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Political Economy of Environmental Policy in Indonesia 1

By Arianto A. Patunru 2

Introduction

In Indonesia, the awareness of the importance of climate change

and environmental issues in general, is already widespread at least
in the realm of academia, policymaker’s, civil society organizations
and NGOs. However, the link to poverty might not be well
understood, for the country like many others is still in its main
objective to achieve high growth in a business-as-usual manner. The
government’s focus at the moment is also more on building social
protection and not on reducing vulnerabilities and improving
livelihoods for the poor through the green economy.

This paper reviews the current discussion on economics of

environmental protection in Indonesia (especially with regards to
the climate change) and proposes areas to fill the gap between
discourse and policy. It also discusses the poverty situation of
Indonesia and highlights the relationships with environmental
issues. Finally it will discuss the policy implication for using the
environment-climate nexus as an instrument for accelerating
poverty reduction. In particular, the paper argues that policies
taking into account the climate change factor and its impact on
poverty would need to be applied in three different levels: macro,
micro, and global.

The environment-poverty nexus in Indonesia

Over time the poverty incidence in Indonesia has been on a

decreasing trend (Figure 1), albeit the spikes following the Asian
financial crisis in 1997/98 and a combination of rice and fuel price
increase in 2005. As of February 2010, the poverty headcount index
in Indonesia is around 13.3%.3
1
Prepared for the conference on “The Environments of the Poor in the
Context of Climate Change and the Green Economy: Making Sustainable
Development More Inclusive”, organized by the Asian Development Bank
(ADB) in New Delhi, India, November 24-26, 2010. I thank Armin Bauer for
helpful comments.
2
Director, Institute for Economic and Social Research, Department of
Economics, University of Indonesia (LPEM-FEUI)
3
The national poverty line is measured with an anchor to daily calorie
consumption that is equivalent to USD 1.55 per day. Using the more
common threshold of USD 1 per day and USD 2 per day (at purchasing
power parity), the poverty incidences were 5.9% and 42.6%, respectively
in 2008, while it was 15.4% with the national poverty line.

1
Figure 1 also depicts GDP growth rates as well as open
unemployment rates during 1998 to 2010. The Asian financial crisis
hit the country severely with a result of 13% contraction. Slowly the
country pulled out and reached its pre-crisis level in 2007, ten years
after the crisis. The recent global financial crisis turned out to be far
less damaging. In fact Indonesia came out quite resiliently (along
with China and India) with a growth rate of 4.5% in 2009, while most
countries in the world experienced a contraction or near-zero
growth.

Figure 1. Growth, Poverty, and Unemployment

Source: BPS (various years), GOI (various years)

Note: 2010 growth is GOI’s estimate

Unemployment rate dynamics on the other hand reflects the four

phases of labor market in Indonesia, namely “growing rapidly”
(1990-97, not shown on the figure), “crashing and coping” (1997-
99), “jobless growth” (1999-2003), and “job recovery” (2003-08)
(World Bank 2010). According to this view, in the aftermath of Asian
financial crisis, agriculture and non-formal sectors served as the
buffers that absorbed the labor force. Then the capacity of the two
sectors diminished, so the accompanying growth did not result in
sizable job creation. Next, the real wage started to fall and then
stagnated, which then induced job creation.4

The interconnection among economic growth, unemployment, and

poverty are reasonably well researched in the literature.
Environment, on the other hand, is not – at least not in relationship

4
These dynamics are not very clear from Figure 1. The World Bank report,
however, makes its case using not only unemployment rate as the
measure, but also employment rate, share on non-agricultural
employment, share of formal sector employment, and median hourly
wages for employees (World Bank 2010).

2
with poverty and employment. But to assess the link, one needs to
see poverty in broader contexts, e.g. Indonesia’s poverty in
comparison with other countries, its important features, and then
juxtapose it with those of environment.

Indonesia’s poverty in comparison

Table 1 shows Indonesia’s poverty – along with inequality – in

comparison with a number of countries: China and India represent
most populous (and developing) countries as well as those in
Indonesia’s proximity, i.e. southeast Asian countries.

