Fossil Fuel Production and Net Exports of Indonesia as Impact of International Emissions Trading

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1 Fossil Fuel Production and Net Exports of Indonesia as Impact of International Emissions Trading Armi Susandi, Abdul Mutalib Masdar Max Planck Institute for Meteorology Bundesstrasse, D-0 Hamburg, Germany JOB Pertamina-Petrochina East Java Jl. Gatot Subroto Kav, 9- Abstract In this paper, we have used the simulation model MERGE (a Model for Evaluating the Regional and Global Effects of greenhouse gas reduction policies) to developed a set of energy and emission scenarios for Indonesia between 000 and 00. The purpose of the study was to explore possible baseline energy development and available options to mitigation scenarios. The scenarios enable us to analyze the strategic decisions involved in the different types of development, the possible impacts of climate change and possibilities for mitigation and adaptation. In the energy sector, Indonesia currently produces primarily oil, gas and some coal. Gas production increases substantially up to the middle of the century, but then starts falling gradually. In the mitigation analysis, if Organization for Economic Co-operation and Development (OECD) countries reduce their emissions with mitigation scenarios, oil production grows at rates lower than those in the past (9. percent per year in the period versus the baseline scenario). Indonesia would export more gas increasing to. percent in the first half of the century. With international trade in emission permits, production of oil and gas will continue to increase in the whole simulation period and then decrease gradually; however, its costs are much lower than the last scenario. When Indonesia commits to limiting its emissions, it will decrease coal production due to anticipated emission reduction targets, gradually, energy use will become less dominated by coal. Gas has potential use in the domestic market (to percent of total production) as the switch from coal to gas gives emission permits to meet demands from the developing world. Keywords: Oil; Gas; Coal; Production; Export; Carbon emissions; Mitigation Presented on the Joint Convention Jakarta IAGI IAGI, December 00, Jakarta - Indonesia

2 . Introduction Indonesia is the fourth most populous country with trends in Indonesia s energy future having considerable consequences for both Indonesia and the global environment. The energy-related sectors of the economy (i.e., energy industry, industry, transport, and residential and commercial) are responsible for most of the increase in greenhouse gas emission over the last two decades (SME-ROI, 00). Besides coal, oil use dominates in the domestic sector while gas use is exported. Indonesia s greenhouse gas emissions are projected to increase rapidly after the economic crisis is overcome. Despite the fact that Indonesia currently has no duty to reduce its emissions, it is necessary to explore the policy options for reducing greenhouse gas emission and its impact on energy development in Indonesia. Some important questions to consider include, for instance, what possible trends will emerge in Indonesian energy production without a climate policy? As well as what is the significant impact to Indonesia s net exports during its commitment to limit emissions and how? In this paper, we investigate these questions using MERGE (Model for Evaluating the Regional and Global Effects of greenhouse gas reduction policies) and a set of newly developed mitigation scenarios. We analyze the implications of emission reduction in the OECD (Organization for Economic Cooperation and Development) on the energy sector of Indonesia, the implications of international trade in emission permits, and the effect of Indonesia adopting emission reduction targets in the future.. Energy reserves in Indonesia In the energy sector, Indonesia has significant gas and coal resources, indeed, has a lot of oil reserves. The GOI estimates Indonesian gas reserves at 0. trillion standard cubic feet (TCSF) or around 0, billion barrels of oil equivalent, of which 9. TCSF are proven and. TCSF are probable (PRI, 00), as seen in Table. Gas reserves are equal to three times Indonesia s oil reserves that can supply for more than 0 years at current production rate. Coal has identified. billion metric tons of coal deposits, of which. billion metric tons are classified as measures and. billion metric tons as indicated. Indonesia also achieved an impressive growth rate in coal export, increasing to.9 exajoule in 000. Indonesia has been part of the Organization of Petroleum Exporting Countries (OPEC) since 9. Indonesia s crude oil reserves at 9. billion barrels with proven reserves of. billion barrels. Recently, Indonesia produced. billion barrels per day, slightly decreasing to percent per year since 99. However, percent of energy consumption is currently supplied by fossil fuel (coal, oil and gas) that generates CO (DGEED, 000).. MERGE In this analysis, we have used the MERGE version. developed by Alan S Manne from Stanford University and Richard Richels from the Electric Power Research Institute, US. MERGE is an intertemporal general equilibrium model, which combines a bottom-up representation of energy supply sector with a top-down perspective on the remainder of the economy (see Manne, Mandelsohn, and Richels 99). MERGE consists of four major parts: () the economic model; () the energy model; () the climate model; () the climate change impact model. The model is calibrated with energy and economic data to the year 000. The economic model is modeled through nested constant elasticity production function. The model has also international trading of gas, oil and energy intensive goods. We have developed the new version of MERGE since it included coal as a tradable good (Susandi, 00). The energy model distinguishes between electric and non-electric energy. There are 0 alternative sources of electric generation (hydro; remaining initial nuclear; gas fired; oil fired; coal fired; gas advanced combined cycles; gas fuel; coal fuel; coal pulverized; integrated gasification and combined cycle with capture and sequestration), plus two backstop technologies: high and low-cost advanced carbon-free electric generation. There are four alternative sources of non-electric energy in the model (oil, gas, coal, renewables) plus a backstop technology.

