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Fossil Energy Subsidies Hinder Energy Transition

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Jakarta, 12 November- Despite the commitment to step up climate action and achieve the Paris Agreement target of keeping the earth’s temperature below 1.5 degrees Celsius, the G20 countries, including Indonesia, are still providing significant fossil energy subsidies. The Institute for Essential Services Reform (IESR) views fossil energy subsidies as counterproductive to energy transitions and achieve decarbonization in the middle of this century.

At the early stage of the pandemic, the G20 countries disbursed at least USD 318.84 billion to support fossil energy. Meanwhile, according to Climate Transparency 2021 data, Indonesia has spent USD 8.6 billion on fossil fuel subsidies in 2019, 21.96% of which was for oil and 38.48% for electricity.

Indonesia had succeeded in reforming fuel and electricity subsidies in 2014-2017 but still allocated a fairly large fossil energy subsidy. Energy subsidies increased by 27% in the period 2017-2019.

“The provision of fossil energy subsidies not only hinders plans and efforts to cut greenhouse gas emissions and decarbonization but also results in inefficiency in energy use. It also creates loss due to untargeted subsidies, and makes renewable energy difficult to compete with,” said Fabby Tumiwa, IESR Executive Director.

Ending fossil fuel subsidies will create a level playing field for renewable energy. Moreover, in his opinion, fossil energy subsidy funds will be much more beneficial if they are diverted to the most vulnerable communities, building education and health facilities, developing renewable energy, and accommodating the impact of the energy transition for workers in the affected fossil energy industry. 

“Energy subsidy reform on the consumption side should not be carried out haphazardly so that the poor do not have access to quality energy at affordable prices. On the other hand, financial reforms need to be followed by collecting and applying the poor family databases and targeted subsidy distribution schemes,” explained Fabby. 

Fabby believes that the pricing policy for Domestic Market Obligation (DMO) coal and gas for PLN is a form of subsidy and has made the price of electricity from coal-fired power plants and gas-fired power plants not reflect the actual costs. This policy also makes PLN prioritize the use of coal-fired power plants over renewable energy, which is cheaper.

“The government should review the DMO price benchmark policy for power generation and make a plan to end this policy. This is in line with the government’s decision to not grant permits for the construction of new coal-fired power plants outside the 35 GW program and plans for early retirement of coal-fired power plans before 2030,” said Fabby.

Climate Transparency 2021 analysis shows that to achieve the Paris Agreement targets, all regions of the world must phase out coal-fired power plants between 2030 and 2040. By 2040, the share of renewable energy in power generation must be increased to at least 75%, and the share of unabated coal-fired power plants is reduced to zero. While in the National Energy Policy, Indonesia promised to reduce coal by 30% by 2025 and 25% by 2050. Meanwhile, to be in line with the Paris Agreement, electricity generation from coal must peak in 2020 and stop coal completely by 2037.

Based on IESR calculations in the Deep Decarbonization of Indonesia’s Energy System study, the cost to transform Indonesia’s energy system to achieve zero emissions in 2050 will reach USD 25 billion per year until 2030. It will escalate sharply thereafter to USD 60 trillion per year.

“Fossil energy subsidies increase the negative impact of GHG emissions as well as add the burden on the state due to economic losses and state financial expenditures to overcome disasters caused by climate change. These subsidies can be diverted to help accelerate the energy transition using renewable energy so that we can achieve the renewable energy mix target of 23% by 2025,” said Lisa Wijayani, Program Manager of the Green Economy, IESR.

At the G20 Declaration last October in Rome, the G20 countries agreed to extend their commitment to reducing inefficient fossil fuel subsidies. IESR views that Indonesia can use the opportunity of Indonesia’s leadership at the G20 in 2022 to encourage real action to exit the burden of financing fossil energy.

“The commitment of the G7 countries to provide climate finance of USD 100 billion by 2025 is still not enough. Therefore, G20 countries must contribute, one of which is by carrying out financial reforms towards renewable energy that supports a green economy. Indonesia as the leader of the G20 countries in 2022, can encourage G20 member countries to carry out financial reforms,” ​​said Lisa.

She said every financial policy that leads to support for fossil energy must receive attention and be strictly inventoried by the Global Stocktake (GST) as part of monitoring the climate action of the Paris Agreement. 

According to a report by the Independent Global Stocktake (iGST), a civil society consortium to support GST, the GST can offer a platform for countries to collaborate in reforming fossil fuel consumption subsidies.

“Information that is inventoried into the GST must also include social elements in it so that the objectives of climate finance in achieving economic growth and social inclusion can be achieved. This GST process must include organizations representing economic, environmental, energy, and social elements, especially gender issues and other vulnerable communities, to ensure that the just transition takes place,” said Lisa.

 

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