Table 1. Poverty and Inequality: Indonesia in Comparison

Country % Population below Income Ratio of Gini
$2 (PPP)/day Highest 20% to Coefficient
Lowest 20%
China 35.7 (2005) 8.3 (2005) 0.415 (2005)
India 75.6 (2005) 5.6 (2005) 0.368 (2005)
Indonesia 54.6 (2005) 6.2 (2007) 0.376 (2007)
Lao PDR 76.9 (2002) 4.9 (2002) 0.326 (2002)
Cambodia 57.8 (2007) 8.1 (2007) 0.442 (2007)
Malaysia 7.8 (2004) 7.0 (2004) 0.379 (2004)
Philippines 45.0 (2006) 9.0 (2006) 0.440 (2006)
Thailand 11.5 (2004) 8.1 (2004) 0.425 (2004)
Vietnam 48.4 (2006) 6.4 (2006) 0.378 (2006)
Source: ADB 2010

Using the USD 2 per day threshold, more than half of Indonesia’s
population is still poor. It is ahead of India, Lao PDR, and Cambodia,
but behind China and other countries. The two measures of
inequality show rather mixed picture. However, Indonesia’s
inequality is still relatively high. In terms of inequality Indonesia is
comparable to Vietnam, but Indonesia’s poverty fares worse.

In the ADB report (2010) China, Malaysia, Thailand, and Vietnam are
recognized as “early achievers” in meeting the MDG’s target of USD
1.25/day, while Cambodia is “on track”, and India, the Philippines,
and Lao are those with “slow progress”. As for Indonesia, the ADB
report makes no assessment due to insufficient data, but it asserts
that in 2007, 29.4% Indonesians were still living on less than USD
1.25/day, suggesting a difficulty in reaching the MDG target by
2015.

While the MDG target might be missed, Indonesia has also missed
its own national target regarding poverty reduction. The medium-
term plan (RPJM) 2005-2009 targeted a poverty reduction from
18.2% in 2002 to 8.2% in 2009. In fact, the poverty headcount rate
was still high at 14.2% in 2009. This was particularly due to a rather
steep increase in poverty number in 2006, after a slow-but-steady
decrease since 2002. In 2005 the poverty headcount index was

3
16%, but it increased to 17.8% in 2006, due mostly to a 33%
increase in rice price and to a lesser extent, an increase on fuel
price in October 2005 (World Bank 2006).

Indonesia’s poverty key features

According to a report by The World Bank, poverty in Indonesia has

three salient features (World Bank 2006). Firstly, there is a large
number of Indonesian vulnerable to poverty. That is, those scattered
just above the poverty line are many, and are very sensitive to the
change in the line. As a result, mobility of the poor to join the near-
poor (vice-verse) is high. A recent study by Suryahadi et al. (2010)
confirms this. The study finds that in 47% of the poor in 2008 stayed
poor in 2009, and 53% graduated to near-poor and non-poor. But
49% of the poor in 2009 were not poor in 2008. Social safety net
was first launched in 1998. Even though poverty rate has gone
down from 23.4% in 1999 to 13.3% in 2010, vulnerable (near-poor)
are more than doubled.

Secondly, non-income poverty is more serious than income poverty.

This includes high malnutrition rates, poor maternal health, weak
education outcomes, and low access to safe water as well as to
sanitation. Table 2 shows some of the “monetary poverty”
measures along with the “non-monetary” or non-income poverty
incidence. With the exception of unhygienic floor, all the non-income
poverty measures are worse than the monetary poverty. It is also
important to note that such non-income poverty is more prevalent
in rural areas. As the table shows, the gaps in non-income poverty
between rural and urban areas are far wider than that in income (or
monetary) poverty. The implication to policy is then obvious:
poverty eradication should be more focused on rural areas, taking
into account the non-income poverty.

