OECD Inventory of Support Measures for Fossil Fuels: Country Notes

Indonesia

Energy resources and market structure

Indonesia is Southeast Asia’s largest economy and is a major fossil-fuel producer and exporter. The country is also the largest net exporter of coal, the eight-largest liquefied natural gas (LNG) net exporter, and one of the world’s largest producer of biofuels after United States and Brazil. With rising domestic demand and maturing oil fields, the country became a net importer of oil in 2004.

In 2021, fossil fuels accounted for 84.41% of Indonesia’s total energy supply (TES), led by coal (36.15%), which surpassed crude oil and refined oil products (32.10%). Indonesia’s oil and natural-gas upstream sector is dominated by international oil companies (IOCs), though state-owned companies retain a leading position in the downstream sector. Coal production is concentrated in the hands of a small group of companies. In 2018, the top six producers in Indonesia accounted for about 60% of total coal production. In 2021, at least 70% of domestic production was exported overseas, mainly to the People’s Republic of China, India, and Korea.

 

Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).

The upstream oil and natural-gas sector has been regulated by the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) since 2012. SKK Migas is a temporary special task force operating under the purview of the Energy and Mineral Resource Ministry (MEMR) until the government amends the 2001 Oil and Gas Law. The downstream oil and natural-gas sector is regulated by the Oil and Gas Downstream Regulatory Agency (BPH Migas).

The state-owned power-utility company, Perusahaan Listrik Negara (PLN), has a near vertical monopoly over Indonesia’s electricity sector. The company currently owns and operates about 69% of the country’s generating capacity through its subsidiaries and has complete market control over the transmission and distribution of power. As a result, and in combination with domestic market obligation requirements, PLN consumes about 80% of the total domestic coal supply.

Indonesia relies mostly on fossil fuels for electricity generation, with approximately 81% of the electricity generated in 2021 coming from fossil fuel, mainly coal. The country is the second-largest geothermal power producer in the world after the United States. It is also the largest biodiesel producer in Asia, with 56 000 barrels per day of output, mainly from palm oil. In 2019, the Administration launched the B-30 upgraded Biofuel programme mandating the increase of biodiesel mix in diesel fuel from 20 to 30%, in a bid to increase fossil-fuel import substitution.

Energy prices and taxes

The bulk of Indonesia’s support to fossil fuels stems from the government compensating Pertamina for the low retail prices the company charges on its sales of Premium RON 88 gasoline, diesel, and certain sales of LPG and kerosene. The use of fossil fuels is also supported through so-called domestic market obligations (DMOs), which require producers of coal, oil, and natural gas to sell a portion of their output (usually between 15% and 25%) on the domestic market at discounted prices.

Figure 2. Total tax rebates and support for fossil fuels in Indonesia

 

 

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

Recent developments and trends in support

In early 2017, the government started to phase out electricity subsidies for households using 900 VA and above, which it considered as not low-income. In March 2018, the Administration instructed ministers to freeze fuel prices and electricity tariffs in response to rising international oil prices to maintain consumers’ purchasing power. In 2020, the Indonesian Administration passed the Job Creation Bill (UU No 11/2020) that provided several incentives for the coal sector. The most notable among these is that all holders of the Coal Mining Work Agreement (PKP2B) signed before 2010 ("PP-23") will be granted an automatic extension without the need to undergo an auction process. There will also be the lifting of the 25,000 ha. concession area limit. Under this new law, all the seven largest coal companies in Indonesia will be covered. In October 2020, President Joko Widodo also announced the country’s priorities for the development of the coal derivative industry, such as coal gasification projects. Under this, coal producers who expand their business into the derivatives industry could be given preferential treatment in their state revenue obligations in the form of the imposition of a 0%-rated royalty, as stated in the Job Creation Bill.

