Authors: I Dewa Made Raditya Margenta and Filda C. Yusgiantoro *
A carbon tax should be seen as an oasis of post-pandemic recovery. The proper carbon tax system will solve two of Indonesia’s many duties; reduce greenhouse gas (GHG) emissions and increase revenues to support economic recovery. In the end, Indonesia’s political will is crucial to carry out this mission.
Recently, the carbon tax has become a hot topic of discussion in Indonesia. This carbon tax is introduced in a revised draft law on the general tax law and becomes the Indonesian national legislative program for this year. According to the bill, the government plans to collect a carbon tax of IDR 75,000 (USD 5.25) per tonne of GHG (tCO2e). The carbon tax could target emissions from the use of fossil fuels such as coal, diesel and gasoline by factories and vehicles.
The introduction of the carbon tax is quite surprising. Previously, the Coordinating Minister of Maritime Affairs and Investments of Indonesia, Luhut Binsar Pandjaitan, mentionned that President Joko Widodo planned to publish a carbon trading regulation in December 2020. However, there is no indication that the regulation will be published so far.
The implementation of a carbon tax is seen as a strategic step for the government to reduce GHG emissions and increase government revenue in order to increase development funds. Consequently, the carbon tax regime must be well constructed, specific and well targeted so that the implementation of the carbon tax can restore the environment and the Indonesian economy.
However, the implementation of the carbon tax will not succeed without strong political will and commitment from the government.
The carbon tax as a climate action plan
As the world’s sixth largest emitter of GHGs, Indonesia is becoming vulnerable to the impact of climate change. According to the Indonesian Ministry of Environment and Forestry, the transportation and manufacturing sectors contributed to about 64% of national GHG emissions in 2017. This number will increase given the increase in energy demand and manufacturing activities to stimulate the economy. Therefore, a new climate policy, such as a carbon tax, must be promoted as a climate action plan.
As an economic-environmental instrument, a carbon tax is easier to solve this problem. In addition, the revenue from this tax can be recycled to support green development. Thus, the target of this tax must be clearly identified, and the carbon tax system must be properly designed to avoid a windfall effect.
Singapore may be the prime example to emulate its carbon tax system. Based on Singapore’s climate action plan, the tax is applied facilities that emit abundant GHGs every year. They also promote a clean and simple carbon tax to preserve fairness, consistency and transparency. Its carbon tax system, which takes place from 2019 to 2023, will be the subject of an impact study in 2022.
From Singapore, Indonesia can learn that the system may have the flexibility to respond to the dynamics that will arise, including the possibility of evolving into a carbon trading system in the future. In addition, having a strong policy like Singapore’s will give an advantage to the implementation of the carbon tax in Indonesia.
Building Indonesia’s political will for a climate action plan
Indonesia’s successful climate action plan relies on various variables such as reducing GHG emissions, identifying the most appropriate instruments and introducing new climate policies. However, all of these variables are highly dependent on political will.
Indonesia’s political will on climate change mitigation would be a perfect start and a powerful tool to take immediate action in climate change mitigation initiatives. Instead, Indonesia’s political will might face a political challenge during the policy-making process. One example is the long policy making process of the New and Renewable Energy Bill. Therefore, Indonesia’s political will to tackle climate change early in the policy-making process is crucial.
Gaining public trust and being tough are essential steps to take before introducing a carbon tax.
As a first step, the government needs to improve its accountability and transparency, reflecting on what Singapore has shown. Indonesia should also consider complementary economic policies that minimize the negative impacts of a carbon tax on the business and household sectors.
Then Indonesia could consider removing fossil fuel subsidies and replacing them with direct subsidies to low-income households.
Finally, Indonesia should ensure that carbon tax revenues are recycled for green development and improved community welfare.
In short, the implementation of a carbon tax in Indonesia will determine the future of the nation and its citizens.
To ensure that the implementation of the carbon tax is on point, Indonesia’s political will is the brain, which can be seen from a carbon tax program and supporting policies. The success of this policy will be seen by an intensive reduction of GHGs, positive economic growth and a simultaneous improvement in the well-being of the Indonesian population.
* Filda C. Yusgiantoro, Ph.D., President of the Purnomo Yusgiantoro Center and Professor of Economics at Prasetya Mulya University