Table 2 Poverty Profiles 1976-2009

Indicators Definition Rural Urban Gap
(%) (%) (% point)
Lack of sanitation Percentage of population living in 50.42 15.05 35.37
(toilet) house without proper toilet
Low education of Percentage of population living in 83.65 50.47 33.18
the head of household in which HHH do not
household (HHH) finish 9-year basic education

Lack of access to Percentage of population living in 56.53 30.55 25.98

clean water household without proper access to
clean and protected source of
drinking water
Low education of Percentage of population living in 40.70 15.97 24.73
youth household in which youth (18-24
years) do not finish 9-year basic
education

4
Unhygienic floor Percentage of population living in 15.79 5.03 10.76
earth-floor housing
Monetary Poverty Percentage of population below 17.35 10.72 6.63
official poverty line
Source: Suryahadi et al. 2010

Thirdly, there are considerable regional disparities in poverty in

Indonesia. That is, the poverty incidence is far higher in eastern
Indonesia; however, most of the poor live in western Indonesia. For
example, as shown in Table 3, in 2009 poverty rate in Java/Bali was
13.7% (down from 15.7% in 2004) while that in the remote Papua
37.1% (up from 38.7% in 2004). But Java/Bali is home to 57% of
Indonesia’s poor, while Papua has only 3%.

5
Table 3. Regional Poverty 2009
Rural Urban Total Per Capita Per Capita
Income: Rural Income: Urban
Sumatra 15.0 12.2 13.9 357 558
Java-Bali 17.7 10.6 13.7 294 543
Nusa 22.4 24.6 23.0 253 405
Tenggara
Kalimantan 9.1 5.1 7.5 376 697
Sulawesi 18.3 6.7 14.8 275 570
Maluku 25.9 7.5 20.9 313 591
Papua 46.3 5.9 37.1 315 707
Indonesia 18.9 10.7 14.1 311 550
Source: BPS 2009, Resosudarmo and Yusuf 2009
Note: Per capita income in Rp ‘000 (2008 prices)

Thirdly, there are considerable regional disparities in poverty in

Indonesia. That is, the poverty incidence is far higher in eastern
Indonesia; however, most of the poor live in western Indonesia. For
example, as shown in Table 3, in 2009 poverty rate in Java/Bali was
13.7% (down from 15.7% in 2004) while that in the remote Papua
37.1% (up from 38.7% in 2004). But Java/Bali is home to 57% of
Indonesia’s poor, while Papua has only 3%.

Environmental condition

Indonesia is one of the biggest emitters in the world, even though in

terms of per capita CO2 emission it is below countries like China,
Malaysia, and Thailand (Table 4a). In terms of deforestation,
Indonesia along with Malaysia and the Philippines show rather
worrying rates (Table 4a and Table 4b). This is of concern especially
because forests are central to the livelihoods of 10 million of the
poorest 36 million Indonesians (World Bank 2006). At the same time
China, India, and Vietnam show a net reforestation rather than
deforestation during 2000-2007. Limited land also constrains
agriculture – its capacity is reduced as agriculture activities
increase. Table 4b also shows how agriculture land, arable land, and
cropland in Indonesia are limited.

Table 4a. Environment: Indonesia’s Deforestation and CO2 Emission

Country Forest Forest CO2 CO2 CO2 CO2
covera covera emission emission emissio emissio
ge (% ge (% (thousand (thousan n per n per
of land, of land, metric d metric cap cap
1990) 2005) tons, tons, (metric (metric
1990) 2007) tons, tons,
1990) 2007)
China 16.8 21.2 2460744 6538367 2.2 4.9
India 21.5 22.8 690577 1612362 0.8 1.4
Indonesi 64.3 48.8 149566 397143 0.8 1.8
a

6
Cambodi 73.3 59.2 451 4441 0.0 0.3
a
Malaysia 68.1 63.6 56593 194476 3.1 7.3
Philippin 35.5 24.0 44532 70916 0.7 0.8
es
Thailand 31.2 28.4 95833 277511 1.7 4.1
Vietnam 28.8 39.7 21408 111378 0.3 1.3
Source: ADB 2010

Table 4b. Environment: Other Measures

Country GDP/uni Deforestati NOX Methan Agri Arabl Croplan
t of on rate (2) (3) e (4) land e d (7)
energy (5) land
use (1) (6)

