, machinery, intellectual property
disasters or civil conflicts, obsolescence
Nonrenewable Extraction Increase in proven reserves and production;
natural capital Other reductions in proven reserves and increase in unit rent due to:
production volume • Lower market price
Decrease in unit rent due to: • Higher production cost
• Lower market price Accelerated extraction path
• Higher production cost Not included: the impact of changes in
Extended extraction path future prices and policies, because these are
unknown
Not included: the impact of changes in
future prices and policies, because these are
unknown
Renewable natural Extraction greater than natural regeneration Increase in harvestable extent, improved
capital Degradation condition, increase in unit rent due to:
Decrease in unit rent due to: • Lower market price
• Lower market price • Higher production cost
• Higher production cost Not included: the impact of changes in
Not included: the impact of changes in unknown
unknown
Human capital Decline and/or aging of the labor force, Growth of the labor force through growth of
declining wage rates, decline in education the domestic population, increased labor force
Changing wage growth trajectory due to participation, or migration (gain to one country,
economic shocks as COVID-19 loss to another)
Not included: loss of human capital from Increasing wage rates; increasing education
missed schooling and health damages from
COVID-19
Loss of human capital via migration
Net foreign assets Foreign liabilities Foreign assets
Population change Mortality Births
Out-migration Immigration
Wealth per capita, end of period
Source: World Bank (2021b).
Indonesia’s total wealth growth has been lagging behind its

structural peers, though it remains faster than the global rate.
Between 1995 and 2018, wealth almost doubled globally, reach-
ing US$1,152 trillion, while Indonesia’s wealth more than doubled—
reaching US$12.9 trillion in 2018 (averaging 4 percent growth an-
nually) (Figure 17). This increase is on par with some of Indonesia’s
peers, such as Egypt, Nigeria, and the Philippines. On the other hand,
it is slower than China, Turkey, Chile, the Republic of Korea, and India,
where human capital contributed the most to wealth accumulation.
P. 2 6 In Indonesia, both human capital and physical capital are closely
associated with commodity price trends. Both accelerated during
the commodity boom in 2003 and decreased during the price down-
turn in 2012. This was in line with a decline in labor earnings, one
of the key components in human capital estimates, particularly in
agriculture and mining (Allen 2016).
FIG 17 INDONESIA’S TOTAL WEALTH GREW ON PAR FIG 18 DESPITE THE GROWTH IN TOTAL WEALTH,
WITH MOST OF ITS PEERS SINCE 1995 PER CAPITA WEALTH HAS GROWN
(Average growth of wealth, 1996-2018, RELATIVELY SLOWLY
percent) (Increase in per capita wealth, 1996-2018,
thousands)
INTERQUARTILE RANGE OF PEERS INDONESIA
9
120
8
100
7
6 80
5
60
4
40
3
SOUTH KOREA
20
PHILIPPINES
2
CZECH REP.
INDONESIA
THAILAND
NIGERIA
POLAND
TURKEY
MEXICO
RUSSIA
BRAZIL
1 0
EGYPT
CHINA
CHILE
INDIA
IRAN
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Source: World Bank 2021b. World Bank staff calculation. Source: World Bank 2021b. World Bank staff calculation.
P. 2 7 Indonesia’s per capita wealth has not grown as quickly as in peer
countries since 1995 (Figure 18). Per capita wealth
increased for
9
most countries globally 120
during this period. Indonesia experienced a
8 faster per capita GDP growth than per capita wealth growth, suggest-
ing that, despite rapid short-term
100 GDP growth, long-term growth could
7
slow unless earnings can be used more to build up national wealth.
6 80
This has resulted in a relatively slow convergence of wealth per
capita between Indonesia 60 and HICs. Per capita wealth growth was
5
4 the slowest for high-income OECD countries compared to others, but

per capita wealth growth40in lower-income countries also stagnated
3
(Figure 19). Indonesia’s per capita wealth convergence has been
SOUTH KOREA
20
slow relative to high-income economies (US), staying almost flat be-
PHILIPPINES
CZECH REP.
INDONESIA
THAILAND
tween 1995 and 2018 and at the bottom end of the interquartile
NIGERIA
POLAND
TURKEY
MEXICO
RUSSIA
BRAZIL
1 0
EGYPT
CHINA
CHILE
INDIA
range of its structural peers (Figure 20). China and India have con-
IRAN
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
0 verged faster.
FIG 19 PER CAPITA WEALTH OF LOWER-INCOME COUNTRIES ARE CONVERGING WITH HICS
(Growth of per capita wealth from 1995 to 2018)
LOW-INCOME HIGH-INCOME: OECD
LOWER-MIDDLE INCOME HIGH-INCOME: NON-OECD
UPPER-MIDDLE INCOME
500
% GROWTH IN TOTAL WEALTH PER CAPITA 1995-2018
400
300
200
100
-100
2.000 20.000 200.000 2.000.000
TOTAL WEALTH PER CAPITA, 1995 (2018 US$, LOG SCALE)
Source: World Bank 2021b. WDI, World Bank staff calculations.

P. 2 8 FIG 20 INDONESIA'S PATH OF CONVERGENCE IS SIMILAR TO THAT
EXPERIENCED BY THE BOTTOM 25 PERCENT OF PEERS
(Per capita wealth excluding nonrenewable source, convergence to US,
index 1=total convergence)
0,14
0,12
0,10
0,08
0,06
0,04
0,02
0,00
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: World Bank 2021b. WDI, World Bank staff calculations.
The composition of Indonesia’s wealth is relatively diversified, with

human capital remaining the largest asset category, but its share
has been declining over time. The share of human capital decreased
from 62 percent in 1995 to 53 percent in 2018, while Indonesia’s
physical capital increased. Natural capital is the smallest asset cate-
gory. Although commodity-related exports account for 55 percent of
total exports, they are lower than many countries in Africa or South
America (Figure 21). Indonesia’s asset diversification increased be-
tween 1995 and 2018 (Figure 22).
Indonesia’s natural wealth is high in absolute terms due to large

endowments of fossil fuels, forests, and agricultural lands. In re-
cent years, Indonesia has reduced its rate of nonrenewable natural
resource depletion as it has transitioned toward increased production
of renewable natural capital (Figure 23). The nonrenewable natural
0-20
capital share of total wealth typically changes as a country develops.
20-40 As countries experience rising incomes, nonrenewable natural capital
40-60
60-80
first increases, then declines.
80-100
P. 2 9 FIG 21 INDONESIA’S EXPORTS ARE NOT COMMODITY DEPENDENT
(Share of commodity export product to total merchandise
exports, percent)
0-20
20-40
40-60
60-80
80-100
Source: UNCTAD Commodity State of Dependence, 2020.

Note: Data is for 2018-19. A country is considered to be commodity-export dependent when more than 60 percent of its total merchandise exports are
composed of commodities.
FIG 22 INDONESIA’S WEALTH ASSETS ARE ALSO SLIGHTLY MORE DIVERSIFIED

COMPARED TO PEERS
Herfindahl Index of Asset Diversification, Indonesia and peers
BRAZIL 6500
INDIA
MEXICO 6000
RUSSIA
CHINA
5500
INDONESIA
NIGERIA
THAILAND 5000
EGYPT
IRAN
4500
PHILIPPINES
TURKEY
4000
3500
3000
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: World Bank 2021b. World Bank staff calculations.

Note: Hirschman Herfindahl Index (HHI) is the quadratic sum of each share of asset class to total assets. It ranges from 0-10,000, where HHI of less than 1,500
is considered a highly diversified assets base, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.
BRAZIL CONGO, DEM REP GHANA COAL RENTS NATURAL GAS RENTS
INDONESIA RUSSIAN FEDERATION MINERAL RENTS OIL RENTS
P. 3 0 Resource rents from nonrenewables in Indonesia are small and be-
BRAZIL 6500 low the average of its peers. In 2018, they accounted for 4 percent
INDIA of GDP, while average peers stood at 5.7 percent (Figure 24). Indone-
MEXICO 6000
RUSSIA sia’s large share of nonrenewable natural capital and rents pose risks
CHINA
INDONESIA
5500 to the country from several challenges that are typical for countries
NIGERIA with a high share of fossil-fuel capital: (i) high exposure to low-carbon
THAILAND 5000
EGYPT
transition risks; (ii) high potential for reduced government revenues
IRAN
4500 derived from fossil fuel wealth; (iii) policies and investments that
PHILIPPINES
TURKEY might further increase low-carbon transition risk; and (iv) the difficul-
4000
ty of diversifying away from nonrenewable natural capital (Cust and
3500 Manley 2018).
FIG 23 INDONESIA'S
3000NONRENEWABLE NATURAL FIG 24 INDONESIA’S NONRENEWABLE RENTS
CAPITAL DEPLETION RATE HAS BEEN REACHED ABOUT 4 PERCENT OF ITS GDP
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
DECLINING DURING 1995-2018 (Nonrenewable natural capital rents,
(Nonrenewables capital depletion, percent of GDP, 2018)
percent of Gross National Income-GNI)
BRAZIL CONGO, DEM REP GHANA COAL RENTS NATURAL GAS RENTS
INDONESIA RUSSIAN FEDERATION MINERAL RENTS OIL RENTS
10 IRAN
RUSSIA
9
NIGERIA
8
EGYPT
7
INDONESIA
6 BRAZIL
MEXICO
5
UKRAINE
4
INDIA
3
THAILAND
2 CHINA
1
PHILIPPINES
TURKEY
0
1995 2000 2005 2010 2015 2018 0% 5% 10% 15% 20% 25%
Source: World Bank 2021b. World Bank staff calculation. Source: World Bank 2021b. WDI, World Bank staff calculation.
P. 3 1 Meanwhile, between 1995 and 1998, renewable natural capital
12 Renewable natural capital
assets such as cropland, pastureland, protected areas, mangroves,
remains important even as
countries grow and develop.
and forest timber resources saw increases in absolute value12
Developing an economy requires (Figure 25). These were driven by increases in physical quantities
efficient use of natural capital
and managing it sustainably. in some cases (e.g., for cropland), as well as in monetary unit value
It is, therefore, important to
invest in renewable capital (e.g., for mangroves, which protect increasingly valuable coastal as-
to build other asset types as
the country’s economy grows.
sets). The rising trends in agricultural capital are similarly observed
Globally, there is a positive in Indonesia's structural peers.
relationship between renewable
capital and a country’s total
wealth. Renewable capital
grows as a country develops,
also suggesting that renewable
capital is complementary to
other capital such as produced
and human capital.
FIG 25 AMONG INDONESIA’S RENEWABLE ASSETS, CROPLAND INCREASED THE MOST,

