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PERFORM in Indonesia
Performing Energy Transition through Fiscal Reform
The PERFORM Project aims to strengthen the fiscal policy frameworks for financing the energy transition and climate targets, as well as mobilising domestic revenues for the development of clean energy and a sustainable green economy in Indonesia.
Background
Based on the Paris Agreement in the form of Nationally Determined Contributions (NDCs), Indonesia has pledged to reduce greenhouse gas emissions by 31.89% in 2030 compared to the Business as Usual (BAU) scenario. Indonesia also aims to achieve Net Zero Emissions (NZE) by 2060. Currently, Indonesia is working on a Long-Term Strategy for Low Carbon and Climate Resilience through 2050, aimed at reducing 129 million tons of carbon emissions from the energy sector by 2060. The share of renewable energy in the national electricity mix is expected to increase from 14% to 23% in 2025.
Indonesia encounters significant challenges in mobilising its own revenues, as the tax ratio was only 10.4% in 2022 (MoF, 2023). This fiscal condition is a major challenge for Indonesia’s sustainable development in financing public goods, especially for the energy transition and achieving climate change targets.
The state budget on average is only able to cover around 34% of the budget needed to meet Indonesia’s unconditional NDC targets (MoF, 2022). To accelerate decarbonisation in Indonesia, a presidential decree was issued on the economic value of carbon emissions that incorporated a carbon tax in the new tax regulation harmonisation law.
Indonesia is taking important steps by planning a carbon pricing mechanism to support climate change mitigation but lacks the regulatory and administrative framework to implement it. In addition, the social impact of implementing these instruments has so far not been considered.
Project approach
The project applies a multi-stakeholder approach based on priorities by the Government of Indonesia. The main political and implementing partners are the Fiscal Policy Agency (Badan Kebijakan Fiskal, BKF) and the Directorate General of Taxes (Direktorat Jenderal Pajak, DJP) of the Ministry of Finance. The project addresses all three capacity development levels: individual, organisational, and system. Cross-cutting themes of dialogue between the state and citizens are supported. The project is carried out in close collaboration with other development partners to ensure no duplication of efforts.
Impact
From 2019 to 2023, the Domestic Resource Mobilization (DRM) project, a technical cooperation project between the German and Indonesian governments prior to PERFORM, supported BKF in improving fiscal policy formulation to support the implementation of the 2030 Agenda. The DRM project provided support in analysis and input to formulate a new Tax Law on Harmonization of Tax Regulations (Undang-Undang Harmonisasi Peraturan Perpajakan/UU HPP) as well as analysis of fiscal sustainability, targeted subsidies, climate change fiscal frameworks, and fiscal support for the energy transition mechanism.
In addition, the DRM project supported DJP in establishing preconditions for improving the validity of tax data through data cleansing and migration for the new central tax system and development of mobile application (M-Pajak) as well as strengthening tax administration capacity in risk management and tax audit, utilisation of XBRL (eXtensible Business Reporting Line) digital business reporting as a basis for increasing tax compliance.
Continuing the successful implementation of DRM, the PERFORM project will focus on strengthening the energy and climate fiscal framework to support financing the energy transition and climate change activities in Indonesia through tax compliance, domestic resources mobilization, fiscal analysis, and recommendations. Indonesia is expected to have a strong fiscal policy framework to finance the energy transition and low-carbon economic development.