STEaPP’s Blog, 15 March 2022
Climate change has been a hot issue for most countries for several decades. Experts have expressed significant concern about the overconsumption of fuels across the globe. Its main driver: fuel subsidies.
Our latest publication (Jazuli, Steenmans, and Mulugetta 2021) highlights the importance of reducing global fuel subsidies. Nevertheless, studies are incredulous how these subventions persist. Our review shows that subsidy reforms are not just a matter of cuts to these subventions and the subsequent fuel price increase. It is more complex than that.
Globally, in 2014, fuel consumption subsidies from various countries accounted for 13% of global GHG emissions (IEA, 2015). Fuel subsidies also often lead to carbon lock-in where development cannot be separated from fuel even though renewable energy potential is abundant (Seto et al., 2016).
Fuel subsidies can reduce logistics and transportation costs to suppress prices. However, these policies often come with a variety of ramifications. In addition to exacerbating global warming, fuel subsidies are hampering investment in fundamental sectors such as education, health, and renewable energy. In addition, these subsidies spoil the rich rather than help the poor. In Indonesia, for example, more than 80% of these subsidies are enjoyed by the richest 50% (Diop, 2014).
Reforms to fuel subsidies frequently result in rising prices of goods and services. This in turn increases the cost of living —hitting poor populations the hardest due to the triggering of instantaneous inflation.
This leads to a policy dilemma. Governments will have to face the undesirable ramifications, at least in the immediate time frame, when proposing reform, as shown in the figure below (Jazuli, Steenmans, and Mulugetta 2021). Some experts also refer to this complexity as the wicked problem policymakers face.
To this end, various efforts to reduce fuel subsidies in various countries are stagnant because the consequences are dangerous economically, socially, and politically. In 2018, Venezuela tried to eliminate its fuel subsidies, leading to prolonged economic and political turmoil. Indonesia, which this piece focuses on, suffered a similar result in 1998, which ended the three decades of the New Order rule.
In Indonesia, it was often declared that cheap fuel was a citizens’ constitutional right. Thus, any effort to reform it was considered unconstitutional and immediately rejected by those in opposition to the government. As a result, by 2004, fuel subsidies reached 20% of the total state budget. Failure after failure to reform fuel subsidies occurred, especially in 1998-2003.
However, in 2005-2008, fuel subsidies were successfully significantly reduced. The price of fuels, especially gasoline, rose by an average of more than 200%. A social safety net program, the Cash Direct Assistance, was given to the poor to help buffer the price shock.
The reform journey suffered various setbacks during 2009-2014 due to weakening coordination between the executive and the legislative. Spending on subsidies even exceeded that of health and defense.
But since the beginning of 2015, the subsidies have continued to be significantly reduced so that it now only amounts to no more than 5% of the state budget. As a result, there has been wide fiscal space for development in other areas such as infrastructure and health. Various social safety net programs were formulated to reduce the adverse social and economic effects when fuel prices rose.
The two-decade journey (1998-present) has transformed the Indonesian reduction of fuel subsidies from a ‘deadly’ political issue, as in 1998, into a policy that is currently considered relatively normal. People are now much more relaxed in their response to reform proposals. Some even voluntarily choose non-subsidized fuels for their daily needs.
The involvement of community leaders is important to note. During its times of failure, efforts to reform the subsidies in Indonesia often faced formidable opposition from various mass organizations, such as the Nahdlatul Ulama (NU) and the Muhammadiyah and business associations such as the Indonesian Chamber of Commerce (Kadin) and the Land Transport Organization (Organda).
But then, especially from 2015, the government actively communicated with figures from these organizations and explained the urgency and the compensation provided. In the end, support came, for example, from NU and Kadin, who then encouraged the success of the reform policy (Jazuli, Steenmans, and Mulugetta 2021).
Reducing fuel subsidies is never a mere economic matter. The subventions have been wickedly persistent thanks to their transformation from a mere economic tool to an unreserved right of the people and a political commodity.
Various countries have difficulty formulating policies to contain the pace of climate change and global warming because they fail to identify and invite influential actors/stakeholders to play a role. Indonesia’s persistence and experience of actively communicating with various stakeholders such as religious, community, business, and parliamentary figures could be valuable evidence and lessons to other countries for the effectiveness of future similar policy reforms. (*)
Our publication
This blog piece was firstly published on the blog of the Department of Science, Technology, Engineering, and Public Policy (STEaPP) of University College London (UCL).