China 3.4 -2.1 566.7 995.8 59.3 15.1 1.3

India 4.9 -0.0 300.7 712.3 60.5 53.4 3.6
Indonesi 4.1 2.0 69.9 224.3 26.8 12.1 8.6
a
Cambodi 4.8 0.5 3.8 14.9 30.9 21.5 0.9
a
Malaysia 4.7 2.0 9.9 25.5 24.0 5.5 17.6
Philippin 7.1 2.1 18.9 44.8 38.6 17.1 16.4
es
Thailand 4.7 0.4 28.0 78.8 38.7 29.8 7.3
Vietnam 3.7 -1.9 37.5 75.1 32.5 20.5 9.9
Source: ADB 2010
Notes: (1) 2005 PPP USD/kg oil equivalent, (2) Average percent change 2000-
2007, (3,4) Million metric tons CO2 equivalent, 2005, (5,6,7) Percent of land area,
2007

It is also interesting to look at the comparison of emission levels

within the country, i.e. at the sub-national levels, as shown in Table
5. In general, provinces in western Indonesia turn out to emit more
CO2 compared to their counterparts in the eastern Indonesia. This
might due to at least two factors: majority of Indonesia’s population
(and the poor) live in western Indonesia. Secondly, western
Indonesia has more fertile soil and hence good for agriculture while
this sector consumes much energy and hence emits more emission.

7
 Table 5. CO2 Emission in 2005 (million tons)
Industr Industry Househol Transpor TOTA
Province Electricity
y (Coal) (fuel) d (fuel) t (fuel) L
Aceh 0.00 0.05 0.25 1.40 0.74 2.45
North Sumatra 0.02 1.34 1.31 4.08 3.93 10.68
West Sumatra 7.50 0.21 0.60 1.22 1.21 10.73
Riau 3.82 1.36 0.54 2.31 1.27 9.29
Jambi 0.00 1.71 0.39 1.12 0.47 3.68
South Sumatra 1.46 1.55 0.64 1.36 1.35 6.36
Bangka-Belitung 0.02 0.05 0.37 0.43 0.22 1.09
Bengkulu 0.00 0.02 0.29 0.33 0.25 0.89
Lampung 0.05 1.44 0.68 1.20 1.24 4.61
Jakarta 0.02 3.12 3.70 15.03 17.99 39.87
West Java 2.77 12.94 3.08 4.09 15.10 37.98
Banten 1.32 8.80 0.95 0.61 2.17 13.85
Central Java 5.69 1.79 1.97 10.08 8.01 27.54
Jogjakarta 0.01 0.09 0.55 2.00 1.16 3.81
East Java 12.28 3.54 2.57 10.35 13.21 41.94
West Kalimantan 0.05 0.45 0.63 1.20 0.78 3.12
Central
0.00 0.08 0.37 0.57 0.34 1.36
Kalimantan
South Kalimantan 1.57 0.25 0.55 1.34 0.92 4.63
East Kalimantan 0.00 0.48 0.51 1.55 1.02 3.56
North Sulawesi 0.00 0.13 0.35 0.44 0.59 1.51
Gorontalo 0.00 0.02 0.19 0.12 0.14 0.46
Central Sulawesi 0.00 0.02 0.35 0.99 0.35 1.71
South Sulawesi 10.22 0.23 0.91 1.24 1.99 14.58
Southeast
0.30 0.03 0.42 0.22 0.25 1.22
Sulawesi
Bali 0.00 0.03 0.72 2.80 1.79 5.35
West Nusa
0.00 0.02 0.45 0.67 0.43 1.56
Tenggara
East Nusa
0.31 0.02 0.30 0.31 0.32 1.27
Tenggara
Maluku 0.00 0.23 0.09 0.27 0.21 0.80
North Maluku 0.00 0.14 0.03 0.00 0.12 0.29
Papua 0.00 0.49 0.06 0.35 0.42 1.32
257.5
47.41 40.62 23.82 67.67 78.01
Total 2
Source: Yusuf 2010

8
Opportunities of for poverty reduction through the green
economy

Majority of Indonesians work in agriculture and informal sectors. The

two sectors have served as a shock absorber in the time of crises.
Furthermore, agriculture multipliers are strong: growth in
agriculture output can stimulate general growth in rural economy,
e.g. through expenditure linkage (McCulloch et al. 2007). However,
it is also true that many current practices in agriculture sector are
not environmentally friendly. As for the informal sector, job security
is obviously far less than that provided by formal sector, hence
informal sector is not sustainable. These two reasons, among many,
are motivations for workers to move to non-agriculture and formal
sectors. As argued by McCulloch et al. (2007), the pathways out of
poverty in Indonesia may take the following ways: agricultural
productivity growth, sectoral shift to rural non-farm enterprises, and
rural-urban migration. It is also important to note that formal sector
is preferable since it reduces workers’ exposure to tax and
corruption payments (McCulloch et al. 2010).