In response to the COVID-19 pandemic, Indonesia committed approximately USD 49.2 billion (IDR 695.2 trillion) for the National Economic Recovery Programme (PEN) in 2020. Out of the recovery budget, at least USD 6.78 billion was committed to support different energy types, of which at least USD 6.54 billion went to support the fossil fuel sector in 2020, mainly as direct transfers to energy sector state-owned enterprises (SOEs) PT Pertamina (for petroleum) and PLN (for electricity). The PEN budget for 2021 was IDR 699.4 trillion with IDR 455.6 trillion allocated for 2022. Fiscal year 2022 will also be the last year for the PEN programme. There are however no publicly available breakdowns for the portion of the PEN funds allotted for the direct benefit of the energy sector. For transport fuel, the government continues to provide gasoline at a discounted price through PT Pertamina to sustain the activities of critical transport services. In order to improve targeting, a new regulation is planned to take effect in August 2022, whereby customers must be registered through the MyPertamina app in order to avail of subsidised fuel products in the country.

As one of the measures included in the PEN programme, the government rolled out PT PLN’s (National Electricity Company) free electricity programme for certain categories of customers. The electricity tariff stimulus is in the form of an electricity bill waiver for 450 VA residential customers, and discounts for 900 VA subsidised residential customers and small-scale commercial or industrial customers. The scheme ran from April 2020 to December 2021. In addition, the energy sector benefited from the government’s multiple fiscal support to public companies, such as 3% discount on Corporate Income Tax, deferral of tax payment for multiple Public Companies (including fossil fuel Public Companies), and industrial gas price reduction to USD 6/MMBtu.

In early April 2021, the Budget Institution (Banggar) of the Indonesian House of Representatives approved the reform of electricity and LPG subsidies, tabling a proposal to replace them instead with targeted social protection support programmes for the most affected groups. As part of this, the government announced electricity tariffs would increase by approximately 17% for customer groups above 3500 VA, effective July 2022. An entry-into-force date of the proposed reform for LPG measures is yet to be announced.

The global energy crisis induced a sharp rise in the amounts dedicated by the Indonesian government to consumer subsidies and compensations for electricity, fuels and liquefied petroleum gas. The related government budget saw a 39% rise for the year 2021, reaching IDR 243 trillion. In 2022, the soaring cost of this measure led policymakers to redirect the fuel support component to low-income consumers, with IDR 9.6 trillion towards 14.6 million workers with wages under IDR 3.5 million: IDR 12.4 trillion for cash assistance for petroleum fuel to 20.65 million households. Each household received IDR 150k; IDR 2.17 trillion for public transport assistance, online bike taxi assistance and fishermen.

The subsidies were also revised downward in September 2022, but the support was sustained in the 2023 budget. Fiscal pressures brought by the global energy crisis also led the government to suspend in 2022 the conversion programme of 3-kilogram LPG stoves to electric ones. In 2023, the Government through Ministry of Finance continued earmarked IDR 211 trillion for fuel, LPG and electricity to cushion the volatility of commodity prices but did not extend the direct cash assistance towards low-income households.

The Indonesian Ministry of Energy and Mineral Resources (ESDM) plans to set up a coal fund agency ― the Public Service Agency (BLU) ― and to start collecting a new levy on coal producers as of the first quarter of 2023. The levy rate would be tiered based on the coal's calorific value and would be collected from coal companies based on their production. Proceeds from the levy would be used to pay the gap between the coal market price and the price cap for the Domestic Market Obligation (DMO).

The fiscal cost of support measures for fossil fuels in Indonesia was estimated at IDR 240.07 trillion in 2022 (Table 1). Forty-nine per cent (49%) was directed at end user beneficiaries, as opposed to 50.71% directed to firms. Support was mainly given out in the form of direct transfers (IDR 164.51 trillion) accounting for 68.53% of the total fiscal cost of support measures. Tax expenditures amounted to IDR 75.56 trillion.

The fiscal cost of support measures for fossil fuels has increased by 69.95% since 2017. Since last year, tax expenditures have increased by 3.80%, from IDR 72.80 trillion to IDR 75.56 trillion and direct transfers increased by 10.58%, from IDR 148.77 trillion to IDR 164.51 trillion. All growth rate percentages above are expressed in terms of nominal national currency amounts.

Table 1. Fiscal cost of support measures for fossil fuels (in trillions of national currency)

	2017	2018	2019	2020	2021	2022
Tax expenditures	36.645	64.200	77.014	70.716	72.796	75.560
Direct transfers	104.615	158.979	144.067	116.196	148.767	164.508
Total	141.260	223.179	221.081	186.912	221.563	240.069

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.