BOTH IN ABSOLUTE TERMS AND SHARE OF TOTAL RENEWABLE RESOURCES
A. CHANGE IN RENEWABLE CAPITAL (US$ MN) B. SHARE OF RENEWABLE RESOURCES

FORESTS, TIMBER PROTECTED AREAS FISHERIES PASTURELAND FORESTS, TIMBER PROTECTED AREAS FISHERIES PASTURELAND
MANGROVES FORESTS, ECOSYSTEM CROPLAND MANGROVES FORESTS, ECOSYSTEM CROPLAND
SERVICES SERVICES
1.200.000 100%
90%
1.000.000
80%
70%
800.000
60%
600.000 50%
40%
400.000
30%
20%
200.000
10%
0 0%
AVG 2000-2003 AVG 2015-2018 AVG 2000-2003 AVG 2015-2018
Source: World Bank 2021b. World Bank staff calculation.
INDONESIA PHYSICAL CAP HUMAN CAP BRAZIL PHYSICAL CAP HUMAN CAP
Indonesia has exploited its natural capital, particularly nonrenew-

RENEWABLES NON RENEWABLES NON RENEWABLES RENEWABLES
400 able resources, to produce

700 physical and human capital. Natural
350
capital, particularly nonrenewables,
600 has declined since 2013 (due
300
to both physical exploitation
500 and variation in global commodity pric-
250
200
es which are reflected in400natural capital values). Human capital has
150 increased after declining300during the Asian Financial Crisis in 1997
100 due to earning losses; the

200
accumulation rate since then has been
50 slow although from a higher base than produced capital and natural
100
0 0
capital. Human capital accumulation started to accelerate in 2002
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
with the onset of the commodity boom period but declined again in
IRAN 2011
PHYSICAL CAP(Figure 26).
HUMAN CAP NIGERIA PHYSICAL CAP HUMAN CAP
RENEWABLES NON RENEWABLES RENEWABLES NON RENEWABLES
250 350
600.000 50%
40%
400.000 40%
30%
400.000
30%
20%
P. 3 2
200.000
200.000
FIG 26 NONRENWABLE NATURAL
20%
PRODUCED AND HUMAN
10%
CAPITAL WEALTH PER CAPITA IS DECLINING;
CAPITAL IS INCREASING
0 10%
0%
AVG 2000-2003
(Annual Indexed Per Capita Wealth,
AVG 2015-2018
Indonesia vs Select
AVG 2000-2003
Structural
AVG 2015-2018
0
Peers, 1995 = 100) 0%
AVG 2000-2003 AVG 2015-2018 AVG 2000-2003 AVG 2015-2018
INDONESIA PHYSICAL CAP HUMAN CAP BRAZIL PHYSICAL CAP HUMAN CAP
INDONESIA RENEWABLES
PHYSICAL CAP NON RENEWABLES
HUMAN CAP BRAZIL RENEWABLES
HUMAN CAP
400 700
400
350 700
600
350
300 600
500
300
250 500
400
250
200 400
200 300
150
300
150 200
100
200
100
50 100
50 100
0 0
0 0
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
IRAN PHYSICAL CAP HUMAN CAP NIGERIA PHYSICAL CAP HUMAN CAP
IRAN RENEWABLES
HUMAN CAP NIGERIA RENEWABLES
HUMAN CAP
250 350
250 350
300
200
300
200 250
150 250
200
150
200
100 150
100 150
100
50 100
50 50
50
0 0
0 0
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: World Bank 2021b. World Bank staff calculation.
13 Growth sustainability can be

The pace of wealth accumulation may need to accelerate for Indo-
measured by ANS as it measures nesia to each high-income status by 2045. With a higher accumula-
how a nation’s assets can turn
into income. The World Bank in tion of wealth, Indonesia will have the potential to increase its output
the 1990s also introduced ANS
as a proxy of change in wealth, and thus boost its economic growth. Economic growth remains sus-
represented by savings. ANS is
measured as gross national saving
tainable, with the share of ANS to GNI increasing.13 Indonesia’s ANS
minus depreciation of produced
capital, depletion of subsoil assets
as a share to GNI has increased by 4.3 percentage points despite
and timber resources, and air GDP per capita increasing by more than 100 percentage points. Sim-
pollution damage to human health,
plus a credit for expenditures on ilarly, in China, GDP per capita almost tripled while the share of ANS
education. A country is considered
consuming more than it is saving in GNI increased by 6.9 percentage points. Indonesia has reduced
if the ANS as a percentage of GNI
is negative, risking its long-term
its natural resource depletion rate in recent years (Figure 26), which
sustainability. If ANS is positive, led to an increase in ANS. However, further increasing human capital
then it is increasing its wealth and
future economic well-being. wealth will be essential for reaching HIC by 2045.
02
P. 3 3
P.33-52 FISCAL POLICIES TO SUPPORT

LOW-CARBON GROWTH IN
INDONESIA
Macro-fiscal Policy Framework and
Commodity Price Volatility
verall, macro-fiscal policy in Indonesia has
O
helped the country to manage commodity
price volatility. Countries with higher exposure
to nonrenewable wealth per capita had higher
fiscal deficits during the 2015-18 period when
commodity prices fell. Despite Indonesia’s ex-
posure to commodity prices, it performed rel-
atively well in terms of macro-fiscal outcomes,
with a lower decrease in overall fiscal balance during the commodity
bust period (Figure 27). This could partly be because its natural re-
source rents during commodity boom and bust periods have been
relatively low and stable, compared to other countries (Figure 28).
P. 3 4 FIG 27 INDONESIA HAS A STABLE
TREND OF OVERALL FISCAL
FIG 28 FISCAL CONDITIONS HAVE BEEN RESILIENT
TO COMMODITY PRICE SHOCKS
BALANCE
(Change in rent per capita, constant
(Overall fiscal balance and 2018 US$)
wealth per capita, 2000-
2018)
A. OVERALL BALANCE VERSUS WEALTH B. CHANGE IN RENT PER CAPITA 2000-2003 TO 2004-14
PER CAPITA, 2000-2018 2004-14 TO 2015-18
CASE STUDY COUNTRY GABON

SIMILAR GDP PER CAPITA COMPARTOR CHILE
RUSSIAN FEDERATION
HIGHER GDP PER CAPITA COMPARTOR
MEXICO
DECLINING OR STAGNANT WEALTH SOUTH AFRICA
PER CAPITA COUNTRY
MALAYSIA
NIGERIA
10 EGYPT, ARAB REP.
PERU
COLOMBIA
5 BRAZIL
OVERAL BALANCE (% OF GDP)
INDONESIA
VIETNAM
COD THA THAILAND
0 TUR
GAB MOROCCO
MDG VNM MEX RUS
BGD PER CHL LIBERIA
MAR IDN COL MYS
LBR NGA TURKEY
-5 BDI PAK BEN ZAF
PAKISTAN
GHA
KEN BANGLADESH
BRA KENYA
-10 MADAGASCAR
EGY
BURUNDI
BENIN
-15 CONGO, DEM. REP.
10,000 100,000 GHANA
-2,000
-1,500
-1,000
-500
500
1000
1,500
TOTAL WEALTH PER CAPITA
(CONSTANT 2018 US$, LOG SCALE) RENT CHANGE (CONSTANT 2018 US$)
Source: World Bank

