Equity and environmental policy in Indonesia

Abstract

This thesis is an attempt to further understand the social and environmental dimension of sustainable development focusing on the impact of environmental reforms, such as pollution reduction and energy pricing policy, has on inequality and poverty for the case of Indonesia. The success of the implementation of the reforms largely depend on the desirability of their distributional effects. A multi-sector, multi-household, Computable General Equilibrium (CGE) model is used to provide the basis for two important empirical case studies: (i) the effects of a carbon tax, and (ii) energy pricing reforms. The CGE model captures the inter­ dependence among markets in the determination of both price of commodities and factor of productions and how it will affect distribution of income. As a departure from the previous literature, the disaggregation of household by expenditure classes allows for precise estimates of the distributional impact and poverty incidence. The main finding from the carbon tax study suggests that in contrast to most studies from developed countries, the introduction of a carbon tax in Indonesia would not necessarily be regressive. It is shown to be strongly progressive in rural areas, and either neutral or slightly progressive in urban areas, with overall progressive distributional effect nationwide. The industries that experience the largest contraction are generally more energy intensive. The owners of factors of production in these industries are largely concentrated among higher income households and people living in the cities. For the analysis of counter factual scenarios on energy price reforms, the result suggests that reducing subsidy on fuels used for transportation purposes (diesel, and gasoline) constitute a progressive reform. However, a reform like the October 2005 package which include a massive increase in the price of the fuel used for domestic purpose (kerosene) tends to be regressive unless accompanied by a proper and effective compensation scheme. However, the uniform transfer package implemented by the Indonesia government in October 2005 tends to over-compensate rural house­ holds at the cost of under-compensating the urban poor. An alternative package that recognizes the difference between urban and rural household's income and expenditure patterns are crucial in the attempt to minimize the adverse distributional impacts of the energy pricing reform. In general, this study shows there is not necessarily a conflict between environmental and equity objectives, especially when the policies or reforms to achieve environmental goals are carefully designed. Show more