Internalizing External Cost in Electricity Development in Indonesia: A Factor Decomposition Analysis

A decomposition model has been developed to examine the factors which affect the change in CO₂ emission due to considering external cost in electricity development in Indonesia during 2006-2025. There are two factors which affect the change in CO₂ emission due to external cost, i.e., technological substitution effect and demand side effect. The results show that the reduction of CO₂ emission would increase from 3.7% to 82.5% if the external cost is increased from low- to high-level. At low and medium external cost rate, the CO₂ emission reduction is mainly due to demand side effect. However, the role of technological substitution effect is more influential at high level of external cost. The results also show that the SO₂ and NO_x mitigation would also increase from 3.5% to 85.0% and from 3.3% to 70.9% respectively if the external cost is increased from low- to high-level