CORRELATION 2021b. World
BETWEEN Bank staff estimates.
COMMODITY Source:
CHANGE World Bank 2021b.
IN GDP, World Bank
2000-2003 TO staff estimates. OVERALL BALANCE
PRICES AND SPENDING 2015-18 PRIMARY BALANCE
0,35
In the past, public spending
GABON
NIGERIA
has been positively correlated with
0,3 commodity prices. However,KENYA the link has waned over time thanks to
RUSSIAN FEDERATION
prudent macro-fiscal policies—especially
BRAZIL cutbacks in fossil-fuel sub-
0,25 LIBERIA
sidies (Figure 29). In other
TURKEYwords, as commodity prices rise, current
EGYPT, ARAB REP.
0,2 expenditure accelerates.SOUTHThe correlation is positive and significant.
AFRICA
PAKISTAN
0,15
The gradual decoupling INDONESIA
of spending from the commodity price cycle
PERU
has been attributed to fiscal
CHILE prudence measures and prioritization of
EXPENDITURE
EXPENDITURE
EXPENDITURE
MOROCCO
0,1 spending towards development. During more recent commodity price
CURRENT
VIETNAM
CAPITAL
rallies, declining subsidies

BENIN
(especially after 2015) and offsetting rev-
TOTAL
0,05 COLOMBIA
enues have helped keepMEXICOthe primary balance in check. Moreover, the

BANGLADESH
0
overall balance deteriorated
GHANA
by less than the primary balance when
MADAGASCAR
-0,05 compared to the commodity boom (2000-2003) and bust (2015-

CONGO, DEM. REP.
BURUNDI
2018) periods (Figure 30). This is due to sound macro-fiscal policies
THAILAND
MALAYSIA
-0,1
that enabled debt to decline by gradually decoupling
-12 -10 -8 -6 -4 -2
spending
0 2 4 6
from
8
the commodity price cycle, reducing interestPERCENTAGE burden, and increasing

POINT CHANGE
spending on development (see World Bank 2020b).

KEN BANGLADESH
OVERAL B
BRA KENYA
-10 MADAGASCAR
EGY
BURUNDI
P -15
. 35 FIG 29 PUBLIC SPENDING IS
POSITIVELY CORRELATED TO
FIG 30
BENIN THERE IS A HIGH GAP BETWEEN OVERALL
AND PRIMARY BALANCE DURING
CONGO, DEM. REP.
10,000 COMMODITY CYCLE
100,000 GHANA COMMODITY BOOM AND BUST
-2,000
-1,500
-1,000
-500
500
1000
1,500
(Correlation coefficient, 1 =
TOTAL WEALTH PER CAPITA
(Change in GDP, 2000-2003 to 2015-2018)
completely correlated)
(CONSTANT 2018 US$, LOG SCALE) RENT CHANGE (CONSTANT 2018 US$)
CORRELATION BETWEEN COMMODITY CHANGE IN GDP, 2000-2003 TO OVERALL BALANCE

PRICES AND SPENDING 2015-18 PRIMARY BALANCE
0,35 GABON
NIGERIA
KENYA
0,3
RUSSIAN FEDERATION
BRAZIL
0,25 LIBERIA
TURKEY
EGYPT, ARAB REP.
0,2 SOUTH AFRICA
PAKISTAN
INDONESIA
0,15 PERU
EXPENDITURE
EXPENDITURE
EXPENDITURE
CHILE
MOROCCO
0,1
CURRENT
VIETNAM
CAPITAL
BENIN
TOTAL
0,05 COLOMBIA
BANGLADESH
MEXICO
0 GHANA
MADAGASCAR
CONGO, DEM. REP.
-0,05
BURUNDI
THAILAND
-0,1 MALAYSIA
-12 -10 -8 -6 -4 -2 0 2 4 6 8
PERCENTAGE POINT CHANGE
Source: Haver Analytics. World Bank staff estimate. Source: World Bank 2021b. World Bank staff estimate.
Aligning Fiscal Policy to the Low-

carbon Transition
ndonesia’s fiscal policies have historically
incentivized carbon consumption, although
I
ongoing reforms are trying to redress this. In-
centives are driven by low taxation of, and subsi-
dies for, fossil fuels. Support for fossil fuels as a
share of tax revenue in Indonesia has declined,
with a sharp drop in 2015 (Figure 31). This drop
was driven by ambitious transport fuel subsidy
14 As per the 2020 national
reform in 2014-15. Petroleum received nearly one-half of total fossil
budget. This includes reported fuel support although this has declined over the 20 years to 2020
direct subsidy spending and
estimated implicit subsidies (Figure 32). Cuts in full support (from 3.9 percent of GDP in 2000 to
accruing as payment obligations to
Pertamina, the state-owned oil and 1.8 percent in 2020)14 created space for higher spending on health,
gas enterprise.
P. 3 6 infrastructure, and social assistance. Social assistance increased
from 0.3 percent of GDP in 2004 to 1.5 percent in 2021. Total fuel
subsidy expenditure rose because of the energy crisis in 2022, al-
though the government has increased administered prices to contain
these pressures.
FIG 31 HIGH BUT DECREASING FOSSIL FUEL FIG 32 MUCH SUPPORT GOES TOWARD PETROLEUM
SUPPORT
TOTAL FOSSIL FUEL SUPPORT INTERQUARTILE RANGE PETROLEUM SUPPORT INTERQUARTILE RANGE
INDONESIA INDONESIA
35 100
% TOTAL FOSSIL FUEL SUPPORT

30
% OF TOTAL TAX REVENUE
80
25
20 60
15 40
10
20
5
0 0
2005
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2005
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
FIG 33 MOST SUPPORT IS GEARED TO CONSUMERS FIG 34 RESULTING IN HISTORICALLY LOW PETROL
END-USER PRICES
FOSSIL FUEL CONSUMER SUPPORT INTERQUARTILE RANGE PETROL END-USER SUPPORT INTERQUARTILE RANGE
INDONESIA INDONESIA
100 35
% TOTAL FOSSIL FUEL SUPPORT
80
USD PER LITRE
25
60
40
10
20
0 0
2005
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2005
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
FIG 35 AND LOW RESIDENTIAL ELECTRICITY
PRICES
RESIDENTIAL ELECTRICITY PRICE INTERQUARTILE RANGE
INDONESIA
0,5
0,4
USD PER KWH
0,3
0,2
0,1
0
2005
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Sources: OECD Green Growth Data, figures compiled by World Bank Group staff.
Note: Interquartile range refers to equivalent data for the 25th and 75th percentile
of structural peers (see Footnote 1).
P. 3 7 Historically, most fossil fuel support is poorly targeted and does
not benefit those who need it the most. Most fossil fuel support is
targeted at consumers rather than producers (Figure 33). This results
in low petrol end-user prices (Figure 34) designed to assist house-
holds. However, benefits accrue more to the better-off households
because they are more significant fuel consumers than the poor. In
the power sector, electricity tariffs are set below cost recovery under
a Public Service Obligation (PSO) arrangement (Figure 35). Although
efforts have been made (especially between 2015 and 2017) to re-
assign consumers to non- or less-subsidized tariff classes through
means testing, many relatively better-off households still benefit from
the PSO tariff. Approximately 45 percent of the PSO is used to sub-
sidize households that do not fall within the database for poor and
vulnerable households.
The current economic environment creates challenges for the re-

duction of fossil fuel subsidies, but there are steps that can be
taken to help gradually move the process forward. Authorities in
a range of countries sometimes decide to choose fuel price subsi-
dies over targeted transfers at a time when energy prices are high
because: (i) many poor households may not receive social transfers
sufficient to compensate for higher fuel prices; (ii) price controls
can shield producers from higher input costs; and (iii) price controls
help keep inflation expectations in check. This occurs despite evi-
dence showing that targeted transfers are more cost-effective in mit-
igating the poverty impacts of price increases (World Bank 2022b).
Addressing and re-targeting subsidies will require sustained efforts
to strengthen the delivery infrastructure for social protection and
devise transfers consistent with political imperatives—such as time-
bound transfers to affected households.
Steps can also be taken to redirect tax incentives directed to-

wards ‘non-green sectors.’ A significant proportion of Indonesia’s
tax expenditure is shown to be targeted at non-green sectors. Some
29 percent of Indonesia’s tax expenditures are targeted at these sec-
tors (Figure 36)—amounting to 0.46 percent of GDP. These incentives
are primarily targeted at mining oil, gas, and coal via exemptions on
import duties and property taxes.
P. 3 8 FIG 36 TAX INCENTIVES ARE TARGETED MOSTLY TOWARDS NON-
GREEN SECTORS
(Tax incentives by sector, share to total, percent)
SHARE OF NON-GREEN TAX INCENTIVES IN

TAX EXPENDITURE (%) 2%
GREEN TAX INCENTIVES
NON-GREEN TAX INCENTIVES
OTHER
29%
69%
Sources: Ministry of Finance (MoF) Tax Expenditure Data 2018; World Bank staff calculation.
4,000,000 Note: Green sectors are sectors with renewable energy, such as geothermal and low-emissions vehicles. Non-Green
sectors include those with fossil fuel energy, such as oil, gas, coal, and electricity consumption. Other sectors, such as
3,500,000 books, post services, insurance, and others, are not explicitly classified into those two.
SUB BUSINESS AND INDUSTRY
3,000,000
2,500,000 Fiscal Instruments and Incentives for

