CARBON TAX IN DEVELOPING COUNTRIES: INDONESIA
Climate change is an imminent danger that everyone is facing. One of the main causes is the green house gas (GHG) emission. According to PEACE (2007), in 2005, Indonesia is in the top 3 of world’s GHG emission excluding EU (by including EU, Indonesia is 4th). In 2008, Sri Mulyani, Indonesia’s financial minister, commissioned Green Paper written with the help of AusAID and Australian Treasury aiming to reduce emissions by 26% with business as usual up to 41% if there is international support by 2020 (Arup, 2009). In the Copenhagen meeting, current president Susilo Bambang Yudhoyono introduced a proposal of carbon tax for 2014 that will impose IDR 80,000 (equivalent to about USD 8) per tonne CO2 and will increase by 5% annually until 2020. With this carbon tax applied, the government is expecting to gain IDR 95 trillion (equivalent to about USD 10 billion) in revenue (Wardhana, no year). The main source of the emission in Indonesia comes from deforestation and land conversion, while emission from agriculture and waster are small. Emission from energy sector is also small, however, it is growing exponentially (PEACE, 2007). The Green Paper outline the strategies that Indonesian government is going to do in energy, land-use change and forestry, international carbon finance and institutional development sector. However, it points out that energy sector is a concern as there is a growing demand by 7% annually (Ministry of Finance, 2009). Therefore, this review will focus more on the policy in energy sector.
There are two ways that the government can implement in order to reduce emission in energy sector, which are carbon tax and emission trading. The advantages and disadvantages of each method are listed in Table 1.
Table 1. Advantages and Disadvantages of Carbon Tax and Emission Trading
| Carbon Tax | Emission Trading | |
| Administration | Easy to be implemented | Need a new department to manage administration |
| Compensation and Assistance | Compensation in a form of tax exemption has to be able to preserve the carbon price signal and it is very difficult to be designed and more costly | Compensation in a form of emission permit and the incentive to abate in general will remain the same |
| Size and Liquidity of the Carbon Market | It is not influenced by the market | Price is determined by the market, it is not efficient in small market or a market dominated by few companies |
| Linking with International Market | Compatible with international permit trading (a possibility to sell a carbon credit if the national abatement exceeds the target) and able to separate domestic price with international price | Follows international price (tends to be higher than domestic price) |
Source: Ministry of Finance (2009)
The emission from energy sector has been increasing due to the growing Indonesian economy and the fact that the reliance of using coal to generate energy because by using coal, not only that there is a the belief that it is the cheapest source of electricity, but also it will help to reduce the reliance to oil imports. Moreover, government is also sending a signal to strengthen the belief by giving energy subsidy making the producer to bear no cost to emit GHG. Thus, the most efficient way to solve this is to stop the subsidy and introduce price to emission. By introducing a price for emission, it will be reflected in the price of the final goods causing users to substitute with lower priced products creating an incentive for the company to reduce emission. In the long run, after introducing a moderate carbon tax and when carbon measurements and accounting system are already capable to support emission pricing beyond fossil fuel combustion, carbon tax can be replaced by cap and trade, allowing a more cost efficient way to abate emission. By introducing USD 8 tax, it is expected to reduce emission by 10% by 2020 and that the revenue generated will be used to help the poor to survive the price reform as prices will definitely go up and they won’t be able to afford as much stuff as before. However, this USD 8 carbon tax is lower than international carbon tax, meaning that the government will not be able to utilize the abatement opportunities to the fullest, thus, the Green Paper propose to move away slowly from tax to emission trading with linkage to international market (Ministry of Finance, 2009).
Carbon tax has several advantages, such as increasing government revenue (increase GDP) and giving incentive to companies to innovate to reduce emission. As stated in the green paper developed by the ministry of finance with Australia, the revenue will then be used to help the poor families to adapt to increase in prices as carbon tax means an extra cost in production which will be transferred to consumers. It is also supported by the paper written by Yusuf and Resosudarmo (2008) stating that the implementation is not necessarily regressive due to structural change and resource allocation. The key here is structural change, which can be very ambiguous in developing countries like Indonesia due to the high level of corruption and low level of enforcement. If there is no improvement on the structural change, the probability of the fund to be received by the lower income households and those living in rural areas are very low. Moreover, people living in provinces that located further away from the capital city are the one that should be considered to receive higher allocation of the tax revenue, as they have to pay ten folds to purchase the same goods, but this is highly unlikely due to the loose central government supervision in those areas.
Reducing GHG emission in developing countries such as Indonesia will impose a greater good for the world. Introducing carbon tax will also help to increase the country’s GDP through tax revenue. Although it seems to be a good solution for both the countries and the world, the implementation should be considered carefully as the citizens might be the one to suffer the most without the support from the government.
REFERENCES
Arup, Tom. 2009. “Indonesia Plans Carbon Tax, Geothermal Push,” The Sydney Morning Herald Online. Home page online. Available from http://www.smh.com.au/national/indonesia-plans-carbon-tax-geothermal-push-20091207-kfcl.html Internet; accessed 10 March 2014.
Ministry of Finance. 2009. “Ministry of Finance Green Paper: Economic and Fiscal Policy Strategies for Climate Change Mitigation in Indonesia, Ministry of Finance and Australia Indonesia Partnership,” Illegal Logging Portal Online. Home page online. Available from http://www.illegal-logging.info/sites/default/files/uploads/IndonesiasiaranpdfGreenPaperFinal.pdf Internet; accessed 10 March 2014.
PEACE. 2007. “Indonesia and Climate Change: Current Status and Policy,” World Bank Group Online. Home page Online. Available from http://siteresources.worldbank.org/INTINDONESIA/Resources/Environment/ClimateChange_Full_EN.pdf Internet; accessed 10 March 2014.
Wardhana, Irwanda Wisnu. “A Policy Paper: Supporting Indonesia’s Carbon Tax Proposal,” Badan Kebijakan Fiskal Online. Home page online. Available from http://www.fiskal.depkeu.go.id/webbkf/kajian%5CSupporting%20Indonesia_s%20Carbon%20Tax.pdf Internet; accessed 10 March 2014.
Yusuf, Arief A. and Budy P. Resosudarmo. “The Distributional Impact of Environmental Policy: The Case of Carbon Tax and Energy Pricing Reform in Indonesia,” University of Tasmania Online. Home page online. Available from http://www.utas.edu.au/__data/assets/pdf_file/0011/407459/20130830_Resosudarmo_1.pdf Internet; accessed 10 March 2014.
