Phasing out Indonesia’s Fossil Fuel Subsidies
After an initially unsuccessful effort in 1998, Indonesia began a new path to gradually phasing out its costly fossil fuel subsidies after a Presidential Decree on the subject. Occasional, negotiated subsidy reductions over the past decade culminated in the recent decision to set domestic fuel subsidies at a fixed rate per litre from 1 January 2015. This means that domestic fuel prices now float according to market price.
Finding the ideal means to phase out fossil fuels has proved difficult in terms of the consequential socio-economic costs and in light of the simultaneously increasing cost of oil. To mitigate the effects of energy price increases on poorer households, the Indonesian Government has provided cash transfers, increased spending on social programmes and introduced tax exemptions for some industries and agriculture.
To date, Indonesia has been a pioneer in the seemingly-impossible task of phasing out market-distorting fossil fuel subsidies.