ELECTRICITY SUBSIDY:
a Low-carbon Transition FUEL TAX: PERTALITE

PERTALITE SUBSIDY
CPO EXPORT TAXES

SUB HOUSEHOLDS
2,000,000
VAT EXEMPTIONS:
FUEL TAX: DIESEL
COAL ROYALITIES
DIESEL SUBSIDY
1,500,000
LPG SUBSIDY
CARBON TAX
ELECTRICITY
closer look at Indonesia’s fiscal instruments

1,000,000
presents opportunities to navigate the above
A
500,00 challenges and help the government achieve
0 its climate ambitions. This section considers In-
donesia’s specific
INSTRUMENTS THAT DECREASE THE COST OF EMISSIONS fiscal
INSTRUMENTS THAT instruments that
INCREASE THE COST shape
OF EMISSIONS
GHG emissions incentives. It begins by invento-

rying Indonesia’s relevant fiscal instruments and
then investigates the fiscal framework for GHG
emissions that they collectively represent—focusing on budgetary
impacts, coverage, inconsistencies.
Fiscal policy offers a range of instruments that can support the

government’s efforts on decarbonization. Fiscal instruments have
their effect by incentivizing businesses and households to reduce
their carbon footprint, whether by discouraging emissions-intensive
activities or promoting activities with a lower or zero carbon footprint
(see Box 1). For instance, taxes can be used to penalize the use of
emissions-intensive fossil fuels, subsidies can encourage consum-
P. 3 9 ers to switch to greener options, and tax expenditures can promote
renewable energy investments. Fiscal instruments can, however, also
shape incentives in ways that obstruct a country’s green transition.
Several of Indonesia’s current fiscal instruments, originally imple-
mented with other policy objectives in mind, are already impacting In-
donesia’s green and climate objectives, not always in favorable ways.
BOX 1 FISCAL INSTRUMENTS TO SUPPORT THE TRANSITION TO LOW-

CARBON EMISSIONS
I
ndonesia has over a dozen fiscal instruments that influence
the incentives for emitting GHGs. These instruments take
the form of taxes and excise duties, activity-specific licenses,
direct and indirect subsidies, and tax expenditures arising from
preferential tax treatment. They target both the consumers and
producers of emissions-intensive goods and services and the
consumers and producers of greener alternatives. They have
been implemented for various reasons (for example, industry
promotion, revenue collection, or social protection), none of which
typically relate to emissions mitigation. This is unsurprising, given
the government’s diverse objectives, which evolve. Therefore, it
would be unreasonable to expect that these instruments would
constitute a coherent and effective overarching fiscal regime for
pricing emissions and achieving the government’s mitigation
goals. The following inventory briefly introduces Indonesia’s most
noteworthy fiscal instruments, categorizing them by the primary
direction in which they currently shift emitter incentives.15
Fiscal instruments that primarily discourage emissions
• Palm oil export taxes: An export levy and an export

duty are levied on palm oil exports. Both are progressive,
in that they tend to be higher when global prices
are higher, although the levy does have a stipulated
maximum rate. Derivative palm oil products have related
but typically lower levy and duty rates. Land conversions
for expanding palm oil plantations are a significant
source of GHG emissions.
15 The legal basis for these
instruments is documented in
Appendix 1.
P. 4 0 • Forestry license: Forestry licenses are required by
subnational governments for activities such as collecting
timber or non-timber forest products, using forest areas,
and using environmental services. There are significant
emissions of GHGs during deforestation.
• Coal royalties: Coal miners are subject to a royalty on

their sales. The applicable royalty rate depends on the
type of license the mining firm holds but can be up to
13.5 percent before any allowable deductions. Coal is
one of the most GHG-emissions-intensive fossil fuels,
and Indonesia is the world’s third-largest producer.
• Carbon tax: Indonesia has planned a phased

introduction of a tax on carbon-dioxide-equivalent
(CO2eq) emissions. It was scheduled to commence in
2022, with initial implementation in the coal-fired power
sector, but has been postponed. The carbon tax will work
together with an emissions trading scheme in this sector.
• Fuel tax: There is a provincial government tax on

motor vehicle fuels (for example, diesel and gasoline).
Although an ad-valorem rate of up to 10 percent is
permitted, almost all provinces apply a rate of 5 percent.
The transport sector accounts for about 27 percent of
Indonesia’s total energy-related CO2eq emissions.
• Luxury goods and service tax (LGST) incentives: LGST

reductions are offered for fuel-efficient and battery-
powered vehicles and implemented through reductions
in the applicable LGST tax base. LGST is reimbursed
or not collected on sales to businesses engaged
in exploration and exploitation in the oil, gas, and
geothermal sectors.
• Income tax borne by government: The government’s

tax dues from geothermal firms’ proceeds, from
geothermal energy that is supplied to power plants, is
borne by government up to annual limits designated
in the national budget. This only applies to geothermal
operations that have been operating since 2002.
P. 4 1 Indonesia has the world’s largest potential for
geothermal power generation, an important substitute
for fossil fuels.
Fiscal instruments that primarily encourage emissions
• Zero royalty on coal value addition: Coal miners are

potentially eligible for a zero-rate coal royalty on coal
that they use for domestic value-added activities. Such
activities include the use of coal-fired power plants.
• VAT exemptions: VAT is exempted from electricity sales

for residential connections less than 6600 VA capacity.
• Fuel subsidies: There is an explicit, fixed, per liter

subsidy on diesel fuel of IDR 500/liter. There are also
subsidies on a popular brand of gasoline (Pertalite)
and on LPG when sold in 3kg cannisters; both are
implemented by setting administered retail prices below
the cost of supply. The government reimburses the
supplier for corresponding losses.
• Electricity subsidy: An electricity subsidy is

implemented through administered below-cost retail
prices for low-voltage connections. The government
reimburses the supplier for corresponding losses.
Indonesia’s grid-connected electricity is predominantly
generated by high-emitting coal-fired power plants.
• Fertilizer subsidy: There is a subsidy on fertilizers to

the agriculture sector, implemented through below-cost
pricing of fertilizers. The government reimburses the
supplier for corresponding losses. Fertilizers account
for about 10 percent of emissions from the agriculture
sector (Savelli et al. 2021).
• Import duty exemptions: Import duty is exempted on

imported goods for businesses engaged in exploration
and exploitation in the oil, gas, and geothermal sectors.
• Land and building tax exemptions: Land and building

tax is fully deductible for businesses engaged in
P. 4 2 exploration in the oil, gas, and geothermal sectors.
• Capital injections into the national electricity company:

Perusahaan Listrik Negara (PLN), the national electricity
company, has received annual capital injections from
the central government since 2019. These assist PLN in
raising finance by maintaining key metrics, such as debt
service coverage ratio, within loan covenants.
Overall, fiscal policies that encourage GHG emissions are more sig-
nificant than those that discourage GHG emissions. Fiscal policies
encouraging GHG emissions may have been equivalent to 1.5 percent
of GDP in 2019, while policies discouraging emissions might have
reached about 0.5 percent of GDP (Table 2). Most instruments have
a relatively minor fiscal footprint, while just a few are particularly large.
Moreover, energy subsidies alone might have amounted to double the
fiscal footprint of all other relevant instruments in 2019. The implica-
tion is twofold. First, Indonesia’s fiscal regime potentially lowers the
price of carbon and, therefore, acts counter to decarbonization efforts.
Second, significant headway on greening the fiscal regime may be
possible through renewed reform efforts focused on energy subsidies.
TABLE 2 FISCAL FOOTPRINT OF POLICY INSTRUMENTS THAT SHAPE THE INCENTIVES FOR
CARBON USE AND CO 2EQ EMISSIONS
Fiscal Instrument Fiscal Gain / Burden (Rp) Fiscal Gain / Burden (% of GDP)
Fiscal instruments that primarily discourage emissions
Palm oil export taxes Levy: Rp 20.2 T (2020) Levy: 0.1 % (2020)
Duty: Data not available Duty: Data not available
Forestry license Forestry revenues:(a) Rp 5.0 T (2019), Rp 4.4 Forestry revenues: 0.0% (2019), 0.0%
T (2020) (2020)
Coal royalties Production contribution and royalties: Rp Production contribution and royalties: 0.1%
12.6 T (2020) (2020)
Carbon tax Estimated at: Rp 0.2 T for first full year 0.0% (2022)
Fuel tax Rp 21.2 T (2019), Rp 18.1 T (2020) 0.1% (2019), 0.1% (2020)
LGST incentives Rp 2.3 T (2019), Rp 1.2 T (2020) 0.0% (2019), 0.0% (2020)
Income tax borne by Rp 2.2 T (2019), Rp 3.0 T (2020) 0.0% (2019), 0.0% (2020)
government
Import duty exemptions Rp 0.0 T [36 billion] (2020)(b) 0.0% (2020)
(geothermal)
Land and building tax Rp 0.0 T (2019), Rp 0.0 T (2020) 0.0% (2019), 0.0% (2020)
exemptions (geothermal)
P. 4 3
Fiscal Instrument Fiscal Gain / Burden (Rp) Fiscal Gain / Burden (% of GDP)
Fiscal instruments that primarily encourage emissions
Zero royalty on coal Initiated in 2021. Data not available. Data not available.
value addition
VAT exemptions Rp 6.0 T (2019), Rp 6.0 T (2020) 0.0% (2019), 0.0% (2020)
Fuel subsidies (c)
Rp 89.7 (2019), Rp 2.7 (2020), Rp 151.4
(d)
0.6% (2019), 0.0% (2020), 0.9% (2021)
(2021)
Electricity subsidy(e) Rp 103.8 (2019), Rp 78.4 (2020), 94.4% 0.6% (2019), 0.4% (2020), 0.5% (2021)
(2021)
Fertilizer subsidy Rp 27.2 T (2021) 0.2% (2021)
PLN capital injections Rp 6.5 (2019), Rp 5.0 (2020), Rp 5.0 (2021) 0.0% (2019), 0.0% (2020), 0.0% (2021)
Import duty exemptions Rp 0.8 B (2020) 0.0% (2020)
Land and building tax Rp 0.1 T (2019), Rp 0.0 T (2020) 0.0% (2019), 0.0% (2020)
exemptions
Income tax holiday Data not available(f) Data not available
Sources: MoF; Ministry of Energy and Mineral Resources (MoEMR); Pertamina; and World Bank staff estimates.
Notes: (a) Comprising of income categories as: reforestation fund; forest resources; forest product utilization business permit fee; use of forest areas for
development purposes outside forestry activities; (b) Before 2020, there is no sectoral split. In 2019, the total was Rp 0.4 T; (c) Includes both implicit and
explicit subsidies for Premium, Pertalite, and Pertamax gasoline; (d) Does not include subsidies on Pertalite and Pertamax due to data limitations; (e) Includes
both implicit and explicit subsidies; and (f) four of 96 companies that received a tax holiday in 2020 were classified as coal products industry or oil and gas
drilling industry. However, the tax expenditures data on tax holiday does not provide a breakdown at the sectoral level.
There are three characteristics where fiscal instruments could