3 The climate submodel is limited to the three most important anthropogenic greenhouse gas: carbon dioxide (CO ), methane (CH ) and nitrous oxide (N O). The emissions of each gas are divided into two categories: energy related and non-energy related emissions. The damage assessment model divided into market and non-market damages, which determine the regional and overall welfare development. To analyze the impact the international climate policy on energy production and net exports of Indonesia, we developed four scenarios, specified in Table. We assume that all Annex B countries (exception of the USA) adopt the Kyoto Protocol with reduces their emission by percent per decade in the years after 00. For instance, we assume that Indonesia accepts a target in 00. After 00, Indonesia s emission falls by percent per decade.. Baselines scenario In 000, Indonesia s population was about million and its projected to grow to 9 millions. The growth rate of the population was. percent in the period of Between 990 and 99 emissions of carbon dioxide, methane and nitrous oxide from household, transport and industry grew at a rate of. percent per year. In 999, energy industry contributed 9 percent of total carbon emissions from fuel combustion in energy demand sectors (SME-ROI, 00). Indonesia ranked seventeenth among world oil producers in 000, with approximately.9 percent of the world s production. Oil production slightly lower or is less constant as continuation of current trends falls by percent per year to 00 (EUSAI 00). The share of oil in energy supply is expected to increase gradually before falling after the first half of the century. Gas production is to increase substantially through the middle of the century and further decreasing to. percent per decade after 00. Coal production grows slightly to cover domestic energy demand while oil that is exported increases. Oil exports increase as capacity of production reach optimum in 00, international oil prices increase due to depleting oil reserves. Gas exports increase slightly and then dramatically after 00, as demand for energy with low emissions increases. Carbon-free technologies are dominant at the end of the century (Susandi 00).. Mitigation scenarios In the previous scenario we have seen that baseline developments are likely to produce considerable emissions of carbon dioxide and thus to impact on the energy production and net export. In this section we will attempt to explore the possible policy option for greenhouse gas emission reduction by matching sustainability development path in OECD and their effects. If the OECD countries (exception of the USA) were to reduce their emissions as specified above, Indonesia can hope to increase the production of gas to. percent in the first half century, to meet export demand but oil exports will be lesser (Figure ). Oil production grows at a rate lower than those in the past (9. percent per year in period compared with baseline scenario). With international trade in emission permits the whole country s, production of oil and gas will continue to increase to meet export demand. Gas exports rapidly increased to 00 and then fall thereafter (Figure ). Oil and gas would be a major contributor to increase foreign exchange revenue of the country. In the last scenario, not only the OECD countries but also all other countries commit to limit their emissions. Indonesian fossil fuel production will become more abundant and simpler to develop especially for gas, but less for coal (Figure ). More and more gas will be utilized as domestic energy resources (to percent of total production) as the switch from coal to gas gives emission permits to meet demand from the developing world (Figure ). On the one hand, coal production would lessen and be more difficult to develop, which lowers the price, while on the other, people have more experience and more advances to develop carbon-free technologies. Oil exports are the same with baseline scenario.

4 . Conclusions This study has analysed the energy production and net exports of Indonesia as implication of international climate policy to project Indonesia s energy development till the year 00, using the inter-temporal general equilibrium model. We developed the new version of MERGE to include trade off coal the original MERGE has no coal as tradable goods. Demand for oil would be slightly lower while the OECD countries reduce their emissions, but gas exports would secure Indonesia foreign exchange; the gas price is more competitive than other energy sources. We could predict that oil export destination of Indonesia would change to non-oecd countries viz. South Korea, China and Singapore. A decrease in oil demand could impact to lower oil prices more than oil prices in the baseline scenario. Coal will increase in use in the domestic sector with a growth rate of percent per decade in the reference scenario, whereas slightly decreasing to percent. With international emissions trade, Indonesia s fossil fuel production (except coal) will rise more rapidly until the middle of century to meet export demand. When Indonesia accepts an emission reduction target starting on 00, gas production will achieve a peak in 00, rising percent higher than the last decade, most of gas production (to percent of total production) use is due to domestic demand. Otherwise, Indonesia has a great interest in mitigation of climate change and has been participating actively in the international climate negotiations.

5 References. DGEED (Directorate General of Electricity and Energy Development). 000 Perencanaan Energy Nasional (National Energy Planning), Jakarta.. EUSAI (Embassy of the United States of America in Indonesia) 000 Coal Sector Report Indonesia 000, Jakarta.. EUSAI (Embassy of the United States of America in Indonesia) 00 Petroleum Report Indonesia 000, Jakarta.. Manne A S, Mendelsohn R O and Richels R G. 99 MERGE - A Model for Evaluating Regional and Global Effects of GHG Reduction Policies. Energy Policy ():-.. SME-ROI. 00 National Strategy Study on the Clean Development Mechanism in Indonesia. Jakarta.. Susandi A and Tol RSJ. 00 The impact of international climate policy on Indonesia. Pacific and Asian Journal of Energy (): -.. Susandi A. 00 Coal as Tradable Goods in MERGE, The th Workshop on International Climate Policy, - April, Vienna, Austria.

6 Table. Proven reserves of fossil fuel energy in Indonesia Energy type Unit Potential resources Proven reserves Natural Gas trillion standard cubic feet (TCSF) Coal billion metric tons.. Oil billion barrels 9.. Source: CSRI, 00 & PRI, 00

7 Table. The scenarios Scenario Emission reduction Start date Emissions trade Reference No No Kyoto Annex B Annex B countries (exception of the USA) 00 No Kyoto Annex B Annex B countries (exception of the USA) 00 All countries with global trade Kyoto all countries with trade Annex B countries China, India and MOPEC. Indonesia ROW All participating countries

8 Reference scenario KAB scenario KBG scenario KAT scenario coal oil gas carbon-free KAB Kyoto Annex B scenario; KBG Kyoto Annex B with Global trade scenario; KAT Kyoto Annex All countries with Trade scenario Figure. Fossil fuel production of Indonesia

9 Reference scenario KAB scenario KBG scenario KAT scenario coal oil gas KAB Kyoto Annex B scenario; KBG Kyoto Annex B with Global trade scenario; KAT Kyoto Annex All countries with Trade scenario Figure. Net exports of Indonesia 9