The Effectiveness of Investment Tax Incentives: Evidence from Renewable Energy Deployment in Indonesia

Mayang Sari, Suphi Sen and Hans-Peter Weikard

No 12886, CESifo Working Paper Series from CESifo

Abstract: We study the effect of a 2018 reform that expanded the scope of corporate income tax exemptions in Indonesia to include investments in renewable energy capacity. We find a large increase in the share of renewables in total installed capacity. These effects are mainly driven by the expansion of renewables and partially by a decrease in investments in fossil-fuel capacity. These regional effects imply a two-fold increase in the renewable energy share of Indonesia. We find no effects on manufacturing, a decline in mining activity accompanied by lower wages but no change in employment, and an increase in services employment, particularly in utilities. These results highlight the effectiveness of fiscal incentives in spurring capital-intensive infrastructure investments in developing countries and have implications for the role of renewable capacity expansion in regional development.

Keywords: investment tax incentives; tax holidays; corporate income tax; renewable energy; investment; industrial policy (search for similar items in EconPapers)
JEL-codes: H25 H30 L50 Q48 (search for similar items in EconPapers)
Date: 2026
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