support the government’s climate targets: coverage, coordination,
and alignment. First, fiscal instruments that are comprehensive and
cover the entire economy—except in those sectors where instruments
already exist to ensure appropriate incentives for emitters. Second,
fiscal instruments are coordinated so they do not needlessly offset
each other within the same sector. Third, there should be an alignment
of fiscal incentives for emitters across the economy wherever possible
so that significant differences between sectors do not unintentionally
distort the allocation of resources.
These principles can be illustrated through a simple framework that

summarizes how and where fiscal instruments have been implement-
ed, based on resource supply and demand across the economy. For
each fiscal instrument discussed above, the matrix below (Table 3)
identifies the sectors to which it applies and the direction in which it
shifts incentives to emit, whether encouraging or discouraging. Fiscal
instruments that discourage greater emissions are represented in
green, whereas those that encourage it are colored red. The columns
of the table cover the major emitting sectors of the economy.
P. 4 4 TABLE 3 THE COVERAGE AND DIRECTION OF INDONESIA’S FISCAL INCENTIVES
FOR EMISSIONS-INTENSIVE ACTIVITIES
Resource Supply Resource Demand

Coal Other Geother- Land House- Industri- Trans- Electric Agricul-
Fiscal fossil mal and hold and al pro- port vehicles ture
instrument fuels forests busi- cesses fuels
ness
energy(1)
Tax and non-tax
Palm oil export
tax
Forestry license
Coal royalties
Carbon tax(2)
Fuel tax
(provincial
government)
Tax expenditure
LGST incentive
for fuel-efficient
vehicles
VAT exemptions
Zero royalty
on coal value
addition
Import duty
exemptions
Land and building
tax exemptions
Income tax
holiday
Expenditure and capital injections
Diesel subsidy
(explicit and
implicit)
Petrol subsidy
(implicit)
LPG subsidy
Electricity subsidy
(explicit and
implicit)
PLN capital
injections
Fertilizer subsidy
Source: World Bank staff estimates.
Note: (1) For conciseness, this category is defined to include household energy demand, including electricity, LPG, and kerosene, as well as business demand for
electricity. (2) Not yet implemented.
P. 4 5 The framework can be useful to start a discussion on green fiscal
incentives settings but should be treated with a caveat. A core be-
lief underpinning the following discussion is that GHG emissions have
negative externalities; hence, goods and services with an emissions
footprint should be subject to policy-induced price-based disincen-
tives that help internalize those externalities. It should be recognized
that fiscal incentives per unit of emissions are not a perfect basis for
assessing the adequacy of carbon pricing across goods and services.
There is no reason why this indicator should be exactly equal across
sectors. There can be reasonable justifications for maintaining differ-
ent levels of this indicator across various goods and services, such
as due to non-GHG externalities and other public policy objectives.
Nevertheless, the framework presented above and in the following
discussion draws attention to important gaps and inconsistencies to
trigger a conversation about whether the existing settings are appro-
priate. The findings from this framework are presented below.
Cross-sector Coverage Gaps in the

Fiscal Regime
everal sectors in the framework lack direct
fiscal instruments that discourage emissions.
S
The supply of non-coal fossil fuels, such as oil
and gas, is not subject to any fiscal disincentives
for its emissions footprint. On the demand side,
the same is true for household and business en-
ergy use and industrial process and product use
(IPPU). Even household consumption of LPG and
kerosene is not discouraged. In contrast, household electricity may
be indirectly exposed to the proposed carbon tax on coal-fired power
plants, if administered electricity prices are allowed to adjust. While
IPPU is also a major consumer of electricity from coal-fired power
plants, the sector’s emissions outside of energy use account for al-
most 4 percent of Indonesia’s total emissions and face no fiscal dis-
incentives.
Coverage gaps could also be more prevalent than what the frame-
work may suggest. The presence of an instrument in any sector nei-
ther means that all that sector’s emissions fall within the scope of
P. 4 6 the instrument nor that within-scope emissions are even adequately
managed by the instrument. For example, the carbon tax will penalize
coal-related emissions generated by coal-fired power plants but will
not tax most of Indonesia’s coal. About 80 percent of Indonesia’s
coal is exported, and companies will avoid the tax on exports. Most
of the remainder will be consumed domestically within the power
sector. Where it is instead used directly in industrial processes, it
will avoid the tax. Even within coal-fired power plants, if those power
plants have a generation capacity below 100 MW, or if those pow-
er plants directly service the industrial sector (for example, smelting
or concrete production), their coal-related emissions will be beyond
the initial remit of the tax. In agriculture, palm oil export taxes im-
pose higher costs but not on domestically consumed palm oil. These
export taxes also do not differentiate between high-emissions and
low-emissions production, a difference which can be large.
Emissions may also be covered by other non-fiscal policy instru-

ments, which could help offset the lack of fiscal disincentives.
Large sources of emissions across the economy remain outside the
scope of any fiscal or other instrument that would directly or indirectly
discourage emissions. Box 2 discusses Indonesia’s proposed emis-
sions trading scheme (ETS). The ETS is a non-fiscal carbon pricing
instrument that, if implemented broadly and effectively, can signifi-
cantly expand the disincentives to GHG emissions across the Indone-
sian economy. Emissions from FOLU are most directly influenced by
regulatory limitations, such as the moratorium on clearing peatland
and primary forests.
Another dimension of coverage is the materiality of the incentives

generated by these fiscal instruments where coverage does exist.
Figure 37 illustrates the size of fiscal incentives per ton of CO2eq
emissions for those instruments with amenable data. This offers rich-
er insight into how the fiscal regime influences behavior at the level
of a marginal unit of emissions. Analogous to the comparative fiscal
footprint discussed earlier, a clear picture emerges that the fiscal re-
gime, on an emissions basis, leans heavily in favor of emissions.
P. 4 7 FIG 37 MOST OF THE FISCAL SUPPORT TAKES THE FORM OF SUBSIDIES TO
FOSSIL FUELS
(Fiscal support per ton of CO 2eq emissions*, Rp)
4,000,000
3,500,000
SUB BUSINESS AND INDUSTRY

3,000,000
2,500,000
FUEL TAX: PERTALITE

PERTALITE SUBSIDY
CPO EXPORT TAXES

SUB HOUSEHOLDS
2,000,000
VAT EXEMPTIONS:
FUEL TAX: DIESEL
COAL ROYALITIES
DIESEL SUBSIDY
1,500,000
LPG SUBSIDY
CARBON TAX
ELECTRICITY
1,000,000
500,00
0
INSTRUMENTS THAT DECREASE THE COST OF EMISSIONS INSTRUMENTS THAT INCREASE THE COST OF EMISSIONS
Sources: MoF; MoEMR; Pertamina; and World Bank staff estimate.

