Critiquing Electric Vehicle Subsidies: Glorified Pseudo-Benefits

Policy Brief

Critiquing Electric Vehicle Subsidies: Glorified Pseudo-Benefits

By Malvin Heraldo Napitupulu Government of Indonesia has implemented a subsidy regulation policy for purchases of electric vehicles (EV). The subsidy is offered on every sale of electric car, hybrid car and electric motorbikes, and also cost coverage of motorbike conversion, from combustion engine to an electric one (Sulaiman, 2022). The reason behind this regulation is to accelerate the development of EVs ecosystem and to create a cleaner Indonesia. The government considers this the right way to reduce fuel reliance and achieve a net zero emission target (Sulaiman, 2023). As a target, Indonesia is moving forward to reach 1.2 million electric bikes and 35,000 electric cars use by 2024.

It is understandable that EV industry must be developed in Indonesia, but subsidy is not the right answer for enliven the businesses. Subsidy tends to cause misalignment between price and production costs (Heuvelen, 2023). It also can create market distortion by artificial surge in demand. Subsidies can inflate demand for EVs because consumers receive significant incentives, creating a bubble that could burst when subsidies are eliminated. Subsidies also have limitation because there will be a time that government stop the subsidy. So, the encouragement to buy EVs is only in short term, leading to spikes in sales, and end up with declines after the subsidy stops. As a result, the EV market wouldn’t be stable and grow that large to substitute the old combustion-engine vehicle industry. Furthermore, the subsidy scheme would affect to market dependence. After the subsidy is eliminated, it may struggle to sustain and make the EV industry vulnerable to change due to economic and political situation.

On the other side, this subsidy scheme doesn’t address the need to build a large industry that requires involvement of all levels of society from high to low income. The government sets an amount of subsidy that is USD 5,150 for new purchase of battery-electric car a half amount for purchasing a conventional hybrid. Then, for electric motorbikes, government subsidizes USD 520 for new purchase and USD 320 for converting and combustion engine two-wheeler to an electric one (Mahalana & Posada, 2023). The income disparity causes each potential buyer would face an ‘annual benefits’ after purchase the EV. With this fixed subsidy amount, people who would adopt it are they who can afford the price or simply if their annual net benefits are positive. What worse, rich people will get benefit they don’t need. At the end, EVs are sold at high price making it exclusive to people with higher income only since the price is still too high for some middle-income society. So, the subsidy for EVs will not result on businesses growth since it is not affordable to low- and middle-income people. For this case, the government should at least make an adjustment to people’s income or wealth. So, low-income or

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Policy Brief Critiquing Electric Vehicle Subsidies: Glorified Pseudo-Benefits

poor people will receive larger subsidies than the middle-income or middle-class. Those with high income or the rich people don’t receive subsidies as they can afford it themselves. This policy is more

Annual Net Benefit ($)

appropriate to implement and “bang for the bucks.”

Figure 1 Overview of Annual Net Benefits of EV Purchase

After all, subsidy for EV purchases cannot be well-defined as part of Payment for Ecosystem Service (PES). Although the government argues that this program is designed for reducing carbon emissions, the fact is Indonesia electricity still rely on coal power plants which has a large number of contributions for emitting carbon to earth’s atmosphere. Non-renewable energy still dominates Indonesia’s energy mix where 62.5% Indonesia’s electricity comes from coal, 22.2 natural gas and 5.6% oil (Statista, 2023).

The operation of fossil energy-based power plants such as coal-fired power plants is planned to continue, and even new constructions is included in the road map. So, in term of the effort of achieving net zero emission goal, this plan to build Indonesia EV industry is irrelevant.

Figure 2 Indonesia Energy Mix

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Policy Brief Critiquing Electric Vehicle Subsidies: Glorified Pseudo-Benefits

So, what should government do?

In order to build a large-scale industry of EV, the government first should target the producers.

Government can reduce import tariffs on EV components while encouraging domestic automakers to produce EVs and EV components, foster partnerships between local companies and international EV manufacturers to transfer technology and expertise. To boost the industry, government also need to support research and development on EV technology, battery chemistry and energy storage solutions by universities and institutions, so more people interested to build EV related company. This model could help lower production costs and also the selling price of EVs, making it more affordable. To make it more attractive, government can incentivize private companies to invest in EV manufacturing, charging infrastructure and battery production (Maghfiroh et al., 2021). Most important of all, the government should invest in launching public awareness campaigns to inform consumers about the benefit of EVs, including cost savings, emission reduction and air quality improvement. Trainings and educational programs also need to be developed so Indonesia has its own skilled local workforce for the EV industry.

Moreover, if the government really wants to focus on creating a green transportation ecosystem in Indonesia, the critical factor that should be prioritized in the future context is private vehicle reduction and encouragement to use public transportation (Sukarno et al., 2016). The subsidy policy will also be more effective if invested in public transportation since 57.29% of Indonesia’s population is concentrated in big cities which require public transportation for people activities (Statista, 2023). The budget also can be allocated to support initial capital investment required for green public transportation projects and also to support the enablement of small-scale investments in green public transportation initiatives through microfinancing options, allowing local communities to participate in the development of sustainable transportation solutions. The government can establish grant or subsidy scheme for these concerns. They also can provide incentives for passengers to choose green public transportation options, such as reduced fares and tax breaks or subsidies for using public transit.

With these policies, people’s transportation habits will change and the effect of reducing emissions will be more significant.

The transformative intention of Indonesian government needs to be appreciated, forcing an acceleration in energy transition. However, subsidies for EV buyers are not the best way to get there.

Hopefully the government’s attention will be focused on something more balanced in dealing with this challenge, resulting in prosperity, both economically and environmentally.

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Policy Brief Critiquing Electric Vehicle Subsidies: Glorified Pseudo-Benefits

References: Heuvelen, E. van. (2023, June). Back to Basics: Subsidy Wars. IMF. https://www.imf.org/en/Publications/fandd/issues/2023/06/B2B-subsidy-wars-elizabethvan-heuvelen Maghfiroh, M. F. N., Pandyaswargo, A. H., & Onoda, H. (2021). Current Readiness Status of Electric Vehicles in Indonesia: Multistakeholder Perceptions. Sustainability, 13(23), Article 23. https://doi.org/10.3390/su132313177 Mahalana, A., & Posada, F. (2023, March 3). Will Indonesia’s ambitious plan to subsidize EVs and hybrids benefit everyone? International Council on Clean Transportation. https://theicct.org/asean-indonesia-evs-mar23/ Statista. (2023, June 1). Indonesia: Urbanization 2011 to 2021. Statista. https://www.statista.com/statistics/455835/urbanization-in-indonesia/ Statista. (2023, August 11). Indonesia: Electricity mix by source 2022. Statista. https://www.statista.com/statistics/993362/indonesia-energy-mix-for-power-generation-bysource/ Sukarno, I., Matsumoto, H., & Susanti, L. (2016). Transportation energy consumption and emissions— A view from city of Indonesia. Future Cities and Environment, 2(1), 6. https://doi.org/10.1186/s40984-016-0019-x Sulaiman, S. (2022, December 14). Indonesia to offer $5,000 subsidy on electric car sales. Reuters. https://www.reuters.com/business/autos-transportation/indonesia-offer-5000-subsidyelectric-car-sales-2022-12-14/ Sulaiman, S. (2023, August 29). Indonesia widens subsidy access for electric bikes after poor uptake.

Reuters. https://www.reuters.com/world/asia-pacific/indonesia-widens-subsidy-accesselectric-bikes-after-poor-uptake-2023-08-29/

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