Prioritizing economic recovery, Govt delays carbon tax until 2025
After being delayed for half a year, Coordinating Economic Minister Airlangga Hartarto announced on Oct. 13 that the carbon tax will be implemented in 2025. Business players and analysts were not surprised as the country has yet to issue any regulations to implement the policy.
The carbon tax in Indonesia has been problematic since its inception. The policy was suddenly introduced as a new tax in the Tax Harmonization (HPP) Law, which is an amendment of existing taxes in the 1983 General Taxation (KUP) Law.
President Joko “Jokowi” Widodo also signed President Regulation (Perpres) No. 98/2021 stipulating the carbon economic value implementation, regulating the cap-and-trade scheme, carbon offset scheme, result-based payments and carbon levies, as well as a combination of existing schemes.
However, aside from Law no. 7/2021 on HPP and Perpres No.98/2020, there has yet to be any regulations issued to implement the carbon tax. The implementing regulations in the pipeline include the Finance Minister Regulation (PMK) on carbon tax tariffs and tax base determination (DPP), the PMK on carbon tax implementation procedures and mechanisms and the Government Regulation (PP) on a carbon tax roadmap.
The carbon tax implementation has been delayed multiple times. Initially slated to roll out on April 1 this year, the policy was pushed back to July 1, until Airlangga recently announced it would be implemented in 2025.
According to Energy and Mineral Resources Minister Arifin Tasrif, the plan to implement the carbon tax should be reevaluated considering the surging global economic uncertainty. Not only that, Indonesia’s economy is still recovering from the COVID-19 pandemic and the Russian-Ukraine conflict has made energy prices soar. Arifin said the carbon tax implementation would increase production costs of coal-fired power plants (PLTU), which in turn raises prices of goods in the country.1
However, some analysts see the rising PLTU production costs as a good thing as it could accelerate the transition to renewable energy. Coals supplied to PLTUs are priced at the low price of US$70/tonne, making the price of electricity affordable.
The Institute of Essential Services Reform (IESR) Fabby Tumiwa said if the PLTU was less competitive, renewable energy would be more attractive and therefore could develop because independent power producers (IPP) would see the opportunity to invest in the sector, rather than maintaining their PLTU.2
Despite the economic situation, it is impossible to implement the carbon tax without implementing regulations. Deputy Finance Minister Suahasil Nazara said that the government still needs to prepare the infrastructure to implement the carbon tax, starting from the carbon calculations and those who will record carbon emission to the verification process. If the carbon market in Indonesia is ready, then the government can implement a carbon tax.3
The carbon tax will first be levied on PLTUs with a capacity of over 100 megawatts. The government said PLTUs under 100 MW would be exempted this year as the electricity supply to communities should not be disrupted, especially for those outside of Java. After addressing the PLTUs, the government plans to slap the carbon tax on other carbon-intensive industries, such as pulp and paper, cement and petrochemicals.
According to the HPP Law, the carbon tax rate is set at a minimum of Rp 30,000 ($2.10) per tonne of CO2 equivalent (CO2e) or Rp 30 per kg of CO2e. Not only is this rate less than half the figure initially proposed (Rp 75/kg CO2e) but it is also significantly less than the International Monetary Fund (IMF) and World Bank’s recommended carbon tax rate for developing countries – between $30-100 per tonne of CO2e. (Read: Unfinished regulations delay govt’s plan to carbon tax PLTUs)
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