Note: *Data on fuel subsidies are estimates for 2022. All others are 2021.
It is also important to consider which stage of the supply chain

the fiscal instrument is imposed on. Implementation at an earlier
or upstream stage of the supply chain typically makes it adminis-
tratively easier to achieve broader coverage, though this is primarily
relevant for emissions from fossil fuels. For example, consider tax-
ing carbon at its source of entry into the economy, such as when
fuel imports enter the country or when domestically produced coal
leaves the mine. This reduces the number of entities that need to be
monitored by the government and helps to ensure that the price dis-
incentive propagates throughout the rest of the supply chain regard-
less of distribution channels and types of use. Disincentivizing coal
upstream means the government does not have to monitor the coal
use or emissions of the much larger number of downstream users.
The disincentive is either absorbed by upstream entities or included
in the price and passed down the supply chain.
P. 4 8
BOX 2 THE EMISSIONS TRADING SCHEME: A NON-FISCAL
INSTRUMENT FOR CUTTING EMISSIONS
A
n emissions trading scheme (ETS) is one type of
non-fiscal policy instrument that governments use
to curtail GHG emissions in the economy. ETSs
create a market for emissions by requiring that emitters hold
tradable emissions permits and limiting the market supply
of these permits. Market demand and supply then come
together to determine a price for the tradable permits and,
equivalently, a price for the underlying permissible emissions.
Whenever an emitter has too few permits to account for
anticipated emissions, it can attempt to either purchase more
permits, reduce emissions, or in some schemes, undertake
other eligible avenues for offsetting emissions. Penalties are
imposed upon emitters that fail to acquire sufficient permits
to meet their obligations. Emitters with excess permits
can attempt to sell the excess back to the market. The
government’s initial allocation of emission permits may take
place through various arrangements, including grandfathering
legacy emissions, open auctions, or a combination of the two.
The Government of Indonesia plans to set up a wide-ranging

domestic ETS by 2025, with implementation across several
economic sectors. It is currently developing the design and
institutional infrastructure of the ETS and implementing
regulations, which requires considerable inter-ministry
coordination and agreement. It is not clear which sectors of the
economy will eventually come under the purview of the ETS,
but the government has signaled an intention to make the ETS
the primary emissions pricing mechanism in Indonesia.
The government’s sectoral and design choices for the ETS

will partly depend on early experiences combining the new
carbon tax with a pilot ETS in the coal-fired power sector.
The pilot ETS has been operational since 2021, covering about
80 percent of GHG emissions from coal-fired grid-connected
power plants. However, the implementation of the carbon tax,
which was initially expected to be introduced in this sector no
later than October 2022, has so far been postponed. In the
P. 4 9 proposed combined implementation of the ETS and carbon
tax, the ETS's market price for emissions will be capped at the
prevailing carbon tax rate. The latter will commence at just
Rp 30,000 per ton of CO2eq, which is very low by international
standards. While the MoF has the authority to raise the carbon
tax rate, such increases are expected to be modest in the
initial years of implementation. This will limit the ETS’s ability
to generate a significantly stronger emissions price, even if
the demand for permits is high. The pilot ETS also employs
significant emission permit grandfathering, which is expected
to continue under the combined approach. The grandfathering
entitles emitters to an allocation of free annual permits of a
magnitude that primarily reflects their historical emissions.
Given these drawbacks, even this deliberate combination
of fiscal and non-fiscal instruments is unlikely to create an
adequate disincentive for emissions.
In the remaining sectors, the government can still decide

to implement just one of an ETS or a carbon tax, reducing
the policy and administrative complexity of the carbon
pricing mechanism. The ETS and carbon tax have their unique
characteristics, including advantages and weaknesses, which
lead to variation in their respective suitability for any given
sector. Careful consideration of these is critical when deciding
which instrument to employ in each sector. Unless significant
weaknesses in the recently proposed approach in the power
sector are addressed, it is likely preferable that just a single
choice of instrument—that is, either an ETS or a carbon tax—
be implemented for each of the remaining sectors.
P. 5 0 Conflicting Incentives Within Sectors
here are instances where fiscal instruments
impose conflicting incentives on emitters. In
T
the area of coal supply, royalties and the upcom-
ing carbon tax combine to discourage the supply
of coal. Simultaneously, however, a zero-royalty
policy on coal used for downstream activities
(particularly coal gasification) and exemptions
on import duties in the sector act in the opposite
direction. In agriculture, where fertilizers account for over 10 percent of
agriculture-related emissions, fertilizers (and thereby their emissions)
are encouraged through fertilizer subsidies. At the same time, palm
oil export taxes aimed at securing domestic supply and improving
downstream development implicitly discourage agricultural emissions
from the second-largest consumer of agricultural fertilizers.
Energy subsidies are the primary source of fiscal incentive incon-

sistencies for emitters. In household and business energy, all grid
users enjoy some degree of subsidized emissions-intensive, primarily
fossil-fuel-generated electricity. These subsidies are implemented by
holding administered electricity tariffs below the supply cost, with the
government compensating PLN for related losses. These supply costs
will increase once a carbon tax is in place. The interaction between
the administered electricity tariffs (subsidies) and the new carbon
tax is, therefore, expected to force the supply side to absorb much
of the tax—thereby triggering larger government subsidies to PLN. In
transport,16 provincial government taxes on motor vehicle fuels, which
discourage emission-intensive fossil fuels, are countered by much
larger central government subsidies on the same fuels.
For the energy products just described, Indonesia’s net fiscal incen-
tive ultimately promotes a larger emissions footprint. In other words,
if the existing fiscal regime were replaced with an equivalent carbon tax,
the tax on these products would be negative. It is possible to estimate
this net tax for several energy products. Figure 38 reveals the essentially
16 In 2018, the transport sector
accounted for about 27 percent negligible disincentive that the provincial fuel tax and the carbon tax—
of Indonesia’s energy-related
GHG emissions, with the latter
if eventually allowed to pass through into electricity prices—can impose
accounting for a little under when confronted with Indonesia’s energy subsidy regime.
one-half of Indonesia’s total GHG
emissions.
P. 5 1 FIG 38 THE NET FISCAL INCENTIVES IN INDONESIA SKEW TOWARDS
ENCOURAGING EMISSIONS
(Equivalent net taxes per ton of emissions, Rp)
SUBSIDY EQUIVALENT NET TAX
ELECTRICITY SUBSIDY: ELECTRICITY SUBSIDY:

DIESEL SUBSIDY PERTALITE SUBSIDY SUBSIDIZED SUBSIDIZED
500,00
HOUSEHOLDS BUSINESS & INDUSTRY
0
PROVINCIAL PROPOSED
-500,00
FUEL TAXES CARBON TAX
-1,000,000
-1,500,000
-2,000,000
VAT EXEMPTIONS ON
-2,500,000 SUBSIDIZED HOUSEHOLD
ELECTRICITY
-3,000,000
-3,500,000
Source: MoF; MoEMR; Pertamina; and World Bank staff estimates.

Note: Data on fuel subsidies are estimates for 2022. All others are 2021.
Electricity and fuel subsidy reforms have been a recurring reform

agenda in Indonesia for the two decades leading up to 2022. Re-
forms have been primarily motivated by evidence that subsidies are
expensive and inefficiently targeted at their principal intended bene-
ficiaries: the poor. The need for green fiscal reform should add impe-
tus to these efforts.
These conflicting incentives are mainly due to the government’s

intention to promote other policy objectives. Faced with multiple
objectives, there are sensible justifications for implementing such fis-
cal instruments, even when they are expected to have countervailing
effects on the incentives for GHG emissions. These other objectives
can in many cases, however, be achieved using instruments that do
not generate steep favorable incentives for specific emissions-inten-
sive activities. The administrative burden of conflicting instruments
also needs to be recognized: there may be more efficient ways to
employ fiscal policy than simultaneously taxing and subsidizing the
same good or service. Moreover, it can become problematic when
fiscal instruments begin to counteract each other, if this is due to a
failure to take a systemwide perspective to the incentives being gen-
erated, and hence where such conflicts are not the result of a care-
ful assessment of tradeoffs. In that case, in addition to generating
P. 5 2 administrative inefficiencies, such conflicts may hamper the govern-
ment’s ability to ensure the overall fiscal regime is set up to achieve
its chief policy priorities.
Cross-sector Inconsistencies in
Emitter Incentives
here is no consistency in the incentives creat-
ed by the fiscal regime for emissions across
T
sectors. Variations in the emissions coverage of
fiscal instruments, differences in the size of the
corresponding incentives, and offsetting impacts
due to instruments that lean in opposite directions
set the stage for significant differences in the price
of emissions across sectors. Individuals or firms
with the same GHG footprint but in different sectors can, therefore,
face entirely different incentives and disincentives to emit.
Different emitter incentives across sectors can be justified from a

climate policy perspective (Bataille et al. 2018). In some sectors
or activities, emitter behavior may be quite unresponsive to changes
in such incentives, or there may be little or no available opportunities
for emitters to transition towards greener alternatives (Hayes and
Hafstead 2020). Higher emissions disincentives might lead to lower
sector output and profitability or lower consumer welfare. They might
have a limited impact on the government’s goal of reducing emissions.
Higher emitter disincentives may, therefore, be more appropriate in
sectors that are more amenable to green transitions after also con-
sidering the government’s other policy objectives.
However, in the present Indonesian context, cross-sector variation

