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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 [email protected]
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.
