Price of Unpreparedness: Macroeconomic Impact of the Sudden Change in Emission Mitigation Target

Abstract

Indonesia revised its mid-term emission mitigation target through the Enhanced Nationally Determined Contribution (Enhanced-NDC). If previously Indonesia targeted to achieve emission reductions of 29 % by 2030 compared to the BAU level, in the enhanced NDC, the country targets to increase its emission reduction commitment to 32 %. In most of the literature, limiting emissions can result in an economic slowdown compared to Business as Usual (BAU) conditions, especially if there are no innovations and policy reforms regarding emission mitigation activities. This study used the Computable General Equilibrium (CGE) model to simulate how far these policy changes impact the economy. This study also tried to simulate how much investment in emission reduction technologies can help Indonesia reduce the GDP loss caused by climate policy shocks. Based on the simulation results, GDP loss under the NDC (29 % reduction) and enhanced NDC (32 % reduction) schemes will be around 0.86 % and 1.04 % by 2030. The GDP loss may also be followed by the "employment loss", as a production reduction may lead to an employment cut-off. In terms of employment rate, if compared to the BAU, the more aggressive emission restriction may lower labour absorption by around 2 % by 2030. Investment in more advanced and efficient mitigation emissions can help reduce this GDP loss at varied levels, depending on the technology's introduction level. A 1 %-2 % additional investment may lower the GDP loss by around 0.05 %-0.11 % by 2030 compared to the BAU. With the same range of additional investment money, employment loss can also be reduced to 0.31 %-0.34 % by 2030.