in fiscal emitter incentives is not based on carefully considered
rationale. A consequence is that the optimal rate of emissions miti-
gation is not being achieved, and consumption, business, and invest-
ment decisions that respond to prevailing incentives are likely to be
distorted—thereby reducing the allocative efficiency of the economy.
Moreover, such a regime is also unlikely to give many investors in new
green industries the confidence and policy coherence they require
before they proceed with investments.
03
P. 5 3
P.53-54 SUMMARY AND CONCLUSIONS

his paper provides a macro-fiscal overview of
Indonesia’s progress along four dimensions of
T
green growth, which are linked to each other
from both the outcomes and policy perspec-
tives: (i) carbon use in the growth process;
(ii) pollution and its impacts on human capi-
tal; (iii) the impact of carbon use on national
wealth; and (iv) fiscal policies for the low car-
bon transition. The paper takes stock of Indonesia’s progress on de-
carbonizing growth. It then analyzes the extent to which fiscal policies
are aligned with this overall objective.
Although GHG emissions have risen in Indonesia, they have started

to slow down—including signs of relative decoupling from growth
in per capita income. GHG emissions align with Indonesia’s stage of
development and other large emerging market economies. The slow-
down in carbon emissions in recent years has been associated with
reforms around FOLU, including moratoria on land conversion—which
have reduced deforestation rates. The energy sector is Indonesia’s
second largest contributor to GHG emissions due to the significant
use of fossil fuels in the energy mix.
P. 5 4 Reducing GHG emissions in Indonesia could have important lo-
cal benefits through reduced pollution and its negative effects on
health and human capital. Forest fires and the use of fossil fuels for
power generation, industry, and transport are significant sources of
pollution. In Indonesia, the casualties from air pollution have been
rising rapidly. The number of deaths from ambient ozone and PM2.5
in Indonesia was less than 60,000 in 2000, but this has increased
rapidly. These have contributed to increased DALYs and a lower life
expectancy in Indonesia.
Indonesia’s total wealth has grown in line with other emerging

market economies. However, per capita wealth has lagged that of
peer countries, and the composition of the wealth stock raises con-
cerns about the sustainability of growth. Indonesia experienced fast-
er per capita growth in GDP than per capita growth in wealth—which
suggests that, despite rapid short-term GDP growth, long-term growth
could slow unless earnings can be better used to build up national
wealth. Increasing human capital wealth will be essential for reach-
ing HIC status by 2045.
Sound macro-fiscal policies have helped manage commodity price

volatility, but the fiscal framework overall could be simplified and
better aligned with decarbonization objectives. Indonesia’s fiscal
policies have historically incentivized carbon consumption, although
ongoing reforms are trying to redress this. This paper considers how
key fiscal instruments alter the incentives for carbon-intensive activ-
ities, and how they come together as an overarching framework that
promotes or discourages CO2eq emissions. It finds that fiscal instru-
ments encourage more than they discourage carbon consumption.
In this context, cross-sector coverage gaps in fiscal disincentives,
conflicting incentives within sectors, and cross-sector inconsisten-
cies in incentives are worth reviewing. A complex fiscal instrument
system calls for simplification to make it easier to assess whether it
is aligned with greener growth goals. Moreover, exploring other fis-
cal instruments that encourage emission reduction is also import-
ant. Given how decentralization plays an important role in Indone-
sia and how transfers account for a significant share of the budget,
‘ecological fiscal transfers’ could be an example. This would provide
transfers to local government for activities that could have positive
environmental and climate impacts.
P. 5 5 Bibliography
Allen, E.R. 2016. “Analysis of Trends and Challenges in the Indonesian Labor Market.” ADB Papers on Indonesia. Manila:
ADB.
Bataille, C., C. Guivarch, S. Hallegatte, J. Rogelj, and H. Waisman. 2018. “Carbon prices across countries”. Nature Climate
Change 8: 648–650.
Cust, J., and D. Manley. 2018. “The Carbon Wealth of Nations: From Rents to Risks.” In The Changing Wealth of Nations
2018: Building a Sustainable Future, edited by G-M. Lange, Q. Wodon, and K. Carey, 97–113. Washington, DC: World
Bank.
Greenstone, M., and C. Fan. 2019. “Air Quality Life Index® Indonesia’s Worsening Air Quality and its Impact on Life
Expectancy.”
Hayes, K., and M. Hafstead. 2020. “Carbon Pricing 103: Effects across Sectors.” Resources for the Future.
Haver Analytics, Haver database
Hubacek, K., X. Chen, K. Feng, T. Wiedmann, and Y. Shan. 2021. “Evidence of decoupling consumption-based CO2
emissions from economic growth.” Advances in Applied Energy Vol. 4: 100074, ISSN 2666-7924 (link).
———. 2021. “Not Yet on Track to Net Zero: The Urgent Need for Greater Ambition and Policy Action to Achieve Paris
Temperature Goals.” IMF Staff Climate Note 2021/005. Washington, DC: IMF.
Mboi, N., IM..Surbakti, I. Trihandini, I. Elyazar, K. Houston Smith, P.B. Ali, S. Kosen, K. Flemons, S.E. Ray, J. Cao, S.D. Glenn,
M.K. Miller-Petrie, MD. Mooney, J.L. Reid, D.N.A. Ningrum, F. Idris, K.N. Siregar, P. Harimurti, R.S. Bernstein, T. Pangestu,
Y. Sidharta, M. Naghavi, C.J.L. Murray, and S.I. Hay. 2018. “On the road to universal health care in Indonesia, 1990–
2016: a systematic analysis for the Global Burden of Disease Study 2016.” Lancet 392: 581–91. (link).
Ministry of Environment and Forestry (Pusarpedal). 2015. (link).
New Zealand Ministry for the Environment. 2020. “Measuring emissions: A guide for organisations – 2020 Detailed
Guide.”
OECD. 2011. “Towards Green Growth” Paris: OECD Publishing. (link).
———. 2020. “Indicators to Measure Decoupling of Environmental Pressure from Economic Growth.” The OECD
Environment Programme.
Oficina Catalana del Canvi Climatic. 2019. “Practical Guide for Calculating GHG Emissions.”
Savelli, A., M. Atieno, J. Giles, J. Santos, J. Leyte, N.V.B. Nguyen, H. Koostanto, Y. Sulaeman, S. Douxchamps, and G.
Grosjean. 2021. “Climate-Smart Agriculture in Indonesia.” CSA Country Profiles for Asia Series. Hanoi (Vietnam): The
Alliance of Bioversity and CIAT, The World Bank Group.
Tanjungpinang City Environment Service. 2019. “Inventory of Greenhouse Gas Emissions, Tanjungpinang City” (link).
United Nations Conference on Trade and Development (UNCTAD). 2020. “The State of Commodity Dependence 2020.”
———. 2020b. “Indonesia Public Expenditure Review 2020: Spending for Better Results.” Washington, DC: World Bank.
———. 2021b. The Changing Wealth of Nations 2021: Managing Assets for the Future. Washington, DC: World Bank.
———. 2022b. “East Asia Pacific Economic Update (October 2022).” Washington, DC: World Bank
World Health Organization (WHO). 2014. “Burden of diseases of ambient air pollution.”
———. 2021. “WHO global air quality guidelines: particulate matter (PM2.5 and PM10), ozone, nitrogen dioxide, sulfur
dioxide and carbon monoxide.” Geneva: World Health Organization.
P. 5 6 Appendix 1 Legal Basis of the Fiscal
Instruments
Fiscal instrument Legal Basis
Palm oil export tax Regulation of the Minister of Finance (PMK) No. 76/2021 on the Second Amendment to PMK No.
57/2020.
Forestry licenses Law No. 41/2009 on Forestry.
Government Regulation No. 6/2007 on Forest Management and Preparation of Forest
Management Plans and Forest Utilization.
Regulation Of The Minister Of Forestry P.15/Menhut-II of 2009 amending Regulation of The
Minister of Forestry P.32/Menhut-II of 2007 on Procedures for Imposition, Collection, And Payment
of Business License Contributions for Utilizing Forests in Production Forests.
Regulation Of The Minister Of Forestry P.76/Menhut-II of 2014 on Determination of The Amount of
Contribution Forest Utilization Business License.
Coal royalties Government Regulation No. 25/2021 on Implementation of the Energy and Mineral Resources
Sector.
Law No. 4/2009 on Mineral and Coal Mining.
Government Regulation No. 81/2019 on Types And Prices For The Types Of Non-Tax State Revenue
Apply To The MoEMR.
More recently: Government Regulation No. 15/2022, on the Treatment of Taxes and/or Non-Tax
State Revenues in the Coal Mining Business Sector.
Carbon tax Law No. 7/2021 on Harmonization of Tax Regulations – Article 13.
Presidential Regulation No. 98/2021 on Implementation of NEK – Article 58.
Another six interrelated implementing regulations from the Fiscal Policy agency (MoF), Directorate
General of Tax, MoEMR, and MoEF.
Fuel tax Law No. 28/2009 amending Law No. 34/2000 on Regional Taxes and Regional Levies.
VAT exemptions Government Regulation No. 12/2001 as amended by Government Regulation No. 31/2007 and
Government Regulation No. 81/2015
LGST incentive Government Regulation No. 73/2019 amending Government Regulation No. 74/2021 on Taxable
for fuel efficient Goods Categorized Luxury In The Form Of Motor Vehicles Subject To Sales Tax On Luxury Goods -
vehicles Article 36.
LGST incentive for Government Regulation No. 73/2019 amending Government Regulation No. 74/2021 on Taxable
goods resulting Goods Categorized Luxury In The Form Of Motor Vehicles Subject To Sales Tax On Luxury Goods –
from mining, Article 36.
excavation, and
drilling
Zero royalty on coal Government Regulation No. 25/2021.
value addition
Import duty PMK No. 217/2019, which regulates the exemption of import duty and not being levied tax in
exemptions the context of the import of goods for upstream oil and gas business activities. Also, PMK No.
259/2016; PMK 7No. 8/2005; PMK No. 20/2005.
For geothermal, PMK No. 177/2007, PMK No. 21/2010.
For power generation industries, some set of the following: Section 26, paragraph 1, clause a,
b, and c of Law No. 17/2006 on Customs; PMK No. 176/2009; PMK No. 76/2012; PMK No.
188/2015; PMK No. 66/2015.
Land and building PMK No. 267/2014 (oil & gas).
tax exemptions PMK No. 172/2016 (geothermal).
Income tax borne PMK No. 179/2013 (geothermal; income tax borne by govt).
by government
Income tax holiday Government Regulation No. 94/2010.
for pioneer industry PMK No. 130/2011, as last revised by PMK No. 129/2014.
(incl. oil refinery PMK No. 159/2015 as last revised by PMK No. 103/2016.
industry)
P. 5 7
Fiscal instrument Legal Basis

