Supporting fiscal reforms to finance energy transition and carbon pricing mechanisms

Context

The Indonesian Ministry of Finance (MoF) estimated that, in 2030, the energy transition will require 250 billion US dollars to achieve the Nationally Determined Contributions (NDCs). The existing fiscal regime and policy cannot serve this purpose, which will result into a large financing gap. Currently, the tax-to-GDP ratio in Indonesia is low (at 10-11 per cent) and large spending on social and health programmes for dealing with the impacts of the COVID19 pandemic require high governmental spending. Therefore, MOF launches a domestic resources mobilisation initiative to increase tax revenues. This includes emphasising the need for tax reform and improving tax compliance and enforcement.

The Just Energy Transition Partnerships (JETP) that commits to invest 20 billion US dollars for energy transition in Indonesia is insufficient to support Indonesia’s energy transition.

Objective

The Indonesian government is improving its fiscal policy framework and mobilises domestic resources for financing the energy transition and achieving climate targets.

Approach

The project works with the MoF on fiscal policy in the energy sector. This includes developing fiscal incentives to finance energy transition and addressing fossil-fuels subsidy and electricity tariffs. At the same time, the project assists the MoF with launching the national carbon bourse, developing carbon pricing mechanisms (including carbon tax and international carbon trading), and other means of climate finance. Moreover, the project will assist tax policy reforms, improving general tax compliance and enforcement as well as digitalisation of tax administration. These steps are needed to mobilise domestic resources and optimise government revenues to support energy transition and climate actions.

Last update: January 2024