The Royal Swedish Academy of Sciences awarded this year’s Economics Nobel Memorial prize to two American environmental economists. Environmental economists generally study theoretical or empirical studies of the economic effects of national or local environmental policies worldwide, including the flow of residuals from the economy to the environment.
William Nordhaus and Paul Romer are considered leaders in the work on the negative impacts of climate change on economics. Both of them were awarded for work in integrating economics analysis, innovation and climate change. Nordhaus, an academician of Yale University, was the pioneer of a quantitative model that explained the linkage between the economy and emissions.
Romer, of New York University`s Stern School of Business, is known as the initiator of endogenous growth theory which explains how economic forces govern the willingness of companies to produces new ideas, technology and innovations. The Nobel committee argued that both economists have taken macroeconomics to a world perspective, to combat climate change as one of the biggest global problems.
This is significant as climate change remains a significant burden for many countries’ performance, including Indonesia. Economic impacts of climate change are wide and complex and eventually may be larger, including on human health, productivity, and agricultural production.
Indonesia has been experiencing a wide range of environmental problems including threats of climate change. The economic loss attributed to climate change in Indonesia is estimated to reach 2.5–7 percent of gross domestic product by 2100, according to the World Bank. Health problems caused by air pollution can cost more than US$400 million per year in the country.
Before the program implementation, kerosene consumption constituted 72 percent of the energy source of the household sector. After the implementation, the bulk of the kerosene consumption became only 4 percent.
Along with the growing population, rapid urbanization and economic growth, the final energy consumption of the residential sector has led to an increasing trend of CO2 emission. Concerning climate change, Indonesia started the path to reduce greenhouse gas emissions by 26 percent unilaterally, and up to 41 percent with international support, below a projected baseline by 2020.
To reduce emissions, the government has for instance initiated the massive kerosene to liquid petroleum gas (LPG) conversion program in 2007. The World Bank considered the program one of the world's largest efforts to promote cleaner cooking fuels; as the switching consumption of kerosene to LPG reduced CO2 emissions by 8.52 million tons of CO2 from 2000 to 2015.
LPG is considered cleaner energy than kerosene since it has higher calorific value and efficiency, producing 20 percent emissions lower than kerosene.
However, by including electricity consumption in the households, CO2 emissions increased by 86 percent during 2000-2015. The high share of fossil fuel in electricity generation led to increasing indirect emissions. Despite its huge renewable energy potential, the share of fossil fuels is currently approximately 96 percent of the total primary energy consumption.
As stipulated in the Energy National Plan, coal plays a significant role in Indonesia's electricity sector because of its reserves, ease of use and price. The increments in carbon intensity correspond to the increasing share of coal as fuel in power plants. During 2000-2015, coal consumption increased by more than 100 percent.
Lowering carbon intensity in electricity has a vital role in reducing emissions. To reduce the emissions from the supply side, Indonesia should increase diversification of the energy mix towards cleaner renewable sources such as geothermal energy. Having a high share of coal-fired generation is essential for the country to improve efficiency by adopting cutting-edge technology and enhancing the coal-fired power plant.
The growing population, increased urbanization and growing household income levels have triggered drastic demand and utilization of electronic home appliances in Indonesia. With over 4 percent urbanization growth Indonesia has been becoming more urbanized with over a half of the population living in urban areas. Energy consumption has naturally increased, with residential sectors being one of Indonesia’s largest consumers of energy.
Given the increasing energy consumption trend, Indonesia must improve the energy efficiency of home appliances. Therefore Indonesia should continuously enhance energy efficiency standards and labeling systems for washing machines, refrigerators, air conditioners and other home appliances. Furthermore, Indonesia should keep gradually decreasing government subsidies for fossil fuel and electricity.
Energy efficiency is the link that allows decreasing emissions compared to its level of “business as usual”. China was able to limit energy demand growth to less than half of its GDP growth. Facing increasing energy intensity, China re-created a policy apparatus to design and implement energy efficiency throughout the economy to keep their energy intensity on track.
China’s ability to limit energy demand growth does not only utilize natural capital as an input in a more efficient way but also reduces emissions.
To reduce emissions and achieve transition to sustainable development, a joint commitment among all stakeholders is urgent, including the public and private sector and also NGOs and other non-profit institutions to encourage Indonesia’s low carbon development.
“It is entirely possible for humans to produce less carbon... Once we start to try to reduce carbon emissions, we’ll be surprised that it wasn’t as hard as we anticipated," Romer said at the press conference which announced the Nobel prize in economics.
The writer graduated from the Graduate School of Environmental Studies, Tohoku University, Japan. His research focuses on environmental economics, sustainable development and energy policy. His current project is '”Inclusive wealth of nations: the measure of sustainable development”. The above views are personal and do not necessarily reflect the views of the institution. Robi can be found at Research Gate and Google Scholar.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.