Diesel subsidy (on Decree of Ministry of Energy and Mineral Resources No. 29.K/HK.02/MEM.L/2021 on the
and off-budget) provision of a stimulus for PT PLN’s consumer electricity tariffs to deal with the impact of
COVID-19.
Petrol subsidy (off-
budget)
LPG subsidy
Electricity subsidy
(on and off-budget)
Fertilizer subsidy Minister of Agriculture Regulation No. 41/2021 which determinates the highest allocation and
retail price of subsidized fertilizer in the agricultural sector.

GEG Indonesia WB

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

GEG Indonesia WB

Uploaded by

Copyright:

Available Formats

Green Economic

Public Disclosure Authorized

Growth in Indira Hapsari

Rights & Permissions

© 2024 The World Bank

Some rights reserved.

The material in this work is subject to copyright. Because

All queries on rights and licenses, including subsidiary

The World Bank Group, 1818 H Street NW, Washington, DC

Please cite the work as follows: “Hapsari,

Figure 2 GHG EMISSIONS IN PER CAPITA TERMS 14

Figure 3 PER CAPITA EMISSIONS IN LINE WITH STAGE OF DEVELOPMENT 14

Figure 4 CARBON INTENSITY OF GROWTH SLOWING 14

Figure 6 COAL HAS BECOME THE HIGHEST CONTRIBUTOR TO ENERGY SUPPLY 16

Figure 7 … WHILE ENERGY SUPPLY FROM RENEWABLES HAS BEEN LIMITED 16

Figure 8 THERE ARE SIGNS OF RELATIVE DECOUPLING IN INDONESIA 18

Figure 9 MANY COUNTRIES HAVE MODERATE TO HIGH CONCENTRATIONS OF AMBIENT OZONE 19

Figure 13 NON-COMMUNICABLE DISEASES CONTRIBUTE THE MOST TO INDONESIA'S REDUCTION IN DALYS 22

Figure 16 INDONESIA HAS HIGH PER CAPITA HUMAN CAPITAL LOSS 24

Figure 21 INDONESIA’S EXPORTS ARE NOT COMMODITY DEPENDENT 29

Figure 24 INDONESIA’S NONRENEWABLE RENTS REACHED ABOUT 4 PERCENT OF ITS GDP 30

Figure 27 INDONESIA HAS A STABLE TREND OF OVERALL FISCAL BALANCE 34

Figure 28 FISCAL CONDITIONS HAVE BEEN RESILIENT TO COMMODITY PRICE SHOCKS 34

Figure 29 PUBLIC SPENDING IS POSITIVELY CORRELATED TO COMMODITY CYCLE 35

Figure 31 HIGH BUT DECREASING FOSSIL FUEL SUPPORT 36

Figure 32 MUCH SUPPORT GOES TOWARD PETROLEUM 36

Figure 33 MOST SUPPORT IS GEARED TO CONSUMERS 36

Figure 34 RESULTING IN HISTORICALLY LOW PETROL END-USER PRICES 36

Figure 35 AND LOW RESIDENTIAL ELECTRICITY PRICES 36

Figure 36 TAX INCENTIVES ARE TARGETED MOSTLY TOWARDS NON-GREEN SECTORS 38

Financial support for this report was generously provided by the

his paper provides a macro-fiscal overview of

Reducing GHG emissions in Indonesia could have important local

The carbon-intensive growth has consequences for Indonesia’s

Sound macro-fiscal policies have helped manage commodity

Indonesia has experienced significant development transitions in

The paper draws upon on a clear definition of green growth. Spe-

This paper provides a macro-fiscal overview of Indonesia’s progress

• Carbon use in the growth process—including the sources of

• Pollution and its impact on human capital—in particular, the

Economic transformation has come with rising GHG emissions,

FIG 1 GHG EMISSIONS FIG 2 GHG EMISSIONS IN PER CAPITA TERMS

MTC0 2 E/1000 USD GDP

The main source of GHG emissions in Indonesia historically has

A. SECTOR CONTRIBUTION TO AGRICULTURE B. SECTOR CONTRIBUTION TO ENERGY GHG EMISSION

C. GROWTH OF ALL GHG FOLU INDUSTRIAL D. GROWTH OF CO 2 ELECTRICITY/HEAT

RENEWABLE COAL GAS OIL RENEWABLE GAS OIL COAL NUCLEAR

EMISSIONS BY SECTOR (31 percent),

2 percent and only employs 500

RENEWABLE COAL GAS OIL RENEWABLE GAS OIL COAL NUCLEAR

Some high-income countries (HICs) have managed to reduce emis-

The challenge for Indonesia and other developing countries is that

Nevertheless, there are encouraging signs of relative decoupling

400 1400 600

350 1200 500

The Impact of GHG Emissions and

400 1400 600

INTERQUARTILE OF TOP-10 POLLUTERS INDONESIA

Source: Green Growth Indicators, 2,0

Source: Green Growth Indicators,

INTERQUARTILE OF TOP-10 POLLUTERS INDONESIA

Source: Green Growth Indicators, 0,00

The casualties from air pollution, the byproduct of GHG emissions,

These ambient air pollutants have contributed to an increase in

Figure 2 GHG EMISSIONS IN PER CAPITA TERMS 14

Figure 3 PER CAPITA EMISSIONS IN LINE WITH STAGE OF DEVELOPMENT 14

Figure 4 CARBON INTENSITY OF GROWTH SLOWING 14

Figure 6 COAL HAS BECOME THE HIGHEST CONTRIBUTOR TO ENERGY SUPPLY 16

Figure 7 … WHILE ENERGY SUPPLY FROM RENEWABLES HAS BEEN LIMITED 16

Figure 8 THERE ARE SIGNS OF RELATIVE DECOUPLING IN INDONESIA 18

Figure 9 MANY COUNTRIES HAVE MODERATE TO HIGH CONCENTRATIONS OF AMBIENT OZONE 19

Figure 13 NON-COMMUNICABLE DISEASES CONTRIBUTE THE MOST TO INDONESIA'S REDUCTION IN DALYS 22

Figure 16 INDONESIA HAS HIGH PER CAPITA HUMAN CAPITAL LOSS 24

Figure 21 INDONESIA’S EXPORTS ARE NOT COMMODITY DEPENDENT 29

Figure 24 INDONESIA’S NONRENEWABLE RENTS REACHED ABOUT 4 PERCENT OF ITS GDP 30

Figure 27 INDONESIA HAS A STABLE TREND OF OVERALL FISCAL BALANCE 34

Figure 28 FISCAL CONDITIONS HAVE BEEN RESILIENT TO COMMODITY PRICE SHOCKS 34

Figure 29 PUBLIC SPENDING IS POSITIVELY CORRELATED TO COMMODITY CYCLE 35

Figure 31 HIGH BUT DECREASING FOSSIL FUEL SUPPORT 36

Figure 32 MUCH SUPPORT GOES TOWARD PETROLEUM 36

Figure 33 MOST SUPPORT IS GEARED TO CONSUMERS 36

Figure 34 RESULTING IN HISTORICALLY LOW PETROL END-USER PRICES 36

Figure 35 AND LOW RESIDENTIAL ELECTRICITY PRICES 36

Figure 36 TAX INCENTIVES ARE TARGETED MOSTLY TOWARDS NON-GREEN SECTORS 38