Govt to impose carbon tax for more revenue to meet emissions target
The government is preparing to levy a carbon tax as part of a major overhaul of the country’s taxation system. By imposing the new tax, it hopes to sustain the state budget and meet national carbon emissions reduction targets. However, many worry that the carbon tax will exacerbate the economic crunch if it is implemented during the pandemic.
A carbon tax was one of the proposed key reforms in the draft of a bill amending the 1983 General Taxation (KUP) Law. The draft’s current form stipulates the imposition of a carbon tax of Rp 75 per kilogram of CO2 equivalent (CO2e)1 – which translates into Rp75,000 (around US$5.19)2 per ton of CO2e – on carbon-intensive goods and services (Read: Govt to increase VAT, introduce new taxes in a new bill to boost revenues).
Meanwhile, the government is contemplating a tax range of $5 to $10 per ton of CO2e to finance climate mitigation efforts. This new levy would be imposed on both individual and corporate taxpayers in carbon-intensive industries, covering pulp and paper, cement, power plants, petrochemicals, the automotive industry, palm oil and food and beverages.3 It has been suggested that the large-scale energy sector be targeted first to promote the use of more environmentally friendly renewable energy.4
Finance minister Sri Mulyani said earlier that the introduction of carbon taxes was related to environmental externalities consistent with Indonesia’s commitments made under the Paris Agreement. This involves the country’s Nationally Determined Contribution (NDC) of emission reductions by 29 percent in a business-as-usual scenario (equivalent to 834 million tons of CO2) or by up to 41 percent (equivalent to 1.08 billion tons of CO2) with international support. All targets are to be met by 2030.5
Despite being a feasible option, experts are worried that a carbon tax will exacerbate Indonesia’s present economic contraction. This is because some sectors that have remained hurt by pandemic – such as the cement and automatic sectors – would bear the heaviest burden of carbon tax while they were not fully recovered. The tax would be better imposed one or even two years from now, once the economy past its sluggish state.6
Regardless, the government is determined to pass the carbon tax, so much so that it has prioritized the new tax over VAT on essential goods – which has apparently been saved for a time of full economic recovery.7 The government is currently experimenting with cofinancing emission reduction using the state budget (APBN) and regional budget (APBD) in 17 regions, with six of them joining this year.8 Further details about the tax have yet to be finalized in a corresponding government regulation (PP).
Meeting the country’s emissions reduction targets under the Paris Agreement has a price tag that the state budget cannot afford. The NDC road map suggests Indonesia would need roughly Rp 343.6 trillion ($23.8 billion) per year for emissions reduction under the scenario of shifting to waste-based power plants or Rp 343.3 trillion ($23.7 billion) when using refuse-derived fuel (RDF) plants. Unfortunately, data on spending realization shows that in the last five years, the state budget only supported annual climate mitigation spending around Rp 86.7 trillion ($5.9 billion)9 – leaving a vast financing gap.
Such financial pressure is more prevalent amid the government’s target to restore the deficit below 3 percent of GDP by 2023. A carbon tax was chosen because of its better cost-efficiency compared to the alternative cap-and-trade mechanism. The first is considered more straightforward and practical, while the latter would require a whole new institution facilitating a complex market-based carbon trading.10
A carbon tax is favored by some countries and largely praised because of many success stories regarding its enactment. In Sweden, a carbon tax effectively cut the country’s carbon emissions by 26 percent in 27 years while maintaining 78 percent economic growth in that period. After imposing a carbon tax in 2013, Britain has enjoyed a massive shift from coal-based to natural gas-based utilities on top of record-low GHG emissions since 1890.11
Despite the pros and cons, carbon taxation is actually a global movement. The World Bank states that 88 countries intend to use a carbon tax to meet their Paris Agreement goals, representing 56 percent of global emissions. These figures are supplemented by 51 regional and local initiatives.12
At the proposed rate of Rp 75,000 (US$5.19) per ton of CO2e, Indonesia would not have the highest carbon tax rate globally. Sweden and France impose carbon taxes of $127 and $50 per ton of CO2e, respectively. However, Indonesia’s rate would be tad higher than Japan’s ($3), Mexico’s ($1 to $3), Chile’s and Columbia’s (both $5)13 . The High-Level Commission on Carbon Prices (HLCP) recommended a $40 charge per ton of CO2 by 2020 and $50 by 2030. On the same note, the IMF, in a 2019 report, endorsed a minimum $35 charge per ton CO2e to be on top of Paris Agreement pledges.14
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