Examining the Fiscal Paradox in The Cost of Taxation and Its Impact on Renewable Energy Transition in Indonesia

Abstract

Background: Despite committing to a 23 percent renewable energy mix by 2025, Indonesia has achieved only 14 percent of installed renewable capacity by 2024, while annual renewable energy investment remains stagnant at approximately USD 1.5 billion that a fraction of fossil fuel investment levels.
Purpose: The objectives of this study are to examine the fiscal paradox in Indonesia’s energy transition, analyzing how tax instruments intended to support renewable energy development may generate structural barriers that constrain investment in the sector.
Design/methodology/approach: This study employs qualitative policy analysis and literature review to evaluate the effects of tax structure and fiscal allocation on renewable energy development.
Findings/Result: Misaligned tax structures generate disincentives through high VAT rates, import duties, complex administrative processesthat impose a cumulative taxation cost burden that directly elevates the Levelized Cost of Electricity (LCOE) for renewable energy projects to an average of USD 58 per MWh. Compounding this cost barrier, fiscal allocation disproportionately favors fossil fuels, with 57 percent of energy sector revenue directed to subsidies compared to only 4.5 percent allocated to renewable energy, creating a systemic fiscal paradox that simultaneously undermines investment competitiveness and policy coherence.
Conclusion: Planned fiscal reforms, including VAT exemption for renewable components, gradual reallocation of fossil fuel subsidies, carbon tax implementation with revenue recycling, and policy harmonization, are essential to resolve the fiscal paradox and accelerate a sustainable energy transition while maintaining fiscal stability.
Originality/value (State of the art): This study makes a distinctive academic contribution by introducing cost of taxation as a multidimensional analytical lens, encompassing compliance costs, administrative burdens, and economic distortion and to explain how fiscal policy design directly undermines renewable energy cost competitiveness and investment feasibility in Indonesia.

Keywords: fiscal paradox, cost of taxation, renewable energy, LCOE, fiscal reform