There is less doubt now that the climate change is happening and
that it will impact on the economy via many channels. This then will
affect especially the poor, as they are the ones working and living in
the less advantaged regions. Therefore, poverty reduction and
environmental protection should not be seen as two independent
policy strategies. The poverty increase in 2006, for example, had
much to do with the rice and fuel price increase, both of which are
related with environmental condition, direct or indirectly.

The politics of environmental protection in Indonesia is also

complicated due to the many agencies involved. At least there are
nine ministries at the national level directly related to policies
affecting natural resources and the environment, namely Ministry of
Forestry, Ministry of Mines and Energy, Ministry of Agriculture,
Ministry of the Environment, Ministry of Marine Affairs and Fisheries,
Ministry of Transmigration and Manpower, Ministry of Human
Settlements and Regional Infrastructure, as well as Ministry of Trade
and Ministry of Finance (Marifa 2005). This becomes far more
complicated when it comes to regional development planning and
management.

In its Law 32/2009 on Protection and Management of the

Environment (a revision to Law 23/1997 on Environmental
Management), Indonesia states its commitment to base national
economic development on environmental sustainability principles.
One of the key features of this law is its strong determination to
enforce good governance in dealing with sustainability (Santosa
2010).

9
One year prior to the enactment of Law 32/2009, the government
established the National Council for Environmental Change (Dewan
Nasional Perubahan Iklim, DNPI) with Presidential Regulation
46/2008 (Niode 2010). The Council is assigned to: (1) Formulate
national policies, strategies, programs, and activities with regards to
climate change mitigation and adaptation, (2) Coordinate all
activities on adaptation, mitigation, technology transfer and
financing of climate change issues, (3) Formulate policies for carbon
trading mechanism, (4) Undertake monitoring and evaluation of
climate change policies, and (5) Represent Indonesia in international
forums for climate change.

Despite the laws and regulation, it seems that the existing policies
addressing poverty and environment are disconnected one another.
It is true that the government has stated its intention to revitalize
agriculture, for example. In such case one can easily see the link to
poverty reduction as most of the poor work in agriculture sector. But
the environmental aspect to it has been overlooked. Furthermore,
the total factor productivity growth in agriculture sector has been
very low. This therefore will require considerable investment on
infrastructure (road, irrigation) as well as better land reform (i.e.
land titling). And all should take environmental aspect into account.

Many have also proposed to tackle the issues of poverty and

environment with a policy that addresses both at the same time,
such as green job programs. The Government of Indonesia also
raised such idea in the early years of President Yudhoyono’s first
term. The policy issue was designed to encourage biofuel
production. The objective was to convert 6 million hectares of land
to oil palm production that would generate 22.5 million kilolitres of
biofuel and create 3–5 million jobs (Barichello and Patunru 2009).
Other biofuel initiatives proposed include banning crude palm oil
exports and sugarcane molasses exports and use them instead for
biofuel production. Estimates of the 2007 budget cost ranged from
USD 100 to 1300 million for these initiatives. This program has
attracted more than its share of criticism. In addition to the
questionable economic viability of these investments, and even
their energy viability, they have been criticized for not offering a
significant reduction in unemployment (Basri and Patunru 2006).

Some proposals

In the lack of coherent policy that integrates the concern on both

poverty and environment simultaneously, we propose the following
approach. Based on the idea of “green growth”, the first modest
strategy is to re-institutionalize green economy into common
measures. That is, to estimate and to publicly disseminate the
Green GDP. It is the conventional (“brown”) GDP that excludes

10
estimates of environmental degradation and natural resource
depletion. This idea of measuring Green GDP has been long
overdue. However, until now there has not been any determined
political will to officially announce it along with the conventional
GDP.

