Energy Conservation, Fossil Fuel Consumption, CO2 Emission and Economic Growth in Indonesia

This paper discusses the relationship between fossil fuel consumption, carbon dioxide emissions and economic growth for the period of 1965-2012 in Indonesia by applying Vector Error Correction Model (VECM) Granger causality. This paper also estimate the effect of energy conservation policy that has already adopted the National Energy Conservation Master Plan (RIKEN 2005) by Indonesian Government to the pattern of energy consumption in Indonesia from 2014 until 2030. Empirical results show that in the short-run there are unidirectional Granger causalities running from coal consumption to economic growth (growth hypothesis) and from economic growth to oil consumption (conservation hypothesis). However, in the long run the results suggest unidirectional Granger causality only running from oil consumption to economic growth and CO2 emissions. Thus, Indonesia should adopts different policies for each type of energies in order to maintain the economic growth while the effort of reducing fossil fuel consumption is in progress. The projection results imply that Indonesia government should revise the energy efficiency targets in RIKEN 2005 since the result of LEAP Projection based on RIKEN target shows a lower energy saving rate (17.32 percent) compared to the target (18 percent)