POLICY ANALYSIS OF ENERGY PRICING & SUSTAINABLE DEVELOPMENT IN INDONESIA Presentation at CSM...

POLICY ANALYSIS OF ENERGY PRICING & SUSTAINABLE DEVELOPMENT IN INDONESIA

Presentation atCSM ’04: 18th Workshop on Methodologies and Tools

for Complex System Modeling and Integrated Policy Assessment

International Institute for Applied Systems AnalysisLaxenburg, Austria

6-8 September, 2004

by

Dr. Wesley FoellResource Management Associates

Madison, Wisconsin USAwfoell@rma.com

INDONESIA THE COUNTRY

STRUCTURE OF PRESENTATIONNeeds of Energy Policy Analysis in Indonesia

Nexus of Energy Subsidy & Sustainable Development

Institutional & Analytical Challenges

Analytical Structure, Models, and Data

Results & Policy Recommendations

Policy Implementation Lessons Learned

THE ENERGY SUBSIDY PROBLEM-2001• FISCAL

– Low prices, e.g. diesel @ 10 cents/liter– Subsidy = 20 % of government budget in 2000

• SOCIAL– 80 % of subsidy goes to non-poor– Nobody like higher prices

• ECONOMIC EFFICIENCY– Hinders improvement of energy efficiency

• SUSTAINABILITY– Accelerates resource depletion– Prevents development of alternative energy sources

PETROLEUM PRODUCTION AND CONSUMPTION: 1992-2002

THE PRACTICAL CHALLENGE-2001

HOW TO DESIGN A PRICE PATH SATISFYING THE FOLLOWING CRITERIA:

• SUBSIDY REDUCED 30 % IN 2002 & ELIMINATED IN 2005.

• ACCEPTABLE IMPACT ON KEY ECON. PARAMETERS.

• MITIGATED IMPACTS ON THOSE LEAST ABLE TO ABSORB INCREASES, E.G., THE POOR.

• “POLITICALLY ACCEPTABLE” PRICE INCREASES.

THE ANALYTICAL CHALLENGE

• CHOICE OF APPROACH

• ANALYTICAL TEAM & NETWORK

TECHNICAL TOOLS & EXPERTISE IN EXISTING INDONESIAN

POLICY ANALYSIS TOOLBOX

• ECONOMETRICS • MATHEMATICAL PROGRAMMING• SIMULATION MODELS • COST/BENEFIT ANALYSIS• INPUT/OUTPUT• MULTI-ATTRIBUTE DECISION ANALYSIS• SYSTEM DYNAMICS• INTEGRATED ASSESSMENT MODELS• COMPUTABLE GENERAL EQUILIBRIUM MODEL

THE CHOICE – A COMPUTABLE GENERAL EQUILIBRIUM MODEL (CGE)

• ADVANTAGES:– TREATS ECONOMY AS COMPLETE SYSTEM OF INTERDEPENDENT

COMPONENTS, E.G., HOUSEHOLDS, INDUSTRIES, GOVERNMENT, ETC.

– INCLUDES SHOCKS OF PRICE INCREASES RIPPLING THROUGH ECONOMY.

– CONSIDERS BOTH CONSUMER & PRODUCER BEHAVIOR.

– CONSIDERS BOTH DIRECT & INDIRECT IMPACTS OF PRICE CHANGES

• DISADVANTAGES– SIGNIFICANT SKILLS NEEDED TO USE & MAINTAIN MODEL

THE (COMPLEX?) POLICY PROCESS

Model Structure

Data Base &Parameters

Policy Simulations

Socialization &Implementation

Existing CGE Model

Disaggregation & Modification of Energy Sectors •Model Behavior

•Price Paths•Compensation Funds

•Gov. & Public Education•NGO Workshops•Compensation Programs•Phased Price-Increases

INDORANI – COMPUTABLE GENERAL EQUILIBRIUM MODEL

• DEVELOPED AT GADJAH MADA UNIVERSITY IN INDONESIA.

• BASED ON THE ORANI MODEL OF MONASH UNIVERSITY IN AUSTRALIA.

• SPECIFIES BEHAVIOR OF PRODUCERS, CONSUMERS, FOREIGNERS, INVESTORS, AND GOVERNMENT.