By regularly issuing the Green GDP estimates, it is expected that

the public awareness will rise and demand for more environmentally
friendly economic activities will emerge. That is, Green GDP figures,
if properly delivered, will serve as demonstration effect. The public
will have incentive to find out who or what has caused the
divergence between Green GDP and Brown GDP. On the other hand,
businesses will have the incentive not to be perceived as
environmentally unfriendly by customers or as part of those
creating the gap between the two GDP measures.

Figure 2 illustrates the estimate of Green GDP, plotted together with

Brown GDP (estimate and actual). The values are based on a study
done by LPEM-FEUI (2004). The green curve represents the Green
GDP estimate, while brown curve for Brown GDP projection and the
blue one is actual Brown GDP. The gap between Green GDP and
Brown GDP that diminishes over time implies increasing effort for
environmental preservation and conservation.

Figure 2. Green and Brown GDP

Source: LPEM-FEUI 2004, BPS (various years, for actual growth)

Similar approach can be implemented in the sub-national levels.

Yusuf (2010) has recently estimated the Green GDP (or “eco-
regional GDP”, ERDP) for provinces in Indonesia as contrasted them
with the usual Brown GDP (i.e. gross regional domestic production,
GRDP). Table 6 shows the results. The third column provides the
percentage ratio of ERDP over GRDP. The smaller the ratio the “less

11
green” the province is. It is interesting that in general, provinces in
eastern Indonesia or remote areas are less green than those
elsewhere. Papua, for example, has a ratio of 56% while Jakarta
91%. This is again consistent with the view that those who suffer
from environmental problem usually come from poor areas.

The second approach is Green Budgeting. This simply means

reducing the subsidy for energy consumption, and in the later stage,
even tax it. In the case of Indonesia now, it might be very difficult to
impose tax for environment purpose (called “green tax”), as the
government is still struggling to reduce the budget burden that
comes from heavy subsidy, especially on fuel.

12
Table 6. GRDP and Eco-Regional GDP 2005
ERDP/GRD
GRDP ERDP
P (%)
Aceh 56,952 47,481 83.37
North Sumatra 139,618 125,938 90.20
West Sumatra 44,675 37,946 84.94
Riau 180,004 130,992 72.77
Jambi 22,487 17,864 79.44
South Sumatra 81,532 63,345 77.69
Bangka-Belitung 14,172 11,601 81.86
Bengkulu 10,134 8,921 88.03
Lampung 40,907 36,700 89.71
Jakarta 433,860 395,011 91.05
West Java 389,245 348,137 89.44
Banten 84,623 75,228 88.90
Central Java 234,435 207,283 88.42
Jogjakarta 25,338 22,019 86.90
East Java 403,392 353,319 87.59
West Kalimantan 33,869 29,997 88.57
Central Kalimantan 20,983 18,882 89.99
South Kalimantan 31,794 25,291 79.55
East Kalimantan 180,289 129,862 72.03
North Sulawesi 18,763 16,921 90.18
Gorontalo 3,481 3,052 87.69
Central Sulawesi 17,117 14,817 86.57
South Sulawesi 56,203 46,223 82.24
Southeast Sulawesi 12,981 10,987 84.64
Bali 33,946 28,804 84.85
West Nusa Tenggara 25,683 18,536 72.17
East Nusa Tenggara 14,810 13,629 92.02
Maluku 4,571 3,925 85.88
North Maluku 2,583 2,247 87.00
Papua 51,529 29,136 56.54
Total 2,669,9 2,274,0 85.1
76 93 7
Source: Yusuf 2010

13
Table 7. Subsidy in National Budget
2009 2010 2011
(Actual) (Revised) (Proposed)
Total Subsidies (USD 13.3 22.0 19.9
bn)
% of GDP 2.5 3.2 2.6
% of Expenditures 14.7 18.0 15.4
Energy (USD bn) 9.1 15.7 14.4
Fuel (USD bn) 4.3 9.7 10.0
Electricity (USD 4.8 6.0 4.4
bn)
Non-energy 4.2 6.3 5.5
Memo:
Exchange Rate 10408 9200 9300
(IDR/USD)
Budget Deficit (% of 1.6 2.2 1.7
GDP)
Source: GOI (various years)

