The Impact of Economic Variables and Energy Consumption on Deforestation in Indonesia

Abstract

Indonesia occupies the third position as a country with the largest tropical forest in the world. In addition, Indonesia is also one of the countries with the largest deforestation rate in the world (Austin, 2019). The Center for International Forestry Research (2018) shows that the total tree cover loss o Indonesian forests in 2001-2018 was 36.7%. The impact of the high rate of deforestation in Indonesia is due to economic activity. In the demand side, the continued population growth has driven the demand for economic output tend to increase. Meanwhile, in the supply side, the increase in economic activity encourages industrialization and energy consumption, especially non- renewable energy because of its relative low cost. Both from the demand and supply side drive deforestation for infrastructure development. This study aims to analyze the effect of economic variables and energy consumption on deforestation in Indonesia. By using the Autoregressive-Distributed Lag (ARDL) methods and Error Correction Model (ECM), we use time series data from 1980-2017 sourced from the World Bank, OECD, IEA and CIFOR. We estimate that there is a statistically significant effect between economic variables and energy consumption on deforestation rates in Indonesia. The results of our research are expected to provide policy recommendations to the government in order to implement a sustainable economic development program with an environmental perspective.