Modeling the Dynamic Relationship Between Energy Exports, Oil Prices, and CO2 Emission for Sustainable Policy Reforms in Indonesia

Indonesia’s dependence on fossil fuel exports, particularly coal and crude oil, presents a dual challenge: sustaining economic growth while addressing rising CO2 emissions. Despite significant attention to domestic energy consumption, the environmental implications of export activities remain underexplored. This study examines the dynamic relationship between energy exports, crude oil prices, and CO2 emissions in Indonesia using a Vector Autoregressive (VAR) model with annual data from 2002 to 2022. The analysis incorporates Impulse Response Functions (IRFs) and Forecast Error Variance Decomposition (FEVD) to trace short- and long-term interactions among variables. Findings reveal that coal exports are strongly persistent and positively linked to past emission levels, while oil exports respond negatively to both coal and emission shocks—suggesting internal trade-offs. CO2 emissions are primarily self-driven yet increasingly influenced by oil export fluctuations over time. Crude oil prices, in contrast, have limited impact on domestic emissions. This study contributes a novel export-based perspective to Indonesia’s emission profile and demonstrates the value of dynamic modeling in policy analysis. Results underscore the importance of integrated strategies that balance trade objectives with climate commitments, offering evidence-based insights for refining Indonesia’s nationally determined contributions (NDCs) and sustainable energy policies.