As shown in Table 7, the subsidy allocation is very high, i.e. between

2% to 3% of GDP (as a comparison, our budget deficit is around
1.5% to 2.2% of GDP). The table shows that energy subsidy takes up
huge portion of the total subsidy. And fuel subsidy dominates the
total energy subsidy. Subsidies for non-energy items include those
for food, fertilizers and seeds for agriculture, public service
obligation, credit subsidy, and tax subsidy. It is obvious that this
“subsidy regime” in the budget is not sustainable, as a big portion
of budget is used for non-productive uses. In the approved state
budget for 2011, environment takes up only USD 1.2 billion
allocation out of total USD 88 billion of central government
expenditure. This is in start contrast with general service (USD 56.5
billion), economy (USD 10.3 billion), and education (USD 8.8 billion).
Of this USD 1.2 billion, 43% goes to natural resource conservation,
27% waste management, and 23% land and spatial management.

Table 8. Rate of Subsidization (% of Market Price)

2008 2009
Coal Oil Gas Electricit Coal Oil Gas Electricit
y y
Iran n/a 90 94 84 n/a 88 95 82
Russia n/a n/a 54 32 n/a n/a 50 27
China 6 9 26 6 7 3 2 4
India n/a 31 80 11 n/a 18 77 12
Indonesi n/a 28 n/a 35 n/a 28 n/a 31
a
Source: EIA 2010

Table 8 compares the “rate of subsidization” of energy in Iran,

Russia, China, India, and Indonesia. These are known as countries

14
that provide huge subsidy for their energy consumption. Again, the
table implies the dependence of energy consumption on subsidy,
including in Indonesia.

It is important to note that in addition to these two approaches,

namely Green GDP and Green Budgeting, there are many other
possible approached. In micro-level it could be price adjustment on
electricity rates, fuel price, etc. Finally, Indonesia also needs to
comply with international agreements on environmental protection.
In the 2009 G20 meeting in Pittsburgh, United States, President
Susilo Bambang Yudhoyono stated Indonesia’s commitment to cut
26% of its emission by 2020. This target would go higher to 41% if
Indonesia received assistance from other countries or donors. But
this commitment is not sufficient and will not be sufficient if other
countries do not support it. Therefore, multilateral and regional
dialogues are still important to come up with common
understanding that socially optimal. The skyrocketing price of food
and commodities (and oil) in 2006 was a result of such lack of
coordination.

Concluding remarks

With regards to the macro-level policy, the central government

strategy would need to address the issue in increasing awareness;
mainstreaming environment issues, so as to eventually influence
policy perspectives. Two fields of possible implementation in the
short run are the Green GDP and Green Budgeting. Green GDP
would have to be appended and published together with the
conventionally measured GDP. The objective of issuing Green GDP is
to increase the level of awareness in the public sphere. As far as the
Green Budgeting is concerned, the state budget is expected to
reflect the government’s intention to accommodate climate change
factor. In the case of Indonesia, this would be the clear intention to
cut the subsidies on gasoline and kerosene (on the expenditure
side), and in the latter stage, to tax the consumption of energy (on
the revenue side). Another application is to embed Payment for
Environmental Services (PES) into the formula of central
government’s transfer to regions.

In the micro-level, policies need to be directed towards influencing

the behavior of households and firms. This would include electricity
tariff adjustment, fuel price adjustment, etc. However, the
government should see all this in an entire development
perspective. For example, raising the prices of electricity should be
paired with policies to increase electrification ratio especially in rural
areas, while adjustment in fuel prices have to consider the
availability of alternative modes of transportation as well as the

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existing public transportation system. Here appropriate policies for
poverty eradication would be pivotal.

Finally, given the nature of climate change (and almost all

environmental problems), namely external and extraterritorial, it is
crucial to have good coordination across countries. Therefore, all
the policies should be inline with any agreement that Indonesia has
signed to.

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