Table 2. Selected support measures for fossil fuels with a large fiscal cost (in trillions of national currency)

Measures associated with large fiscal cost in 2022		2022	2017	Variation since 2017
Tax expenditures
	Preferential royalty rates and corporate tax rates for small coal mining license holders	38.378	0.000	38.378
	VAT exemption for crude oil, coal, and natural gas	17.161	19.724	-2.563
	Preferential export tax rate for coal [formerly Export tax exemption on coal]	14.914	10.498	4.416
Direct transfers
	Compensation for Below-Market Prices for Premium, Solar, LPG and Kerosene	115.615	47.047	68.568
	Compensation for Below-Market Prices for Electricity	44.699	43.971	0.728
	Below-Market Price on DMO for Natural Gas	2.718	2.439	0.279

1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).

2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.

3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.

4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.

Source: OECD Inventory of support measures for fossil fuels (2023).

Table 3. Description of selected support measures for fossil fuels

Preferential royalty rates and corporate tax rates for small coal mining license holders	Royalties and tax rates vary among Indonesian coal mining companies. Holders of coal mining licenses issued by provincial governments or districts are subject to lower royalty and corporate and tax rates than companies licensed through the national regime. Licenses issued under the old CCoW regime pay a corporate tax of 45% and royalty of 13.5%, while holders of newer IUP coal mining licenses issued by provincial governments pay 3–7% royalties, with a corporate tax rate of 25%.
VAT exemption for crude oil, coal, and natural gas	Since 2000, coal has been exempted from VAT. The exemption also applies to other extractive resources including crude oil, natural gas, geothermal power and several mineral resources. Before 2000 companies were exempt from VAT or received a VAT rebate depending on the tax obligations specified in their contracts and prevailing legislation.
Preferential export tax rate for coal [formerly Export tax exemption on coal]	In 2012, the government designated thermal coal as a commodity excluded export tariffs. A tariff was later imposed, coming into effect on 8 August 2015. The tariff is an income tax of 1.5% of the export value of coal.
Compensation for Below-Market Prices for Premium, Solar, LPG, and Kerosene	The Indonesian government has set the retail prices for premium (motor gasoline), solar (diesel fuel), and kerosene below corresponding market price levels since 1967. To compensate state-owned Pertamina for the losses the company incurs because of the lower selling prices, the government regularly provides direct financial compensation to the downstream operator. Due to the decline of Indonesia’s domestic oil production and the global rise in international oil prices observed in the 2000s, the cost of this compensation has been rising sharply (for instance, in 2012, the government overshot its budgetary target by about 30%) and the government has therefore tried to reform the measure repeatedly.
Compensation for Below-Market Prices for Electricity	As is the case for petroleum fuels, the Indonesian government sets electricity prices for all consumer types (i.e. households, industries, and commercial and government services). Like the compensatory payments made to Pertamina (see Below-Market Price for Premium, Solar, LPG and Kerosene), the government provides PLN, the state-owned electricity operator, an annual compensation for the losses the company incurs as a result of the lower selling prices.
Below-Market Price on DMO for Natural Gas	With the adoption of the 2001 Oil and Gas Law, the Indonesian government extended the Domestic Market Obligation (DMO) system applicable to crude oil to natural gas. The natural gas DMO thus mandates International Oil Companies operating under a PSC (Production Sharing Contract) to sell about 25% of their natural gas output to the domestic market at discounted prices. The specific prices and conditions under which the DMO volumes are sold differ from contract to contract. Anecdotal evidence suggests, however, that domestic prices are generally much lower than the price at which natural gas producers sell their output on the international market. This measure counts toward consumer support as it provides for cheaper natural gas in Indonesia. Unfortunately, it is almost impossible to estimate the amounts of support provided through this measure since domestic prices and volumes of natural gas under DMO vary from contract to contract, and contracts are usually held confidential due to their commercial sensitivity.

Data sources

Country data in OECD.stat

OECD Fossil Fuel Support Portal

National data sources

Note on the Methodology

Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.

The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.