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Editorial: A cap on fuel subsidies
We should give credit where credit is due
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We should give credit where credit is due. The House of Representatives working committee on the state budget should be applauded for recommending the government put a cap on fuel subsidies in 2009 and maintain the gap between domestic and international prices.
This development shows many House members do have a conscience for public interest after all and common sense regarding the importance of energy conservation and efficiency.
The recommendation made by the committee for the 2009 state budget bill requires an automatic increase in domestic fuel prices whenever international prices rise above US$130 a barrel.
The 38-member House working committee and the government agreed last Thursday to limit fuel subsidies next year to Rp 155.7 trillion ($16.75 billion), assuming an average crude oil price of $120 a barrel. The $130 price level will act as a trigger to set off the automatic domestic increase.
The most important element of such a measure is the size of the gap between domestic and international prices.
Too wide a gap would not be effective because such a disparity would create big incentives for fuel smuggling to foreign countries or for misuse by industrial users. On the other hand, too small a gap is not feasible as such a sharp increase could cause a shock to the economy. A disparity of between 10 to 20 percent would be the most appropriate range.
Finance Minister Sri Mulyani Indrawati understandably welcomes the recommendation as it was strikingly different from the motion approved by a plenary House session two days earlier. Of the 360 House members attending the session last Tuesday, 233 voted to exercise the parliamentary right to investigate the 28 percent fuel price increases made by the government on May 24.
The motion seemed strange, reflecting a capricious attitude on the House's part because it had reached political consensus with the government during deliberations on the 2008 state budget bill, giving the government a mandate to raise fuel prices whenever crude oil prices rose above $100 a barrel.
Given the volatile political mood of House members and in anticipation of the 2009 general and presidential elections, many may doubt that the working committee's recommendation will be adopted for the 2009 state budget bill, which will be proposed to parliament in mid-August.
The recommendation, nevertheless, indicates the House is still aware of the market price mechanism's ability to enforce fuel efficiency and conservation, and many House members still have an open mind about floating domestic fuel prices on international market levels.
The current government could choose the easy way out and take the populist measure by continuing wasteful subsidy spending, but it would be at the risk of leading the economy into a much more devastating crisis within two to three years.
Maintaining the domestic fuel prices at the current level, still 40 percent lower than international levels despite last month's 28 percent hike, would cause a devastating impact on the fiscal sector as the state budget deficit would explode to an unmanageable level.
Delaying fuel price adjustments to international levels much longer will only plant a time bomb for the next government, to be appointed in October 2009.
The market pricing mechanism and fiscal measures to be implemented by the government will immediately help cut fuel consumption and consequently government spending on fuel subsidies.
Energy pricing policies obviously have an immediate bearing on energy efficiency investment. When people are made to understand the era of cheap fuel is over, they will begin reorganizing their lives accordingly and businesses will prefer fuel-efficient machinery and invest in fuel conservation.
Despite criticisms from many politicians and economists, the market is still a powerful and fundamental factor in a possible nationwide implementation of energy efficiency initiatives.
Subsidies that depress energy prices provide a significant disincentive for investment in energy-efficient machinery. The removal of this barrier is an important step toward creating an investment climate in which energy efficiency can prosper.
However, all these fuel-conservation and efficiency measures will only be effective with the support of fiscal measures and financial incentives. Governments have at their disposal a variety of instruments, such as tax credits and subsidized or low-interest loans, through which energy efficiency can be promoted.
