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Mar 286 min read

Carbon Tax as a Sustainable Development Effort, How is it Implemented in Indonesia?

Updated: Mar 30




Climate change has started to become a concern for many parties in recent times. There are at least three global forums that have become turning points in strengthening the climate agenda itself. First, the Paris Agreement in COP 21 of 2016 an agreement to reduce the emission rate from business as usual in 2030 and hold global temperature below 2 degrees Celsius. Second, COP 26 in 2021 has an agreement to achieve net zero emissions globally by 2050 through climate finance. Third, the G20 in 2022 has a full commitment to climate change through the gradual reduction of fossil fuel subsidies and the construction of new renewable energy infrastructure. In response to this, carbon pricing or carbon tax is an instrument that is relied on and promoted by various countries, one of which is Indonesia (Avisena, 2021). So, how is the implementation of a carbon tax in Indonesia? Besides that, what are the opportunities and challenges of a carbon tax in Indonesia?

Carbon Tax and Its Mechanism

Carbon tax taxonomically can be regarded as a Pigouvian tax or a type of tax from any market activity that generates negative externalities. This means that carbon taxes are imposed on various forms of gas emissions that cause a greenhouse effect such as carbon dioxide (CO2), nitrous oxide (N20), and methane (CH4) at rates that are adjusted to the needs and conditions of a country (Hindarto, 2021). In other words, a carbon tax is a tax levied on emissions from fossil fuels. Furthermore, in its design, carbon taxes aim to reduce greenhouse gas emissions or pollution caused by companies in the production process. It doesn’t stop there, the carbon tax also aims to reduce the number of fossil fuels used by individuals and companies.

 

Furthermore, the carbon tax calculation method generally consists of 2 schemes, namely (Budianto, 2021):

1. Cap and tax

The cap and tax scheme focuses on setting prices directly or rates based on the carbon content produced from fossil fuels. This scheme is also known as a crediting mechanism in which an entity that emits more buys emission permits than an entity that emits less. For this type of carbon tax, the government can directly collect a carbon tax based on the amount of fuel purchased by integrating it into the fuel price. As an illustration, the industrial sector that uses coal will be subject to a higher carbon tax than the industrial sector that uses other natural gas considering that coal itself has a higher emission content.

2. Cap and trade

The cap and trade scheme has a basis for limiting emission levels based on carbon-producing sectors. This scheme is also known as the emission trading system where entities that carry out emission reduction activities can sell their carbon credits to entities that need carbon credits. For this type of carbon tax, the tax subject must calculate and report the amount of greenhouse gas emissions and the amount of carbon tax to be paid at the end of the tax year. As an illustration, the industrial sector that uses renewable energy will not be subject to a carbon tax because no emissions are produced, so the emission quota can be sold to industries that produce large emissions, namely coal for example.

Implementation of Carbon Tax in Indonesia

The government introduced a carbon tax in Law no. 7 of 2021 concerning Harmonization of Tax Regulations (UU HPP). In the regulation in article 13, there are at least 7 important points, namely (Ministry of Finance, 2021):

  1. Imposition: Charged for carbon emissions that have a negative impact on the environment;

  2. Directions for imposing a carbon tax: Paying attention to the carbon market road map which includes strategies for reducing carbon emissions, targeting priority sectors, alignment with the development of new and renewable energy, and alignment between various other policies;

  3. Principles of a carbon tax: Principles of fairness and affordability by taking into account the business climate and small communities;

  4. The carbon tax rate is set higher or equal to the price of carbon in the carbon market with the lowest rate being IDR 30.00 per kilogram of carbon dioxide equivalent (CO2e);

  5. Utilization of state revenues from carbon taxes is carried out through the APBN mechanism which can be used to control climate change, provide social assistance to poor households affected by carbon taxes, subsidize renewable energy, and others;

  6. Taxpayers who participate in trading carbon emissions can be given a reduction in carbon taxes;

  7. Implementation of a carbon tax: Effective April 1, 2022 (postponed to July 1, 2022), which was first imposed on entities engaged in coal-fired power plants with a cap and tax scheme.

 

In addition, the Government has also designed a carbon tax roadmap that aims for a just and sustainable energy transition. There are at least 3 stages consisting of (Suryani, 2022):

  1. 2021: Stipulation of Presidential Decree on Carbon Economic Value and HPP Law, Development of a carbon tax and carbon exchange technical mechanisms, Piloting of carbon trading in the power sector by the Ministry of Energy and Mineral Resources with an average price of IDR 30,000/tCO2e (followed by 32 PLTUs);

  2. 2022: Synchronization of Cap & Trade and Cap & Tax of the electricity sub-sector, Determination of a stamp for the coal power plant sector by the Ministry of Energy and Mineral Resources (there are 2 groups, namely capacities above 400 megawatts subject to emission limits of 0.918 tons of CO2 and capacities of 100-400 megawatts subject to emission limits 1,013 tons CO2), Implementation of a limited carbon tax on coal power plants at a rate of IDR 30,000/tCO2e, Preparation of an MRV system to support carbon trading;

  3. 2025: Full implementation of carbon trading through carbon exchanges, Expansion of the Cap & Trade, and Cap & Tax sectors with determination according to sector readiness.

Opportunities and Challenges of Implementing Carbon Tax in Indonesia

Looking at the existing arrangements, the carbon tax is projected to have a number of advantages within the framework of sustainable development. There are at least 3 opportunities for implementing a carbon tax, namely:

  1. Changing behavior: Aims to change the behavior of economic actors to switch to low-carbon, green economic activities;

  2. Support emission reduction: Support the target of reducing greenhouse gas emissions in the medium and long term;

  3. Encouraging innovation and investment: Encouraging the development of carbon markets, technological innovation, and investments that are more efficient, low carbon, and environmentally friendly with the principle of revenue recycling.

 

Despite the promising opportunities, carbon taxes also have a series of obstacles. There are at least 3 challenges to implementing carbon taxes, namely (Hindarto & Samyanugraha, 2021):

  1. Readiness of infrastructure and technical rules: The need for human resources with special training to be involved and a series of regulations that include transparent targets and measurements through evaluation and mentoring with certain standards;

  2. Presence of carbon leakage: The possibility of leakage from the target of achieving carbon where greenhouse gas emissions are not actually reduced but only moved to other places that are not subject to carbon taxes;

  3. Tax scheme bias: Implementation of a carbon tax as state revenue should be prioritized compared to reducing emissions and developing low-carbon ecosystems such as green technology research and others.

Facing the existing challenges, there are at least two effective steps that can be taken. First, strengthening readiness for monitoring, reporting, and verification of greenhouse gas emissions by business actors and related parties. Second, carry out the process of developing carbon tax policies in an inclusive manner with openness and community involvement. Thus, the implementation of a carbon tax itself can be a significant first step in developing a sustainable green economy with the principle of low carbon emissions.

 


 

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