• BASED UPON EQUILIBRIUM OF:

1) CAPITAL & LABOR REQUIRED TO PRODUCE GOODS & SERVICES,

AND

2) ECONOMIC COMPONENTS FORMING NATIONAL ECONOMY

DATA BASE & PARAMETERS-I

• I/O TABLE ADJUSTED TO YEAR 2000

• HIGHLY DISAGGREGATED FUELS

DATA BASE & PARAMETERS-II• HIGHLY DISAGGREGATED HOUSEHOLD TYPES

– LANDLESS– POOR PEASANT– MIDDLE PEASANT– RICH PEASANT– RURAL NON-AGRI POOR– RURAL NON-AGRI RICH– URBAN POOR– URBAN RICH– URBAN NON-WORKERS

• ELASTICITY PARAMETERS FOR SUBSTITUTION– AMONG FUELS– BETWEEN PRIMARY FACTORS OF PRODUCTION– BETWEEN DOMESTIC PRODUCTS & IMPORTS

SCENARIO PRICE PATHS FOR FUELSBASELINE FUELS PRICE PATH

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2000 2001 2002 2003 2004 2005 2006

YEAR

FU

EL

PR

ICE

RE

LA

TIV

E T

O

WO

RL

D P

RIC

E

Gasoline

Kerosene

Auto Diesel

Industrial Diesel

Fuel Oil

PLN Electricity

"SOFT START" KEROSENE PRICE PATH

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2000 2001 2002 2003 2004 2005 2006

YEAR

FUEL

PRI

CE R

ELAT

IVE

TO

WO

RLD

PRIC

E

Gasoline

Kerosene

Auto Diesel

Industrial Diesel

Fuel Oil

PLN Electricity

FUEL SUBSIDY SCENARIO

TOTAL SUBSIDY-BASELINE PRICE PATH

-10000

0

10000

20000

30000

40000

50000

60000

1999 2000 2001 2002 2003 2004 2005

YEAR

SU

BS

IDY

, BIL

LIO

N R

UP

IAH Avgas

Avtur

Premium

Kerosin

ADO

IDO

FO

Total

SOCIALIZATION & IMPLEMENTATION

• POOR PEOPLE ( INCOME LESS THAN 125 % OF POVERTY LEVEL) FACE INCREASED HOUSEHOLD COSTS OF 15 PERCENT

• ESTABLISH COMPENSATION FOR POOR– EDUCATION– FOOD– HEALTH CARE SERVICES

• EDUCATE KEY ELEMENTS OF SOCIETY TO UNDERSTAND SUBSIDY PROBLEM AND HOW TO ADDRESS IT

CURRENT FUEL PRICE PATHS

ACTUAL 2000-2004 & PROJECTED 2005 & 2006

DOMESTIC PRICE RELATIVE TO WORLD PRICE, (%)

-

20.0

40.0

60.0

80.0

100.0

120.0

2000 2001 2002 2003 2004 2005 2006

YEAR

(%)

RE

LA

TIV

E P

RIC

E

Gasoline

Kerosene

Auto Diesel

Ind. Diesel

Fuel Oil

Actual SubsidiesPETROLEUM SUBSIDY AS PERCENT OF

GOVERNMENT BUDGET

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

1995 1996 1997 1998 1999 2000 2001 2002 2003

YEAR

PE

RC

EN

T

THE SITUATION TODAY -- 2004

• SOME IMPACT COMPENSATION IS PROVIDED TO THE POOR

• SUBSIDY INCREASING ONCE AGAIN AS WORLD PRICE OF OIL REACHES NEW HIGHS

• PEOPLE RESISTING TO ACCEPT RATIONALE OF PRICE INCREASES

• PRICE INCREASES DEFERRED UNTIL AFTER ELECTION (SEPTEMBER 20, 2004)

LESSONS LEARNED

• CGE MODEL WAS APPROPRIATE FOR THE TASK

• TRANSPARENT POLICIES ARE MORE CRUCIAL THAN EVER

• ANALYSTS (SOME) NEED TO BE INVOLVED IN TOTAL IMPLEMENTATION

• GIVE HIGH PRIORITY TO MAINTAINING A CREDIBLE TEAM

IIASA PROVERB FROM 1974

• SUCCESSFUL MODELS:

• - MUST BE USEFUL!

• - MUST BE USEABLE!

BUT MOST IMPORTANTLY,

• MODELS MUST BE USED!!!!!

DANKE SCHOEN

FOR YOUR ATTENTION

Acknowledgements

This work was carried out by a large team of analysts in Indonesia, including among others, Jack Huddleston of the University of Wisconsin-Madison; EAPO staff members Oetomo Tri Winarno and Franciscus Sutijastoto; Mohamad Ikhsan, Umar Said and Vid Adrison of the University of Indonesia; Anggito Abimanyu and his Gajah Mada INDORANI team; and Connie Smyser and Edi Setianto. However the author takes all responsibility for the content of this presentation.