Sustainable Development and Environmental Reforms
Attributes
Medium: Animals, Plants and/or Others
Country: Indonesia
Analytical Framework(s): Other
Study Date: 2007
Publication Date: 2008
Major Result(s)
Study Note: The complete picture of the distributional impact of environmental policies in general, has to consider two distinct but inseparable issues (OECD, 1994). The first is concerns related to distribution of the environmental benefit of the policy, i.e.,who gains more and who gains less. The second is associated with the distribution of financial effects of the environmental policies, i.e., who pays more and who pays less. This research focuses on the latter. The trade-off between environmental and equity objectives, in the sense that lower income households pay proportionately more than higher income households following certain environmentally-motivated policies is supported by empirical evidence, especially for the case of pollution regulation or energy-related emission. For example, in developed countries, environmental policies to reduce pollution or discourage fossil fuel consumption are mostly regressive i.e., the burden of the regulations are mostly borne by lower income households, thereby making income distribution less equal. However, whether or not a similar conclusion would apply to developing countries still has to be researched. The distributional impact of environmental policies depends on the income and expenditure patterns of households, which may naturally be different between rich and poor countries. Therefore, whether such environmental policies are equitable or not is an empirical question. This research will use Indonesia as a case study in an attempt to answer this empirical question and also to contribute to the debate of whether there is a conflict between environmental and equity goals and to what extent policy design might be able to mitigate any adverse distributive effects of environmentally-motivated reforms.
Study Details
Summary: This research 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 includes 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 households income and expenditure patterns are crucial in the attempt to minimise 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.
Site Characteristics: Two empirical case studies are chosen. The first is the issue of climate change policy, and the second is the issue of energy pricing reform in Indonesia. Indonesia is chosen as a case study, not only because of its importance in global climate change policy, but also because fuel subsidy is such an important issue there. The author's knowledge of Indonesia, access to data, and the potential to contribute to the debate and to policy making in Indonesia, are considered to be the main advantages.With regard to the carbon abatement policy, the main motivation here is to contribute to the existing literature which generally concludes a carbon tax in developed countries is regressive. In addition, Indonesia recently ratified the Kyoto Protocol. As a party to the Convention, one of the obligations is to communicate actions taken to mitigate climate change and to establish the National Committee on Climate Change. Ratifying the protocol means the issue of reducing GHG emissions will have more priority in the public discourse. The likely distributive effect of undertaking GHG reduction in developing countries will be a crucial issue thereby giving more relevance to this research. For the second case study, i.e., energy pricing reform, the main motivation is the concern that a fuel subsidy contributes to the deterioration of environmental quality in developing countries. Government-induced market distortion has long been considered dominant cause of environmental problems. Removing this distortion, therefore, constitutes one of the important environmental policies. This includes removing environmentally-harmful fuel subsidy which is highly relevant in the Indonesian current policy context.
Comments: The linkage between the economic, environmental and social dimension of sustain-able development had been stressed since 1987 in the so-called "Brundtland report". More recently, it was mentioned as one of the three pillars of sustainable development at the 2002 Johannesburg World Summit. This three pillars concept is also known as the ESE triangle representing the Economic, Social, and Environmental dimension of sustainable development. It is widely acknowledged that the three dimensions of sustainable development are related. In many cases, the three pillars can conflict, when the goal of one of the aspects does not go hand in hand with any of the others. It was suggested that for Indonesia, there has been greater emphasis on economic parameters and less emphasis on social and environmental parameters. The linkage - including its possible conflict - between environmental and social objectives, especially equity objectives, seems less debated in the policy arena compared to the discussion on the interaction between the economy and equity, or between the economy and the environment. However, as environmental concern is getting more widespread attention, and intervention in the form of environmental policies is becoming more widely advocated, the equity aspect of such policies is becoming increasingly important. The equity dimension starts to become more important, when it is acknowledged that the natural consequences of any government policy, including environmental policy, carries a distributional effect. If this distributional effect is undesirable, because for example, it could increase poverty and inequality, it may be perceived as having the potential to do harm to the society. If there is an expectation of such an adverse distributive effect, it may even prevent the policy from being implemented. In Indonesia, the plan to reduce fuel subsidies has always been followed by social protest. This also happens elsewhere as noted by OECD, "the social protest that followed the oil price increase of 2000 prompted reductions in environmentally-motivated taxes on oil products in countries such as France, Italy, and Australia, and the postponement of planned tax increases in others, like the United Kingdom or Germany delayed planned tax increases".