The Environmental Kuznets Curve (EKC) hypothesizes a relationship between environmental quality and economic growth, suggesting that environmental quality tends to get worse as economic development occurs — until a certain point. At that point, economic development leads to better environment quality, following an inverted U-shape. However, not all indicators of environmental quality follow this pattern. Carbon dioxide (CO2) levels, for instance. This is most likely because CO2 levels rise as a country consumes more energy to boost its economy — showing no turning point.
This pattern has been evident in Indonesia. In the last decade, Indonesia has enjoyed a 5.4 percent increase per year in economic development. This steep growth spurred the burning of a significant amount of fossil fuel, intensifying CO2 emissions by 3.9 percent per year. In fact, Indonesia’s energy sector is dominated by fossil fuels, which accounted for approximately 96 percent of total primary energy in 2014. Fortunately, there is a commitment from the government to gradually reduce this proportion. It is expected that by 2025 the proportion of new and renewable energy will increase to 23 percent, at minimum.
Two researchers from Kyushu University of Japan explored Indonesia’s development patterns through the EKC lens. Using several econometric models, the researchers examined the relationship between CO2 emissions per capita, income per capita, and electricity production from renewable sources from 1971 to 2010. They also considered energy consumption and technology factors since those significantly contribute to economic growth. Using a statistical method, they successfully tested the relationship among those variables in both the short and long term.
In a study published in the journal Energy Policy, the researchers report strong evidence of the EKC pattern of CO2 emissions in Indonesia. According to their findings, there actually is a turning point for Indonesia’s CO2 emissions; their model estimates that CO2 emissions start to decrease when income per capita reaches approximately $8,000. By comparison, the highest that Indonesia’s income per capita reached during the study’s observation period was only $1,570.
The evidence that Indonesia’s CO2 emissions may follow the EKC patterns is explained by several promising findings of the models. First, the study suggests a negative relationship between renewable energy shares and CO2 emissions. As the share of renewable energy increases, the CO2 levels declines. However, this beneficial influence of renewable energy is unlikely to be achieved in the near future, the authors found.
The study found a significant role for technology. Adopting more efficient technology may significantly reduce CO2 emissions and inefficiency of energy consumption. Indeed, the researchers suggest that the EKC pattern can only emerge when technology is factored into the model. Without this, income is not sufficient in explaining the variability of CO2emissions.
There are several implications of these findings in terms of Indonesia’s energy policy. First, the huge gap between the estimated turning point and current economic level suggests a need to evaluate current energy policy in order to reach a lower turning point. Second, the tendency of energy consumption to be inefficient in the long term indicates a need to incorporate more energy efficiency strategies in current policy. Indonesia’s current policy, which includes phasing out subsidies on fossil fuel and electricity, should be consistently enforced and, critically, combined with incentive for adopting cleaner and more efficient technology. Finally, the significant positive influence of renewable energy in initiating the turning point of CO2 emissions bring about the important to increase and accelerate the share of renewable energy in Indonesia energy mix.
