Government signals ETS cap revisions, calls for EV policy predictability

By Raymond Hendriawan

The Directorate General of Electricity at Indonesia’s Ministry of Energy and Mineral Resources (ESDM) signaled that 2026 will focus on strengthening the country’s energy transition framework, including revisions to the emissions trading system (ETS) governing the power sector.

The signal was delivered during a panel session organized by the International Institute for Sustainable Development (IISD) on Feb. 10, 2026.

Bayu Nugroho, Coordinator for Environmental Protection of Electricity at ESDM, confirmed that Ministerial Regulation No. 16/2022 (Permen ESDM 16/2022) is currently under revision to improve the design and credibility of Indonesia’s ETS.

“Permen ESDM 16/2022 is being revised so that the cap becomes stronger and better accepted by the market,” he said. “Setting the cap is highly influential. We are still refining how to determine it properly.”

He acknowledged that implementing the ETS across Indonesia’s diverse power generation fleet remains technically and administratively challenging, particularly in remote and underdeveloped (3T) regions, where smaller plants face reporting and compliance constraints.

“Smaller plants struggle with emissions reporting. Once they report, we must ensure the data can be processed and integrated into the ETS and trading system. Coordination remains a challenge,” Bayu said.

He added that ETS reform cannot be separated from broader electricity system management, including tariff and subsidy structures.

“This is directly related to the electricity sector and inevitably linked to subsidies,” he said, indicating that carbon pricing design must consider PLN’s tariff framework and state compensation mechanisms.

Carbon pricing and EV competitiveness intertwined

The discussion highlighted that ETS reform in the power sector is structurally linked to electric vehicle (EV) economics. Carbon pricing is designed to raise the cost of high-emission electricity generation, yet EV competitiveness depends heavily on electricity tariffs and fiscal incentives.

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If ETS caps are tightened without parallel clarity on fuel and electricity subsidies, price signals could become distorted. Continued fuel subsidies for internal combustion engine (ICE) vehicles, meanwhile, suppress total cost of ownership (TCO) comparisons and weaken the economic case for electrification.

Without coordinated reform, transition signals to investors risk becoming inconsistent rather than reinforcing.

EV subsidy stability under scrutiny

Transport electrification emerged as a second major area of concern, particularly around incentive predictability and cost competitiveness.

Dr. Alin Halimatussadiah of the University of Indonesia emphasized that accelerating EV adoption ultimately depends on lowering TCO.

EV competitiveness, she said, hinges on cost per kilometer. While EVs may offer lower operating costs over time, upfront prices remain high. At the same time, fuel subsidies artificially reduce ICE vehicle TCO.

“Fuel subsidies make ICE total cost of ownership artificially lower,” she noted.

Electricity subsidies further complicate the comparison. Alin suggested that evaluating EV and ICE competitiveness under scenarios where both fuel and electricity subsidies are removed would provide a clearer market signal.

Policy stability, she added, is equally critical. Abrupt changes in EV incentive schemes have previously triggered sharp market contractions.

“Don’t suddenly remove incentives. Investors have already committed capital. They need clarity on when incentives start and how they will gradually decrease,” she said.

She called for a clear subsidy roadmap specifying implementation timelines, gradual reductions, duration and measurable continuation criteria to reduce regulatory risk.

Anggoro, Secretary-General of the Indonesia Electric Motor Industry Association, underscored the need for policy coherence to translate into tangible economic benefits.

“Companies ask us a simple question: If we shift from gasoline to electric vehicles, what is the benefit? Will operational costs fall? Are there carbon pricing tools that provide advantages?” he said.

He cited the Rp 7 million electric motorcycle subsidy introduced two years ago, which initially boosted sales but, once withdrawn in early 2025, resulted in a roughly 70% market contraction and forced several players to shut down.

“When incentives are suddenly removed, it creates serious problems. Investors have already committed capital. We need sustainability,” he said.

For the EV industry, the core issue is not merely the size of subsidies but predictability and alignment with carbon pricing and broader energy policies. Without a clear roadmap linking ETS reform, fiscal incentives and ministerial regulations, transition ambitions risk stalling at the implementation stage.

Editing by Reiner Simanjuntak